-----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, U1bVtSqG7Uxb+aCVIAVyGmFpbN7gWePOJsq8xCFyd49t9ladm2v6z/MGObK8Kqwu a5gJg3wCqCwyVYYI26+cjg== 0000947482-97-000025.txt : 19970827 0000947482-97-000025.hdr.sgml : 19970827 ACCESSION NUMBER: 0000947482-97-000025 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970826 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: HPR INC CENTRAL INDEX KEY: 0000947482 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 042985551 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-26348 FILM NUMBER: 97669794 BUSINESS ADDRESS: STREET 1: 245 FIRST STREET CITY: CAMBRIDGE STATE: MA ZIP: 02142 BUSINESS PHONE: 6176798000 MAIL ADDRESS: STREET 1: 245 FIRST STREET CITY: CAMBRIDGE STATE: MA ZIP: 02142 FORMER COMPANY: FORMER CONFORMED NAME: HEALTH PAYMENT REVIEW INC DATE OF NAME CHANGE: 19950703 10-K 1 FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 1997 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ------------------- FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1997 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________________ to________________________ Commission file number: 0-26348 HPR INC. (Exact name of registrant as specified in its charter) Delaware 04-2985551 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No) 245 First Street Cambridge, MA 02142 (Address of principal executive offices) (617) 679-8000 (Registrant's telephone number, including area code) Securities registered pursuant to 12(b) of the Act: Title of each class Name of each exchange on which registered None _____________________________________ Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 (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 voting stock held by stockholders who are not affiliates of the registrant was approximately $268 million based on the last reported sale price of the registrant's Common Stock on the Nasdaq National Market on August 11, 1997. As of August 11, 1997, there were outstanding 15,334,919 shares of the registrant's Common Stock, $0.01 par value per share. DOCUMENTS INCORPORATED BY REFERENCE Certain of the information called for by Parts I through IV of this report on Form 10-K is incorporated by reference from certain portions of the Proxy Statement of the registrant to be filed pursuant to Regulation 14A and to be sent to stockholders in connection with the Annual Meeting of Stockholders to be held on October 31, 1997. Such Proxy Statement, except for the parts therein that have been specifically incorporated herein by reference, shall not be deemed "filed" as part of this report on Form 10-K. PART I Item 1. Business The Company The Company was incorporated on September 28, 1987 in Massachusetts under the name HPR, Inc. The Company re-incorporated in Delaware on December 20, 1991, under the name Health Payment Review, Inc. On July 24, 1995, the name of the Company was changed to HPR Inc. Unless the context otherwise requires, references herein to the "Company" and "HPR" refer to HPR Inc., a Delaware corporation, its wholly-owned subsidiaries and HPR, Inc., its Massachusetts predecessor. On June 3, 1992, Concurrent Review Technology, Inc., a California corporation, was merged into the Company's wholly- owned subsidiary, Concurrent Review Technology, Inc., a Delaware corporation. On August 16, 1995 the Company established a wholly-owned subsidiary, HPR Securities Corp., a Massachusetts corporation. On April 30, 1996, the Company acquired The Integrity Group, Inc., an Alabama corporation, which became a wholly-owned subsidiary of HPR. On April 18, 1997 the Company established a wholly-owned subsidiary, HPR International, Inc., a Barbados corporation. The Company's executive offices are located at 245 First Street, Cambridge, Massachusetts 02142. Its telephone number is (617) 679-8000. General HPR develops and markets software and proprietary database products incorporating clinical knowledge that enable payors and providers of healthcare services to better manage the financial risk associated with the delivery of healthcare and the quality of care. HPR products are used to manage healthcare costs and quality of care by clinically evaluating providers' claims for payment; measuring efficiency, quality, and medical outcomes; determining appropriate utilization of medical services; influencing physician referral patterns and profiling practice patterns; assisting in HEDIS(R) reporting; and managing and supporting the physician credentialing and accreditation processes. The Company's clinical knowledge bases are developed and maintained by a full time medical staff in consultation with board-certified physicians serving on Company-organized panels. The Company's products are designed to meet the needs of parties assuming financial risk for the delivery of healthcare. HPR believes that providing clinical knowledge in usable form is essential to its customers. The Company believes it can be distinguished from its competitors through the depth and integrity of its "clinical knowledge bases," as further described below. HPR is currently marketing its CodeReview(R), Medicare CodeReview(TM), ProMatch(TM), Patterns Review(R), CRMS Fundamentals(TM), Episode Profiler(TM), Quality Profiler(TM), Referral Profiler(TM), Patterns Profiler(TM), HealthPlan Reporter(TM), Credentialer(TM), and CCMS Core(TM) products. HPR markets its products through a combination of a national direct sales force and third-party marketing agreements. The Company was incorporated in 1987. In 1988, the Company introduced its first product, CodeReview. In 1992, the Company acquired the clinical knowledge base for Patterns Review by means of a merger with Concurrent Review Technology, Inc., and shortly thereafter released Patterns Review. In 1993 Medicare CodeReview was released, and in May 1995, the Company released its fourth product, Episode Profiler. In October 1995, the Company released its fifth product, Quality Profiler. With the acquisition of The Integrity Group, Inc. in April 1996, the Company acquired and began marketing its sixth product, Credentialer. During fiscal 1997 the Company introduced four more products to market: Referral Profiler in July 1996, Patterns Profiler in September 1996, HealthPlan Reporter in March 1997, and ProMatch in June 1997. The introduction of these four products brings HPR's total marketable product count as of June 30, 1997 to ten. The Company released its eleventh product, CRMS Fundamentals in July 1997 and is currently developing its twelfth product, CCMS Core that will represent the first product the Clinical Care Management System product line. Industry Background The United States healthcare industry is undergoing rapid change. In recent years, healthcare expenditures have increased at approximately twice the rate of inflation. In 1997, healthcare expenses have increased to over $1 trillion. The increase in healthcare expenditures has forced payors and providers to change the way they operate. As pressure to manage healthcare costs has increased, demand has intensified for healthcare information systems for use by the parties assuming financial risk. These parties include "payors," such as self-insured employers; managed care organizations ("HMOs and PPOs"); traditional indemnity insurers and third party administrators ("TPAs"); and increasingly, "providers," such as physicians, hospitals, and integrated healthcare delivery systems. This environment has caused physicians to form groups or networks and to affiliate with hospitals, and has provided an impetus for consolidation among hospitals and the emergence of integrated healthcare delivery systems. Increasingly, these parties are under growing pressure to provide greater levels of value - more services at a lower price. Market factors - competition, regulation - are trimming profit margins ever thinner and forcing organizations to seek out the highest levels of efficiency in order to achieve every cost savings possible while improving the delivery of healthcare to their members. Historically, cost containment efforts have been hampered by a lack of integrated clinical and financial information. Payors continue to require methods for cost control to review and correct healthcare claims. As managed care techniques are becoming more sophisticated and responsibility for cost containment is shared by payors and providers, however, these parties need to manage risk by linking information from analysis and reporting software to real-time care management tools. Each of these goals requires the collection, analysis, and interpretation of clinical and financial information related to the delivery of healthcare, intensifying the need for integrated medical management solutions. Today, employers, government purchasers, and consumers are demanding more services for less dollars, they are increasingly requiring verification that the quality of care they are buying is not being compromised, and access to services is not diminished. Reporting requirements like HEDIS 3.0 and accreditation standards that demand demonstrable quality management initiatives are direct outgrowths of these concerns. These factors have combined to create a new emphasis in the market. Today's healthcare environment has evolved from pure cost management to an integrated medical management focus. This philosophy is more member-focused with an objective of improving the effectiveness of the provider, and improving the quality of care received by the member - maximizing the value that can be derived from the available healthcare premium dollars as measured by the health of the members. Strategy HPR develops and markets software and proprietary database products incorporating clinical knowledge that enable payors and providers to better manage the financial risk