-----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, BeukiKOnzA9a5jw740IQHqBS+bkOBQDsnJVnuRjZaZCWoi3dtouknwKnO2WfcSng QD4xxElLgSJji7KI/IUbrg== 0000950169-97-000231.txt : 19970329 0000950169-97-000231.hdr.sgml : 19970329 ACCESSION NUMBER: 0000950169-97-000231 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NONE 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-25378 FILM NUMBER: 97566475 BUSINESS ADDRESS: STREET 1: 300 EAST LOMBARD ST CITY: BALTIMORE STATE: MD ZIP: 21202 BUSINESS PHONE: 4103327532 MAIL ADDRESS: STREET 1: 300 EAST LOMBARD ST CITY: BALTIMORE STATE: MD ZIP: 21202 10-K 1 HCIA INCORPORATED SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from _______ to _______ Commission file number 0-25378 HCIA Inc. (Exact name of registrant as specified in its charter) Maryland 52-1407998 (State or other jurisdiction of incorporation or organization) (I.R.S. employer identification no.) 300 East Lombard Street, Baltimore, MD 21202 (Address of Principal executive offices) (Zip Code) Registrant's telephone number, including area code (410) 895-7470 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the Common Stock, $.01 par value, held by non-affiliates of the registrant based on the closing sales price of the Common Stock as quoted on the National Association of Securities Dealers, Inc. National Market System as of February 28, 1997 was $396,075,220. The number of shares of the registrant's Common Stock, $.01 par value, outstanding as of February 28, 1997 was 11,833,656. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Proxy Statement for the 1997 Annual Meeting of Stockholders are incorporated by reference into Part III. -2- PART I Item 1. Business. Background HCIA Inc. ("HCIA" or the "Company") was incorporated in Maryland in 1985. In 1988, all of the then outstanding capital stock of the Company was acquired by Citicorp Financial Guaranty Holdings, Inc. which subsequently transferred the stock to AMBAC Inc. ("AMBAC"). AMBAC is a publicly held holding company that through its affiliates provides financial guarantee insurance and financial services to both public and private clients. From 1988 until HCIA's initial public offering, AMBAC provided additional capital and financing for the growth of the Company. In March 1992, HCIA acquired substantially all of the assets of the Information Strategies division of McGraw-Hill, Inc. and certain assets of the commercial products division of the SysteMetrics subsidiary of McGraw-Hill, Inc. (collectively, "MHI"). The business of MHI acquired by the Company had revenue for the fiscal year ended December 31, 1991 of approximately $4.8 million. In April 1992, the Company acquired all of the outstanding capital stock of Healthcare Knowledge Resources, Inc. ("HKR"), a health care information company with revenue for the fiscal year ended June 30, 1991 of approximately $12.2 million. The acquisition of HKR provided the Company with a perpetual and exclusive license (subject to certain conditions) to the International Classification of Clinical Services System (the "ICCS System"), a proprietary classification system for tracking and measuring the use of medical resources, and the database developed by the Commission on Professional and Hospital Activities ("CPHA"). See "-- Decision Support Systems." During the first quarter of 1995, HCIA completed an initial public offering of approximately 2.0 million newly issued shares of Common Stock. Subsequent to the offering, in April 1995, the Company acquired all of the outstanding capital stock of Datis Corporation, a health care information company with revenue for the twelve months ended December 31, 1994 of approximately $6.9 million. In August 1995, HCIA sold 1.5 million newly issued shares and AMBAC sold approximately 1.1 million shares of Common Stock at $28.50 per share in a combined public offering. In December 1995, the Company acquired the assets constituting the CHAMP unit of William M. Mercer, Incorporated ("CHAMP"), which provides a database service for the analysis of health care costs to employers, for $17.5 million in cash. In May 1996, the Company acquired Response Healthcare Information Management, Inc. ("Response"), a patient-centered data collection company, for approximately $6.3 million in cash. In August 1996, the Company acquired LBA Health Care Management, Inc. ("LBA"), a health care information company combining data collection, benchmarking and decision support tools with a clinical implementation management team, for approximately $128.8 million, $100.1 million of which was paid in cash and $28.7 million of which was paid by the delivery of Common Stock. In December 1996, the Company acquired all of the capital stock of HealthChex, Inc. ("HealthChex"), which provides physician profiling and medical claims review systems to health care providers and payors, for $11.5 million in cash. In addition to the acquisitions described above, the Company has also acquired a number of smaller companies and business lines, including several acquisitions in Europe. During 1996, the Company completed two additional public offerings. In May 1996, AMBAC sold the remaining shares of Common Stock it held, and the Company sold an additional 261,951 shares of Common Stock, at a per share price of $51.00. In August 1996, the Company sold approximately 2.0 million shares of Common Stock, at a per share price of $54.125, to repay bank indebtedness incurred in connection with the acquisition of LBA. -3- General HCIA is a leading health care information content company that develops and markets integrated clinical information systems and products. The Company's systems and products range from standardized databases to highly focused decision support systems that assist its customers in evaluating the efficacy and economics of health care delivery. HCIA currently sells its decision support systems to more than 470 customers, including hospitals, integrated delivery systems, self-insured employers, pharmaceutical companies and managed care organizations. The Company's syndicated products are sold to over 7,000 customers. During 1996, revenue from the sale of decision support systems represented 82% of revenue and syndicated products represented the remaining 18% of revenue. As a result of its unique ability to integrate health care data collected from numerous sources and across varied treatment settings, the Company believes that it is well positioned to offer the information systems and products necessary to continue to increase average revenue per customer through the sale of more sophisticated and comprehensive decision support systems. By utilizing its core collection of proprietary data standardization methodologies, value-added clinical measurement tools and databases, including the ICCS System(TM), HCIA creates clinical information systems and products from its many large and disparate data streams. The ICCS System(TM) allows for the standardization and comparison of detailed clinical data across a broad range of data sources. The Company's proprietary disease management methodologies link the costs, quality, utilization and outcomes of medical services delivered to patients in various clinical settings. These methodologies and technical resources permit the Company to provide a level of clinical information which is substantially more detailed and useful in modifying clinical practice patterns than information derived from traditional health care data sources. Decision Support Systems HCIA offers a range of decision support systems, which are utilized by each of the three major health care market constituencies. Providers, such as hospitals, physician groups and integrated delivery systems, use the Company's decision support systems to measure and analyze the cost and quality of medical interventions. The Company's entry-level systems provide customers with competitor specific information such as market share by specialty, local market utilization rates compared with regional and national norms and customer specific analyses of product line and physician level resource consumption. High-end decision support systems incorporate benchmarks for specific medical resource consumption and are designed to help providers understand the best practice for a medical intervention. Buyers, such as managed care organizations, indemnity insurers and self-insured employers, utilize the information and analyses on medical resource usage and outcomes derived from the Company's decision support systems to select and monitor the performance of network providers, channel specific types of patients towards the most clinically effective providers, and negotiate fair prices and appropriate utilization criteria, as well as to manage the overall health status of a covered population. Suppliers, such as pharmaceutical, biotechnology and medical supply and device companies, utilize the Company's decision support systems in market analysis, product positioning and pharmacoeconomic analysis. Pharmacoeconomic analysis provides suppliers with information needed to measure the specific benefit/cost and outcome of an individual product against those of competing products, alternative therapies or, in the case of a new drug or product, the status quo therapy. -4- The Company's entry-level systems are generally priced from $25,000 annually, while high-end systems are generally priced from $250,000 to more than $1.0 million annually. HCIA has also entered into a number of strategic relationships with state hospital associations, business partners such as HBO & Company ("HBOC") and Cerner Corporation ("Cerner"), and large users of data such as Cigna Healthcare, Amgen Inc. and Columbia/HCA. Most of HCIA's decision support systems are based on a combination of the Company's Databridge(TM) collection of databases and data handling technologies, Solesource(TM) desktop analytical software, and clinical implementation management team. Databridge(TM). Databridge(TM) is HCIA's collection of proprietary databases and data-handling technologies. A typical decision support system customer submits data in an electronic, computer-readable format. In creating the interface for the customer's data stream, HCIA enables the transfer of customer data and the subsequent application of the Company's proprietary software algorithms and data-standardization technologies to the incoming data, transforming the data into HCIA's proprietary standardized formats. Databridge(TM) has several components, including: Database. A large number of the Company's customers are also its data suppliers. Most of the Company's decision support system contracts provide that as the Company extracts data from the customer (as part of the process of delivering a system to the customer), the data become part of the Company's database. The Company supplements its database with data it purchases or licenses from federal and state governments, trade groups and other industry sources. The Company maintains more than a terabyte of live health care data, including data from medical records, laboratory, pharmacy, imaging, outpatient clinics, physician's offices, insurance claims, managed care encounters and point-of-care member patient surveys. The Company's database resides in a relational database structure that utilizes a network of large Sun Microsystems servers. The Company believes that its current software and hardware platforms are scaleable and provide it with a cost and flexibility advantage. The Company has made a significant investment in an open-network architecture which links its several geographical locations and provides customers with leased-line and dial-up access. The Company supports most of the major relational database platforms. The Company has personnel drawn from several key health care disciplines (e.g., pharmacists, clinical nurses and medical technologists) who are responsible for the auditing, editing and standardizing of its database, as well as the upgrading and maintaining of its core methodologies. The Company believes that its database provides more clinical detail and better outcomes measurement capabilities than competitive systems. Furthermore, the detailed medical content of the data and HCIA's experience in collecting and standardizing this information provide additional competitive advantages. The acquisitions of the CHAMP and Response databases have significantly expanded the Company's outpatient and episode-of-care capabilities. As a result of acquisitions and its internal growth, the Company believes that it has built one of the largest and most sophisticated collections of integrated clinical, financial and labor/productivity data in the health care industry. ICCS System(TM). The Company holds a perpetual and exclusive license to the ICCS System(TM), subject only to the Company's obligation to use all commercially reasonable efforts to maintain and upgrade the system. The ICCS System(TM) assigns a discrete and clinically detailed 12-digit code to every product and service consumed in the treatment of patients. The Company believes that the ICCS System(TM) is the health care industry's most widely implemented uniform classification system for tracking and measuring the use of medical resources (e.g., drugs, devices, laboratory tests, blood units, diagnostic imaging and clinical services) across health care providers. The ICCS System(TM) allows for the standardization and comparison of detailed clinical data, regardless of the original source of the data (e.g., medical records, insurance claims, laboratory or pharmacy systems). The ICCS System(TM) is used -5- by the Company to create the most clinically detailed portion of its database. The Company develops a set of proprietary software interfaces with each customer who is a supplier of such data. The interfaces are built by a series of proprietary "data-mapping" applications that incorporate the ICCS System(TM) and a series of algorithms that allow the mapping applications to "learn" each time a new clinical item is encountered. In doing so, the applications are able to automatically standardize more data each time a new interface is created. Set forth below is an illustration of the application of the ICCS System(TM) to the delivery of a common anti-infective drug. ICCS Code ICCS Structure Example 4 Service Type Pharmacy 41 General Therapeutic Category Anti-infective 412 Specific Therapeutic Category Cephalosporin 412020 Generic Drug Type Cefazolin 412020.2 Route of Administration Parenteral 412020.232 Dosage Form IV Piggy Back 412020.23279 Dosage Strength 500 412020.232792 Dosage Unit Milligrams SoleSource(TM). SoleSource(TM) is the Company's workstation that provides customers with access to and analyses of information obtained with a decision support system. SoleSource(TM) utilizes Microsoft Foundation Classes Software and accesses a variety of database configurations, including Microsoft SQL Server, Microsoft Access and Informix. As the Company has worked with a variety of different health care organizations during the last several years (e.g., hospitals, managed care organizations and pharmaceutical companies), it has developed an extensive library of proprietary health care database applications. In addition, as a result of its recent acquisitions, the Company has expanded, and will continue to expand, the scope of its database applications. Depending on the customer, the size of the database and the sophistication of the decision support system, the Company licenses various SoleSource(TM) applications to customers as part of a decision support system. Clinical Improvement Methodology and Management. In addition to providing databases and application software, the Company, utilizing proprietary methodologies, assists customers with the implementation of clinical solutions. The Company's knowledge-based clinical improvement methodologies allow HCIA to leverage its ICCS-level information and enable clients to realize improved clinical outcomes and lower costs through the modification of medical and behavioral practice patterns. The Company's methodologies link the costs, quality, utilization and outcomes of medical services delivered to patients in various clinical settings and focus on episodes of illness that offer the greatest opportunity for improving outcomes and reducing costs. The Company utilizes database analyses, clinical improvement methodologies and an implementation management team to assist customers in reducing clinical resource consumption and improving outcomes in major specialties, including: o invasive cardiovascular o vascular o orthopaedics o neurosciences o oncology o pulmonary o medical cardiology o women's services -6- Syndicated Products Syndicated products include publications and standardized databases which are generally priced between $100 to $2,000, with certain products priced up to $25,000. The products are developed from specific portions of the Company's database, and feature particular industry niches. Most syndicated products are sold as annually renewable subscriptions or as multi-year contracts. Syndicated products range from database directories (e.g., health care industry professionals, nursing homes and managed care organizations) to more complex analyses (e.g., cost and outcome summaries for each U.S. hospital). HCIA also markets to managed care clients a number of more sophisticated syndicated products containing national and regional normative data on length of stay, costs and medical necessity. The Company markets these products directly to managed care organizations, and through alliances with information systems vendors, third-party administrators and other entities that process data streams for managed care organizations and payors. These syndicated products generally are used for utilization management, claims adjudication and actuarial forecasting and generally result in annual revenue of $100,000 or more per customer. Customers The Company's customers include numerous health care industry participants located throughout the United States, United Kingdom and Spain, including major provider and provider groups, managed care organizations, and pharmaceutical, biotechnology and medical device companies. As of December 31, 1996, the Company had more than 470 decision support system customers and more than 7,000 syndicated product customers. In 1995 and 1996, no single customer accounted for 10% or more of the Company's revenue. HCIA's ten largest customers accounted for approximately 36% and 28% of its revenue during 1995 and 1996, respectively. Sales and Marketing HCIA markets its information systems and products through a variety of means that are designed to enhance its name recognition and facilitate the marketing of additional systems and products to its customer base. The Company's marketing personnel are organized into market focused units. The Company utilizes a direct sales approach with the existing customer base to market its decision support systems and seeks to present proposals to both existing and potential clients in face-to-face meetings at the executive level. The Company's field sales force is highly specialized and frequently draws on the Company's clinical implementation management team. In addition, HCIA has entered into agreements with companies such as HBOC, Cerner and Transition Systems, whereby the Company's systems are marketed through their respective sales forces. The Company also approaches each of the major market constituencies through the sale of lower-priced syndicated products. Many of these products, such as the 100 Top Hospitals study, are specifically designed to increase the visibility of the Company as an industry-leading source of health care information. The Company uses both telemarketing and direct-mail efforts in the sales of its syndicated products. HCIA continually seeks opportunities to create name recognition as a leading provider of health care information. As part of this strategy, the Company is widely quoted in the media, including publications such as The Wall Street Journal and Modern Healthcare, and its senior officers are frequently asked to speak at industry conferences and serve on the editorial boards of industry newsletters and publications. -7- Competition The market for health care information products and services is intensely competitive. The Company believes that the principal competitive factors in the health care information market are the breadth and quality of system and product offerings, access to proprietary data, proprietary methodologies and technical resources, price and the effectiveness of marketing and sales efforts. In addition, the Company believes that the speed with which information companies can anticipate and respond to the evolving health care industry structure and identify information needs is an important competitive factor. The Company believes that it competes favorably with respect to each of these factors. Competitors vary in size and in the scope and breadth of products and services offered, and the Company competes for the sale of systems and products and the resulting access to data with different companies in each of its target markets. Many of the Company's competitors have significantly greater financial, technical, product development, marketing and other resources than the Company. Furthermore, other major information companies not presently offering clinical health care information services may enter the markets in which the Company competes. The Company's potential competitors include specialty health care information companies, health care information system and software vendors and large data processing and information companies. Many of these competitors have substantial installed customer bases in the health care industry and the ability to fund significant product development and acquisition efforts. Intellectual Property HCIA considers its methodologies, computer software and databases to be proprietary. The Company seeks to protect its proprietary information through confidentiality agreements with its employees. The Company's policy is to have employees enter into confidentiality agreements containing provisions prohibiting the disclosure of confidential information to anyone outside the Company, requiring employees to acknowledge, and, if requested, assist in confirming the Company's ownership of any new ideas, developments, discoveries or inventions conceived during employment, and requiring assignment to the Company of proprietary rights to such matters that are related to the Company's business. The Company also relies on a combination of trade secret, copyright and trademark laws, contractual provisions in agreements with customers and technical measures to protect its rights in various methodologies, systems and products and databases. The Company has only filed one patent application, and no copyright registration applications, covering its software technology. Due to the nature of its software applications, the Company believes that patent, trade secret and copyright protection are generally less significant than the Company's ability to further develop, enhance and modify its current systems and products. Government Regulation The FDA has promulgated a draft policy for the regulation of certain computer products as medical devices. Although it is not possible to anticipate the final form of the FDA's policy with regard to computer software, the Company expects that, whether or not the draft policy is finalized, the FDA is likely to become increasingly active in regulating computer software that is intended for use in health care settings. The Company's products and product development activities, therefore, could become subject to extensive regulation by the FDA. The FDA regulates the introduction of new medical devices as well as activities such as manufacturing, labeling and recordkeeping for such products. To the extent that computer software is a medical device under FDA regulations or policy, the Company would be required, depending on the product, to comply with regulations, to (i) register and list the product with -8- the FDA, (ii) notify the FDA and demonstrate substantial equivalence to other products on the market before marketing such products or (iii) obtain FDA approval by demonstrating safety and effectiveness before marketing a product. In addition, such products would be subject to the FDA's general controls, including those relating to good manufacturing practices and adverse experience reporting. The process of obtaining clearance from the FDA can be costly and time consuming, and there can be no assurance that, if required, such clearance would be granted for the Company's existing and future systems and products on a timely basis, if at all, or that FDA review will not include delays that would adversely affect the Company's ability to market new systems and products or to expand permitted uses of existing systems and products. The FDA could also limit or prevent the manufacture or distribution of the Company's systems and products and has the power to require the recall of such systems and products. FDA regulations depend heavily on administrative and scientific interpretation, and there can be no assurance that future interpretations made by the FDA or other regulatory bodies, with possible prospective and retroactive effects, will not adversely affect the Company. The confidentiality of patient records and the circumstances under which records may be released for inclusion in the Company's databases is subject to substantial regulation by state governments. These state laws and regulations govern both the disclosure and use of confidential patient medical record information. Although compliance with these laws and regulations is principally the responsibility of the hospital, physician or other health care provider supplying the data to the Company, the Company's databases have been designed to enable health care providers to comply with the confidentiality requirements of state law. The Company believes that its procedures comply with the laws and regulations regarding the collection of patient data in substantially all jurisdictions. However, additional legislation governing the dissemination of medical record information has been proposed at both the state and federal level. This legislation may require holders of such information to implement security procedures that may result in substantial costs to the Company. There can be no assurance that changes to state or federal laws will not materially restrict the ability of health care providers to submit information from patient records to the Company. Employees As of December 31, 1996, the Company had 820 employees, including 100 in sales and marketing, 408 in health care data, 178 in technology and 134 in finance and administration. None of the Company's employees are represented by a union or other collective bargaining group. The Company believes its relationships with its employees to be satisfactory. Risk Factors; Forward-Looking Statements CERTAIN STATEMENTS CONTAINED HEREIN REGARDING MATTERS THAT ARE NOT HISTORICAL FACTS ARE FORWARD-LOOKING STATEMENTS (AS SUCH TERM IS DEFINED IN THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND BECAUSE SUCH STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW. Acquisitions. The Company has, in large part, expanded its systems and