in the delivery of healthcare. Key elements of the Company's strategy are to: - Maintain clinical focus. The Company has established its reputation by focusing on the application of clinical knowledge. HPR plans to continue to develop and expand its clinical knowledge bases to deliver information solutions to its customers. The Company believes that its ability to incorporate clinical expertise into its products is a key strategic asset. - Target parties assuming financial risk. Historically, the Company's products have been used primarily by payors who traditionally have assumed most of the financial risk associated with the delivery of healthcare. In response to the shifting of risk from payors to providers, the Company has developed products that specifically address the needs of providers as well as payors. - Expand product offering. The Company plans to expand its product offering through research and development and the acquisitions of new products, technologies and businesses. The Company is currently marketing CodeReview, Medicare CodeReview, ProMatch, Patterns Review, CRMS Fundamentals, Episode Profiler, Quality Profiler, Referral Profiler, Patterns Profiler, HealthPlan Reporter, Credentialer, and CCMS Core. - Leverage existing customer base. Through the introduction of new products, the Company can leverage its existing customer base by cross-selling. The modular design of the Company's products is intended to accommodate new products as they are introduced. - Generate recurring revenue. The Company generates recurring revenues through a combination of multi-year licenses and historically high renewal rates. The Company seeks to maintain and increase recurring revenues through a combination of regular product updates and comprehensive customer service. Clinical Knowledge Bases HPR believes that providing clinical knowledge in usable form is essential to meeting the needs of its customers. The Company believes it can be distinguished from its competitors through the depth and integrity of its "clinical knowledge bases." Clinical knowledge bases represent the codification of specific medical treatments, protocols, and "best treatment practices" from within the medical community. These practices are represented as a series of software algorithms or rules. The rules contained in the clinical knowledge bases form the foundation for the application software in the Company's products. The clinical knowledge bases are updated continually and refined through the combined efforts of the Company's in-house clinical affairs staff of ten physicians and nurses and of the board-certified physicians serving on Company-organized panels, many of whom have been associated with the Company since its inception. The Company's application software and databases incorporate diagnoses and clinical procedures represented by numeric codes selected from industry-standard coding systems. These classification systems include the World Health Organization's International Classification of Diseases, 9th Edition ("ICD-9") (diagnostic codes); the American Medical Association's Current Procedural Terminology, 4th Edition ("CPT-4") (medical procedure codes); and U.S. Healthcare Financing Administration ("HCFA") Level I, II, and III HCFA Common Procedure Coding System ("HCPCS") (codes for procedures or services that are not incorporated into CPT-4). These coding systems are updated each year by the World Health Organization, the American Medical Association, and HCFA, respectively. The Company develops clinical knowledge bases for new products and regularly updates the clinical knowledge bases for existing products. In addition to annual updates that incorporate the annual revisions to ICD-9, HCPCS, and CPT-4 codes, the Company reviews its clinical knowledge bases approximately once every two years to reflect changes in medical practice. Focusing on one medical specialty at a time, the clinical staff revises the rules incorporated into the clinical knowledge bases on the basis of clinical experience, changes in medical practice, and reviews of current medical literature. Revisions are subjected to multiple levels of review by the physicians serving on Company-organized panels. Participation on these panels is based upon experience with utilization review, geography, academic and practical experience, and medical specialty. As a result of the level of physician involvement in the development of its clinical knowledge bases, HPR believes that its products have credibility among physicians who are subject to reimbursement and payment constraints imposed by cost containment efforts. This "clinical credibility" allows customers using the Company's products to be better able to influence physician practice patterns. - Consensus Panels. The Company has organized sixteen "consensus panels" of between eight and 15 physicians. The consensus panels identify changes in medical practice relevant to revising and enhancing the Company's clinical knowledge bases. Panelists are chosen for their clinical knowledge and practical experience within a medical specialty. There are over 200 board-certified physicians who are available to the Company for service on a consensus panel. Panel membership is rotated regularly to maintain balanced and diverse clinical perspectives. Each panelist is financially compensated. Consensus panels convene approximately eight to 10 times per year. - Senior Advisory Panel. The "senior advisory panel" is comprised of approximately 10 physicians who each have at least 10 years of experience in utilization management or managed care and have participated in a consensus panel. The senior advisory panel reviews the work of consensus panels and the clinical knowledge base updates that reflect annual revisions to diagnostic and procedural codes. Members of the senior advisory panel are financially compensated. The senior advisory panel meets once or twice per year. - Specialty Consultants. Currently more than 30 physicians with clinical expertise and utilization management experience serve as "specialty consultants." The specialty consultants are retained by the Company for advice on specific clinical issues on an as-needed basis. Software Development In addition to the clinical knowledge bases that form the foundations for its products, HPR has developed application software that enables customers to access the clinical knowledge bases. HPR's clinical and software development staff collaborate to develop products designed to be responsive to customer needs. In particular, the products generally are portable, scaleable and customizable, and support an open architecture. The Company's software has been developed using commercially available technology. Products HPR is currently marketing CodeReview, Medicare CodeReview, ProMatch, Patterns Review, CRMS Fundamentals, Episode Profiler, Quality Profiler, Referral Profiler, Patterns Profiler, HealthPlan Reporter, Credentialer, and CCMS Core. Each of these products is designed to be used individually or as part of an integrated system (with the exception of ProMatch, which can only be used with CodeReview). Current Products Clinical Payment Management System (CPMSTM) CPMS includes clinically sophisticated software products that can be integrated into a user's claims processing system to detect and correct billing errors as well as identify potentially inappropriate or unnecessary care before the customers pay for it. HPR's CPMS products are available on many industry standard hardware and operating systems. The Clinical Payment Management System is made up of the following products: CodeReview, ProMatch, and Patterns Review. A description of each of these products follows: - CodeReview CodeReview reduces healthcare claims costs by detecting, correcting, and documenting improper or erroneous numerical coding of physician claims under both the CPT-4 and HCPCS coding systems. CodeReview makes no judgment about the necessity, clinical appropriateness, or price of services rendered, but instead reviews medical treatment and procedure codes submitted by physicians for clinical inconsistencies and logical errors. CodeReview allows payors to subject physician claims to a consistent and objective claims review prior to making payment. CodeReview is also used by payors and providers to standardize billing data to permit fair comparisons of practice patterns. Generally, physicians are paid by payors for healthcare services performed according to a fee schedule associated with CPT-4 or HCPCS treatment codes. The coding systems used by physicians may allow a medical claim to be billed in various ways through the submission of different combinations of treatment codes. This may result in significantly different reimbursement for the claim. For example, the surgical removal of a gall bladder typically involves a series of distinct procedures to prepare the patient, remove the gall bladder, complete the surgery, and monitor recovery. The surgery may also include exploration of the abdomen and imaging services. However, while exploration of the abdomen and the provision of imaging services each has a unique treatment code, proper billing practice requires coding the entire series as one procedure -- the removal of a gall bladder -- which generally reduces the payment due for the procedure. CodeReview screens each claim against its clinical knowledge base, which incorporates all of the approximately 7,500 CPT-4 and 2,800 HCPCS Level II codes, and applies over 80,000 logical rules for detecting improper or erroneous coding to the claims submitted by providers. If, for example, a physician files a claim with codes for both the removal of a gall bladder and the exploration of the abdomen, CodeReview "re-bundles" the claim, recoding it to include only removal of a gall bladder. CodeReview also detects other coding errors, such as "upcoding," or billing for a more extensive procedure than actually was performed. CodeReview can be customized to include procedures for which selected coverage policies may vary, or to account for regional variations in payment practices. CodeReview was introduced in 1988 and developed pursuant to a product development agreement with Caterpillar, Inc. There currently are more than 240 licensees of CodeReview, each of which has entered into a written non-cancelable license agreement for a term of years with the Company pursuant to which the licensee generally agrees to pay an annual license fee for use of the product, maintain the product's confidentiality, and use the product only for certain purposes. - ProMatch ProMatch is an add-on module to the CodeReview claims editing software application. ProMatch is used to identify inappropriate and miscoded procedure/diagnosis combinations. The product is designed to share a single interface with CodeReview, making it easy to implement and use. The savings realized using ProMatch are in addition to those savings achieved by CodeReview alone. There are currently 10 licenses of ProMatch. - Patterns Review Patterns Review evaluates physician practice patterns for both inpatient and outpatient services by comparing those patterns (determined on the basis of codes filed by the physician) with accepted medical standards for appropriateness, frequency, and intensity. A "pattern" is a group of diagnoses for which similar clinical management is appropriate. For example, there are separate diagnostic codes for a wrist sprain and an ankle sprain, but the appropriate course of treatment for each is similar, so both diagnoses fall within the same pattern. The clinical knowledge base for Patterns Review assigns each of the approximately 15,000 ICD-9 diagnostic codes to one of approximately 340 treatment patterns. The clinical knowledge base for Patterns Review includes guidelines for clinical appropriateness, frequency, and intensity for each pattern. Patterns Review matches the diagnostic code of a claim to the appropriate treatment pattern and then compares the pattern to the actual treatment rendered. Patterns Review can be used by customers both as a tool for consistent and objective claims review prior to making payment under a claim and as a management tool for post-payment utilization analysis. When used prior to making payment, Patterns Review provides the clinical rationale for reducing payment. When used as a post-payment utilization management tool, Patterns Review profiles physician practice patterns by comparing them to the clinical guidelines incorporated in the clinical knowledge base. This enables customers to identify inefficient or inappropriate practice patterns by specific provider. There currently are more than 116 licensees of Patterns Review, each of which has entered into a written non-cancelable license agreement for a term of years with the Company pursuant to which the licensee generally agrees to pay an annual license fee for use of the product, maintain the product's confidentiality and use the product only for certain purposes. In 1992, the Company merged with Concurrent Review Technology, Inc. whose principal product, Patterns of Treatment, was a collection of clinical protocols. HPR incorporated those protocols into the application software and clinical knowledge base for Patterns Review. CodeReview and Patterns Review are designed to function in conjunction with a customer's claims processing system to evaluate claims each time a claim is processed. The Company has developed interfaces that enable CodeReview and Patterns Review to function with most commercially available healthcare claims processing systems. Clinical Resource Management System (CRMS(TM)) CRMS is a fully integrated line of clinical analysis products, each supported by a common data warehouse and a flexible Windows(R)-based analytic workstation. CRMS products enable users to assemble information, access it quickly and easily, analyze it, and apply the results to provide users with the clinical knowledge to manage cost, quality, and outcomes of patient care. Each CRMS product incorporates a common look and feel, minimizing the user learning curve and making it easy to move from one application to another. Information is presented in both a numeric and graphic format for easy interpretation. The Clinical Resource Management Systems is made up of the following products: Episode Profiler, Quality Profiler, Referral Profiler, Patterns Profiler, HealthPlan Reporter, and CRMS Fundamentals. The following is a description of the each of these products. - Episode Profiler Episode Profiler provides comprehensive clinical and provider profiling using "episode of care" analysis. An "episode" includes all aspects of treatment, starting with an initial diagnosis and incorporates inpatient, outpatient, hospital, and physician services. The clinical knowledge base for Episode Profiler assigns each of the approximately 15,000 ICD-9 diagnostic codes to one of approximately 560 episode treatment groups ("ETGs"). Each ETG describes an appropriate episode of care for the natural progression and treatment of a specific medical condition. Episode Profiler can compare a provider's costs on a per episode basis with those of a specified comparison group. Customers can use Episode Profiler to create profiles for an entire health plan, a specific group of providers, or an individual provider, adjusting a provider's patient population for illness severity and accounting for complications and other medical conditions. The Company introduced Episode Profiler in May 1995. There currently are more than 60 licensees of Episode Profiler, each of which has entered into a written non-cancelable license agreement for a term of years with the Company pursuant to which the licensee generally agrees to pay an annual license fee for use of the product, maintain the product's confidentiality and use the product only for certain purposes. The software for the ETGs is licensed by the Company from Symmetry Health Data Systems, Inc. - - Quality Profiler Quality Profiler evaluates the quality of healthcare delivered and identifies instances of healthcare providers delivering inadequate levels of medical care. Quality Profiler is designed to screen for failure to provide preventive care services and minimum levels of care for specific acute and chronic illnesses, as well as to identify complications that may be indicative of poor patient outcome. In screening for failures to provide preventive care services, the clinical knowledge base for Quality Profiler incorporates the clinical components of the U.S. Preventive Task Force Guidelines and the Health Employer Data Information Set (HEDIS) guidelines established by the National Committee for Quality Assurance (NCQA). Quality Profiler is designed to compare patient data (such as age and gender) to claims filed for the patient over a specific period of time to look for the absence of appropriate codes for preventive treatments that should have been performed under the guidelines. For example, for a 55-year old woman, Quality Profiler is designed to search over the prior 12 months for the CPT-4 code indicating the performance of a mammogram. Quality Profiler's clinical knowledge base also incorporates protocols for medical services associated with favorable outcomes for certain specific acute and chronic illnesses as identified by members of the consensus and senior advisory panels. Quality Profiler is designed to compare the claims filed for a patient diagnosed with one of these illnesses to the protocols developed by HPR's physician consulting network to identify instances of under-utilization. Quality Profiler tracks complications that indicate poor outcomes for specified illnesses. Quality Profiler is designed to generate both provider-specific and member-specific information. The Company introduced Quality Profiler in October 1995 and there are currently more than 48 licensees, each of which has entered into a written non-cancelable license agreement with the Company pursuant to which the licensee generally agrees to pay an annual license fee for use of the product, maintain the product's confidentiality and use the product only for certain purposes. The product was developed with assistance from Healthsource, Inc., which has received a license to use the product. - - Referral Profiler Referral Profiler is expert software designed to analyze primary care work-ups and referral patterns to specialists in relation to clinical guidelines. Referral Profiler enables users to manage medical care more cost-effectively by identifying redundant testing and unnecessary or inappropriate services associated with the referral management process. Referral Profiler guidelines specify when certain tests and specialty consultations are most effective in the diagnostic work-up. Users can share the diagnosis-specific guideline and cost information with providers as part of ongoing educational or payment-related programs to improve performance, or use the guidelines as a reference tool to provide information at the point of care for improved medical management. With Referral Profiler, end users generate clinically-detailed reports on the utilization of specialists for use in network management, quality and outcomes management, utilization control, and physician selection. The product was developed with assistance from United Healthcare Corporation, which has received a license to use the product. Referral Profiler was released in July 1996 and currently has 17 licensees. - - Patterns Profiler Using clinical and financial results from Patterns Review, Patterns Profiler is designed