products through the acquisition of health care information companies, product lines and data resources. The Company intends to continue the acquisition of methodological, analytical and technical resources that will further enhance and expand the Company's systems and products. -9- Acquisitions involve numerous risks, including difficulties in the assimilation of operations and products, the ability to manage geographically remote units, the diversion of management's attention from other business concerns, the risks of entering markets in which the Company has limited or no direct expertise and the potential loss of key employees of the acquired companies. In addition, acquisitions may involve the expenditure of significant funds and the incurrence of significant charges associated with the amortization of goodwill or other intangible assets, write-offs of acquired in-process research and development costs and/or future write-downs of the recorded values of assets acquired. There can be no assurance that any acquisition will result in long-term benefits to the Company or that management will be able to manage effectively the resulting business. Management of Growth. The Company is currently experiencing a period of rapid growth and expansion which could place a significant strain on the Company's personnel and resources. The Company's growth has resulted in an increase in the level of responsibility for both existing and new management personnel. Many of the Company's management personnel have had limited or no experience in managing companies as large as the Company. The Company has sought to manage its current and anticipated growth through the recruitment of additional management and technical personnel and the implementation of internal systems and controls. However, the failure to manage growth effectively could materially and adversely affect the Company's operating results. Dependence on Key Personnel. The Company depends to a significant extent on key management, technical and marketing personnel. The Company's growth and future success will depend in large part on its ability to attract, motivate and retain highly qualified personnel, including management personnel of acquired companies. Except for an agreement with George D. Pillari, its Chairman of the Board, President and Chief Executive Officer, the Company does not have employment agreements with any of its executive officers. The loss of key personnel or the inability to hire or retain qualified personnel could have a material adverse effect on the Company. Variations in Quarterly Results. The Company has experienced and expects to continue to experience variations in quarterly results. Recent quarterly variations are primarily due to the effect of one-time charges related to acquired in-process research and development costs and the timing of contract executions. Quarterly results are also influenced by the timing of release of certain systems and products as a result of the annual release of certain external data sources. The Company's operating results for any particular quarterly or annual period may not be indicative of results for future periods. Dependence on Intellectual Property Rights. The Company has made significant investments in the development and maintenance of its core collection of proprietary data standardization methodologies, value-added clinical measurement tools and technical resources that are used to transform its many large and disparate data streams into clinically relevant information products. The Company relies largely on its license agreements with customers and its own security systems, confidentiality procedures and employee nondisclosure agreements to maintain the trade secrecy of its proprietary information. There can be no assurance that the legal protections and precautions taken by the Company will be adequate to prevent misappropriation of the Company's proprietary information. In addition, these protections do not prevent independent third-party development of functionally equivalent or superior systems, products or methodologies. Competition. The health care information market is intensely competitive and rapidly changing. The Company competes for the sale of systems and products and the resulting access to data with different companies in each of its target markets. Competitors vary in size and in the scope and breadth of the products and services offered. Many of the Company's competitors have significantly -10- greater financial, technical, product development and marketing resources than the Company. There can be no assurance that future competition, or any significant loss of access to data resulting therefrom, will not have a material adverse effect on the Company. Major Customers. During 1995 and 1996, the Company's ten largest customers accounted for approximately 36% and 28%, respectively, of the Company's revenue. Many of the Company's contractual arrangements with its customers are subject to annual renewal. The loss of one or more of the Company's largest customers could have a material adverse effect on the Company. Integrity and Reliability of Data. The Company's success depends significantly on the integrity of its data. Although the Company tests data for completeness and consistency, it does not conduct independent audits of the information provided by its customers. Moreover, while the Company believes that the benchmarking and other clinical, cost and performance information contained in its database is representative of the operational aspects of various types of health care industry participants, there can be no assurance that such information is appropriate for comparative analysis in all cases or that the databases accurately reflect general or specific trends in the health care market. If the information contained in the data were found, or were perceived, to be inaccurate, or if such information were generally perceived to be unreliable, the Company's business and operating results could be materially and adversely affected. Potential Cost of Performance Guarantees. As part of certain of its decision support systems, the Company guarantees that a customer will achieve or identify a certain level of cost savings at least equal to the fees the customer pays for the system. To the extent such cost savings are not achieved, the Company may be subject to claims related to such guarantees. Although the Company has never incurred a claim under these guarantees, there can be no assurance that this will continue to be the case. Liabilities related to such claims could have a material adverse effect on the Company's business and operating results. Volatility of Stock Price. The stock market historically has experienced volatility which has affected the market price of securities of many companies and which has sometimes been unrelated to the operating performance of such companies. The trading price of the Common Stock may be subject to significant fluctuations in response to general market conditions and to factors specific to the Company, such as variations in quarterly results of operations, announcements of acquisitions, new systems or products by the Company or its competitors, governmental regulatory action, other developments or disputes with respect to proprietary rights, general trends in the industry and overall market conditions, and other factors. Changes in the Health Care Industry. The health care industry is subject to changing political, economic and regulatory influences that may affect the procurement practices and operation of health care industry participants generally. During the past several years, the U.S. health care industry has been subject to an increase in governmental regulation of, among other things, reimbursement rates and certain capital expenditures. Various programs have been proposed to reform the U.S. health care system. Many of these programs contain proposals to increase governmental involvement in health care, lower reimbursement rates and otherwise change the operating environment for the Company's customers. Health care industry participants may react to these proposals and the uncertainty surrounding such proposals by curtailing or deferring investments, including those for the Company's systems and products. The Company cannot predict what impact, if any, such factors might have on its business, financial condition and results of operations. In addition, many health care providers are consolidating to create larger health care delivery enterprises with greater regional market power. As a -11- result, the remaining enterprises could have greater bargaining power, which may lead to price erosion of the Company's systems and products. Government Regulation. The U.S. Food and Drug Administration (the "FDA") has promulgated a draft policy addressing the regulation of certain computer products as medical devices under the Federal Food, Drug, and Cosmetic Act. The FDA could determine in the future that certain applications of the Company's systems and products are clinical decision tools subject to FDA regulation as medical devices. In addition, the Company could become subject to future regulation of the manufacture and marketing of medical devices and health care software systems, or to legislation or regulation regarding the use of patient records or of access to health care data. Compliance with such legislation and regulation could be burdensome, time consuming and expensive. The Company cannot predict the effect of possible future legislation and regulation. WHEN USED IN THIS FORM 10-K, IN ANY FUTURE FILINGS BY HCIA WITH THE SECURITIES AND EXCHANGE COMMISSION, IN THE COMPANY'S PRESS RELEASES AND IN ORAL STATEMENTS MADE WITH THE APPROVAL OF AN AUTHORIZED EXECUTIVE OFFICER, THE WORDS OR PHRASES "WILL LIKELY RESULT," "ARE EXPECTED TO," "WILL CONTINUE," "IS ANTICIPATED," "ESTIMATE," "PROJECTED" OR SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE SECURITIES ACT. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL EARNINGS AND THOSE PRESENTLY ANTICIPATED OR PROJECTED. HCIA WISHES TO CAUTION READERS NOT TO PLACE UNDUE RELIANCE ON ANY SUCH FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE MADE. HCIA UNDERTAKES NO OBLIGATION TO PUBLICLY UPDATE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. Item 2. Properties. The Company's executive offices are located in Baltimore, Maryland, in approximately 65,000 square feet of leased office space, under a lease that expires on December 31, 2002, and which includes an option for an additional term of up to five years. The Company also leases approximately 46,500 square feet of office space in Ann Arbor, Michigan, under leases that expire on March 31, 2000, and 42,000 square feet of office space in Denver, Colorado, under a lease that expires on August 31, 2001. The Company also maintains offices in Fairport, New York, Waltham, Massachusetts, Louisville, Kentucky, Concord, California, Olympia, Washington, East Greenwich, Rhode Island, Windsor, Connecticut, Deerfield, Illinois, Alcester, England and Barcelona, Spain. The Company believes that its facilities are adequate for its current operations. Item 3. Legal Proceedings. The Company is a defendant from time to time in lawsuits incidental to its business. The Company is not currently a party to, and none of its properties is subject to, any material legal proceedings. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. -12- Item 4A. Executive Officers of the Company. Executive officers are elected annually by the Board of Directors and serve at the discretion of the Board of Directors. Information regarding the executive officers of the Company who are not directors is as follows: Name Age Position ---- --- -------- Sachi J. Morishige 30 Senior Vice President-Corporate Development Barry C. Offutt 35 Senior Vice President and Chief Financial Officer Jean Chenoweth 50 Senior Vice President-Industry Relations Charles A. Berardesco 38 Senior Vice President, General Counsel and Secretary Donald S. Good, Jr. 34 Senior Vice President-Commercial Markets EJay Lockwood 34 Senior Vice President-Managed Care Markets Kevin J. Hicks 37 Senior Vice President-Provider Markets Ms. Morishige has been employed by the Company in various capacities since its founding in 1985, and currently serves as Senior Vice President-Corporate Development. Mr. Offutt served as a Vice President from April 1992 until September 1995, when he was appointed a Senior Vice President, and has served as Chief Financial Officer since October 1992. He is a certified public accountant and was employed by Arthur Andersen & Co. in various capacities from 1984 to March 1992. Ms. Chenoweth served as Vice President - Industry Relations from April 1992 until her appointment as Senior Vice President in September 1995. She served in various senior management positions, including President, with HKR and its predecessor from 1989 through April 1992. Mr. Berardesco served as Vice President, General Counsel and Secretary from May 1996 until September 1996, when he was appointed a Senior Vice President. Prior to May 1996, he was a partner with the law firm of Whiteford, Taylor & Preston L.L.P., counsel to the Company. Mr. Good served as a Vice President from May 1996 until September 1996, when he was appointed Senior Vice President-Commercial Markets. Prior to May 1996, he was a healthcare consultant with Arthur Andersen & Co. Mr. Lockwood has been employed by the Company since January 1996, having served as Vice President-Commercial Markets until his appointment as a Senior Vice President in February 1996. Prior to January 1996, he was employed by CIGNA Healthcare in various capacities. -13- Mr. Hicks has served as Senior Vice President-Provider Markets, since joining the Company in August 1996. Prior to that time, he served in various senior management positions, including chief executive officer, with LBA. -14- PART II Item 5. Market for the Company's Common Equity and Related Stockholder Matters. The Company's Common Stock has been publicly traded on the NASDAQ National Market System since February 22, 1995 under the symbol "HCIA." The following table sets forth, for the quarterly period indicated, the high and low closing sale price per share of Common Stock as reported by NASDAQ: 1995 1996 High Low High Low ------------------- ---------------------- First Quarter $25 $17-5/8 $55-3/4 $41-7/8 Second Quarter 31-5/8 21 67-7/8 45-5/8 Third Quarter 31-1/4 24-1/2 67-3/8 50-1/16 Fourth Quarter 46-3/4 22-3/4 36-1/8 23-1/4 As of February 28, 1997, there were 72 holders of record of the Company's Common Stock. The number of record holders is not representative of the number of beneficial holders since many shares are held by depositories, brokers or other nominees. Dividends The Company has never paid any cash dividends on its Common Stock and does not anticipate paying any cash dividends on the Common Stock for the foreseeable future. The Company currently intends to retain future earnings, if any, to fund the development and growth of its business. Sales of Unregistered Securities In connection with the acquisition of LBA, the Company issued a total of 492,961 shares of Common Stock to the then stockholders of LBA's parent company. The foregoing issuances were exempt from registration pursuant to Section 4(2) of the Securities Act as they did not involve a public offering. In issuing the shares, the Company relied upon the status of the stockholders (or their representatives) as officers or directors of LBA and that each had such knowledge and experience in financial and business matters that such stockholder was capable of evaluating the merits and risks of an investment in the Company's Common Stock. Item 6. Selected Financial Data.
Year Ended December 31, 1992 1993 1994 1995(1) 1996(1) ------- ------- ------- -------- -------- (in thousands, except per share data) STATEMENTS OF OPERATIONS DATA: Revenue $19,470 $28,111 $30,711 $ 48,015 $ 73,520 Salaries, wages and benefits 9,431 14,168 15,457 21,932 32,688 Other operating expenses 7,499 8,611 8,625 12,055 17,058 Depreciation and amortization 3,204 4,595 4,826 6,864 12,670 Write-off of acquired in-process research and development costs -- -- -- 12,152 48,065 ------- ------- ------- -------- -------- Operating income (loss) (664) 737 1,803 (4,988) (36,961) Interest income -- -- 111 1,290 1,110 Interest expense 625 111 131 187 530 ------- ------- ------- -------- -------- Income (loss) before income taxes, minority interest in loss (income) of consolidated subsidiaries and cumulative effect of change in accounting for income taxes (1,289) 626 1,783 (3,885) (36,381) Provision (benefit) for income taxes (330) 362 759 (1,554) 5,886 Minority interest in loss (income) of consolidated subsidiaries (45) 90 (3) (74) -- ------- ------- ------- -------- -------- Income (loss) before cumulative effect of change in accounting for income taxes (1,004) 354 1,021 (2,405) (42,267) Cumulative effect of change in accounting for income taxes -- (142) -- -- -- ------- ------- ------- -------- -------- Net income (loss) $(1,004) $ 212 $ 1,021 $ (2,405) (42,267) ======= ======= ======= ======== ======== Net income (loss) per share $ 0.19 $ (0.31) $ (4.19) Shares used in per share calculation 5,518 7,733 10,096 ======= ======= ======= ======== ======== BALANCE SHEET DATA: Working capital $ 454 $ 3,852 $ 5,620 $ 35,671 $ 36,996 Total assets 37,643 41,122 40,865 108,401 223,196 Long-term liabilities, excluding current installments 1,298 2,136 1,835 699 2,305 Stockholders' equity 28,907 32,762 34,371 98,044 202,407
(1) In connection with various acquisitions, the Company has recorded charges related to acquired in-process research and development costs. Exclusive of such charges and related income tax effects, net income per share would have been $0.60 and $0.68 for 1995 and 1996, respectively. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. OVERVIEW HCIA Inc. ("HCIA" or the "Company") is a health care information content company that develops and markets integrated clinical information systems and products. The Company's systems and products range from standardized databases to highly focused decision support systems that assist its customers in evaluating the efficacy and economics of health care delivery. The Company's customers include hospitals, integrated delivery systems, self-insured employers, pharmaceutical companies and managed care organizations. In 1991, HCIA began a series of acquisitions of health care information companies, product lines and data resources. In connection with certain of these acquisitions, the Company has recorded one-time charges related to acquired in-process research and development costs. Such charges totaled approximately $12.2 million and $48.1 million during 1995 and 1996, respectively. As a result of these charges, the Company recorded net losses for each of these years. The Company has accounted for all of its acquisitions using the purchase method of accounting and, accordingly, has included the results of the acquired entities since the date of acquisition. See Note 1 of the Notes to Consolidated Financial Statements. The Company has made a substantial investment in the acquisition and development of its core collection of methodologies, clinical measurement tools and technical resources. The Company's strategy is to leverage these resources across substantially all of its systems and products, thereby giving it the ability to increase revenue generated from these resources without a commensurate increase in expenses. In addition to its internal product development efforts, the Company seeks to continue the acquisition of other health care information companies, product lines and data resources, and intends to integrate and leverage these assets into product-line extensions across its markets. The Company does not track profitability by product line since many of the Company's resources are utilized throughout its systems and products. The Company's internal product development efforts are generally in connection with customer contracts, and the related costs are included as a component of operating expenses in the year incurred. The Company capitalizes costs related to internal product development which is not in connection with a specific customer contract from the point of technological feasibility to the point of general availability. As a result of its acquisitions of health care information companies, product lines and data resources, the Company has acquired intangible assets, the cost of which it amortizes over various useful lives. In addition, the Company has capitalized internal development costs and acquired assets relating to the development of methodologies, clinical measurement tools and technical resources, including its database, of $3.4 million, $6.9 million and $14.4 million during 1994, 1995 and 1996, respectively. Consequently, the Company has recorded amortization expense of $3.9 million, $5.2 million and $10.1 million during 1994, 1995 and 1996, respectively. See Notes 1, 2, and 4 of the Notes to Consolidated Financial Statements. As a result of its unique ability to integrate health care data collected from numerous sources and across varied treatment settings, the Company believes that it is well positioned to offer the information systems and products necessary to continue to increase average revenue per customer through the sale of more sophisticated and comprehensive systems and products. With respect to entry-level systems and products, pricing is relatively fixed and is influenced by competitive systems and products. With respect to high-end systems and products, pricing is often negotiated with the customer and is based on a number of factors, including the value attributed by the customer to the system. 8 The Company's revenue is comprised of both recurring revenue from the Company's installed customer base as well as from first-time sales. The Company seeks to generate recurring revenue from decision support systems through multi-year agreements (typically two to three years) and through renewals of its syndicated products, which are updated annually. The Company defines its recurring revenue percentage as revenue recognized during the period from a sale of a system or product to a customer who purchased a similar system or product in the prior period, divided by the Company's total revenue in the prior period. In determining its recurring revenue percentage, the Company includes in its revenue the revenue of entities acquired during the period as if such acquisitions had occurred at the beginning of the prior period. The Company does not classify revenue as recurring to the extent that it exceeds the revenue from a similar system or product purchase in the prior period. The Company's recurring revenue percentage was 69% and 66% in 1995 and 1996, respectively. RESULTS OF OPERATIONS The following table sets forth, for the fiscal periods indicated, certain items from the statements of operations of the Company expressed as a percentage of revenue:
YEAR ENDED DECEMBER 31, 1994 1995 1996 ----- ------ ------ Revenue 100% 100% 100% Salaries, wages and benefits 50 46 45 Other operating expenses 28 25 23 Depreciation and amortization 16 14 17 Write-off of acquired in-process research and development costs -- 25 65 Operating income (loss) 6 (10) (50) Net interest income -- 2 1 Income (loss) before income taxes and minority interest in loss (income) of consolidated subsidiaries 6 (8) (49) Provision (benefit) for income taxes 3 (3) 8 Net income (loss) 3% (5)% (57)%