to create summary and detailed reports for use in network management and provider profiling. Patterns Profiler provides peer comparisons of provider performance by specialty, plan type, or employer, helping users to quickly identify opportunities to reduce inappropriate or unnecessary patient care. Patterns Profiler was released in September 1996 and currently has 46 licensees. - - HealthPlan Reporter HealthPlan Reporter produces annual HEDIS reports. By design, HealthPlan Reporter incorporates claims, encounter, provider and membership data into one warehouse to produce all of the eight HEDIS domains. It supports random sampling (hybrid method) for those applicable measures and offers a utility to capture and incorporate the results of the medical record review. Narrative and statistical (provider & plan) information provided by the plan is imported/entered directly into the application, thus maintaining a central approach to HEDIS processing. HealthPlan Reporter was released in March 1997 and currently has more than 22 licensees. CRMS Product Under Development - - CRMS Fundamentals CRMS Fundamentals is a Windows-based, client server software that generates per-member-per month (PMPM) and rates-per-1000 reports. CRMS Fundamentals is being designed to work with all sizes and types of healthcare organizations managing financial risk and it will include an efficient user interface. CRMS Fundamentals will facilitate reporting and analysis of critical cost and utilization trend information. Customers will be able to "slice and dice" traditional managed care statistics by more than a dozen variables including: product lines, employers, providers, procedure groups, diagnoses, age, and gender. With CRMS Fundamentals, users will be able to: o compare actual financial performance to budget o identify variations that impact the financial performance o point to clinical practices where targeted intervention and/or education will improve the efficiency of the user's health care delivery system CRMS Fundamentals was released in July 1997 and currently has 2 licensees. HPR's Credentialing Management System The Credentialing Management System supports the authorization of independently licensed health practitioners to deliver patient care services. - - Credentialer Credentialer is a comprehensive provider network management tool. Providing automated workflow support to healthcare organizations, Credentialer enables users to effectively manage credentialing and recredentialing processes in compliance with the NCQA guidelines for accreditation. Credentialer provides an infrastructure to collect, store, and report on a practitioner's credentials, as well as their status within the network and basic information regarding their practice. Additionally, Credentialer can be used to generate provider directories, and to collect and analyze provider-specific patient satisfaction and complaints/grievances data. Credentialer was acquired as part of The Integrity Group, Inc. acquisition on April 30, 1996 and currently has over 75 licensees. HPR's Clinical Care Management System (CCMS(TM)) CCMS, currently under development and not yet available for general release, is designed to be an integrated product line of clinically based workflow software applications that provides a comprehensive solution for member-centered medical management. CCMS provides access to all of the information necessary to effectively manage an individual member's care. CCMS supports the next generation of medical management, enabling case managers to perform consistent, "real time" evaluation and tracking of individual patients as care is being delivered, and also allows them to follow patients with chronic diseases to help prevent acute episodes. CCMS incorporates case management guidelines based on a comprehensive foundation of clinical knowledge. These guidelines allow for more effective, medically sound, and clinically appropriate case and medical management. CCMS Core, the first in the suite of CCMS products, is being developed in conjunction with three co-development partners: Tufts Associated Health Plans of Massachusetts, Healthsource, Inc. of New Hampshire, and ChoiceCare Health Plans of Ohio. Three customers, in addition to Tufts Associated Health Plans and Healthsource, have signed license agreements to receive the software upon general release, which the Company anticipates in the first half of fiscal 1998. Product and Customer Support The Company's products are valuable to customers only if the clinical knowledge bases embodied therein are current and each customer can effectively apply the clinical knowledge bases to its own analytical requirements. In addition to updates to incorporate annual revisions to ICD-9, HCPCS, and CPT-4 codes, the Company updates its clinical knowledge bases approximately once every two years on the basis of clinical experience, changes in medical practice, and review of current medical literature. The Company provides all its customers with toll free telephone hotline support, available weekdays during business hours, to supply both clinical and technical assistance. The Company also works with customers on a consulting basis to facilitate product installation and utilization. HPR invites its customers to participate in an annual conference. The users conference is a source of ideas and suggestions for current and future products, as well as a forum on market and industry issues. This conference lasts three to four days and over 200 people participate in sessions for analytical, technical, and clinical personnel. The users conference is a valuable resource for the Company as well as its customers, providing feedback on products and marketing opportunities to provide training and new product demonstrations. In addition to the annual users conference, for the past several years the Company has convened a "medical directors forum." This group includes the medical directors from a number of HPR's clients, and provides valuable insight for the Company into its customers' ongoing and future product needs, from which the Company can make plans for enhancement of existing products and development of new products. Medical Advisory Board The Company's Medical Advisory Board, chaired by Dr. Richard H. Egdahl, was formally established in 1995 to serve as an important resource to HPR's management. The Medical Advisory Board is composed of prominent physicians who first met in December 1995. The Medical Advisory Board meets approximately twice annually and is otherwise available to provide advice at the Company's request on clinical issues and matters of overall policy and direction of the Company. Members of the Medical Advisory Board receive an honorarium for each meeting attended. Customers The Company has approximately 360 customers. Based upon discussions with its customers, the Company believes that, in the aggregate, its customers cover approximately 70 million lives. Approximately 55% are managed care organizations such as HMOs and PPOs, 20% are indemnity plans, 10% are TPAs and employers, and 15% are providers. The Company estimates based on industry data and surveys by industry analysts, that in the United States there are currently approximately 900 payors, 180 groups of greater than 50 physicians and 6,000 hospitals with greater than 50 beds, which are either customers or potential customers. The Company believes these provider groups represent a relatively unpenetrated market for its products. Additionally, the emergence of integrated healthcare delivery systems may represent a significant potential market opportunity. The Company expects the mix of its customers to shift toward providers who will assume more of the financial risk in the delivery of healthcare. There is no assurance, however, that the Company will be able to penetrate these relatively new market opportunities with the same level of success that has been realized in the payor market. Currently, 42% of the Company's customers use more than one of the Company's products. The Company's customers include: Managed Care Indemnity Foundation Health Corporation Blue Cross/Blue Shield of Arkansas,Inc. Healthsource, Inc. Blue Cross/Blue Shield of New Jersey, Inc. Kaiser Permanente Blue Cross/Blue Shield of Tennessee,Inc. Oxford Health Plans, Inc. Fortis Benefits Insurance Company United HealthCare Corporation Providers TPAs/Employers Monarch Health Systems ACMG, Inc. Lovelace Health Systems First Health Services Corporation Allina Health Plans Holy Cross Shared Services Sales and Marketing HPR markets its products through a combination of a national direct sales force and third-party marketing agreements. Currently, the Company's sales force consists of approximately 30 people, operating out of four sales offices. Because the Company's products represent a large capital investment for its customers, and due to the length of the sales cycle, senior management and clinical support staff take an active role in marketing and sales activities. Corporate marketing activities conducted by the Company's marketing staff include press releases, customer testimonials, the development of corporate product literature, presentations at industry events and trade shows and advertising, as well as communications with targeted decision makers and consultants in the healthcare community. Research and Development Nearly half of the Company's employees are involved with product development. In addition, the Company's over 200 physician consultants, organized into panels, contribute to product development. The Company's research and development activities include new product development, product updates and enhancement of existing products. Some of the Company's product development has been accomplished with support from third party users of the products, allowing the Company more efficiently to develop products that are responsive to customer needs. A substantial majority of the Company's research and development expenses are incurred in connection with new product development. The Company's research and development expenses for fiscal 1995, 1996 and 1997 were $3,257,000, $3,891,000, and $7,011,000, respectively. Competition The Company's competitors include healthcare information companies and large data processing and information companies. Many of these competitors have substantial installed customer bases in the healthcare industry and the ability to fund significant product development and acquisition efforts. The Company believes that the principal competitive factors in its market are clinical credibility and integrity and product innovation. These factors address both customer needs for cost containment tools and increasing industry concerns about quality control. Other important competitive factors include product reputation and reliability, system features, client service, price, and the effectiveness of marketing and sales efforts. Based on historical performance, the Company believes it competes favorably with respect to each of these factors. However, there can be no assurance that the Company will remain competitive with respect to any individual factor or combination thereof. Governmental Regulations and Healthcare Reform The healthcare industry is subject to changing political, economic and regulatory influences that may affect the procurement practices and operation of healthcare organizations. The Company's products are designed to function within the structure of the healthcare financing and reimbursement system currently being used in the United States. During the past several years, the healthcare industry has been subject to an increase in governmental regulation of, among other things, reimbursement rates. Certain proposals to reform the U.S. healthcare system are currently under consideration by the U.S. Congress. These programs may contain proposals to increase governmental involvement in healthcare and otherwise change the operating environment for the Company's customers. Healthcare organizations may react to these proposals and the uncertainty surrounding such proposals by curtailing or deferring investments, including those for the Company's products. On the other hand, changes in the regulatory environment have in the past increased and may continue to increase the needs of healthcare organizations for cost-effective information management and thereby enhance the marketability of the Company's products and services. The Company cannot predict with any certainty what impact, if any, such proposals or healthcare reforms might have on the Company's results of operations, financial condition and business. Intellectual Property HPR considers its methodologies, computer software and knowledge-bases to be proprietary. The Company seeks to protect its proprietary information through nondisclosure agreements with its employees. The Company's policy is to have employees enter into nondisclosure agreements containing provisions prohibiting the disclosure of confidential information to anyone outside the Company, requiring disclosure to the Company 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 secrets, copyright and trademark laws, contractual provisions and technical measures to protect its rights in various methodologies, systems and products and knowledge-bases. Except as described below, the Company has not filed any patent applications or copyrights covering its software technology. Any infringement or misappropriation of the Company's proprietary software and clinical knowledge-bases would disadvantage the Company in its efforts to retain and attract new customers in a highly competitive market and could cause the Company to lose revenues or incur substantial litigation expense. HPR was awarded a U.S. patent (No. 5,253,164) in October 1993 for the system and methodology embodied in CodeReview(R). On January 23, 1995, the Company and GMIS, Inc. ("GMIS") entered into an agreement settling certain litigation initiated by GMIS to declare the Company's patent invalid and responded to by the Company with a countersuit for patent infringement. Under the settlement agreement, the Company granted GMIS a non-exclusive license under the patent, and GMIS acknowledged the validity of the patent and made a one-time payment of $7,200,000 to the Company. Due to the nature of its application software, the Company believes that patent, trade secret and copyright protection are less significant than the Company's ability to further develop, enhance and modify its current products. Although the Company believes that its products do not infringe on the intellectual property rights of others, there can be no assurance that such a claim will not be asserted against the Company in the future. If asserted, such a claim could cause the Company to lose revenues or incur substantial litigation expense. Employees As of June 30, 1997, the Company employed 179 individuals. None of the Company's employees are represented by a union or other collective bargaining group. The Company believes its relationship with its employees to be satisfactory. Executive Officers of the Registrant The executive officers of the Company, and their ages as of July 31, 1997, are as follows: Name Age Position Marcia J. Radosevich,Ph.D 44 Chairman of the Board, Chief Executive Officer, President Brian D. Cahill 39 Chief Operating Officer and Chief Financial Officer George A. Abatjoglou 27 Treasurer and Controller Paul W. Brient 29 Vice President, Product Marketing Andrew C. Garling, M.D. 52 Vice President, Clinical Affairs Joseph K. Jaeger 38 Vice President, Sales Matthew Ricketson 39 Vice President, Professional Services Steven J. Rosenberg 41 Senior Vice President,Software Development and Services Thomas L. Saltonstall 49 Vice President, Human Resources and Corporate Administration James B. Stowe 48 Vice President, Marketing - -------------------------------------------------------------------------------- Dr. Radosevich has served as Chief Executive Officer and a director of the Company since 1988 and was elected Chairman of the Board of Directors in June 1995. From 1988 until 1992, and since May 31, 1996 she also has held the position of President of the Company. She served as Vice Chairman of the Board from 1992 to June 1995. Dr. Radosevich is a director of Oxford Health Plans, a health maintenance organization. Mr. Cahill joined the Company as Vice President, Finance, Chief Financial Officer, Treasurer and Secretary in 1993 and was promoted to Chief Operating Officer in 1997. From 1982 to 1992, Mr. Cahill held various accounting and finance positions at Epsilon Data Management, Inc., a database marketing company which in 1990 became a subsidiary of American Express Travel Related Services Company, Inc. He became Controller, Treasurer and Secretary of Epsilon Data in 1987 and Vice President, Finance and Chief Financial Officer in 1990. Mr. Abatjoglou, CPA, joined HPR in 1995 and was promoted to Treasurer and Controller in 1997. He is responsible for managing the daily operations of the finance department. Prior to joining HPR, Mr. Abatjoglou served three years as a senior accountant at the public accounting firm of Coopers & Lybrand L.L.P., the Company's independent accountants. Mr. Brient, who joined HPR in 1995 as the manager of new product development, was promoted to Vice President, Product Management in 1997. Previously, he served as a senior consultant at the Boston Consulting Group and founded a successful practice management software business in Florida. Dr. Garling joined the Company as Vice President, Clinical Affairs in 1997. Previously he served as Vice President and Corporate Medical Director at Advanced Health Corporation, a publicly held company which provides physician practice management services. Prior to Advanced Health, he served as Vice President of Prudential Health Care. In addition he served eleven years as an emergency room physician with Kaiser Permanente. Mr. Jaeger joined the Company in 1993 and spent four years as the National Director of Sales prior to his promotion to Vice President, Sales in 1997. Prior to working for HPR, Mr. Jaeger held Regional Sales Manager positions for Mozart Systems and On-Line Software in Chicago. He also spent four years as a Sales Representative for Pansophic Systems, Inc. Mr. Ricketson joined HPR in 1996 as Vice President, Professional Services. He most recently worked at Marcam Corporation, a producer of enterprise-wide software for manufacturers, where he oversaw the Customer Service function during a period when that company grew from $20 million to $200 million in annual revenues. Mr. Rosenberg joined the Company as Vice President, Software Development and Services in 1994. From 1992 to 1994, he served as Vice President of Sales Technologies Inc., a sales force automation company, and from 1990 to 1992 was Vice President of AICORP, Inc., a software company. Mr. Saltonstall joined the Company in 1996 as Vice President, Human Resources and Corporate Administration. He comes to HPR from National Medical Care, Inc., an international healthcare company, where he was Vice President for Human Resources. Mr. Stowe joined the Company as Vice President, Marketing and Business Development in 1995. From 1989 until joining the Company, he was a partner and practice leader at Charles J. Singer & Co., a managed care research and consulting firm. Each officer serves at the discretion of the Board of Directors. There are no family relationships among any of the directors and executive officers of the Company. Item 2. Properties The Company's executive and corporate offices comprise 48,000 square feet of a facility at 245 First Street, Cambridge, Massachusetts under lease agreements that expire on August 31, 2003. The Company also maintains three sales offices in Illinois, Arizona and Nevada. The Company believes that its facilities are adequate for its current operations. Item 3. Legal Proceedings From time to time, the Company is involved in litigation relating to claims arising out of its operations in the normal course of business. As of the date of this Annual Report on Form 10-K, the Company is not a party to any legal proceedings which, if decided adversely to the Company, in management's opinion would have a material adverse effect on the Company's results of operations or financial position. Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of security holders during the fourth quarter of fiscal 1997. Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Market for Common Stock The Company effected its initial public offering on August 10, 1995 at a price of $8.00 per share (adjusted to reflect a 2 for 1 stock split for shareholders of record as of April 26, 1996 effected in the form of a stock dividend). Since that date, the Company's Common Stock has traded on the Nasdaq National Market under the symbol HPRI. The following table represents the high and low sales prices for the Company's common stock for each quarter of fiscal 1997 and 1996 as reported by Nasdaq National Market. All stock prices have been restated to reflect a 2 for 1 stock split to shareholders of record as of April 26, 1996 effected in the form of a stock dividend. High Low Fiscal 1997 4th quarter ended June 30, 1997 $18.75 $ 10.75 3rd quarter ended March 31, 1997 $18.38 $ 10.13 2nd quarter ended December 31, 1996 $16.25 $ 11.50 1st quarter ended September 30, 1996 $22.00 $ 13.50 Fiscal 1996 4th quarter ended June 30, 1996 $25.63 $ 18.25 3rd quarter ended March 31, 1996 $21.75 $ 15.50 2nd quarter ended December 31, 1995 $18.13 $ 11.25 1st quarter ended September 30, 1995 $13.25 $ 9.00 Holders of Record As of August 11, 1997 there were 84 holders of record of the Company's Common Stock. Dividends The Company has never declared or paid any cash dividends on the Common Stock. The Company currently intends to retain future earnings, if any, to fund the development and growth of its business and does not anticipate paying any cash dividends on the Common Stock in the foreseeable future. Item 6. Selected Financial Data The following table contains selected consolidated financial data of the Company and is qualified by the more detailed Consolidated Financial Statements and Notes thereto included in Item 8 hereof. The statement of operations data for the fiscal years ended June 30, 1995, 1996 and 1997 and the balance sheet data as of June 30, 1996 and 1997 have been derived from Consolidated Financial Statements, which statements have been audited by Coopers & Lybrand L.L.P., independent accountants, and are included in Item 8 of this Form 10-K. The statement of operations data for the fiscal years ended June 30, 1993 and 1994 and the balance sheet data as of June 30, 1993, 1994, and 1995 have been derived from the Company's Consolidated Financial Statements, which statements have been audited by Coopers & Lybrand L.L.P. and are not included in this Form 10-K. This data should be read in conjunction with Consolidated Financial Statements and Notes thereto and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." Fiscal Year Ended June 30, (in thousands, except per share data)
1993 1994 1995 1996(6) 1997 Statement of Operations Data: Revenues......................... $10,770 $14,065 $18,264 $28,310 $39,101 ------- ------- ------- ------- ------- Expenses: Cost of revenues............... 2,277 3,452 4,235 7,348 7,900 Marketing and sales............ 3,529 4,016 4,664 6,328 8,672 Research and development....... 598 1,499 3,257 3,892 7,011 General and administrative..... 1,701 2,324 2,037 3,594 4,774 Cost of acquisition (1) ....... -- -- -- 336 -- -- -- -- --- -- Total expenses............... 8,105 11,291 14,193 21,498 28,357 ----- ------ ------ ------ ------ Operating income................. 2,665 2,774 4,071 6,812 10,744 Interest income (expense), net... (105) 17 302 878 1,240 Gain on settlement of litigation(2) -- -- 5,800 -- -- -- -- ----- -- -- Income before taxes.............. 2,560 2,791 10,173 7,690 11,984 ----- ----- ------ ----- ------ Provision for income taxes....... 1,059 1,160 4,106 3,168 4,973 ----- ----- ----- ----- ----- Net income(2).................... $1,501 $1,631 $6,067 $4,522 $7,011 ====== ====== ====== ====== ====== Net income per share............. $0.11 $0.12 $0.43 $0.29 $0.44 1995 Pro forma net income(3)..... $2,608 1995 Pro forma net income per $0.18 share(3)......................... 1996 Pro forma net income(4)..... $4,719 1996 Pro forma net income per $0.30 share(4)......................... Weighted average common shares and equivalents (5)................ 13,522 13,966 14,175 15,840 16,103
June 30, ---------------------------------------------------- (in thousands) 1993 1994 1995 1996(6) 1997 ------- ------- ------- -------- ------- Balance Sheet Data: Working capital............... $2,192 $3,555 $11,130 $20,465 $31,881 Total assets.................. 7,915 10,805 17,988 34,603 47,531 Long-term liabilities......... 367 601 1,931 882 559 Stockholders' equity.......... 3,377 5,055 11,282 27,915 38,269 Dividends per share............. 0 0 0 0 0 (1) In April 1996, the Company incurred costs related to the acquisition of The Integrity Group, Inc. which resulted in an expense of $336,000. (2) In January 1995, GMIS, Inc. made a one-time payment to the Company in settlement of certain litigation, which payment was recorded as a gain, net of certain legal and other costs. (3) Reflects the fiscal 1995 net income on a pro forma basis by excluding the gain on settlement of litigation and its related tax effect. Gain on settlement of litigation, net of expenses, was $5,800,000, less an effective tax rate of 40.4% ($2,341,000), which results in an after tax gain of $3,459,000 on settlement of litigation. Accordingly, net income of $6,067,000 less the $3,459,000 after tax gain results in pro forma net income of $2,608,000. (4) Reflects the fiscal 1996 net income on a pro forma basis by excluding the costs related to the acquisition of The Integrity Group, Inc. and the related tax effect. Costs of the acquisition were $336,000, less an effective tax rate of 41.2% ($138,000), resulting in an after tax loss of $198,000 due to acquisition costs. Accordingly, net income of $4,521,000 plus the $198,000 after tax expenditures results in pro forma net income of $4,719,000. (5) All share and earnings per share amounts have been restated to reflect the impact of a stock split effected in the form of a 100% stock dividend granted on May 6, 1996 to all shareholders of record on April 26, 1996. (6) The acquisition of The Integrity Group was accounted for as a pooling of interests. However, due to the relative immateriality of TIG's financial position with respect to HPR as of the date of combination, the merger of the equity interests was given retroactive effect to the beginning of fiscal 1996. Accordingly, TIG's assets, liabilities, and shareholder's equity were brought onto the Company's consolidated books as of the beginning of the period as an adjustment to beginning equity.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview The Company licenses its products primarily pursuant to multi-year non-cancellable agreements that, in general, provide for payment of equal annual license fees over their terms. This type of arrangement provides the Company with a significant recurring component to its revenues each year. Revenue from software license agreements is recognized upon execution of a contract and shipment of the software provided that no significant vendor obligations remain outstanding and the related receivable is due within one year of the contract date and collection is deemed probable by management. For recurring license fees, revenues are recognized on the contract anniversary date. The Company accrues incidental support costs associated with these licenses when revenues are recognized. Revenues from services are recognized when the services are delivered. There can be no assurance that the Company will be able to enter into new license agreements at the current rate or to maintain the current pricing for its products. Prior to fiscal 1993, the Company's revenues were derived from a single product, CodeReview, and between July 1993 and May 1995 from three products, CodeReview, Medicare CodeReview and Patterns Review. In May 1995, the Company introduced its fourth product, Episode Profiler, and in October 1995 introduced its fifth product, Quality Profiler. The acquisition of The Integrity Group, Inc. in April 1996 provided the Company with its sixth product, Credentialer. During fiscal 1997 the Company introduced four more products to market: Referral Profiler in July 1996, Patterns Profiler in September 1996, HealthPlan Reporter in March 1997, and ProMatch in June 1997. The introduction of these four products brings HPR's total product count to ten as of June 30, 1997. In July 1997, the Company released its eleventh product to market, CRMS Fundamentals. In addition, the Company has expended significant development resources during fiscal 1997 towards the production of its twelfth product, CCMS Core, the first product in the CCMS line. The Company believes that as the markets for CodeReview and Patterns Review mature, the continued growth of the Company will require the successful introduction of new products and further enhancements to its existing products. There can be no assurance that the Company will continue to