9 1996 Compared to 1995 Revenue Revenue for 1996 was $73.5 million, an increase of $25.5 million or 53% over 1995. The increase was the result of increased sales of the Company's decision support systems. Revenue from the sales of decision support systems represented 82% of revenue for 1996 and syndicated products represented the remaining 18% of revenue. The decision support systems revenue increase was primarily the result of increased sales to providers and managed care customers, particularly as a result of acquisitions, as well as increased penetration of the supplier market. Salaries, Wages and Benefits Salaries, wages and benefits decreased to 45% of revenue for 1996 from 46% for 1995. This decrease was a result of the continued leveraging of the Company's historical investments in technology and basic infrastructure as revenue increased. Other Operating Expenses Other operating expenses, which include occupancy, travel and marketing expenses, decreased to 23% of revenue for 1996 from 25% for 1995. This decrease was a result of certain of these expenses growing at a slower rate than revenue. Depreciation and Amortization Depreciation and amortization increased to 17% of revenue for 1996 from 14% for 1995. This increase was a result of the additional amortization associated with certain acquisitions and capitalized internal development costs as well as depreciation of other acquired assets. Write-Off of Acquired In-Process Research and Development Costs In connection with four acquisitions completed during 1995 and 1996, the Company acquired ongoing research and development activities. The Company recorded one-time charges totaling $12.2 million and $48.1 million during 1995 and 1996, respectively, resulting from the write-off of the acquired in-process research and development costs. The amount of the one-time charges was equal to the estimated current fair value, based on the discounted risk-adjusted cash flows, of specifically identified technologies for which technological feasibility had not yet been established pursuant to Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed," ("SFAS No. 86") and for which future alternative uses did not exist. Interest Income and Expense Net interest income was $580,000 for 1996 compared with net interest income of $1.1 million for 1995. The decrease was the result of higher interest expense in 1996 related to debt incurred in connection with certain acquisitions. Income Taxes The Company's effective tax rate was 16% for 1996 compared with (39)% for 1995. The change was primarily the result of non-deductible goodwill and the non-deductible write-off of the in-process research and development costs resulting from certain acquisitions during 1996. 10 1995 Compared to 1994 Revenue Revenue for 1995 was $48.0 million, an increase of $17.3 million or 56% over 1994. The increase was primarily the result of a 77% increase in revenue from the sale of decision support systems. Revenue from the sale of decision support systems represented 80% of revenue for 1995 and Syndicated Products represented the remaining 20% of revenue. The decision support systems revenue increase was primarily the result of increased sales of decision support systems to providers, particularly as a result of acquisitions during the year, and to a lesser extent, due to increased sales through CHKS Ltd., the Company's English subsidiary. Sales of the Company's systems to the supplier market also increased. In particular, the Company met several performance milestones pursuant to its contract with CIGNA Healthcare during the year. Salaries, Wages and Benefits Salaries, wages and benefits decreased to 46% of revenue for 1995 from 50% for 1994. This decrease was a result of the leveraging of the Company's historical investments in technology and basic infrastructure as revenue increased. Other Operating Expenses Other operating expenses, which include occupancy, travel and marketing expenses, decreased to 25% of revenue for 1995 from 28% for 1994. This decrease was a result of certain of these expenses growing at a slower rate than revenue. Depreciation and Amortization Depreciation and amortization decreased to 14% of revenue for 1995 from 16% of revenue for 1994. The decrease was the result of the fixed nature of a large component of the depreciation and amortization, which was the result of prior acquisitions, being measured against a larger revenue base. Write-Off of Acquired In-Process Research and Development Costs In connection with an acquisition during 1995, the Company acquired ongoing research and development activities. At the time of the acquisition, the Company recorded a one-time $12.2 million charge resulting from the write-off of the acquired in-process research and development costs. The amount of the one-time charge was equal to the estimated current fair value, based on the risk-adjusted cash flows, of specifically identified technologies for which technological feasibility had not yet been established pursuant to SFAS No. 86 and for which future alternative uses did not exist. Interest Income and Expense Net interest income was $1.1 million for 1995 compared with net interest expense of $20,000 for 1994. The increase in net interest income was the result of a portion of the proceeds of the Company's public offerings being utilized to repay the amount due under the Company's credit agreement with the Company's former majority stockholder, AMBAC Inc. (approximately $1.9 million), with the balance being invested in cash equivalents and short-term investments. Income Taxes The Company's effective income tax rate was (39)% for 1995 compared with 43% for 1994. The change was a result of the Company recording a net loss in 1995. 11 LIQUIDITY AND CAPITAL RESOURCES During 1995 and 1996, the Company completed several public offerings of its Common Stock. The net proceeds to the Company from the offerings were approximately $182.3 million. In August 1996, the Company obtained from First Union National Bank of North Carolina ("First Union") a credit facility totaling $100 million, consisting of a $50 million term loan and a $50 million revolving line of credit. The Company incurred a one-time facility fee of $520,000. The Company borrowed the entire $50 million term loan and approximately $36 million of the revolving line of credit in connection with the acquisition of LBA Healthcare Management, Inc. ("LBA") and repaid such borrowings with a portion of the net proceeds to the Company from a public offering of the Company's common stock. The Company currently maintains the $50 million (subject to certain borrowing limitations) revolving line of credit for general corporate purposes, including future acquisitions and working capital requirements. Borrowings are collateralized by substantially all of the Company's assets. The Company is required to pay a commitment fee on the average daily unused portion of the facility at a rate ranging from 0.25% to 0.375% per annum, depending on the Company's debt/cash flow ratio. Borrowings bear interest at varying rates based on an index tied to First Union's prime rate or LIBOR (6.25% at December 31, 1996). The credit facility also contains financial covenants applicable to HCIA, including a debt/cash flow ratio and ratios of debt to capital. As of December 31, 1996, the Company was in compliance with all such financial covenants and had a maximum borrowing capacity of $50 million, and there were no borrowings outstanding under the facility. The credit facility reduces to $37.5 million in July 1999, $25 million in July 2000 and expires on July 31, 2001. During 1994, 1995 and 1996, the Company generated net cash from operations of approximately $4.4 million, $3.1 million and $11.4 million, respectively. During 1995 and 1996, approximately $7.1 million and $12.1 million of cash generated from operations was used to fund the increase in accounts receivable. The increases in accounts receivable were primarily the result of revenue growth, as well as the timing of receipt of payments from certain major customers. Net cash provided by financing activities during 1994, 1995 and 1996 was approximately $568,000, $66.2 million and $143.6 million, respectively, primarily as a result of the Company's public offerings of its common stock. The net cash provided by operations and financing activities has been utilized primarily for acquisitions and capital expenditures. The Company made capital expenditures (including capitalized leases) totaling $1.6 million, $3.1 million and $6.4 million during 1994, 1995 and 1996, respectively. As of December 31, 1996, the Company had net working capital of $37.0 million, including cash, cash equivalents and short-term investments in the amount of $13.8 million, and did not have any material commitments for capital expenditures. 12 In April 1995, the Company completed the acquisition of all of the outstanding capital stock of Datis Corporation ("Datis"). The purchase price for the capital stock of Datis was approximately $14.6 million in cash, which included approximately $14.25 million funded by the Company and $386,000 funded with the proceeds received from the exercise of certain options to purchase Datis stock. In addition, the Company repaid approximately $900,000 of outstanding debt of Datis. In December 1995, the Company acquired the CHAMP unit of William M. Mercer, Incorporated ("CHAMP") for $17.5 million in cash and, in May 1996, the Company completed the acquisition of Response Healthcare Information Management, Inc. ("Response") for approximately $6.3 million in cash. In August 1996, the Company acquired LBA for a total purchase price of approximately $128.8 million, $100.1 million of which was paid in cash and $28.7 million of which was paid by the delivery of HCIA common stock. The Company utilized $86 million in borrowings under the First Union credit facility discussed above to fund the cash portion of the purchase price, which was subsequently repaid from the proceeds of a public offering of Common Stock. In December 1996, the Company acquired HealthChex, Inc. ("HealthChex") from Equifax Inc. for $11.5 million in cash. Each of these acquisitions has been accounted for using the purchase method of accounting and, accordingly, the assets have been valued at their estimated fair market value. The Company expects to incur additional costs of $6 to $9 million to complete the development efforts related to systems and products obtained in connection with the acquisitions of CHAMP, Response, LBA and HealthChex, and to integrate these products with the Company's other products. Such costs are expected to consist of direct labor and contracted labor costs and are expected to be incurred over the next two to three years. 13 Item 8. Financial Statements and Supplementary Data. REPORT OF INDEPENDENT AUDITORS THE BOARD OF DIRECTORS HCIA INC.: We have audited the accompanying consolidated balance sheets of HCIA Inc. and subsidiaries as of December 31, 1995 and 1996, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of HCIA Inc. and subsidiaries as of December 31, 1995 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Baltimore, Maryland January 23, 1997 14 CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 (in thousands, except per share data) HCIA INC. AND SUBSIDIARIES
1994 1995 1996 ------- ------- -------- Revenue $30,711 $48,015 $ 73,520 Salaries, wages and benefits 15,457 21,932 32,688 Other operating expenses 8,625 12,055 17,058 Depreciation 957 1,619 2,567 Amortization 3,869 5,245 10,103 Write-off of acquired in-process research and development costs -- 12,152 48,065 ------- ------- -------- Operating income (loss) 1,803 (4,988) (36,961) Interest income 111 1,290 1,110 Interest expense 131 187 530 ------- ------- -------- Income (loss) before income taxes and minority interest in income of consolidated subsidiaries 1,783 (3,885) (36,381) Provision (benefit) for income taxes 759 (1,554) 5,886 Minority interest in income of consolidated subsidiaries (3) (74) -- ------- ------- -------- Net income (loss) $ 1,021 $(2,405) $(42,267) ======= ======= ======== Net income (loss) per share $ 0.19 $ (0.31) $ (4.19) ======= ======= ======== Shares used in per share calculation 5,518 7,733 10,096 ======= ======= ========
See accompanying notes to consolidated financial statements. 15 CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1995 AND 1996 (in thousands) HCIA INC. AND SUBSIDIARIES
1995 1996 -------- -------- ASSETS Current assets: Cash and cash equivalents $ 3,190 $ 13,302 Short-term investments 23,280 510 Trade accounts receivable, net of allowance for doubtful accounts of $454 in 1995 and $1,042 in 1996 16,623 32,122 Prepaid expenses and other current assets 2,236 3,886 Income tax receivable -- 339 Deferred compensation funds held in trust -- 5,321 -------- -------- Total current assets 45,329 55,480 Furniture and equipment, net 6,576 12,188 Computer software costs, net 11,012 20,425 Other intangible assets, net 42,338 115,601 Net deferred tax asset 3,090 17,074 Other 56 123 Deferred compensation funds held in trust -- 2,305 -------- -------- Total assets $108,401 $223,196 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 732 $ 1,315 Accrued salaries, benefits and other liabilities 4,222 7,957 Capital lease obligations 174 121 Notes payable 2,265 1,718 Income taxes payable 1,098 -- Deferred revenue 1,167 2,052 Acquired deferred compensation liability -- 5,321 -------- -------- Total current liabilities 9,658 18,484 Notes payable 699 -- Acquired deferred compensation liability -- 2,305 -------- -------- Total liabilities 10,357 20,789 -------- -------- Stockholders' equity: Preferred stock--$0.01 par value; authorized 500,000 shares; no shares issued and outstanding -- -- Common stock--$0.01 par value; authorized 50,000,000 shares; issued and outstanding 8,955,932 as of December 31, 1995 and 11,781,458 as of December 31, 1996 90 118 Additional paid-in capital 102,882 249,591 Accumulated deficit (4,953) (47,220) Cumulative unrealized appreciation of short-term investments 44 4 Cumulative effect of currency translation adjustment (19) (86) -------- -------- Total stockholders' equity 98,044 202,407 -------- -------- Total liabilities and stockholders' equity $108,401 $223,196 ======== ========
See accompanying notes to consolidated financial statements. 16 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 (in thousands) HCIA INC. AND SUBSIDIARIES
Cumulative Unrealized Appreciation/ Preferred Preferred Preferred Total Additional (Depreciation) Stock Stock Stock Preferred Common Paid-In Accumulated of Short-Term Series A Series B Series C Stock Stock Capital Deficit Investments --------- --------- --------- --------- ------ ---------- ----------- -------------- BALANCE AT DECEMBER 31, 1993 $ 10,662 $ 5,500 $ 6,400 $ 22,562 $ 30 $ 11,319 $ (1,155) -- Capital contributions -- -- -- -- -- 605 -- -- Conversion of preferred stock (10,662) (5,500) (6,400) (22,562) 24 24,952 (2,414) -- Net income -- -- -- -- -- -- 1,021 -- Effect of currency translation adjustment -- -- -- -- -- -- -- -- -------- ------- ------- -------- ---- -------- -------- ---- BALANCE AT DECEMBER 31, 1994 -- -- -- -- 54 36,876 (2,548) -- Sale of common stock to the public -- -- -- -- 36 66,006 -- -- Net loss -- -- -- -- -- -- (2,405) -- Effect of currency translation adjustment -- -- -- -- -- -- -- -- Unrealized appreciation of short-term investments -- -- -- -- -- -- -- 44 -------- ------- ------- -------- ---- -------- -------- ---- BALANCE AT DECEMBER 31, 1995 -- -- -- -- $ 90 $102,882 $ (4,953) $ 44 Exercise of stock options -- -- -- -- -- 638 -- -- Sale of common stock to the public -- -- -- -- 23 116,233 -- -- Tax benefits related to exercise of stock options -- -- -- -- -- 1,128 -- -- Issuance of stock in connection with an acquisition -- -- -- -- 5 28,710 -- -- Net loss -- -- -- -- -- -- (42,267) -- Effect of currency translation adjustment -- -- -- -- -- -- -- -- Unrealized depreciation of short-term investments -- -- -- -- -- -- -- (40) -------- ------- ------- -------- ---- -------- -------- ---- BALANCE AT DECEMBER 31, 1996 $ -- $ -- $ -- $ -- $118 $249,591 $(47,220) $ 4 ======== ======= ======= ======== ==== ======== ======== ====
Cumulative Effect of Currency Total Translation Stockholders' Adjustment Equity ----------- ------------- BALANCE AT DECEMBER 31, 1993 $ 6 $ 32,762 Capital contributions -- 605 Conversion of preferred stock -- -- Net income -- 1,021 Effect of currency translation adjustment (17) (17) ---- -------- BALANCE AT DECEMBER 31, 1994 (11) 34,371 Sale of common stock to the public -- 66,042 Net loss -- (2,405) Effect of currency translation adjustment (8) (8) Unrealized appreciation of short-term investments -- 44 ---- -------- BALANCE AT DECEMBER 31, 1995 $(19) $ 98,044 Exercise of stock options -- 638 Sale of common stock to the public -- 116,256 Tax benefits related to exercise of stock options -- 1,128 Issuance of stock in connection with an acquisition -- 28,715 Net loss -- (42,267) Effect of currency translation adjustment (67) (67) Unrealized depreciation of short-term investments -- (40) ---- -------- BALANCE AT DECEMBER 31, 1996 $(86) $202,407 ==== ======== See accompanying notes to consolidated financial statements. 17 CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 (in thousands) HCIA INC. AND SUBSIDIARIES
1994 1995 1996 -------- --------- ---------- Cash flows from operating activities: Net income (loss) $ 1,021 $ (2,405) $ (42,267) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 4,826 6,864 12,670 Write-off of acquired in-process research and development costs -- 12,152 48,065 Income tax benefit related to stock options -- -- 1,128 Deferred tax provision (338) (3,625) 5,606 Changes in operating assets and liabilities: Accounts receivable (349) (7,078) (12,057) Income taxes payable/receivable 1,097 973 (1,637) Prepaid expenses (234) (1,505) (328) Accounts payable (853) 215 (1,247) Accrued salaries, benefits and other liabilities (771) (816) 812 Deferred revenue 40 (1,714) 674 Minority interest 3 75 -- ------- -------- --------- Net cash provided by operating activities 4,442 3,136 11,419 ------- -------- --------- Cash flows from investing activities: Purchases of furniture and equipment (1,568) (3,145) (6,357) Cost of acquisitions, net of cash acquired -- (35,271) (146,765) Computer software costs purchased or capitalized (2,603) (6,151) (12,671) Other intangible assets purchased or capitalized (779) (716) (1,742) Purchases of short-term investments -- (69,312) (59,640) Proceeds from disposals of short-term investments -- 46,077 82,370 Payments on note receivable 108 1,551 -- Other (40) 104 (67) ------- -------- --------- Net cash used in investing activities (4,882) (66,863) (144,872) ------- -------- --------- Cash flows from financing activities: Proceeds from exercise of stock options -- -- 638 Proceeds from public offerings -- 66,042 116,256 Proceeds from issuance of preferred stock 605 -- -- Issuance of stock in connection with an acquisition -- -- 28,715 Acquisition related borrowings -- -- 86,000 Repayment of acquisition related borrowings -- -- (86,000) Fees paid to establish credit facilities -- -- (520) Borrowing from related party 1,400 2,915 -- Repayments of notes payable -- (513) (1,246) Repayments of related party borrowings (1,250) (1,900) -- Principal payments on capital leases (187) (315) (211) ------- -------- --------- Net cash provided by financing activities 568 66,229 143,632 ------- -------- --------- Impact of currency fluctuations on cash and cash equivalents (17) (8) (67) ------- -------- --------- Increase in cash and cash equivalents 111 2,494 10,112 Cash and cash equivalents -- beginning of year 585 696 3,190 Cash and cash equivalents -- end of year $ 696 $ 3,190 $ 13,302 ======= ======== ========= Supplemental cash flow information -- cash paid during the year for interest $ 137 $ 89 $ 461 ======= ======== ========= -- cash paid during the year for income taxes $ -- $ 1,088 $ 790 ======= ======== =========
See accompanying notes to consolidated financial statements. 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1994, 1995, AND 1996 HCIA INC. AND SUBSIDIARIES (1) BACKGROUND (a) Description of Business HCIA Inc. ("HCIA" or the "Company") is a health care information content company that develops and markets integrated clinical information systems and products. The Company's systems and products range from standardized databases to highly focused decision support systems that assist its customers in evaluating the efficacy and economics of health care delivery. The Company's customers include hospitals, integrated delivery systems, self-insured employers, pharmaceutical companies and managed care organizations. (b) Public Offerings During February 1995, the Company completed an initial public offering of approximately 2.0 million shares of common stock at $14.00 per share. In August 1995, the Company completed a public offering of approximately 2.6 million shares at $28.50 per share, consisting of 1.5 million shares issued by the Company and approximately 1.1 million shares sold by the Company's then largest stockholder, AMBAC Inc. ("AMBAC"). In May 1996, approximately 4.2 million shares of the Company's common stock were sold by AMBAC in a public offering. In connection with the offering the Company sold 261,951 shares of common stock at $51.00 per share. In August 1996, approximately 2.2 million shares of the Company's common stock were sold at $54.125 per share in a public offering. Of these shares, 216,696 were sold by certain stockholders. The Company did not receive any of the proceeds from the sale of shares by the selling stockholders. Net proceeds to the Company from the offerings discussed above were approximately $182.3 million. (c) Acquisitions Certain information regarding the Company's major acquisitions in the periods covered by these financial statements is summarized below:
Datis CHAMP Response LBA ---------------------- --------------------- --------------------- ----------------------- Life of Life of Life of Life of Asset Asset Asset Asset ------- ------- ------- ------- Purchase Price $14,250,000 $17,500,000 $6,261,000 $128,829,000 Assets Acquired Current Assets $ 1,338,000 $ 175,000 $1,274,000 $ 4,681,000 Furniture & Equipment $ 1,092,000 3-5 years -- $ 293,000 3-5 years $ 1,533,000 3-5 years Other Assets $25,000 -- -- -- Deferred tax asset -- -- $ 221,000 $ 18,534,000 Software $ 233,000 5 years $ 859,000 5 years $ 255,000 5 years -- Trade Name -- $ 1,266,000 12 years -- -- Customer base -- $ 595,000 12 years $ 393,000 12 years $ 5,135,000 10 years Methodologies -- -- -- $ 12,843,000 6 years Assembled Workforce -- $ 1,102,000 12 years $ 133,000 12 years $ 4,080,000 10 years Goodwill $16,503,000 20 years $ 1,351,000 12 years $ 304,000 15 years $ 43,859,000 20 years In-process research & development -- $12,152,000 $ 4,309,000 $ 41,507,000 Liabilities assumed $ 4,941,000 -- $ 921,000 $ 3,343,000
HealthChex ---------------------- Life of Asset ------- Purchase Price $11,503,000 Assets Acquired Current Assets $ 508,000 Furniture & Equipment $ 590,000 3-5 years Other Assets -- Deferred tax asset $ 835,000 Software -- Trade Name -- Customer base $ 599,000 10 years Methodologies $ 1,628,000 5 years Assembled Workforce $ 715,000 10 years Goodwill $ 5,107,000 20 years In-process research & development $ 2,249,000 Liabilities assumed $ 728,000 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HCIA INC. AND SUBSIDIARIES On April 28, 1995, the Company acquired all of the capital stock of Datis Corporation ("Datis") for $14,250,000 in cash. Datis provided databases and related analyses to hospitals and hospital systems. The goodwill amortization period is based on the nature of Datis' products and markets and the historical rates of change in the products and markets. On December 15, 1995, the Company acquired the assets constituting the CHAMP unit of William M. Mercer, Incorporated ("CHAMP") for $17,500,000 in cash. CHAMP provides database and analytical reporting services to large employers to assist them in the management of their healthcare costs. On May 15, 1996, the Company acquired all of the outstanding stock of Response Healthcare Information Management, Inc. ("Response") for $6,261,000 in cash. Response develops and markets information products which capture and analyze point-of-care, patient-centered data relating to disease-specific outcomes measurement and member/patient satisfaction. On August 9, 1996, the Company acquired all of the capital stock of LBA Holdings, Inc. (formerly HealthVision, Inc.) and its operating subsidiary LBA Health Care Management, Inc. ("LBA"). The purchase price including acquisition expenses was $128,829,000, of which $100,114,000 was paid in cash and $28,715,000 was paid through the delivery of 492,961 shares of the Company's common stock. LBA develops and markets information products that analyze and benchmark detailed clinical and productivity outcomes. The cash portion of the purchase price was funded primarily through a credit facility obtained from First Union National Bank of North Carolina ("First Union") consisting of a $50,000,000 term loan and a $36,000,000 draw on a $50,000,000 revolving line of credit (see note 9). These loans were repaid with a portion of the proceeds from the Company's August 1996 public offering. On December 2, 1996, the Company purchased all of the capital stock of Equifax Health Analytical Services, Inc. ("HealthChex") for $11,503,000 in cash. The parties have agreed to make an election under Internal Revenue Code Sec. 338(h)(10) to treat this acquisition as an asset purchase for tax purposes. HealthChex provides physician profiling and medical claims review systems to health care providers and payors. The values and lives of the intangible assets and in-process research and development costs obtained in the CHAMP, Response, LBA and HealthChex acquisitions were determined by an independent appraiser. The lives and values of the intangible assets were based on, among other things, employee retention rates, customer retention rates and the historical rates of change in the products and markets. The current fair value of in-process research and development costs was determined, based on the risk-adjusted cash flows (at discount rates of 19% to 22%), of specifically identified technologies for which technological feasibility had not yet been established pursuant to Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed" ("SFAS No. 86") and for which future alternative uses did not exist. Consideration of technological feasibility for purposes of these calculations was given on a basis consistent with that normally utilized by the Company (see note 2d). Non-recurring charges to write off these costs were recorded on the date of each acquisition. These charges are recorded as operating expenses on the accompanying consolidated statements of operations. During November 1995, the Company acquired an additional 36% interest in CHKS Limited ("CHKS"). As a result of this acquisition, CHKS became a wholly owned subsidiary of the Company. The Company issued notes payable to the former shareholders in the principal amount of $2,795,000. This acquisition was accounted for using the purchase method of accounting and resulted in additional goodwill of $2,709,000. The goodwill is being amortized over its estimated useful life of 15 years. The estimate of the amortization period is based on the nature of the products and markets of CHKS and the historical rate of change in the products and markets. 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HCIA INC. AND SUBSIDIARIES Also during 1995, the Company acquired certain assets and assumed certain liabilities of John Froehlich Associates, MetriCor Inc. and MetaGenerics. The aggregate purchase price for these acquisitions was $1,677,000, consisting of cash of $1,166,000 and notes payable of $511,000. These acquisitions resulted in increases in furniture and equipment of $75,000, increases in other intangible assets of $1,938,000 and increases in current liabilities of $336,000. The other intangible assets consist of goodwill which is being amortized on a straight-line basis over estimated useful lives of 10 to 15 years. The estimate of each amortization period is based on the nature of the products and markets of the acquired entities and the historical rate of change in the products and markets. During 1996 the Company also acquired all of the stock of IASIST S.A. and all of the interests in Managed Marketing LLC. The aggregate purchase price for these acquisitions was $2,713,000 and was paid in cash. These acquisitions resulted in increases in current assets of $496,000, furniture and equipment of $85,000, software of $303,000 and goodwill of $2,159,000, offset by increased current liabilities of $330,000. The goodwill is being amortized on a straight-line basis over its estimated useful life of 15 years. The estimate of each amortization period is based on the nature of the products and markets of the acquired entities and the historical rates of change in the products and markets. Unless otherwise noted, funding for the acquisitions discussed above was provided from the proceeds of the Company's public offerings. All of these acquisitions were accounted for using the purchase method of accounting. Unaudited pro forma combined results of the operations of the Company for the years ended December 31, 1995 and 1996 are presented below and have been prepared assuming that the acquisitions discussed above had been made as of January 1, 1995. 1995 1996 ------- ------- (unaudited) Revenue $79,456 $93,568 Net income $ 2,146 $ 7,192 Net income per share $ 0.20 $ 0.59 The pro forma results include the historical accounts of the Company and the acquired entities adjusted to reflect the effects of the depreciation and amortization of the acquired identifiable tangible and intangible assets based on the new cost basis of the assets acquired, additional interest expense related to notes payable issued in connection with certain acquisitions, the reversal of the non-recurring write-off of acquired in-process research and development costs recorded in connection with certain acquisitions and related income tax effects. The pro forma results are not necessarily indicative of actual results which might have occurred had the operations and management of the Company and the acquired entities been combined in 1995 and 1996. 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Principles of Consolidation The accompanying financial statements include the accounts of the Company and its subsidiaries. The minority interest of CHKS for the periods before it became wholly owned is stated separately on the financial statements. All significant intercompany transactions have been eliminated in consolidation. (b) Cash Equivalents and Short-Term Investments Cash equivalents consist of highly liquid securities with original maturities of three months or less at the date acquired by the Company. At December 31, 1995 and 1996, the Company's short-term investments, which are classified as an available for sale securities portfolio, consist of the following:
1995 1996 ----------------------------- ------------------------- Fair Value Cost Fair Value Cost ------------- ----------- ---------- -------- Auction Market Preferred Stock $ 7,000,000 $ 7,000,000 $ -- $ -- Variable Rate Debentures 5,500,000 5,500,000 -- -- Municipal Bonds 10,780,000 10,736,000 510,000 506,000 ----------- ----------- -------- -------- Total $23,280,000 $23,236,000 $510,000 $506,000 =========== =========== ======== ========
The portfolio is carried at fair value in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." All securities mature within one year. Realized gains and losses are recorded using the specific identification basis to determine costs. During 1995 and 1996, proceeds from sales of the securities totaled $46,077,000 and $82,370,000, respectively. Gross realized gains and losses on sales of the securities were immaterial in 1995 and 1996. (c) Furniture and Equipment Furniture and equipment are stated at cost. Included in furniture and equipment are computer hardware, furniture and fixtures and leasehold improvements. These costs are being depreciated on the straight-line method over their estimated useful lives of three to five years. (d) Computer Software Costs Computer software costs include the cost of internally developed software and the fair market value assigned to computer software obtained in purchase transactions. Costs for internally developed software are capitalized in accordance with SFAS No. 86. These costs relate primarily to the building of production systems and extending existing applications to new markets or platforms using existing technologies and programming methods. The Company capitalizes only those costs incurred after a detailed program design or, in the absence of such, a working prototype has been developed. The Company generally develops its applications in connection with customer contracts and includes the related costs as a component of operating expenses in the period incurred. The Company capitalized or purchased a total of $2,603,000, $7,260,000 and $13,229,000 of computer software costs in 1994, 1995 and 1996, respectively, including $1,092,000 in 1995 and $558,000 in 1996 related to business acquisitions. Capitalized costs are amortized, beginning with market availability, over the economic useful life of the product. Typically, this life is five years. The annual amortization expense is the greater of the amount computed using (a) the ratio that current gross revenues for a product bears to the total of current and anticipated future gross revenues for that product or (b) the straight-line method over the remaining estimated economic life of the product including the period being reported. Amortization expense for computer software was $1,456,000, $2,048,000 and $3,816,000 during 1994, 1995 and 1996, respectively. Accumulated amortization for computer software was $6,510,000 and $10,326,000 at December 31, 1995 and 1996, respectively. The Company evaluates, on a quarterly basis, the recoverability of capitalized software costs on the basis of whether such costs are fully recoverable from projected undiscounted cash flows of individual system and product lines. 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (e) Revenue Recognition Revenue from license fees for access to the Company's databases is recognized when access to the database is made available to the customer. Revenue from custom system or database development and implementation contracts is recognized on a percentage of completion basis using the cost-to-cost method. This method of accounting has resulted in unbilled accounts receivable of $3,073,000 and $3,686,000 at December 31, 1995 and 1996, respectively. On a quarterly basis, the Company assesses whether the current estimate of total contract costs for each of these contracts indicates a loss is expected and accrues any such losses on the entire contract in that quarter. Where the Company has contracted to provide both access to a Company database and development of a custom database, the contract value is segmented into its discrete elements according to their relative values, and revenue is recognized separately on each element in accordance with the above. Revenue from group data contracts, which obligate the Company to process data, produce reports and update databases on periodic intervals, is recognized as the contracted obligations are fulfilled. Revenue from licensing of software products is recognized upon shipment, provided that no vendor obligations remain outstanding. While the Company has no significant post-contract support ("PCS") obligations, any revenue related to insignificant PCS obligations on software licenses is deferred and recognized over the contract term. The Company determines the component of revenue applicable to PCS obligations based upon its experience in fulfilling such obligations. Revenue on all other products is recognized when the product is shipped. During 1994, one customer accounted for 12% of the Company's revenue. At December 31, 1994, receivables from that customer represented 12% of the Company's trade accounts receivable. Consistent with Company policy, no collateral or other security was held with respect to such trade accounts receivable. During 1995 and 1996, no single customer accounted for 10% or more of the Company's revenue or trade accounts receivable. (f) Foreign Currency Translation The assets and liabilities of the Company's foreign operations are translated at year-end exchange rates, while revenue and expenses are translated at rates prevailing during the period. Accordingly, translation adjustments that arise due to fluctuations in exchange rates are excluded from operations and are reported as a separate component of stockholders' equity. (g) Income Taxes Prior to the completion of the Company's initial public offering in February 1995, the Company was party to a federal tax-sharing agreement with AMBAC and was included in AMBAC's consolidated federal income tax return. The tax-sharing agreement provided for the determination of tax expense or benefit based on the contribution of the Company to AMBAC's tax liability, computed substantially as if the Company filed a separate income tax return. The tax liability due AMBAC was settled quarterly, with a final settlement taking place after the filing of the consolidated federal tax return. Commencing February 22, 1995, the Company was no longer included on a consolidated basis for tax purposes with AMBAC and is responsible for filing its own federal income tax return. The Company uses the asset and liability method required by Statement of Financial Accounting Standards No. 109, "Accounting For Income Taxes," to account for deferred income taxes. Under this method, deferred income taxes are recognized for temporary differences between the financial reporting bases of assets and liabilities and their respective tax bases and for operating loss and tax credit carryforwards based on enacted rates expected to be in effect when such amounts are realized or settled. The effects of changes in tax laws or rates on deferred tax assets and liabilities are recognized in the period that includes the enactment date. (h) Earnings Per Share Earnings per share has been calculated based upon the weighted average number of shares outstanding and using the treasury stock method for outstanding stock options. The number of shares used in this calculation has been adjusted to reflect a one-for-three reverse stock split and the conversion of Class A and Class B common stock into a single class of common stock (see note 10). For 1994, the fair market value per share for the purpose of the calculation of the weighted average shares outstanding was assumed to be $11.00, which was the mid-point of the Company's initial public offering price range. 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (i) Accounting for Stock Options The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB No. 25") in accounting for its stock options. Additional information required by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS No. 123") is discussed in Note 10. (j) Use Of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (k) Reclassifications Certain amounts for 1994 and 1995 have been reclassified to conform to the presentation for 1996. (3) FURNITURE AND EQUIPMENT Furniture and equipment consist of the following at December 31: 1995 1996 ------------ ------------ Computer equipment $ 8,629,000 $15,274,000 Office furniture and equipment 1,398,000 1,881,000 Other 392,000 516,000 ----------- ----------- 10,419,000 17,671,000 Less accumulated depreciation (3,843,000) (5,483,000) ----------- ----------- $ 6,576,000 $12,188,000 =========== =========== (4) OTHER INTANGIBLE ASSETS Other intangible assets at December 31, 1996 consist of the following:
Capitalized Accumulated Carrying Weighted Cost Amortization Value Average Life ------------- ------------ ------------- ------------ Databases $ 7,788,000 $ 4,778,000 $ 3,010,000 5 CPHA license and prepaid royalties 14,031,000 3,886,000 10,145,000 17 Goodwill 79,467,000 4,777,000 74,690,000 19 Customer bases 6,722,000 290,000 6,432,000 10 Methodologies 14,471,000 919,000 13,552,000 6 Assembled workforce 6,030,000 276,000 5,754,000 10 Other 2,274,000 256,000 2,018,000 13 ------------ ----------- ------------ $130,783,000 $15,182,000 $115,601,000 ============ =========== ============
Other intangible assets at December 31, 1995 consist of the following:
Capitalized Accumulated Carrying Weighted Cost Amortization Value Average Life ------------- ------------ ------------- ------------ Databases $ 5,888,000 $3,711,000 $ 2,177,000 5 CPHA license and prepaid royalties 14,031,000 3,061,000 10,970,000 17 Goodwill 27,536,000 2,231,000 25,305,000 17 Customer bases 595,000 -- 595,000 12 Assembled workforce 1,102,000 -- 1,102,000 12 Other 2,274,000 85,000 2,189,000 13 ----------- ---------- ----------- $51,426,000 $9,088,000 $42,338,000 =========== ========== ===========
Databases consist of the fair market value of various acquired databases, the cost of acquiring data and internal development costs (direct labor and related overhead) incurred in standardizing data for use in internally developed databases. These assets are being amortized on a straight-line basis over their estimated useful lives of five years. Amortization expense for databases was approximately $839,000, $962,000 and $1,067,000 during 1994, 1995 and 1996, respectively. 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS During 1992, the Company acquired an exclusive license to access and sell the databases and certain other assets of the Commission on Professional and Hospital Activities ("CPHA"). This license was recorded at its estimated fair value of $8,073,000 at the date of acquisition and is being amortized on a straight-line basis over 17 years. The amortization period was determined to be the estimated economic life cycle of the licensed properties, as corroborated by an independent appraisal, and reflected the remainder of the existing term of the license at the date of acquisition plus one renewal term provided under the terms of the agreement. Under the terms of the license, the Company paid royalties to CPHA based on revenues earned utilizing the licensed assets. Subsequent to the acquisition, the Company and CPHA entered into a new license agreement. Under the terms of the new agreement, the Company paid $5,958,000 to CPHA in lieu of future royalty obligations. The payment is recorded as prepaid CPHA royalties and is being amortized on a straight-line basis over 17 years, consistent with the estimated economic life of the licensed properties. Goodwill represents the excess of the purchase price over the fair value of net assets acquired. Goodwill is being amortized on a straight-line basis over 10 to 20 years. Such amortization periods are estimated based on the nature of the products and markets of the acquired companies and the historical rates of changes in these products and market areas. Customer bases, methodologies and assembled workforces were obtained through the CHAMP, Response, LBA and HealthChex acquisitions. The values and lives of these assets were determined by an independent appraiser based on factors such as going concern value, employee turnover and historical customer retention rates. Other intangibles consist of a trade name obtained in the CHAMP acquisition and certain non-competition agreements. The value and life of the tradename was determined by an independent appraiser. The non-competition agreements are amortized over their 1 to 2 year terms commencing with the date the employees are no longer employed by the Company. (5) ACCRUED SALARIES, BENEFITS AND OTHER LIABILITIES Accrued salaries, benefits and other liabilities consist of the following at December 31: 1995 1996 ---------- ---------- Accrued salaries $1,108,000 $2,220,000 Accrued benefits 304,000 477,000 Accrued vacation 562,000 681,000 Other 2,248,000 4,579,000 ---------- ---------- $4,222,000 $7,957,000 ========== ========== (6) LEASES The Company leases office space and certain equipment under operating leases. Rent expense for these leases was $1,527,000, $2,286,000 and 3,563,000 net of rental income of $0, $0 and $412,000 during 1994, 1995 and 1996, respectively. The minimum rental commitments under noncancelable operating leases as of December 31, 1996, are as follows: Year Ending December 31: 1997 $ 4,619,000 1998 4,042,000 1999 3,910,000 2000 2,906,000 2001 2,274,000 Thereafter 1,400,000 ----------- Gross minimum payments required $19,151,000 Sublease Income (949,000) ----------- Net minimum payments required $18,202,000 =========== 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (7) SAVINGS INCENTIVE PLAN The Company maintains the HCIA Inc. Savings Incentive Plan, a profit sharing plan qualified under Section 401(a) of the Internal Revenue Code. All employees of the Company who have completed one year of service are eligible to participate in the Plan. Subject to certain limitations on individual contributions and allocations and Company deductions, the Plan allows participants to defer up to 15% of their pay on a pre-tax basis and up to 10% of their pay on an after-tax basis. The Company also makes matching contributions equal to 50% of the amount a participant defers up to 6% of the participant's pay. The Plan also provides for discretionary contributions by the Company. All participants are fully vested in all of their accounts in the Plan. The Company's contributions to the Plan during 1994, 1995 and 1996 were approximately $167,000, $194,000 and $397,000, respectively. (8) INCOME TAXES The income tax expense (benefit) relating to the operations of the Company consists of the following:
1994 1995 1996 ----------- ------------ ---------- Federal and state: Current $1,097,000 $ 2,071,000 $ 280,000 Deferred (338,000) (3,625,000) 5,606,000 ---------- ----------- ---------- Total income tax expense (benefit) $ 759,000 $(1,554,000) $5,886,000 ========== =========== ==========
The tax provisions in the accompanying financial statements differ from prevailing federal corporate rates. A reconciliation of this difference follows:
1994 1995 1996 Amount % Amount % Amount % ----------------- ----------------------- ------------------------ Computed expected tax expense (benefit) at statutory rate $623,000 35.0% $(1,346,000) (34.0)% $(12,370,000) (34.0)% Goodwill amortization 44,000 2.5 220,000 5.6 637,000 1.8 Tax-exempt interest -- -- (234,000) (5.9) (216,000) (0.6) State tax, net of federal benefit 93,000 5.2 (224,000) (5.7) (1,609,000) (4.4) Acquired in-process research and development -- -- -- -- 19,226,000 52.8 Other, net (1,000) -- 30,000 0.7 218,000 0.6 ---------------- --------------------- ---------------------- Provision (benefit) for income taxes $759,000 42.7% $(1,554,000) (39.3)% $ 5,886,000 16.2% ================ ===================== ======================
26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The tax effects of temporary differences that give rise to significant portions of the deferred tax liabilities and deferred tax assets at December 31, 1995 and 1996, are presented below: 1995 1996 ---------- ----------- Deferred tax assets: Operating accruals $ 403,000 $ 881,000 Basis difference in intangibles 6,297,000 10,091,000 Bonus accrual -- 2,005,000 Net operating loss carryforwards -- 11,457,000 ---------- ----------- Gross deferred tax assets 6,700,000 24,434,000 Valuation allowance -- -- ---------- ----------- Net deferred tax assets 6,700,000 24,434,000 ---------- ----------- Deferred tax liabilities: Capitalized software 3,005,000 6,226,000 Fixed assets 605,000 1,134,000 ---------- ----------- Total deferred tax liabilities 3,610,000 7,360,000 ---------- ----------- Net deferred tax assets $3,090,000 $17,074,000 ========== =========== The valuation allowance for deferred tax assets as of January 1, 1995 and December 31, 1995 and 1996 was $0. Therefore, there was no net change in the valuation allowance for 1995 and 1996. The Company has net operating loss carryforwards of $41,600,000 at December 31, 1996, which expire between 2002 and 2011. (9) CREDIT AGREEMENT In August 1996 the Company obtained a credit facility from First Union totaling $100,000,000, consisting of a $50,000,000 term loan and a $50,000,000 revolving line of credit. The Company incurred a one-time facility fee and related expenses of $520,000 which is being amortized over the five year term of the line of credit. The Company borrowed the entire $50,000,000 term loan and approximately $36,000,000 of the line of credit in connection with the LBA acquisition (see note 1(c)). These borrowings were repaid by August 31, 1996 with a portion of the proceeds from the Company's August 1996 public offering of its common stock (see note 1(b)). The Company currently maintains the $50,000,000 line of credit (subject to borrowing limitations) and made no additional borrowings against it during 1996. The line of credit bears interest at rates ranging from First Union's prime rate to prime plus 0.5% or LIBOR (5.5% at December 31, 1996) plus 0.75% to LIBOR plus 1.75%, depending on the Company's debt to cash flow ratio. The Company pays a commitment fee on the unused portion of the line of credit at rates ranging from 0.25% to 0.375% depending on the Company's debt to cash flow ratio. The line of credit is subject to financial covenants including debt to cash flow and debt to capital ratios. As of December 31, 1996, the Company was in compliance with all such covenants and had a maximum borrowing capacity of $50,000,000. The credit facility reduces to $37,500,000 in July 1999, $25,000,000 in July 2000 and expires on July 31, 2001. 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (10) STOCKHOLDERS' EQUITY (a) Capital Amendment Effective February 14, 1995, the Company filed an amendment to its articles of incorporation which effected: (i) a one-for-three reverse stock split; (ii) the conversion of the Class A and Class B common stock into a single class of common stock; and (iii) the authorization of a total of 15,000,000 shares of common stock and 500,000 shares of preferred stock, each having a par value of $.01 per share. All references to common stock and stock options in these financial statements have been adjusted to reflect the one-for-three reverse stock split as if it had occurred prior to January 1, 1994. Effective August 12, 1996, the Company filed an amendment to its articles of incorporation increasing the authorized number of shares of common stock to 50,000,000. (b) Common and Preferred Stock The preferred stock may be issued from time to time by the board of directors as shares of one or more series. The description of the shares of each series of preferred stock is established by the board of directors prior to the issuance of the series of shares. During 1994, the Company issued 2,378,672 shares of common stock to AMBACin exchange for the 225,621 shares of preferred stock then outstanding. During 1995, the Company issued 3,512,500 shares of common stock in connection with its public offerings. During 1996, the Company issued 2,261,591 shares of common stock in connection with its public offerings and 492,961 shares in connection with its acquisition of LBA. (c) Options At December 31, 1994, 1995 and 1996, the Company had outstanding stock options as follows: Stock options outstanding pursuant to: 1994 1995 1996 ------- ------- --------- HCIA Stock Option Plan -- 169,933 956,266 Directors' Option Plan -- 22,500 57,000 Other options 374,226 507,800 451,111 ------- ------- --------- Total stock options outstanding 374,226 700,233 1,464,377 ======= ======= ========= 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The HCIA Stock Option Plan provides that up to 1,350,000 options may be issued to employees of the Company. Options granted to date under this plan vest over a period of three or four years and expire ten years from date of grant. The Directors' Option Plan provides that up to 200,000 options may be issued to outside directors of the Company. Options granted to date under this plan vest over periods of one to two years and expire ten years from the date of grant. The Company has also issued non-plan options which generally vest over periods of two or three years and expire six to ten years from date of grant. In February 1995, the Company issued a non-plan option to its chief executive officer which was fully vested on the date of grant and expires ten years from date of grant. All stock options issued by the Company have been granted with exercise prices equal to or greater than the estimated fair market value of the common stock on the date of grant. Stock option transactions are summarized as follows:
1994 1995 1996 ----------------- ----------------- ------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------- -------- ------- -------- --------- -------- Outstanding at beginning of year 164,997 $ 6.00 374,226 $ 8.62 700,233 $13.80 Granted 217,563 $10.50 357,433 $18.99 1,524,000 $45.61 Exercised -- -- (6,427) $10.50 (62,605) $ 9.27 Cancelled (8,334) $ 6.00 (24,999) $11.20 (697,251) $58.35 Outstanding at end of year 374,226 $ 8.62 700,233 $13.80 1,464,377 $25.89 Options exercisable at end of year -- -- 186,867 $13.50 345,215 $13.13
The following summarizes information about stock options outstanding as of December 31, 1996:
Options Outstanding Options Exercisable ----------------------------------------------- --------------------------- Number Weighted Avg. Weighted Number Weighted Range of Outstanding Remaining Average Exercisable Average Exercise Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price - --------------- ----------- ---------------- -------------- ----------- -------------- $6 126,097 3.5 $ 6.00 47,766 $ 6.00 $10 to $15 367,848 7.8 12.43 265,215 12.83 $25 to $30 797,932 9.7 28.30 32,234 26.17 $48 to $51 29,500 9.1 48.65 -- -- $59.88 143,000 9.6 59.88 -- -- --------- --- ------ ------- ------ 1,464,377 8.7 $25.89 345,215 $13.13 ========= === ====== ======= ======
The Company applies APB No. 25 and related interpretations in accounting for its stock options. Accordingly, no compensation expense has been recognized in connection with its stock options. Had compensation expense for the Company's stock options been determined consistent with SFASNo. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: 1994 1995 1996 ------ -------- --------- Net Income As reported $1,021 $(2,405) $(42,267) Pro forma $ 812 $(2,996) $(43,795) Earnings per share As reported $ 0.19 $ (0.31) $ (4.19) Pro forma $ 0.15 $ (0.39) $ (4.34) The fair value of the options for purposes of the above pro forma disclosure was calculated using the Black-Scholes option pricing model and the following assumptions: a risk-free interest rate of 6.58%, weighted average expected life of six to seven years, no dividend payments and a volatility of 31.29% based on the annualized 10 year industry average. The effects of applying SFAS No. 123 in the pro forma net income and earnings per share for 1994, 1995 and 1996 may not be representative of the effects on such pro forma information for future years. 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (11) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of cash and cash equivalents, trade accounts receivable, other current assets, accounts payable, accrued expenses and capital lease obligations approximates fair value because of the short-term maturity of these instruments. The fair value of short-term investments is estimated based on quoted market prices for these or similar investments. The Company has notes payable to individuals relating to certain of its business acquisitions. It is not practicable to estimate the fair value of these notes since they are not traded, no quoted values are readily available for similar financial instruments and the Company believes it is not cost-effective to have valuations performed. However, management believes that there has been no permanent change in the value of such notes. 30 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable. -16- PART III Item 10. Directors and Executive Officers. The information required by this Item is contained in the Company's Proxy Statement for the 1997 Annual Meeting of Stockholders under the headings "Election of Directors" and "Additional Information -- Section 16(a) Beneficial Ownership Reporting Compliance," and in Item 4A of this Form 10-K. Item 11. Executive Compensation. The information required by this Item is contained in the Company's Proxy Statement for the 1997 Annual Meeting of Stockholders under the heading "Executive Compensation and Other Information." Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required by this Item is contained in the Company's Proxy Statement for the 1997 Annual Meeting of Stockholders under the heading "Security Ownership of Management and Certain Beneficial Owners." Item 13. Certain Relationships and Related Transactions. The information required by this Item is contained in the Company's Proxy Statement for the 1997 Annual Meeting of Stockholders under the heading "Certain Transactions." -17- PART IV Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K. (a) The following documents are filed as a part of this Report: 1. The following report and financial statements are included in Item 8 of this Report: Independent Auditors' Report Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Changes in Stockholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements (b) Form 8-Ks: 1. On October 1, 1996, the Company filed a Form 8-K enclosing a press release announcing the preliminary results for the quarter ended September 30, 1996. 2. On October 23, 1996, the Company filed a Form 8-K/A-2 (i) enclosing a press release announcing the results for the quarter ended June 30, 1996 and (ii) including the following financial statements relating to the previously announced acquisition of LBA: Financial Statements of Datis Corporation Financial Statements of William M. Mercer, Incorporated National Health Analysis Unit (CHAMP) Financial Statements of HealthVISION, Inc. Financial Statements of LBA Health Care Management, Inc. Pro Forma Financial Statements (c) Financial Statement Schedules: Independent Auditors' Report on Schedule Schedule II -- Valuation and Qualifying Accounts All other schedules to the financial statements for which provision is made in the accounting regulations of the Commission are not applicable, not required or the information is included in the financial statements or notes thereto and therefore have been omitted. (d) Exhibits: -18-