design, develop, and release successful new product offerings in the future. The Company has experienced a seasonal pattern in its operating results, with the fourth and second fiscal quarters typically having the highest revenues and net income and the first and third fiscal quarters typically having lower revenues and net income. The timing of revenues is influenced by a number of factors, including the timing of individual orders and shipments, seasonal customer buying patterns and changes in product development and sales and marketing expenditures. The Company believes the seasonality of its revenues and net income for the fourth fiscal quarter can be attributed to due dates for payment obligations under multi-year license agreements, renewals of existing agreements and the Company's sales compensation program, which is based significantly on fiscal year sales levels. Furthermore, the Company typically experiences long sales cycles for new customers, which may extend over several quarters before a sale is consummated. As a result, the Company believes that quarterly results of operations will continue to be subject to significant fluctuations and that its results of operations for any particular quarter or fiscal year may not be indicative of results of operations for future periods. The Company believes that continued investment in research and development and expansion of its national direct sales force are critical to its success. The Company believes that the aggregate amount of research and development expense will continue to increase, if revenues increase as expected, while the level of research and development expense as a percentage of revenues will remain relatively constant. For each of the last three fiscal years, the Company has made significant investments in the direct sales force in anticipation of new product releases. As the Company has grown from two products in fiscal 1994 to the current offering of three distinct product suites encompassing 12 individual products, the Company has continued to invest in quality personnel within the sales organization. The Company believes that the national sales force is well positioned to address the shift of financial risk associated with the delivery of healthcare from payors to providers and consequently, will be prepared to sell into this new market for the Company. However, there is no assurance that the Company will be able to penetrate these relatively new market opportunities with the same level of success that has been realized in the payor market. The Company capitalizes software costs for internally developed software in accordance with FASB 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed." These costs relate primarily to the development of new products and the extension of existing applications to new markets or platforms using existing technologies and programming methods. The capitalized costs are amortized on a straight-line basis over the estimated useful life of the product (typically three years), commencing when each product is available to the market. Results of Operations The following table sets forth, for the fiscal periods indicated, certain items from the statement of operations expressed as a percentage of revenues: Fiscal Year Ended June 30, 1995 1996 1997 -------- -------- ------ Revenues...................... 100 % 100% 100% Expenses: Cost of revenues............ 23 26 20 Marketing and sales......... 26 22 22 Research and development.... 18 14 18 General and administrative.. 11 13 12 Cost of acquisition -- 1 0 -- - - Total expenses........... 78 76 72 -- -- -- Operating income.............. 22 24 28 Interest income (expense), 2 3 3 net........................... Gain on settlement of 32 -- -- litigation.................... -- -- -- Income before taxes........... 56 27 31 Provision for income taxes.... 23 11 13 -- -- -- Net income.................... 33 % 16% 18% ==== === === Fiscal Years Ended June 30, 1995, 1996 and 1997 Revenues. Revenues increased 55% from $18,264,000 in 1995 to $28,310,000 in 1996 and 38% to $39,101,000 in 1997. A major contributor to this steady revenue growth has been the successful release of new products to market. Over the three year period from fiscal 1995 to fiscal 1997 the Company's product offering has grown from three products in fiscal 1995 to ten products as of June 30, 1997. The Company's first two products, CodeReview and Patterns Review, continue to show strong year over year performance both through new licenses and renewals of existing licenses. Fiscal year 1996 revenues reflect revenues from the acquisition of The Integrity Group, Inc. ("TIG") in April 1996, which was accounted for as a pooling of interests incorporating TIG's results of operations for the entire fiscal year. In addition, the fiscal 1996 results reflect a full year of revenues related to the Company's Episode Profiler product, initially released in the fourth quarter of fiscal 1995, as well as revenues from the release of Quality Profiler in October 1995. Fiscal 1997 revenues include contributions from 4 new products: Referral Profiler, Patterns Profiler, HealthPlan Reporter, and ProMatch. In addition, the Company has recognized development revenues in fiscal 1997 from CCMS Core co-development contracts with Tufts Associated Health Plans and Healthsource, Inc. Cost of Revenues. Cost of revenues increased 74% from $4,235,000 in 1995 to $7,348,000 in 1996 and 8% to $7,900,000 in 1997. As a percentage of revenues, the cost of revenues increased from 23% in 1995 to 26% in 1996 and decreased to 20% in 1997. The increase from 1995 to 1996 was primarily due to certain royalty payments to third parties for software licensed by the Company for incorporation into the Company's products and by increased investment in the technical and clinical customer support functions. During fiscal 1997 significant resources were dedicated to the development of three new products released during the year, as well as HPR's newest products, CCMS Core (currently under development) and CRMS Fundamentals. As a result, there was a shift in personnel resources and the related expenses from application maintenance and other typical cost of revenue projects, to application development. Accordingly, there was a redistribution of fiscal 1997 expense classification from cost of revenue to research and development. As the Company finishes development of CCMS Core in fiscal 1998 it is expected that the cost of revenues will remain relatively constant or increase slightly as a percentage of revenues as resources focus on the maintenance of the Company's twelve existing products. Marketing and Sales. Marketing and sales increased 36% from $4,664,000 in 1995 to $6,328,000 in 1996 and 37% to $8,672,000 in 1997. As a percentage of revenues, marketing and sales decreased from 26% in 1995 to 22% in 1996 and remained flat in 1997. The Company invests in certain promotional activities each fiscal year which include trade shows and seminars as well as the development of collateral materials designed to increase awareness of the Company and its products. In addition, the Company spends significant time and resources in recruiting quality individuals to be a part of the direct sales force. As the Company has continued to invest in marketing and sales programs, the investment has contributed to higher revenues in each of the last three fiscal years causing sales and marketing expense to decrease as a percentage of revenues over that same period. The Company expects sales and marketing to remain relatively constant as a percentage of revenues. Research and Development. Research and development efforts by the Company are focused on developing new products and enhancing existing products. Research and development costs increased 19% from $3,257,000 in 1995 to $3,892,000 in 1996 as a result of continued research efforts on Quality Profiler and Referral Profiler. Research and development increased 80% from $3,892,000 in 1996 to $7,011,000 in 1997 as a result of development in connection with the release of four new products to market in fiscal 1997. In addition, in fiscal 1997 the Company underwent one of its largest development efforts to date in the design and production of CCMS Core, the first in a suite of Clinical Care Management System products. As a percentage of revenues, research and development decreased from 18% in 1995 to 14% in 1996 and then increased in 1997 to 18%. The decrease in 1996 is a result of two factors: the significant increase in revenue dollars in 1996 over 1995 and the release of Episode Profiler in late 1995 and Quality Profiler in October 1996, both of which were in development during fiscal 1995. The increase in fiscal 1997 is a by-product of the development efforts discussed above. With the increase in development activities on the Company's new product lines, management expects that research and development expenditures will increase but remain substantially the same or decrease slightly as a percentage of revenue for the foreseeable future. General and Administrative. General and administrative expenses increased 76% from $2,037,000 in 1995 to $3,594,000 in 1996 and 33% to $4,774,000 in 1997. As a percentage of revenues, general and administrative expenses increased from 11% in 1995 to 13% in 1996 and decreased slightly to 12% in fiscal 1997. The increased expenditures from 1995 to 1996 are due primarily to increased expenses related to being a publicly-traded company, certain costs incurred in moving the Company's headquarters in August 1995, and an increase in the provision for bad debt expenses in proportion to the increase in revenues. During fiscal 1997 the Company made significant investments in infrastructure, management information systems, and human resources to prepare itself for