Exhibit Number Description ------- ----------- 3.1 *** Articles of Incorporation of the Registrant, as amended to date. 3.2 Bylaws of the Registrant, as amended to date. 10.1 * Employment Agreement dated as of January 1, 1995 by and between the Registrant and George D. Pillari. 10.1.1 First Amendment to Employment Agreement. 10.2 HCIA Inc. 1994 Stock and Incentive Plan, as amended to date. 10.3 ** Agreement dated December 4, 1992 by and among Healthcare Knowledge Resources, Inc., the Registrant and the Commission on Professional and Hospital Activities. 10.4 HCIA Inc. 1995 Non-Employee Directors Stock Option Plan, as amended to date. 10.5 ** Tax Sharing Agreement by and among AMBAC Inc., AMBAC Indemnity Corporation, American Municipal Bond Holding Company and the Registrant dated as of July 18, 1991. 10.6 *** Form of Management Retention Agreement. 10.7 * Registration Rights Agreement, dated August 10, 1995, by and among the Registrant, George D. Pillari, AMBAC Inc. and AMBAC Indemnity Corporation. 10.8 *** Registration Rights Agreement, dated August 9, 1996, by and among the Registrant and certain stockholders. 10.9 *** Credit Agreement, dated August 8, 1996, by and between First Union National Bank of North Carolina, as Agent, and the Registrant. 11.1 Statement regarding Computation of Per Share Earnings. 21.1 Subsidiaries of the Registrant. 23.1 Consent of KPMG Peat Marwick LLP. 27.1 Financial Data Schedule
- ------------ * Incorporated by reference to the Registrant's Registration Statement on Form S-1. (File No. 33-94946). ** Incorporated by reference to the Registrant's Registration Statement on Form S-1. (File No. 33-88226). *** Incorporated by reference to the Registrant's Registration Statement on Form S-3. (File No. 333-08639). -19- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HCIA INC. By: /s/ George D. Pillari ---------------------------------- George D. Pillari Chairman of the Board, President & CEO Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/ George D. Pillari Chairman of the Board, March 28, 1997 - --------------------------- President and Chief George D. Pillari Executive Officer (principal executive officer) /s/ Barry C. Offutt Senior Vice President March 28, 1997 - --------------------------- and Chief Financial Officer Barry C. Offutt (principal financial and] accounting officer) /s/ Phillip B. Lassiter Director March 28, 1997 - --------------------------- Phillip B. Lassiter /s/ Richard Dulude Director March 28, 1997 - --------------------------- Richard Dulude /s/ Richard Berman Director March 28, 1997 - --------------------------- Richard Berman /s/ W. Grant Gregory Director March 28, 1997 - --------------------------- W. Grant Gregory /s/ Mark C. Rogers Director March 28, 1997 - --------------------------- Mark C. Rogers /s/ Carl J. Schramm Director March 28, 1997 - --------------------------- Carl J. Schramm Exhibit Index
Page No. 3.1 *** Articles of Incorporation of the Registrant, as amended to date................ 3.2 Bylaws of the Registrant, as amended to date................................... 10.1 * Employment Agreement dated as of January 1, 1995 by and between the Registrant and George D. Pillari............................................... 10.1.1 First Amendment to Employment Agreement........................................ 10.2 HCIA Inc. 1994 Stock and Incentive Plan, as amended to date.................... 10.3 ** Agreement dated December 4, 1992 by and among Healthcare Knowledge Resources, Inc., the Registrant and the Commission on Professional and Hospital Activities............................................................ 10.4 HCIA Inc. 1995 Non-Employee Directors Stock Option Plan, as amended to date.... 10.5 ** Tax Sharing Agreement by and among AMBAC Inc., AMBAC Indemnity Corporation, American Municipal Bond Holding Company and the Registrant dated as of July 18, 1991........................................... 10.6 *** Form of Management Retention Agreement......................................... 10.7 * Registration Rights Agreement, dated August 10, 1995, by and among the Registrant, George D. Pillari, AMBAC Inc. and AMBAC Indemnity Corporation...... 10.8 *** Registration Rights Agreement, dated August 9, 1996, by and among the Registrant and certain stockholders............................................ 10.9 *** Credit Agreement, dated August 8, 1996, by and between First Union National Bank of North Carolina, as Agent, and the Registrant........................... 11.1 Statement regarding Computation of Per Share Earnings.......................... 21.1 Subsidiaries of the Registrant................................................. 23.1 Consent of KPMG Peat Marwick LLP............................................... 27.1 Financial Data Schedule........................................................
* Incorporated by reference to the Registrant's Registration Statement on Form S-1 (File No. 33-94946). ** Incorporated by reference to the Registrant's Registration Statement on Form S-1. (File No. 33-88226). *** Incorporated by reference to the Registrant's Registration Statement on Form S-3. (File No. 333-08639). Independent Auditors' Report The Board of Directors and Stockholders HCIA Inc.: Under date of January 23, 1997, we reported on the consolidated balance sheets of HCIA Inc. and Subsidiaries (the Company) as of December 31, 1995 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996, as contained in the annual report on Form 10-K for the year 1996. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule in the Form 10-K. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this consolidated financial statement schedule based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG PEAT MARWICK LLP Baltimore, Maryland January 23, 1997 SCHEDULE II --- VALUATION AND QUALIFYING ACCOUNTS (In thousands)
Balance at Charged to Deductions Balance Beginning Costs and at Description of Period Expenses End of Period Allowance for Doubtful Accounts Year ended December 31, 1994..... $499 $87 $(227)(A) $359 Year ended December 31, 1995..... 359 214 (119)(A) 454 Year ended December 31, 1996..... 454 560 28 (A) 1,042
(A) Accounts receivable write-offs and recoveries EX-3.(II) 2 EXHIBIT 3.2 Exhibit 3.2 AMENDED AND RESTATED BYLAWS OF HCIA INC. ARTICLE I STOCKHOLDERS Section 1. Annual Meeting. The annual meeting of stockholders of the Corporation shall be held each year at the principal office of the Corporation in the State of Maryland, or at such other place, during the month of April, at such date, hour and place within or without the State as may be fixed by the Board of Directors for the purpose of election of Directors and for the transaction of such other business as may properly come before the meeting. Section 2. Special Meeting. A special meeting of stockholders may be called by the Board of Directors or by the President to be held at the principal office of the Corporation in the State of Maryland or at such other place as may be determined by the Board of Directors when such meeting is called. Special meetings of stockholders shall also be called by the Secretary upon the written request of the holders of shares entitled to cast not less than 25% of all the votes entitled to be cast at such meeting; provided, however, unless requested by stockholders entitled to cast a majority of all votes entitled to be cast at such meeting, a special meeting need not be called for the purpose of considering any matter which is substantially the same as a matter voted on at any special meeting of the stockholders held during the preceding 12 months. Such request shall state in general terms the purpose of such meeting and the matters proposed to be acted on at such meeting. The Secretary shall inform such stockholders of the reasonably estimated cost of preparing and mailing notice of the meeting and, upon payment to the Corporation of such costs, the Secretary shall give notice to each stockholder entitled to notice of the meeting. Notice of such special meeting shall be given in the same manner as is provided in the case of annual meetings. Section 3. Notice. Not less than 10 nor more than 90 days before each meeting of stockholders, the Secretary shall give to each stockholder entitled to vote at such meeting and to each stockholder not entitled to vote who is entitled to notice of the meeting, written or printed notice stating the time and place of the meeting and, in the case of a special meeting or as otherwise may be required by statute, the purpose for which the meeting is called, either by mail or by presenting it to such stockholder personally or by leaving it at his residence or usual place of business. If mailed, such notice shall be deemed to be given when deposited in the United States mail addressed to the stockholder at his post office address as it appears on the records of the Corporation, with postage thereon prepaid. Section 4. Scope of Notice. No business shall be transacted at a special meeting of stockholders except that designated in the notice. Any business of the Corporation may be transacted at the annual meeting without being specifically designated in the notice, except such business as is required by statute to be stated in such notice. Section 5. Quorum. At any meeting of stockholders, the presence in person or by proxy of stockholders entitled to cast a majority of all the votes entitled to be cast at such meeting shall constitute a quorum; but this section shall not affect any requirement under any statute or the Charter for the vote necessary for the adoption of any measure. If, however, such quorum shall not be present at any meeting of the stockholders, the stockholders entitled to vote at such meeting, present in person or by proxy, shall have the power to adjourn the meeting from time to time to a date not more than 120 days after the original record date without notice other than announcement at the meeting until such quorum shall be present. At such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally notified. Section 6. Voting. A majority of the votes cast at a meeting of stockholders duly called and at which a quorum is present shall be sufficient to approve any matter which may properly come before the meeting, unless more than a majority of the votes cast is required by statute or by the Charter. Unless otherwise provided in the Charter, each outstanding share of stock, regardless of class, shall be entitled to one vote on each matter submitted to a vote at a meeting of stockholders. Section 7. Proxies. A stockholder may vote the shares of stock owned of record by him, either in person or by proxy executed in writing by the stockholder or by his duly authorized attorney in fact. Such proxy shall be filed with the Secretary of the Corporation before or at the time of the meeting. No proxy shall be valid after eleven months from the date of its execution, unless otherwise provided in the proxy. Section 8. Voting of Shares by Certain Holders. Shares registered in the name of another corporation, if entitled to be voted, may be voted by the President, a Vice-President or a proxy appointed by the President or a Vice-President of such other corporation, unless some other person who has been appointed to vote such shares pursuant to a bylaw or a resolution of the Board of Directors of such other corporation presents a certified copy of such bylaw or resolution, in which case such person may vote such shares. Any fiduciary may vote shares registered in his name as such fiduciary, either in person or by proxy. Shares of its own stock directly or indirectly owned by this Corporation shall not be voted at any meeting and shall not be counted in determining the total number of -2- outstanding shares entitled to be voted at any given time, unless they are held by it in a fiduciary capacity, in which case they may be voted and shall be counted in determining the total number of outstanding shares at any given time. The Board of Directors may adopt by resolution a procedure by which a stockholder may certify in writing to the Corporation that any shares of stock registered in the name of the stockholder are held for the account of a specified person other than the stockholder. The resolution shall set forth the class of stockholders who may certify, the purpose for which the certification may be made, the form of certification and the information to be contained in it; if the certification is with respect to a record date or closing of the stock transfer books, the time after the record date or closing of the stock transfer books within which the certification must be received by the Corporation; and any other provisions with respect to the procedure which the Board of Directors considers necessary or desirable. On receipt of such certification, the person specified in the certification shall be regarded as, for the purposes set forth in the certification, the stockholder of record of the specified stock in place of the stockholder who makes the certification. Section 9. Inspectors. At any meetings of stockholders, the chairman of the meeting may, or upon the request of any stockholder shall, appoint one or more persons as inspectors for such meeting. Such inspectors shall ascertain and report the number of shares represented at the meeting based upon their determination of the validity and effect of proxies, count all votes, report the results and perform such other acts as are proper to conduct the election and voting with impartiality and fairness to all the stockholders. Each report of an inspector shall be in writing and signed by him or by a majority of them if there be more than one inspector acting at such meeting. If there is more than one inspector, the report of a majority shall be the report of the inspectors. The report of the inspector or inspectors on the number of shares represented at the meeting and the results of the voting shall be prima facie evidence thereof. Section 10. Informal Action by Stockholders. Any action required or permitted to be taken at a meeting of stockholders may be taken without a meeting if a consent in writing, setting forth such action, is signed by each stockholder entitled to vote on the matter and any other stockholder entitled to notice of a meeting of stockholders (but not to vote thereat) has waived in writing any right to dissent from such action, and such consent and waiver are filed with the minutes of proceedings of the stockholders. -3- Section 11. Voting by Ballot. Voting on any question or in any election may be viva voce unless the presiding officer shall order or any stockholder shall demand that voting be by ballot. Section 12. Nominations and Stockholder Business. (a) Annual Meetings of Stockholders. (1) Nominations of persons for election to the Board of Directors and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders (i) pursuant to the Corporation's notice of meeting, (ii) by or at the direction of the Board of Directors or (iii) by any stockholder of the Corporation who was a stockholder of record at the time of giving of notice provided for in this Section 12(a), who is entitled to vote at the meeting and who complied with the notice procedures set forth in this Section 12(a). (2) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (iii) of paragraph (a)(1) of this Section 12, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the Corporation not less than 60 days nor more than 90 days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the 90th day prior to such annual meeting and not later than the close of business on the later of the 60th day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made. Such stockholder's notice shall set forth (i) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (ii) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and of the beneficial owner, if any, on whose behalf the proposal is made; and (iii) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made, (x) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner and (y) the number of shares of each class of stock of the -4- Corporation which are owned beneficially and of record by such stockholder and such beneficial owner. (3) Notwithstanding anything in the second sentence of paragraph (a)(2) of this Section 12 to the contrary, in the event that the number of directors to be elected to the Board of Directors is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by the Corporation at least 70 days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this Section 12(a) shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the tenth day following the day on which such public announcement is first made by the Corporation. (b) Special Meetings of Stockholders. Only such business as shall have been brought before the meeting pursuant to the Corporation's notice of meeting shall be conducted at a special meeting of stockholders. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected: (i) pursuant to the Corporation's notice of meeting; (ii) by or at the direction of the Board of Directors; or (iii) provided that the Board of Directors has determined that directors shall be elected at such special meeting, by any stockholder of the Corporation who is a stockholder of record at the time of giving of notice provided for in this Section 12(b), who is entitled to vote at the meeting and who complied with the notice procedures set forth in this Section 12(b). In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder may nominate a person or persons (as the case may be) for election to such position as specified in the Corporation's notice of meeting, if the stockholder's notice containing the information required by paragraph (a)(2) of this Section 12 shall be delivered to the Secretary at the principal executive offices of the Corporation not earlier than the 90th day prior to such special meeting and not later than the close of business on the later of the 60th day prior to such special meeting or the tenth day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. (c) General. (1) Only such persons who are nominated in accordance with the procedures set forth in this Section 12 shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 12. The presiding officer of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was -5- made in accordance with the procedures set forth in this Section 12 and, if any proposed nomination or business is not in compliance with this Section 12, to declare that such defective nomination or proposal be disregarded. (2) For purposes of this Section 12, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (3) Notwithstanding the foregoing provisions of this Section 12, a stockholder shall also comply with all applicable requirements of state law and of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 12. Nothing in this Section 12 shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. ARTICLE II BOARD OF DIRECTORS Section 1. Powers. The business and affairs of the Corporation shall be managed under the direction of its Board of Directors. All powers of the Corporation may be exercised by or under the authority of the Board of Directors except as conferred on or reserved to the stockholders by law, by the Charter or by these Bylaws. A Director need not be a stockholder. The Board of Directors shall keep minutes of its meetings and full and fair accounts of its transactions. Section 2. Number and Term of Office. The Board of Directors shall consist of such number of Directors as the Board of Directors shall designate from time to time. The members of the Board of Directors shall be elected to serve for terms of three (3) years. Unless otherwise provided in the applicable resolution electing the Director, a Director shall hold office until the annual meeting for the year in which his term expires and until his successor is elected and qualifies, or until his death, resignation or removal in the manner provided in Section 9 of this Article II. Section 3. Election of Directors. The Board of Directors shall be divided into three classes. Each such class shall consist, as nearly as possible, of one-third of the total number of Directors, and any remaining Directors shall be included within each such class or classes as the Board of Directors shall designate. At each annual meeting of stockholders, successors to the class of Directors whose term expires at that annual -6- meeting shall be elected for a term of three years. In the event of the failure to elect Directors at an annual meeting of the stockholders, then Directors may be elected at any regular or special meeting of stockholders entitled to vote for the election of Directors, provided that notice of such meeting shall contain mention of such purpose. If the number of Directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of Directors in each class as nearly equal as possible. Except as otherwise provided in the Charter, at each meeting of the stockholders for the election of directors, provided a quorum is present, the Directors shall be chosen and elected by a plurality of the votes validly cast at such election. Section 4. Vacancies. If the office of a Director becomes vacant for any reason other than removal or increase in the size of the Board, such vacancy may be filled by the Board by a vote of a majority of Directors then in office, although such majority is less than a quorum. Section 5. Annual Meetings. An annual meeting of the Board of Directors shall immediately follow the annual meeting of stockholders each year. No notice of the annual meeting need be given to the Directors. Section 6. Special Meetings. Special Meetings of the Board of Directors may be called at any time by the President, Chairman of the Board or by any two Directors, to be held at the principal office of the Corporation in the State of Maryland, or at such other place or places as the Directors may from time to time designate. Notice of special meetings of the Board of Directors shall be given to each Director at least twenty four (24) hours prior to the meeting by service to the Director by telegram, letter or by personal notice, including telephone notice. Section 7. Quorum. A quorum for the transaction of business at every meeting of the Board of Directors shall consist of a majority of the Board of Directors, and the vote of a majority of those present at a meeting at which a quorum is present shall be required to pass any measure or resolution unless a greater number is required by statute or by the Charter or by these Bylaws. If less than a quorum of Directors is present at said meeting, a majority of the Directors present may adjourn the meeting from time to time without further notice. The Directors present at a meeting which has been duly called and convened may continue to transact business until adjournment, notwithstanding the withdrawal of enough Directors to leave less than a quorum. Section 8. Telephone Meetings. Members of the Board of Directors may participate in a meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. -7- Participation in a meeting by these means shall constitute presence in person at the meeting. Section 9. Informal Action by Directors. Any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting, if an unanimous written consent which sets forth the action is signed by each Director and such consent is filed with the minutes of proceedings of the Board of Directors. Section 10. Compensation. Directors shall not receive any stated salary for their services as Directors but, by resolution of the Board of Directors, a fixed sum and expenses of attendance, if any, may be allowed to Directors for attendance at each annual, regular or special meeting of the Board of Directors or of any committee thereof; but nothing herein contained shall be construed to preclude any Director from serving the Corporation in any other capacity and receiving compensation therefor. Section 11. Removal of Directors. Any Director of the Corporation may be removed with cause by the affirmative vote of the holders of seventy-five percent (75%) of all the votes entitled to be cast for the election of Directors, but no Director may be removed by the stockholders without cause. Except as otherwise provided by contract, any vacancy in the Board of Directors caused by any such removal may be filled at such meeting or any adjournment of such meeting by the holders of shares of stock of all classes representing a majority of the aggregate number of votes of the shares of stock of all classes then issued, outstanding and entitled to vote for the election of Directors. If such stockholders do not fill such vacancy at such meeting, such vacancy may be filled in any other manner permitted by law. ARTICLE III COMMITTEES Section 1. Number, Tenure and Qualifications. The Board of Directors may appoint from among its members an Executive Committee and other committees, composed of two or more Directors, to serve at the pleasure of the Board of Directors. Section 2. Powers. The Board of Directors may delegate to committees appointed under Section 1 of this Article any of the powers of the Board of Directors except as prohibited by law. Section 3. Meetings. In the absence of any member of any such committee, the members thereof present at any meeting, whether or not they constitute a quorum, may appoint a Director to act in the place of such absent member. -8- Section 4. Telephone Meetings. Members of a committee of the Board of Directors may participate in a meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means shall constitute presence in person at the meeting. Section 5. Informal Action by Committees. Any action required or permitted to be taken at any meeting of a committee of the Board of Directors may be taken without a meeting, if an unanimous consent which sets forth the action is signed by each member of the committee and such consent is filed with the minutes of the proceedings of such committee. Section 6. Minutes of Meetings. The minutes of any meeting of a committee shall be distributed to each member of the Board of Directors. ARTICLE IV OFFICERS Section 1. General Provisions. The officers of the Corporation shall consist of a President, Secretary and Treasurer and also may consist of a Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, Chairman of the Board, a Vice Chairman of the Board, additional Vice Presidents, one or more Assistant Treasurers, one or more Assistant Secretaries and such other officers as the Board may determine from time to time. The officers of the Corporation shall be elected annually by the Board of Directors at the first meeting of the Board of Directors held after each annual meeting of stockholders. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as may be convenient. Each officer shall hold office until his successor is duly elected and qualifies or until his death, resignation or removal in the manner hereinafter provided. Any two or more offices except President and Vice President may be held by the same person. In its discretion, the Board of Directors may leave vacant any office except that of President, Treasurer and Secretary. Election or appointment of an officer or agent shall not in itself create contract rights between the Corporation and such officer or agent. Section 2. Removal. Any officer or agent of the Corporation may be removed by the Board of Directors if in its judgment the best interests of the Corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. -9- Section 3. Vacancies. A vacancy in any office may be filled by the Board of Directors. Section 4. President. The President shall in general supervise and control all of the business and affairs of the Corporation. Unless the President is not a member of the Board of Directors, in the absence of both the Chairman and the Vice-Chairman of the Board, he shall preside at all meetings of the Board of Directors and of the stockholders at which he shall be present. In the absence of a designation of a Chief Executive Officer by the Board of Directors, the President shall be the Chief Executive Officer and shall be ex officio a member of all committees that may, from time to time, be constituted by the Board of Directors. He may execute any deed, mortgage, bond, contract or other instrument which the Board of Directors has authorized to be executed except in cases where the execution thereof shall be expressly delegated by the Board of Directors or by these Bylaws to some other officer or agent of the Corporation or shall be required by law to be otherwise executed; and in general shall perform all duties incident to the office of President and such other duties as may be prescribed by the Board of Directors from time to time. Section 5. Vice Presidents. In the absence of the President or in the event of a vacancy in such office, the Vice President (or in the event there be more than one Vice President, the Vice Presidents in the order designated at the time of their election or, in the absence of any designation, then in the order of their election) shall perform the duties of the President and when so acting shall have all the powers of and be subject to all the restrictions upon the President; and shall perform such other duties as from time to time may be assigned to him by the President or by the Board of Directors. The Board of Directors may designate one or more Vice Presidents as executive, senior or Assistant Vice President or as Vice President for particular areas of responsibility. Section 6. Secretary. The Secretary shall: (a) keep the minutes of the proceedings of the stockholders, the Board of Directors and committees of the Board in one or more books provided for that purpose; (b) see that all notices are duly given in accordance with the provisions of these Bylaws or as required by law; (c) be custodian of the corporate records and of the seal of the Corporation, if the Corporation shall have a seal; (d) keep a register of the post office address of each stockholder which shall be furnished to the Secretary by such stockholder; (e) have general charge of the stock transfer books of the Corporation; and (f) in general perform such other duties as from time to time may be assigned to him by the President or by the Board of Directors. Section 7. Treasurer. The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable -10- effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. He shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the President and Board of Directors, at the regular meetings of the Board or whenever they may require it, an account of all his transactions as Treasurer and of the financial condition of the Corporation. If required by the Board of Directors, he shall give the Corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the Corporation, in case of his death, resignation, retirement or removal from office, all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the Corporation. Section 8. Chief Executive Officer. The Board of Directors may designate a Chief Executive Officer, who shall have responsibility for implementation of the policies of the Corporation, as determined by the Board of Directors, and for the administration of the business affairs of the Corporation. Section 9. Chief Operating Officer. The Board of Directors may designate a Chief Operating Officer, who shall have the responsibilities and duties as set forth by the Board of Directors or the Chief Executive Officer. Section 10. Chief Financial Officer. The Board of Directors may designate a Chief Financial Officer, who shall have the responsibilities and duties as set forth by the Board of Directors or the Chief Executive Officer. Section 11. Chairman and Vice-Chairman of the Board. The Chairman of the Board, if one is elected, shall preside over the meetings of the Board of Directors and of the stockholders at which he shall be present. In the absence of the Chairman of the Board, the Vice-Chairman of the Board shall preside at such meetings at which he shall be present. The Chairman of the Board and the Vice-Chairman of the Board shall, respectively, perform such other duties as may be assigned to him or them by the Board of Directors. Section 12. Assistant Secretaries and Assistant Treasurers. The Assistant Secretaries and Assistant Treasurers, in general, shall perform such duties as shall be assigned to them by the Secretary or Treasurer, respectively, or by the President or the Board of Directors. The Assistant Treasurers shall, if required by the Board of Directors, -11- give bonds for the faithful performance of their duties in such sums and with such sureties as shall be satisfactory to the Board of Directors. Section 13. Compensation. The compensation of the officers shall be fixed from time to time by the Board of Directors and no officer shall be prevented from receiving such compensation by reason of the fact that he is also a Director of the Corporation. ARTICLE V CONTRACTS, LOANS, CHECKS AND DEPOSITS Section 1. Contracts. The Board of Directors may authorize any officer or agent to enter into any contract or to execute and deliver any instrument in the name of and on behalf of the Corporation and such authority may be general or confined to specific instances. Section 2. Checks and Drafts. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the Corporation shall be signed by such officer or officers, agent or agents of the Corporation and in such manner as shall from time to time be determined by the Board of Directors. Section 3. Deposits. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in such banks, trust companies or other depositories as the Board of Directors may designate. ARTICLE VI SHARES OF STOCK Section 1. Certificates of Stock. Each stockholder shall be entitled to a certificate or certificates which shall represent and certify the number of shares of each class of stock held by him in the Corporation. Each certificate shall be signed by the President or Vice-President and countersigned by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer and may be sealed with the corporate seal. The signatures may be either manual or facsimile. Certificates shall be consecutively numbered; and if the Corporation shall, from time to time, issue several classes of stock, each class may have its own number series. A certificate is valid and may be issued whether or not an officer who signed it is still an officer when it is issued. Each certificate representing stock which is restricted as to its transferability or voting powers, which is preferred or limited as to its dividends or as to its share of the assets upon liquidation or which is redeemable at the option of the Corporation, shall have a statement of such restriction, limitation, preference -12- or redemption provision, or a summary thereof, plainly stated on the certificate. In lieu of such statement of summary, the Corporation may set forth upon the face or back of the certificate a statement that the Corporation will furnish to any stockholder, upon request and without charge, a full statement of such information. Section 2. Transfers of Stock. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate of stock duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, the Corporation shall issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of the State of Maryland. Section 3. Lost Certificate. The Board of Directors may direct a new certificate to be issued in place of any certificate previously issued by the Corporation alleged to have been lost, stolen or destroyed upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or his legal representative to advertise the same in such manner as it shall require and/or to give bond, with sufficient surety, to the Corporation to indemnify it against any loss or claim which may arise as a result of the issuance of a new certificate. Section 4. Closing of Transfer Books or Fixing of Record Date. The Board of Directors may set, in advance, a record date for the purpose of determining stockholders entitled to notice of or to vote at any meeting of stockholders, or stockholders entitled to receive payment of any dividend or the allotment of any other rights, or in order to make a determination of stockholders for any other proper purpose. Such date, in any case, shall not be prior to the close of business on the day the record date is fixed and shall be not more than 90 days, and in the case of a meeting of stockholders not less than 10 days, before the date on which the meeting or particular action requiring such determination of stockholders is to be held or taken. In lieu of fixing a record date, the Board of Directors may provide that the stock transfer books shall be closed for a stated period but not longer than 20 days. If the stock transfer books are closed for the purpose of determining stockholders entitled to notice of -13- or to vote at a meeting of stockholders, such books shall be closed for at least 10 days before the date of such meeting. If no record date is fixed and the stock transfer books are not closed for the determination of stockholders, (a) the record date for the determination of stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day on which the notice of meeting is mailed or the 30th day before the meeting, whichever is the closer date to the meeting; and (b) the record date for the determination of stockholders entitled to receive payment of a dividend or an allotment of any other rights shall be the close of business on the day on which the resolution of the Board of Directors, declaring the dividend or allotment of rights, is adopted. When a determination of stockholders entitled to vote at any meeting of stockholders has been made as provided in this section, such determination shall apply to any adjournment thereof, except where the determination has been made through the closing of the stock transfer books and the stated period of closing has expired. Section 5. Stock Ledger. The Corporation shall maintain at its principal office or at the office of its counsel, accountants or transfer agent, an original or duplicate stock ledger containing the name and address of each stockholder and the number of shares of stock of each class held by such stockholder. ARTICLE VII DIVIDENDS Section 1. Declaration. Dividends upon the shares of stock of the Corporation may be declared by the Board of Directors, subject to the provisions of law and the Charter of the Corporation. Dividends may be paid in cash, property or shares of the Corporation, subject to the provisions of law and the Charter of the Corporation. Section 2. Contingencies. Before payment of any dividends, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board of Directors may from time to time, in its absolute discretion, think proper as a reserve fund for contingencies, for equalizing dividends, for repairing or maintaining any property of the Corporation or for such other purpose or purposes as the Board of Directors shall determine to be in the best interest of the Corporation, and the Board of Directors may modify or abolish any such reserve in the manner in which it was created. -14- ARTICLE VIII SEAL Section 1. Seal. The corporate seal, if the Corporation shall decide to have a seal, shall have inscribed thereon the name of the Corporation, the year of its organization and the word "Maryland". The Board of Directors may authorize one or more duplicate seals and provide for the custody thereof. Section 2. Affixing Seal. Whenever the Corporation is required to place its corporate seal to a document, it shall be sufficient to meet the requirements of any law, rule or regulation relating to a corporate seal to place the word "(SEAL)" adjacent to the signature of the person authorized to execute the document on behalf of the Corporation. ARTICLE IX FISCAL YEAR The fiscal year of the Corporation shall end on the 31st day of December of each year unless otherwise provided by the Board of Directors. ARTICLE X INDEMNIFICATION Section 1. General. The Corporation shall indemnify: (i) any individual who is a present or former Director or officer of the Corporation; or (ii) any individual who serves or has served in another corporation, partnership, joint venture, trust, employee benefit plan or any other enterprise as a director or officer, or as a partner or trustee of such partnership or employee benefit plan, at the request of the Corporation and who by reason of service in that capacity was, is or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, to the full extent permitted under the Maryland General Corporation Law. The Corporation may, with the approval of its Board of Directors, provide such indemnification for a person who formerly served a predecessor of the Corporation in any of the capacities described in (i) or (ii) above and for any employee or agent of the Corporation or a predecessor of the Corporation. Section 2. Advancement of Expenses. Reasonable expenses incurred by a Director or officer who is or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or -15- investigative, shall be paid or reimbursed by the Corporation in advance of the final disposition of the proceeding upon receipt by the Corporation of: (i) a written affirmation by the party seeking indemnification that he has a good faith belief that the standard of conduct necessary for indemnification by the Corporation as authorized herein has been met; and (ii) a written undertaking by or on behalf of the party seeking indemnification to repay the amount if it shall ultimately be determined that the standard of conduct has not been met. ARTICLE XI WAIVER OF NOTICE Whenever any notice is required to be given pursuant to the Charter or Bylaws of the Corporation or pursuant to applicable law, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Neither the business to be transacted at nor the purpose of any meeting need be set forth in the waiver of notice, unless specifically required by statute. The attendance of any person at any meeting shall constitute a waiver of notice of such meeting, except where such person attends a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. ARTICLE XII AMENDMENT OF BYLAWS Any provision of these Bylaws may be altered, amended or repealed at any regular or special meeting of the stockholders or of the Board of Directors by vote of not less than a majority of the aggregate number of the votes entitled to be cast thereon, except that Sections 2, 3 and 9 of ARTICLE II and this ARTICLE XII may be altered, amended or repealed, and any bylaw or provision of the Charter of the Corporation inconsistent with Sections 2, 3 or 9 of ARTICLE II or this ARTICLE XII may be adopted, only by the authorization of not less than seventy-five percent (75%) of the aggregate number of the votes entitled to be cast thereon by either the stockholders of the Corporation (considered for this purpose as a single class) or by the Board of Directors, as applicable. -16- The foregoing are certified as the Amended and Restated Bylaws of the Corporation as of January 1, 1997. /s/ Charles A. Berardesco -------------------------------- Charles A. Berardesco, Secretary EX-10 3 EXHIBIT 10.1.1 Exhibit 10.1.1 FIRST AMENDMENT TO EMPLOYMENT AGREEMENT THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT is dated as of November 13, 1996, by and between HCIA INC., a Maryland corporation (the "Company") and GEORGE D. PILLARI (the "Executive"). R E C I T A L S WHEREAS, the Company and the Executive entered into an Employment Agreement, dated as of January 1, 1995 (the "Employment Agreement"), pursuant to which the Executive serves as the Chairman of the Board, President and Chief Executive Officer of the Company. WHEREAS, the Company and the Executive desire to amend the Employment Agreement to provide for certain additional terms as further set forth hereinbelow. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows: 1. Definitions. Except as otherwise defined herein, any capitalized term used herein shall have the meaning set forth in the Employment Agreement. 2. Amendment to Section 4(b)(i). Section 4(b)(i) of the Employment Agreement is hereby amended by deleting the penultimate sentence thereof and inserting the following in lieu thereof: "(i) As used herein, the "Severance Amount" shall mean two times the sum of (x) the Executive's highest Salary and (y) the highest Target Bonus percentage paid or payable to the Executive at any time prior to the date of such termination or resignation (such sum being not less than 140% of such salary). (For purposes of calculating the Severance Amount, the Target Bonus shall include cash bonuses and the value on the grant date, as determined by the Compensation Committee of the Board of Directors, of any restrictive stock or restrictive stock units or other awards granted in lieu of cash, but excluding the value of any stock options)." 3. Amendment to Section 6(a) of the Employment Agreement. Section 6(a) of the Employment Agreement is hereby amended by adding the following after subparagraph (iv) therein: "(v) the Executive shall be fully vested in all stock options, restrictive stock, restrictive stock units and other awards theretofore awarded under the Company's 1994 Stock and Incentive Plan, as amended, or any successor thereto; (vi) for the purposes of calculating the Executive's benefit under any in force retirement plan (the "Retirement Plan"), the Executive shall receive an additional two (2) years of credited service; (vii) within five business days following the Executive's termination of employment, the Company shall make a lump sum payment to the Executive equal to the amount that the Company would have contributed for the Executive's account under the Company's Savings Incentive Plan (or any successor plan) (the "SIP") in respect of the two years following the date of termination, based on (A) the formula for determining employer contributions in effect on the date of termination and (B) the Executive's Salary and Target Bonus used for purposes of determining the Severance Amount, and calculated without giving effect to the limitations provided for in Sections 401(a)(17) and 415 of the Internal Revenue Code of 1986, as amended (the "Code"), or any successor provisions thereto; (viii) within five business days following the date of termination of employment, the Executive shall receive a lump sum payment of his account balance as of the date of termination of any non-qualified plan, if any, maintained by the Company or any of its affiliates to provide benefits in excess of those permitted under the Code to be provided by the Retirement Plan. The Company shall remain obligated to pay to the Executive or his beneficiaries any benefits to which he or they may be entitled under any non-qualified plan maintained by the Company or any of its affiliates providing benefits in excess of those permitted under the Code to be provided by the Retirement Plan, if any; such payments shall be made in accordance with the terms of such plans, and benefits thereunder shall take account of the two years of additional credited service provided for in subclause (vii) above; (ix) for a period of two years following the date of termination of employment (the "Continuation Period"), the Executive and his dependents, if any, shall continue to participate (at no greater expense to them then was the case for such coverage prior to his termination) in the employee benefit arrangements described in Section 3(d) hereunder; provided, however, that the benefits shall cease to the extent the Executive begins coverage under the plans of a subsequent employer; (x) at the end of the Continuation Period, the Executive and his dependents shall be entitled to, for the remainder of his life, medical and dental benefits under any applicable plans and programs of the Company as if he retired on the last day of the Continuation Period, with such benefits to commence immediately at the end of the Continuation Period and with the amount of contributions by the Executive to be no greater than that of any other employee of the Company who had retired on the last day of the Continuation Period (it being understood and agreed that the contribution rates may be changed, and the terms of such benefits may be modified, to the extent permitted under the relevant plans, from those in effect on the date thereof); (xi) during the Continuation Period, the Company shall provide the Executive with appropriate individual outplacement services and financial planning at the Company's expense; -2- (xii) the Executive shall be fully vested in all stock options, restrictive stock, restrictive stock units and any other awards theretofore awarded to him under the Company's 1994 Stock and Incentive Plan, as amended, and any successor thereto; and (xiii) the Executive shall receive all amounts due to him under any compensatory plan or arrangement of the Company and not specifically addressed above, in accordance with the terms of the relevant plan or arrangement." 4. Amendment to Section 6. Section 6 is hereby amended by adding the following new subsection 6(c) thereto: "(c) Upon any Change in Control, the Executive shall be fully vested in all stock options, restrictive stock, restrictive stock units and any other awards therefore awarded to him under the Company's 1994 Stock and Incentive Plan, as amended, or any successor thereto." 5. Amendment to Section 10(b)(i). Section 10(b)(i) is hereby amended to change the addressee of notices to the Company as follows: "(i) To the Company: HCIA Inc. 300 East Lombard Street Baltimore, Maryland 21202 Attention: General Counsel" 6. Other Provisions. Except as amended hereby, the Employment Agreement shall continue in full force and effect in accordance with its terms. This First Amendment shall be construed and enforced in accordance with the laws of the State of Maryland, exclusive of its conflicts of laws provision. IN WITNESS WHEREOF, the parties have executed this First Amendment as of the date first set forth hereinabove. HCIA INC. By: /s/ Charles A. Berardesco _______________________________________ Charles A. Berardesco Senior Vice President & General Counsel EXECUTIVE: /s/ George D. Pillari _______________________________________ George D. Pillari EX-10 4 EXHIBIT 10.2 Exhibit 10.2 HCIA INC. 1994 STOCK AND INCENTIVE PLAN As Amended Through November 13, 1996 Section 1. Purpose The purpose of the HCIA Inc. 1994 Stock and Incentive Plan (the "Plan") is to attract and retain outstanding individuals as Key Employees of HCIA Inc. (the "Company") and its Affiliates, as hereinafter defined, and to motivate such individuals to achieve the long-term performance goals of the Company by providing incentives to such individuals in the form of stock ownership or monetary payments based on the value of the capital stock of the Company or its financial performance, or both, on the terms and conditions set forth herein. Section 2. Definitions As used in the Plan and unless the context clearly indicates otherwise, the following terms shall have the respective meanings set forth below: (a) "Affiliate" shall mean any entity that, directly or indirectly, controls or is controlled by the Company. (b) "Award" shall mean any Option, Stock Appreciation Right, Restricted Stock, Restricted Stock Unit or Performance Award granted under the Plan. (c) "Award Agreement" shall mean any written agreement, contract or other instrument or document evidencing any Award granted under the Plan. (d) "Beneficiary" shall mean the person designated by the Participant, on a form provided by the Company, to exercise the Participant's rights in accordance with Section 7(h) of the Plan in the event of death, or, if no such person is designated, the estate or personal representatives of such Participant. (e) "Board of Directors" shall mean the Board of Directors of the Company. (f) "Code" shall mean the Internal Revenue Code of 1986, as amended. (g) "Commission" shall mean the United States Securities and Exchange Commission or any successor agency. (h) "Committee" shall mean the Compensation Committee of the Board of Directors. The Committee shall be composed of two or more directors, all of whom shall be "disinterested persons" within the meaning of Rule 16b-3 and "outside directors" within the meaning of Section 162(m)(4)(C) of the Code and any regulations issued thereunder. (i) "Disability" shall mean a total and permanent disability within the meaning of the Company's long-term disability plan, as amended from time to time. (j) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (k) "Fair Market Value" shall mean the average of the highest and lowest selling prices of the Shares as reported on the National Association of Securities Dealers Automated Quotation System National Market System or such other national securities exchange as may be designated by the Committee or, in the event that the Shares are not listed for trading on a national securities exchange, the average of the highest and lowest quoted selling prices of the Shares as reported by the National Association of Securities Dealers Automated Quotation System ("NASDAQ") or, if not listed on NASDAQ, the fair market value of the Shares as determined in good faith by the Board of Directors or the Committee, in any such case as of the valuation date. (l) "Incentive Stock Option" shall mean a stock option granted under Section 7(a) of the Plan that is intended to meet the requirements of Section 422 of the Code or any successor provision thereto. (m) "Key Employee" shall mean any officer or other employee of the Company or any Affiliate who is described in Section 6 of the Plan. (n) "Non-Qualified Stock Option" shall mean a stock option granted under Section 7(a) of the Plan that is not intended to be an Incentive Stock Option. (o) "Option" shall mean an Incentive Stock Option or a Non-Qualified Stock Option. (p) "Participant" shall mean a Key Employee who is designated to be granted or has received an Award under the Plan. (q) "Performance Award" shall mean any Award granted under Section 7(d) of the Plan. (r) "Person" shall mean any individual, corporation, partnership, limited liability company, association, joint-stock company, trust, unincorporated organization or government or political subdivision thereof. -2- (s) "Released Securities" shall mean Restricted Stock with respect to which all applicable restrictions have expired, lapsed or been waived. (t) "Restricted Stock" shall mean any Shares granted and issued under Section 7(c) of the Plan. (u) "Restricted Stock Unit" shall mean any Award granted under Section 7(c) of the Plan that is denominated in Shares. (v) "Restriction Period" shall mean, with respect to Restricted Stock or Restricted Stock Units, that period of time determined by the Committee pursuant to Section 7(c) of the Plan. (w) "Retirement" shall mean termination of a Participant's employment with the Company or any Affiliate at his or her "normal retirement date" as defined in the Company's Savings Incentive Plan or any successor plan. (x) "Termination" shall mean any resignation or discharge from employment with the Company or any Affiliate except in the event of Disability, Retirement or death. (y) "Rule 16b-3" shall mean Rule 16b-3 promulgated by the Commission under the Exchange Act or any successor rule or regulation thereto. (z) "Shares" shall mean shares of the common stock, par value $.01 per share, of the Company and such other securities or property as may become the subject of Awards or become subject to Awards pursuant to an adjustment made under Section 8 of the Plan. (aa) "Stock Appreciation Right" shall mean any Award granted under Section 7(b) of the Plan. Section 3. Effective Date; Stockholder Approval; Termination (a) Effective Date and Stockholder Approval. Subject to the approval of the Plan by the stockholders of the Company in accordance with the provisions of Rule 16b-3, the Plan shall be effective as of December 22, 1994. (b) Termination. No Award shall be granted under the Plan after December 31, 2004; provided, however, that any Award granted on or before December 31, 2004 may extend beyond such date unless expressly provided otherwise herein or in the applicable Award Agreement; provided further, to the extent set forth in Section 8 hereof, the authority of the Committee to amend, alter, adjust, suspend, discontinue or terminate any Award or to waive any conditions or restrictions with respect to any Award, and the authority of the Board of Directors to amend the Plan, shall extend beyond such date. -3- Section 4. Administration (a) The Plan shall be administered by the Committee; provided, however, that if at any time the Committee shall not be in existence, the functions of the Committee as specified in the Plan shall be exercised by those members of the Board of Directors who qualify as "disinterested persons" under Rule 16b-3 and as "outside directors" under Section 162(m)(4)(C) of the Code and any regulations issued thereunder. Subject to the terms of the Plan and applicable law, the Committee shall have full power and authority with respect to the Plan, including, without limitation, the power to: (i) designate Participants; (ii) determine the types of Awards to be granted to each Participant under the Plan; (iii) determine the number of Shares to be covered by (or with respect to which payments, rights or other matters are to be calculated in connection with) Awards; (iv) determine the terms and conditions of any Award; (v) determine whether, to what extent, under what circumstances and the method by which Awards may be settled or exercised in cash, Shares, other securities, other Awards or other property, or canceled, forfeited or suspended; (vi) determine whether, to what extent and under what circumstances cash, Shares, other securities, other Awards, other property and other amounts payable with respect to an Award shall be deferred either automatically or at the election of the holder thereof or of the Committee; (vii) interpret and administer the Plan and any instrument or agreement relating to, and any Award made under, the Plan (including, without limitation, any Award Agreement); (viii) establish, amend, suspend and waive such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; and (ix) make any other determination and take any other action that the Committee deems necessary or desirable for the administration of the Plan. Unless otherwise expressly provided in the Plan, all designations, determinations, interpretations and other decisions under or with respect to the Plan, or any Award, shall be within the sole discretion of the Committee, may be made at any time and shall be final, conclusive and -4- binding upon all Persons, including the Company, any Affiliate, any Participant, any holder or Beneficiary of any Award, any stockholder and any employee of the Company or any Affiliate. The Committee shall not have the authority to (i) amend the exercise price of any outstanding Option without the approval of the stockholders of the Company or (ii) grant an Award of Restricted Stock or a Restricted Stock Unit which has a vesting period of less than 3 years. Notwithstanding the foregoing, the Committee shall have the authority to amend the exercise price of outstanding Options and/or grant Awards of Restricted Stock or Restricted Stock Units with vesting periods of less than 3 years provided that the aggregate number of shares subject to such amended Options or Awards does not exceed 10% of the aggregate number of shares with respect to which Awards may be granted under the Plan. (b) No member of the Committee shall be liable for any action or determination made in good faith, and the members of the Committee shall be entitled to indemnification and reimbursement in the manner provided in the Company's Charter and Bylaws, as amended from time to time. (c) The Committee may designate persons other than its members to carry out its responsibilities under such conditions or limitations as it may set, except that the Committee may not delegate: (i) its authority with regard to Awards (including decisions concerning the timing, pricing and amount of Awards) granted to Key Employees who are officers or directors for purposes of Section 16(b) of the Exchange Act; or (ii) its authority pursuant to Section 8 to amend the Plan. Section 5. Grants of Awards; Shares Available for Award (a) The Committee may, from time to time, grant Awards to one or more Key Employees; provided, however, that: (i) subject to any adjustment pursuant to Section 8, (x) the aggregate number of Shares available with respect to which Awards may be granted under the Plan shall be 1,350,000 and (y) the aggregate number of Shares with respect to which Awards may be made to any one Key Employee during any single fiscal year of the Company may not exceed 250,000. (ii) to the extent that any Shares covered by an Award granted under the Plan, or to which any Award relates, are forfeited, or if an Award otherwise terminates, expires or is canceled prior to the delivery of all of the Shares or of other consideration issuable or payable pursuant to such Award, then the number of Shares counted against the number of Shares available under the Plan in connection with the grant of such Award, to the extent of any such forfeiture, termination, expiration or cancellation, shall be available for granting of Awards under the Plan; (iii) Shares which have been issued, or any other shares of the capital stock of the Company, which a Participant tenders to the Company in satisfaction of income and payroll -5- tax withholding obligations or in satisfaction of the exercise price of any Award shall be available for granting of Awards under the Plan; (iv) notwithstanding anything herein to the contrary, the Committee may limit the application of Sections 5(a)(ii) and 5(a)(iii) in any manner that it considers necessary or appropriate to ensure that the Plan complies with the requirements of Rule 16b-3 under the Exchange Act or any successor provision; and (v) notwithstanding anything herein to the contrary, any Shares ceasing to be subject to an Award due to the exercise of an Award or expiration of a Restriction Period shall no longer be available for granting of Awards under the Plan. (b) For purpose of this Section 5: (i) if an Award is denominated in Shares, the number of Shares covered by such Award, or to which such Award relates, shall be counted on the date of grant of such Award against the number of Shares available for granting of Awards under the Plan; and (ii) if an Award is not denominated in Shares, the number of Shares shall be counted on the date of grant of such Award against the number of Shares available for granting Awards under the Plan equal to the quotient of the Fair Market Value (calculated as of the date of grant) of the maximum amount of cash or other consideration payable pursuant to such Award, divided by the Fair Market Value of one Share on the date of grant. (c) Any Shares delivered by the Company pursuant to an Award may consist, in whole or in part, of authorized and unissued Shares or of treasury Shares. In determining the size of any Award, the Committee may take into account a Participant's responsibility level, performance, potential, cash compensation level, the Fair Market Value of the Shares at the time of the Award and such other considerations as it deems appropriate. Section 6. Eligibility Any employee, including any executive officer or employee-director of the Company or any Affiliate, who is not a member of the Committee and who, in the opinion of the Committee, contributes to the continued growth, development and financial success of the Company or an Affiliate shall be eligible to be designated as a Participant. Section 7. Awards (a) Options. The Committee is hereby authorized to grant Options to Participants in the form of either Non-Qualified Stock Options or Incentive Stock Options with the terms and conditions set forth in this Section 7 and with such additional terms and conditions, in either case not inconsistent with the provisions of the Plan, as the Committee shall determine. -6- (i) Limitations on Incentive Stock Options. (A) In the event the Committee grants Incentive Stock Options, the aggregate Fair Market Value (determined at the time the Incentive Stock Options are granted) of the Shares underlying any such Incentive Stock Options, together with the shares underlying any incentive stock options (as defined in Section 422 of the Code) under any other plans of the Company or any Affiliate, which shall be first exercisable by any one Participant shall not, during any calendar year, exceed $100,000, or such other limitation as may be provided in the Code. (B) The grant of Incentive Stock Options hereunder shall be subject to guidelines adopted by the Committee with respect to the timing and size of Incentive Stock Options. (C) The terms of any Incentive Stock Option granted under the Plan shall comply in all respects with the provisions of Section 422 of the Code, or any successor provision thereto, and any regulations promulgated thereunder. (ii) Exercise Price. The exercise price per Share purchasable under an Option shall be determined by the Committee; provided, however, that such exercise price shall not be less than the Fair Market Value of a Share on the date of grant of the Option (or, if the Committee so determines, in the case of any Option granted in tandem with or in substitution for another Award or any outstanding award granted under any other plan of the Company, on the date of grant of such other Award or award). (iii) Option Term. The term of each Option shall be fixed by the Committee; provided, however, that in no event shall the term of an Incentive Stock Option exceed a period of ten years from the date of its grant. (iv) Exercisability and Method of Exercise. Except for such limitations as may be set forth herein, an Option shall become exercisable in such manner and within such period or periods and in such installments as shall be determined by the Committee and set forth in the Award Agreement evidencing the Option. The Committee also shall determine the method or methods by which, and the form or forms in which, payment of the exercise price with respect to any Option may be made or deemed to have been made. (b) Stock Appreciation Rights. The Committee is hereby authorized to grant Stock Appreciation Rights to Participants. Subject to the terms of the Plan and any applicable Award Agreement, a Stock Appreciation Right granted under the Plan shall confer on the holder thereof a right to receive, upon exercise thereof, the difference of (i) the Fair Market Value of one Share on the date of exercise or, if the Committee shall so determine in the case of any such right -7- other than one related to any Incentive Stock Option, at any time during a specified period before or after the date of exercise, less (ii) the grant price of the right as specified by the Committee, which shall not be less than the Fair Market Value of one Share on the date of grant of the Stock Appreciation Right (or, if the Committee so determines, in the case of any Stock Appreciation Right granted in tandem with or in substitution for another Award or any outstanding award granted under any other plan of the Company, on the date of grant of such other Award or award). Subject to the terms of the Plan and any applicable Award Agreement, the grant price, term, methods of exercise, methods of settlement and any other terms and conditions of any Stock Appreciation Right shall be as determined by the Committee. The Committee may impose such conditions or restrictions on the exercise of any Stock Appreciation Right as it may deem appropriate, including, without limitation, restricting the time of exercise of the Stock Appreciation Right to specified periods as may be necessary to satisfy the requirements of Rule 16b-3. (c) Restricted Stock and Restricted Stock Units. (i) Issuance. The Committee is hereby authorized to grant Awards of Restricted Stock and Restricted Stock Units to Participants, such Awards, including the total number of Shares to which they pertain, to be evidenced by an Award Agreement. (ii) Restrictions. Shares of Restricted Stock and Restricted Stock Units shall be issued in the name of the Participant without payment of consideration, and shall be subject to such restrictions as the Committee may impose (including, without limitation, a Restriction Period, any limitation on the right to vote a Share of Restricted Stock or the right to receive any dividend or other right or property), which restrictions may lapse separately or in combination at such time or times, in such installments or otherwise, as the Committee may deem appropriate. Different Restricted Stock or Restricted Stock Unit Awards may, among other things, have different Restriction Periods. (iii) Registration. Any Restricted Stock granted under the Plan may be evidenced in such manner as the Committee may deem appropriate, including, without limitation, book-entry registration or issuance of a stock certificate or certificates. In the event any stock certificate is issued to evidence Shares of Restricted Stock granted under the Plan, such certificate shall be registered in the name of the Participant and shall bear an appropriate legend (as determined by the Committee) referring to the terms, conditions and restrictions applicable to such Restricted Stock. Upon completion of the applicable Restriction Period, the related restriction or restrictions upon the Award shall expire and new certificates representing the Award shall be issued without the applicable restrictive legend described herein. Such Shares shall be delivered in accordance with the terms and conditions of such Participant's Award Agreement. (d) Other Stock or Stock-Based Awards. An Award other than as described in (a) through (c) above may be granted pursuant to which Shares are, or in the future may be acquired, or which is valued or determined in whole or in part by reference to, or otherwise based upon, Shares. -8- (e) Code Section 162(m) Requirements. The Committee in its sole discretion shall determine whether Awards made pursuant to the Plan shall be designed to meet the requirements of performance-based compensation within the meaning of Section 162(m) of the Code and any regulations issued thereunder. (f) Termination of Employment. The Agreement relating to an Award will set forth provisions governing the disposition of an Award in the event of the retirement, disability, death or other termination of a Participant's employment. (g) Election to Recognize Income. If a Participant makes an election in a timely manner pursuant to Section 83(b) of the Code to recognize income for tax purposes when an Award is first made, the Participant shall notify the Company within 10 days of the making of such election. (h) General. (i) Award Agreements. Each Award granted under the Plan shall be evidenced by an Award Agreement in such form as shall have been approved by the Committee. (ii) Awards May Be Granted Separately or Together. Awards may be granted either alone or in addition to, in tandem with, or in substitution for any other Award or any award granted under any other plan of the Company or any Affiliate. Awards granted in addition to or in tandem with other Awards, or in addition to or in tandem with awards granted under any other plan of the Company or any Affiliate, may be granted either at the same time as or at a different time from the grant of such other Awards or awards. (iii) Forms of Payment Under Awards. Subject to the terms of the Plan and of any applicable Award Agreement, payments or transfers to be made by the Company or any Affiliate upon the grant, exercise or payment of an Award may be made in such form or forms as the Committee shall determine, including, without limitation, cash, Shares, other securities, other Awards or other property, or any combination thereof, and may be made in a single payment or transfer, in installments or on a deferred basis, in each case in accordance with the rules and procedures established by the Committee. Such rules and procedures may include, without limitation, provisions for the payment or crediting of interest in installments or deferred payments. (iv) Limits on Transfer of Awards. No Award (other than Released Securities), except as otherwise provided by the Committee in its discretion, and no right under any such Award, shall be assignable, alienable, saleable or transferable by a Participant otherwise than by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order as defined in the Code or Title I of ERISA (or, in the case of an Award of Restricted Stock, to the Company); provided, however, that, if so determined by the Committee, a Participant may, in the manner established by the Committee, designate a Beneficiary to exercise the rights of the Participant, and to receive any property distributable with respect to any Award upon the death of the Participant. Each Award, and each right under any Award, shall be exercisable, during the Participant's lifetime, only by the Participant or, if permissible under applicable law, by the -9- Participant's guardian or legal representative. No Award (other than Released Securities), and no right under any such Award, may be pledged, alienated, attached or otherwise encumbered, and any purported pledge, alienation, attachment or encumbrance thereof shall be void and unenforceable against the Company or any Affiliate. (v) Term of Awards. Except as otherwise provided herein, the term of each Award shall be for such period as may be determined by the Committee. (vi) Share Certificates and Representation by Participants. All certificates for Shares or other securities delivered under the Plan pursuant to any Award or the exercise thereof shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan or the rules, regulations and other requirements of the Commission, any stock exchange or other market upon which such Shares or other securities are then listed or traded, and any applicable federal or state securities laws, and the Committee may cause a legend or legends to be inscribed upon any such certificate(s) to make appropriate reference to such restrictions. The Committee may require each Participant or other Person who acquires Shares or other securities under the Plan to represent to the Company in writing that such Participant or other Person is acquiring the Shares or other securities without a view to the distribution thereof. Section 8. Amendment and Termination; Adjustments; Corrections (a) Amendments to the Plan. The Committee may, at any time or from time to time, amend, alter, suspend, discontinue or terminate the Plan in whole or in part; provided, however, that no amendment, alteration, suspension, discontinuation or termination of the Plan shall in any manner (except as otherwise provided in this Section 8) adversely affect the rights of any Participant under any Award granted and then outstanding under the Plan, without the consent of the respective Participant; provided further, however, that any amendment which under the requirements of applicable law must be approved by the stockholders of the Company shall not be effective unless and until such stockholder approval has been obtained in compliance with such law, and provided, further, that any amendment that must be approved by the stockholders of the Company in order to maintain the continued qualification of the Plan under Rule 16b-3 under the Exchange Act, or any successor provision, shall not be effective unless and until such stockholder approval has been obtained in compliance with such rule. No termination or amendment of the Plan may, without the consent of the Participant to whom an Award has been granted, adversely affect the rights of such Participant under such Award. (b) Certain Adjustments of Awards. (i) In the event the Company or any Affiliate shall assume outstanding employee awards or the right or obligation to make future such awards in connection with the acquisition of another business or business entity, the Committee may make such adjustments in the terms of Awards, not inconsistent with the terms of the Plan, as it shall deem appropriate in -10- order to achieve reasonable comparability or other equitable relationship between the assumed awards and the Awards granted under the Plan, as so adjusted. (ii) In the event that the Committee shall determine that any dividend or other distribution (whether in the form of cash, Shares, other securities or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of Shares or other securities of the Company, issuance of warrants or other rights to purchase Shares or other securities of the Company, or other similar corporate transaction, change in applicable laws, regulations or financial accounting principles or other event affects the Shares, such that an adjustment is determined by the Committee to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Committee may, in such manner as it may deem equitable, adjust any or all of: (A) the number and type of Shares (or other securities or property) which thereafter may be made the subject of Awards under the Plan; (B) the number and type of Shares (or other securities or property) subject to outstanding Awards; and (C) the grant, purchase or exercise price with respect to any Award, or, if deemed appropriate, make provision for a cash payment to the holder of an outstanding Award; provided, however, in each case, that with respect to Awards of Incentive Stock Options, no such adjustment shall be authorized to the extent that such authority would cause the Plan to violate Section 422(b)(1) of the Code or any successor provision thereto; provided further, that the number of Shares subject to any Award denominated in Shares shall always by a whole number. The foregoing adjustments shall be determined by the Committee in its sole discretion. (c) Correction of Defects, Omissions and Inconsistencies. The Committee may correct any defect, supply any omission or reconcile any inconsistency in any Award or Award Agreement in the manner and to the extent it shall deem desirable to carry the Plan into effect. Section 9. General Provisions (a) No Rights to Awards. No Key Employee, Participant or other Person shall have any claim to be granted any Award under the Plan, and there is no obligation for uniformity of treatment of Key Employees, Participants or holders or Beneficiaries of Awards under the Plan. The terms and conditions of Awards need not be the same with respect to each Participant. (b) Withholding. No later than the date as of which an amount first becomes includable in the gross income of a Participant for federal income tax purposes with respect to any Award under the Plan, the Participant shall pay to the Company, or make arrangements satisfactory to the Company regarding the payment of, any federal, state, local or foreign taxes of any kind required by law to be withheld with respect to such amount. Unless otherwise determined by the Committee, withholding obligations arising with respect to Awards under the Plan may be settled with Shares (other than Restricted Stock), including Shares that are part of, or are received upon exercise of, the Award that gives rise to the withholding requirement. The obligations of the Company under the Plan shall be conditioned on such payment or arrangements, and the Company and any Affiliate shall, to the extent permitted by law, have the right to deduct any such taxes from -11- any payment otherwise due to the Participant. The Committee may establish such procedures as it deems appropriate for the settling of withholding obligations with Shares, including, without limitation, the establishment of such procedures as may be necessary to satisfy the requirements of Rule 16b-3. (c) Acceleration. Except as otherwise provided hereunder, the Committee may, in its discretion, (i) accelerate the time at which an outstanding Award granted hereunder may be exercised and (ii) extend the post-termination of employment exercise period of any outstanding Award. With respect to Restricted Stock, in the event of a public tender offer for all or any portion of the Shares of the Company, or in the event that any proposal to merge or consolidate the Company with another entity is submitted to the stockholders of the Company for a vote, the Committee, in its sole discretion, may shorten or eliminate the Restriction Period consistent with the best interests of the Company. (d) No Right to Employment. The grant of an Award shall not be construed as giving a Participant the right to be retained in the employ of the Company or any Affiliate. Further, the Company or any Affiliate may at any time dismiss a Participant from employment, free from any liability or any claim under the Plan, unless otherwise expressly provided in the Plan or in any Award Agreement. (e) Unfunded Status of the Plan. Unless otherwise determined by the Committee, the Plan shall be unfunded and shall not create (or be construed to create) a trust or a separate fund or funds. The Plan shall not establish any fiduciary relationship between the Company and any Participant or other Person. To the extent any Person holds any right by virtue of the grant of an Award under the Plan, such right (unless otherwise determined by the Committee) shall be no greater than the right of an unsecured general creditor of the Company. (f) Government and Other Regulations. The obligation of the Company to make payment of Awards in Shares or otherwise shall be subject to all applicable laws, rules and regulations, and to such approvals by any government agencies as may be required. If Shares awarded hereunder may in certain circumstances be exempt from registration under the Securities Act of 1933, as amended, the Company may restrict its transfer in such manner as it deems advisable to ensure such exempt status. (g) No Restriction on Right of Company to Effect Corporate Changes. The Plan shall not affect in any way the right or power of the Company or its stockholders to make or authorize any or all adjustments, recapitalizations, reorganizations or other changes in the Company's capital structure or its business, or any merger or consolidation of the Company, or any issue of stock or options, warrants or rights to purchase stock or of bonds, debentures, preferred or prior preference stocks whose rights are superior to or affect the Shares or the rights thereof or which are convertible into or exchangeable for the Shares, or dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. -12- (h) Governing Law. The validity, construction and effect of the Plan, and any rules and regulations relating to the Plan, shall be determined in accordance with the laws of the State of Maryland, exclusive of its conflicts of law provisions, and applicable Federal law. (i) Severability. If any provision of the Plan, any Award Agreement or any Award is or becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction, or as to any Person or Award, or would disqualify the Plan, any Award Agreement or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to applicable laws, or, if it cannot be so construed or deemed amended without, in the determination of the Committee, materially altering the intent of the Plan, the Award Agreement or the Award, such provision shall be stricken as to such jurisdiction, Person or Award, and the remainder of the Plan, such Award Agreement and such Award shall remain in full force and effect. (j) No Fractional Shares. No fractional Shares shall be issued or delivered pursuant to the Plan, any Award Agreement or any Award, and the Committee shall determine whether cash, other securities or other property shall be paid or transferred in lieu of any fractional Shares, or whether such fractional Shares or any rights thereto shall be canceled, terminated or otherwise eliminated. (k) Headings. Headings are given to the sections and subsections of the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof. -13- EX-10 5 EXHIBIT 10.4 Exhibit 10.4 HCIA INC. 1995 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN As Amended Through August 7, 1996 1. Definitions For purposes of the Plan: (a) "Annual Award" means an award of Options pursuant to Section 5(b) of the Plan. (b) "Annual Meeting" means an annual meeting of the Company's stockholders. (c) "Board" means the Board of Directors of the Company. (d) Change in Control" means (i) the acquisition by an individual, entity or group (within the meaning of Section 13(d)(3) of the Exchange Act), other than (A) an employee benefit plan (or related trust) sponsored or maintained by the Company or any of its affiliates or (B) AMBAC Inc., a Delaware corporation ("AMBAC"), AMBAC Indemnity Corporation, a Wisconsin stock insurance corporation ("AIC") or any of their respective affiliates, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or more of the then outstanding voting securities of the Company entitled to vote generally in the election of directors or of equity securities having a value equal to 30% or more of the total value of all equity securities of the Company, provided, however, that any securities of the Company acquired by any individual, entity or group directly from AMBAC, AIC or any of their respective affiliates, or from an underwriter or placement agent (or other person or entity performing similar services) who acquired such securities directly from AMBAC, AIC or any of their respective affiliates, shall not be included in the number of shares acquired by such individual, entity or grou for purposes of determining whether a Change in Control has occurred; or (ii) individuals who as of the Offering Date constitute the Board, and subsequently elected members of the Board whose election is approved or recommended by at least a majority of such current members or their successors whose election was so approved or recommended, cease for any reason to constitute at least a majority of such Board. (e) "Code" means the Internal Revenue Code of 1986, as amended. (f) "Committee" means the committee designated by the Board pursuant to Section 3(c) of the Plan. (g) "Common Stock" means the Common Stock of the Company, par value $.01 per share, or such other class or kind of shares or other securities as may be applicable under Section 12. (h) "Company" means HCIA Inc., a Maryland corporation, or any successor to substantially all its business. (i) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. (j) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (k) "Fair Market Value" means the average of the highest and the lowest quoted selling prices of the Common Stock as reported on the National Association of Securities Dealers Automated Quotation System National Market System or such other national securities exchange as may be designated by the Committee or, in the event that the Common Stock is not listed for trading on a national securities exchange, the average of the highest and lowest quoted selling prices of the Common Stock as reported by the National Association of Securities Dealers Automated Quotation System ("NASDAQ"), in any such case for the applicable valuation date or, if there were no sales on such valuation date, for the most recent day for which there was such a sale. (l) "Initial Award" means an award of Options pursuant to Section 5(a) of the Plan. (m) "Non-Employee Director" means a member of the Board who is not an employee of the Company or any of its subsidiaries and is not an employee of AMBAC, AIC or any of their respective subsidiaries while AMBAC and AIC maintain, in the aggregate, an equity interest in the Company representing 25% or more of the voting power of the Company's outstanding voting stock. (n) "Offering Date" means the effective date of the Company's registration statement no. 33-88226 relating to the initial public offering of the Common Stock. (o) "Option" means an option to purchase shares of Common Stock awarded to a Non-Employee Director pursuant to the Plan. (p) "Option Shares" means the shares of Common stock issuable upon exercise of an Option. -2- (q) "Permanent Disability" means a physical or mental impairment rendering a Non-Employee Director substantially unable to function as a member of the Board for any period of six consecutive months. Any dispute as to whether a Non-Employee Director is Permanently Disabled shall be resolved by a physician mutually acceptable to the Non-Employee Director and the Company, whose decision shall be final and binding upon the Non-Employee Director and the Company. (r) "Plan" means the HCIA Inc. 1995 Non-Employee Directors Stock Option Plan as described herein. (s) "Retirement" means a Non-Employee Director ceasing to be a member of the Board as a result of retirement from the Board in accordance with the retirement policy then applicable to Board members. (t) "1933 Act" means the Securities Act of 1933, as amended. 2. Purpose The purpose of the Plan is to retain the services of qualified persons who are not employees of the Company to serve as members of the Board and to secure for the Company the benefits of the incentives inherent in increased Common Stock ownership by Non-Employee Directors, by granting to such person options to purchase shares of Common Stock. 3. Shares Available; Administration (a) Subject to the provisions of Section 12 of the Plan, the maximum number of shares of Common Stock which may be issued under the Plan shall not exceed 200,000 shares. Either authorized and unissued shares of Common Stock or treasury shares may be delivered upon exercise of Options awarded pursuant to the Plan. (b) If Options have been forfeited to the Company as described in Section 6(d), the Options Shares underlying such Options shall again be available for issuance in connection with future awards under the Plan. (c) The Plan will be administered by a committee designated by the Board and composed exclusively of members of the Board who are not Non-Employee Directors (the "Committee"). The Committee may adopt rules and regulations necessary to carry out the Plan's purposes. The Committee's interpretation and construction of any Plan provision shall be final and conclusive. 4. Eligibility Options awarded pursuant to the Plan shall be granted only to Non-Employee Directors. -3- 5. Awards (a) Initial Award. On the date of a Non-Employee Director's initial election or appointment to the Board (or in the case of a Non-Employee Director who is a member of the Board as of the Offering Date, on the Offering Date), such Non-Employee Director (including any Non-Employee Director reelected or reappointed after a period of at least 12 calendar months during which he did not serve on the Board) shall be granted an Initial Award consisting of an Option to purchase 5,000 shares of Common Stock. Such Option shall have a per share exercise price equal to the Fair Market Value of the Common Stock on the date of award and shall be subject to the vesting schedule provided for in Section 6(a) and the other terms and conditions provided for herein. (b) Annual Awards. At each Annual Meeting, commencing with the Annual Meeting held in 1995 subsequent to the Offering Date, each person who has served as a member of the Board during the period elapsed since the immediately preceding Annual Meeting (or in the case of the Annual Meeting held in 1995, each person who has served as a member of the Board since the Offering Date), and who has, during all or a portion of such service, been a Non-Employee Director for purposes of the Plan shall be granted as of the date of such Annual Meeting an Annual Award consisting of an Option to purchase 5,000 shares of Common Stock (or such lesser number determined by multiplying 5,000 by a fraction, the numerator of which is the number of full or partial months since the immediately preceding Annual Meeting (or Offering Date, if applicable) during which such person served on the Board in the capacity of a Non-Employee Director, and the denominator of which is the number of full or partial months since the immediately preceding Annual Meeting (or Offering Date, if applicable)). Such Option shall have a per share exercise price equal to the Fair Market Value of the Common Stock on the date of award and shall be subject to the vesting schedule provided for in Section 6(b) and the other terms and conditions provided for herein. 6. Vesting (a) Vesting of Initial Awards. Initial Awards shall vest and become exercisable as follows: (i) An Initial Award made other than in connection with a Non-Employee Director's initial election to the Board at an Annual Meeting shall vest and become exercisable in two equal installments as of the first and second anniversaries of the date of grant, provided that the Non-Employee Director remains in service as a member of the Board until the relevant vesting date. (ii) An Initial Award made in connection with a Non-Employee Director's initial election to the Board at an Annual Meeting shall vest and become exercisable as to 50% of the Options Shares subject to the Option constituting such Initial Award as of the date of the first Annual Meeting following the date of award, and as to the remaining 50% of the Option Shares subject to such Option as of the date of the second Annual Meeting following the date of award, provided the Non-Employee Director to whom such Annual Award was made -4- continues in service as a member of the Board until the relevant vesting date (whether or not the Non-Employee Director is nominated for reelection at the Annual Meeting held on either vesting date, and whether or not, if nominated, he is reelected). (b) Vesting of Annual Awards. Each Annual Award shall vest and become exercisable as of the date of the first Annual Meeting following the date of award, provided the Non-Employee Director to whom such Annual Award was made continues in service as a member of the Board until the vesting date (whether or not the Non-Employee Director is nominated for reelection at the Annual Meeting held on such vesting date, and whether or not, if nominated, he is reelected). (c) Accelerated Vesting. Notwithstanding anything to the contrary in Sections 6(a) and 6(b), an Option shall become fully vested and exercisable upon the first to occur of (i) a Non-Employee ceasing to be a member of the Board as a result of death, Permanent Disability or Retirement, or (ii) a Change in Control of the Company. (d) Forfeiture. In the event of a Non-Employee Director's termination of service as a member of the Board for any reason other than death, Permanent Disability or Retirement prior to the satisfaction of any vesting period requirement hereof, the unvested portion of any Options awarded to the Non-Employee Director shall be forfeited to the Company as of the date of termination of service, and the Non-Employee Director shall have no further right or interest therein. 7. Term of Options (a) Ten-Year Term. Each Option shall expire ten years from its date of award, subject to earlier termination as provided herein. (b) Exercise Following Certain Terminations of Service. If a Non-Employee Director's service as a member of the Board terminates for any reason other than death, Permanent Disability or Retirement, the Non-Employee Director shall have the right, subject to the terms and conditions hereof, to exercise the Option, to the extent it has vested as of the date of such termination of service, at any time within six months after the date of such termination, subject to the earlier expiration of the Option as provided in Section 7(a). At the end of such six-month period the Option shall expire. (c) Exercise Following Termination of Service Due to Death, Permanent Disability or Retirement. If a Non-Employee Director's service as a member of the Board terminates by reason of death, Permanent Disability or Retirement, all Options awarded to such Non-Employee Director may be exercised by such Non-Employee Director, or by his or her estate, personal representative or beneficiary, as the case may be, at any time within one year after the date of termination of service, subject to the earlier expiration of the Option as provided in Section 7(a). At the end of such one-year period the Option shall expire. -5- (d) Exercise Following Termination of Service Subject to Company Policies and Procedures on Insider Trading. Any exercise of an Option pursuant to Section 7(b) or 7(c) following termination of a Non-Employee Director's service as a member of the Board for any reason other than death shall be subject to, and shall be permitted only to the extent such exercise complies with, the policies and procedures of the Company concerning insider trading that were applicable to the Non-Employee Director on the date of such termination of service (as such policies and procedures may be amended by the Company during the period provided in Section 7(b) or 7(c), as the case may be, for exercise of the Option). 8. Time and Manner of Exercise (a) Notice of Exercise. Subject to the other terms and conditions hereof, a Non-Employee Director may exercise any Options (to the extent vested) by giving written notice of exercise to the Company, provided, however, that no less than 10 Option Shares may be purchased upon any exercise of the Option unless the number of Option Shares purchased at such time is the total number of Option Shares in respect of which an Option is then exercisable, and provided, further, that in no event shall an Option be exercisable for a fractional share. The date of exercise of an Option shall be the later of (i) the date on which the Company receives such written notice or (ii) the date on which the conditions provided in Section 8(b) are satisfied. Notwithstanding any other provision of the Plan or of the notice of award relating to an Option provided for in Section 9, no Option may be exercised, whether in whole or in part, and no Option Shares will be issued by the Company in respect of any such attempted exercise, at any time when such exercise is prohibited by Company policy then in effect concerning transactions by a Non-Employee Director in the Company's securities. In the event that a Non-Employee Director gives written notice of exercise to the Company at a time when such exercise is prohibited by such policy, the Company in its sole discretion may disregard such notice of exercise or may consider such notice to be delivered as of the first date that the Non-Employee Director is permitted to exercise such option in accordance with such Company policy. (b) Payment. Prior to the issuance of a certificate pursuant to Section 8(e) hereof evidencing the Option Shares in respect of which all or a portion of an Option shall have been exercised, a Non-Employee Director shall have paid to the Company the Option Price for all Option Shares purchased pursuant to the exercise of such Option. Payment may be made by personal check, bank draft or postal or express money order (such modes of payment are collectively referred to as "cash") payable to the order of the Company in U.S. dollars or in shares of Common Stock already owned by the Non-Employee Director valued at their Fair Market Value as of the last business day preceding the date of exercise, or in any combination of cash or such shares as the compensation committee of the Board in it sole discretion may approve. Payment of the exercise price in shares of Common Stock shall be made by delivering to the Company the share certificate(s) representing the required number of shares, with the Non-Employee Director signing his or her name on the back, or by attaching executed stock powers (the signature of the Non-Employee Director must be guaranteed in either case). -6- (c) Stockholder Rights. A Non-Employee Director shall have no rights as a stockholder with respect to any shares of Common Stock issuable upon exercise of an Option until a certificate evidencing such shares shall have been issued to the Non-Employee Director pursuant to Section 8(e), and no adjustment shall be made for dividends or distributions or other rights in respect of any share for which the record date is prior to the date upon which the Non-Employee Director shall become the holder of record thereof. (d) Limitation on Exercise. No Option shall be exercisable unless the Common Stock subject thereto has been registered under the Securities Act and qualified under applicable state "blue sky" laws in connection with the offer and sale thereof, or the Company has determined that an exemption from registration under the Securities Act and from qualification under such state "blue sky" laws is available. (e) Issuance of Shares. Subject to the foregoing conditions, as soon as is reasonably practicable after its receipt of a proper notice of exercise and payment of the Option Price for the number of shares with respect to which the Option is exercised, the Company shall deliver to the Non-Employee Director (or following the Non-Employee Director's death, such other person entitled to exercise the Option), at the principal office of the Company or at such other location as may be acceptable to the Company and the Non-Employee Director (or such other person), one or more stock certificates for the appropriate number of shares of Common Stock issued in connection with such exercise. Such shares shall be fully paid and nonassessable and shall be issued in the name of the Non-Employee Director (or such other person). (f) Tax Withholding. The Company shall have the right, prior to the delivery of any certificates evidencing shares of Common Stock to be issued upon full or partial exercise of an Option, to require a Non-Employee Director to remit to the Company any amount sufficient to satisfy any Federal, state or local tax withholding requirements. The Company may permit the Non-Employee Director to satisfy, in whole or in part, such obligation to remit taxes, by directing the Company to withhold shares of Common Stock that would otherwise be received by the Non-Employee Director, pursuant to such rules as the Committee may establish from time to time. The Company shall also have the right to deduct from all cash payments made pursuant to or in connection with the Option any Federal, state or local taxes required to be withheld with respect to such payments. (g) Restrictions on Transfer. An Option may not be transferred, pledged, assigned, or otherwise disposed of, except by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order as defined in the Code or Title I of ERISA ("QDRO"). The Option shall be exercisable, during the Participant's lifetime, only by the Participant or by the person to whom the Option has been transferred pursuant to a QDRO. No assignment or transfer of the Option, or of the rights represented thereby, whether voluntary or involuntary, by operation of law or otherwise, except by will or the laws of descent and distribution or pursuant to a QDRO, shall vest in the assignee or transferee any interest or right in the Option, but immediately upon any attempt to assign or transfer the Option the same shall terminate and be of no force or effect. -7- (h) Non-qualified Status of Options. Options awarded under the Plan are not intended to qualify, and shall not be treated, as an "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended. 9. Notice of Award The terms and conditions of each award of Options shall be embodied in a notice of award which shall contain terms and conditions not inconsistent with the Plan and which shall incorporate the Plan by reference. Each notice of award shall state the date on which the Options were granted, the number of shares subject to such Option and the per share exercise price therefor. 10. Effective Date; Term of the Plan The effective date of the Plan shall be the Offering Date. Unless earlier terminated in accordance with Section 11 below, the term of the Plan shall expire on the tenth anniversary of the Offering Date. After such date, no further awards of Options may be made hereunder, but previously granted awards shall remain outstanding subject to the terms hereof. 11. Amendments The Board may at any time and from time to time alter, amend, suspend or terminate the Plan in whole or in part, provided, however, that in no event may the provisions of the Plan respecting eligibility to participate or the timing or amount of awards be amended more frequently than once every six months, other than to comport with changes in the Code, ERISA or any rules or regulations thereunder, provided, further, that any amendment which under the requirements of applicable law must be approved by the stockholders of the Company shall not be effective unless and until such stockholder approval has been obtained in compliance with such law, and provided, further, that any amendment that must be approved by the stockholders of the Company in order to maintain the continued qualification of the Plan under Rule 16b-3 under the Exchange Act, or any successor provision, shall not be effective unless and until such stockholder approval has been obtained in compliance with such rule. No termination or amendment of the Plan may, without the consent of the Non-Employee Director, affect any such person's rights under the provisions of the Plan with respect to awards of Options which were made prior to such action. 12. Adjustment of and Changes in Common Stock In the event of any merger, consolidation, recapitalization, reclassification, stock dividend, distribution of property, special cash dividend, or other change in corporate structure affecting the Common Stock, the Committee shall make such adjustments, if any, as it considers necessary or appropriate in the number and class of shares subject to Options or authorized to be awarded hereunder, in order to prevent dilution or enlargement of rights. Any new or additional -8- Options awarded pursuant to such adjustments shall be subject to all of the terms and conditions of the Plan. 13. No Right to Reelection Nothing in the Plan shall be deemed to create any obligation on the part of the Board to nominate any of its members for reelection by the Company's stockholders, nor confer upon any Non-Employee Director the right to remain a member of the Board for any period of time, or at any particular rate of compensation. 14. Governing Law The Plan and all notices issued or agreements entered into under the Plan shall be construed in accordance with and governed by the laws of the State of Maryland. 15. No Restriction on Right of Company to Effect Corporate Changes The Plan shall not affect in any way the right or power of the Company or its stockholders to make or authorize any or all adjustments, recapitalizations, reorganizations or other changes in the Company's capital structure or its business, or any merger or consolidation of the Company, or any issue of stock or of options, warrants or rights to purchase stock or of bonds, debentures, preferred or prior preference stocks whose rights are superior to or affect the Common Stock or the rights thereof or which are convertible into or exchangeable for Common Stock, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. EX-11 6 EXHIBIT 11.1 Exhibit 11.1 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE (In Thousands Except Per Share Amounts) Fully Primary Diluted (1) Year ended December 31, 1996 Weighted average shares outstanding.................... 10,096 Effect of dilutive common stock equivalents(1)......... -- N/A -------- Weighted average shares outstanding for EPS purposes... 10,096 Net loss............................................... $(42,267) -------- Net loss per share (2)................................. $ (4.19) ======== (1) As of December 31, 1996, options to purchase 1,464,377 shares of common stock were outstanding. As the Company had a net loss for the year ended December 31, 1996, the fully diluted earnings per share is not applicable. EX-21 7 EXHIBIT 21.1 Exhibit 21.1 SUBSIDIARIES OF THE REGISTRANT Response Healthcare Information Management, Inc. Healthcare Knowledge Systems, Limited CHKS Limited* CHKS, S.A. IASIST, S.A. LBA Holdings, Inc. LBA Health Care Solutions, Inc.** HealthChex, Inc. HCIA Holding (Germany) GmbH * CHKS Limited is 55% owned by Healthcare Knowledge Systems, Limited and 45% owned directly by the Registrant. ** A wholly owned subsidiary of LBA Holdings, Inc. EX-23 8 EXHIBIT 23.1 Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors HCIA Inc.: We consent to incorporation by reference in the registration statements (No. 33-98328 and No. 33-98330) on Form S-8 of HCIA Inc. of our reports dated January 23, 1997 relating to the consolidated balance sheets of HCIA Inc. and subsidiaries as of December 31, 1995 and 1996 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996 and the related consolidated financial statement schedule, which reports appear, or are incorporated by reference, in the December 31, 1996 annual report on Form 10-K of HCIA Inc. KPMG PEAT MARWICK LLP Baltimore, Maryland March 28, 1997 EX-27 9 FINANCIAL DATA SCHEDULE / EXHIBIT 27.1
5 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 13,302 510 32,122 0 0 55,480 12,188 0 223,196 18,484 0 0 0 118 249,591 223,196 73,520 73,520 0 110,481 0 0 (580) (36,381) 5,886 0 0 0 0 (42,267) (4.19) 0
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