the future. Although the increase in expenditures in fiscal 1997 is in line with the Company's growth during the year, the Company believes that if revenues increase, general and administrative expenses should decrease as a percentage of revenues in the future. However, there can be no assurance that general and administrative expenses will not increase at a rate faster than revenues in the future. Costs of Acquisition. In April 1996, the Company acquired The Integrity Group, Inc. ("TIG"), an Alabama corporation, in a transaction accounted for as a pooling of interests. The Company incurred one time costs related to the acquisition of $336,000 primarily related to legal, accounting, and finders fees. Interest Income (Expense), Net. The Company realized interest income of $302,000 in 1995, $877,000 in 1996, and $1,240,000 in 1997. Interest income represents interest earned on the Company's excess cash balances, which are generally placed in short term investments, money market funds and government securities. The increase is due to the interest earned on cash balances of the Company generated from operations and the proceeds from the Company's initial public offering of its common stock completed in August 1995 and from the follow-on offering completed in February 1996. Gain on Settlement of Litigation. In January 1995, the Company settled all of the outstanding claims between the Company and GMIS, Inc. related to the Company's patent for CodeReview. Under the settlement agreement, the Company granted GMIS a nonexclusive license under the patent, and GMIS acknowledged the validity of the patent and made a one-time payment, net of legal and certain other costs, of $5,800,000 to the Company. Income Taxes. The Company's effective tax rate was 40.4% in 1995 compared with 41.2% in 1996 and 41.5% in 1997. The Integrity Group, Inc. was a Subchapter S corporation until its acquisition on April 30, 1996. As a result, the former shareholders of TIG are responsible for all taxes on profits made through that date. The Company has recorded taxes for the final two months of the 1996 fiscal year related to TIG's activity. The Company has no federal income tax loss carry forwards. Liquidity and Capital Resources During the period from inception through June 30, 1997, the Company raised approximately $15.9 million, net of expenses, through the issuance of equity securities, of which amount approximately $7.2 million was raised in the first quarter of fiscal 1996 in the Company's initial public offering and $4.2 million was raised in the third quarter of fiscal 1996 in the Company's second public offering. The Company generated cash of $5.3 million from operations in fiscal 1995, approximately $4.5 million in fiscal 1996 and approximately $3.8 million during fiscal 1997. At June 30, 1997, the Company had cash and cash equivalents of $13.9 million. The Company regularly invests excess funds in short-term money market funds, government securities and commercial paper. On February 7, 1997, the Company received an extension and modification of its revolving bank credit facility from $5,000,000 to $7,500,000 with an expiration date of December 30, 1997. No borrowings have been made to date under the facility. The Company believes that available funds and cash generated from operations will be sufficient to meet the Company's operating requirements, assuming no change in the operations of the Company's business, for the foreseeable future. To date inflation has not had a material impact on the Company's financial results. There can be no assurance, however, that inflation may not adversely affect the Company's financial results in the future. Impact of Recently Issued Accounting Pronouncements The FASB issued Statement No. 128 ("SFAS 128"), "Earnings per Share," which modifies the way in which earnings per share ("EPS") is calculated and disclosed. Currently, the Company discloses primary EPS. Upon adoption of this standard for the fiscal period ending June 30, 1998, the Company will be required to disclose either basic EPS or both basic and dilutive EPS. The principal difference being that common stock equivalents would not be considered in the computation of basic EPS. The impact of adoption of SFAS 128 has not yet been determined. The FASB recently issued Statement No. 130 ("SFAS 130"), "Reporting Comprehensive Income". This statement requires changes in comprehensive income to be shown in a financial statement that is displayed with the same prominence as other financial statements. While not mandating a specific financial statement format, the Statement requires that an amount representing total comprehensive income be reported. Comprehensive income components include: unrealized gains and losses on available-for-sale investments in debt and equity securities, foreign currency translation adjustments, and minimum pension liability adjustments. The Statement will become effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods is required for comparative purposes. The Company does not believe that this statement will have a material impact on the results of operations. In June 1997, the Financial Accounting Standard Board issued Statement of Financial Accounting No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS No. 131). SFAS No. 131 specifies new guidelines for determining a company's operating segments and related requirements for disclosure. The Company does not believe that this statement will have an impact on the presentation of the financial statements and the disclosures therein. Risk Factors Relating to Forward-Looking Statements Statements in this report concerning the future results of operations, financial condition and business of the Company are "forward-looking" statements as defined in the Securities Act of 1933 and the Securities Exchange Act of 1934. Investors are cautioned that information contained in these forward-looking statements is inherently uncertain, and that actual performance and results may differ materially due to numerous risk factors, including but not limited to the following: Seasonality and Variable Operating Results. The Company has experienced a seasonal pattern in its operating results, with the fourth and second fiscal quarters typically having the highest revenues and net income and the first and third fiscal quarters typically having lower revenues and net income. The timing of revenues is influenced by a number of factors, including the timing of individual orders and shipments, seasonal customer buying patterns and changes in product development and sales and marketing expenditures. The Company believes the seasonality of its revenues and net income for the fourth fiscal quarter can be attributed to due dates for payment obligations under multi-year license agreements, renewals of existing agreements and the Company's sales compensation program, which is based significantly on fiscal year sales levels. The Company believes the seasonality of its revenues and net income in the second fiscal quarter can be attributed to the seasonal purchasing patterns of its customers. The Company most recently reported a net loss in the first and third quarters of fiscal 1994 and there can be no assurance that the Company will be profitable during future quarters. In addition, although the Company has no present agreements or commitments to enter into any major contracts, the signing of a major contract could generate a large increase in revenues and net income for any given quarter or fiscal year, which increase may prove anomalous when compared to changes in revenues and net income in other periods. Furthermore, the Company typically experiences long sales cycles for new customers, which may extend over several quarters before a sale is consummated. As a result, the Company believes that quarterly results of operations will continue to be subject to significant fluctuations and that its results of operations for any particular quarter or fiscal year may not be indicative of results of operations for future periods. Dependence Upon New Product Development, Acceptance and Enhancement. The market for the Company's products is characterized by rapid technological progress and changing customer needs. The Company believes that as the markets for CodeReview and Pattern Review mature, the continued growth of the Company will require the successful introduction of new products. Accordingly, the Company's future success will depend on its ability to successfully develop and introduce new products, including HealthPlan Reporter, CCMS Core, and the other modules of the Clinical Care Management System ("CCMS"), and to enhance its existing products. There can be no assurance that the Company will be successful in developing, introducing on a timely basis, and marketing such products or enhancements or that they will be accepted by the market. Significant research and development expenditures will be required in the future. There can be no assurance that the Company's expected new product releases and product enhancements will adequately address customer requirements for performance and functionality or that its software will not contain "bugs" that would delay product introduction or shipment. Dependence on Third Party for Component of Episode Profiler. A principal component of Episode Profiler, the "Episode Treatment Groups" product, is licensed from a third-party vendor, Symmetry Health Data Systems, Inc. ("Symmetry"), under the terms of a 63-month license which commenced November 17, 1994 and has a 24-month renewal term which is contingent on the Company meeting minimum royalty requirements. Symmetry has agreed, subject to certain conditions, that it will not license Episode Treatment Groups to certain other companies which might be considered competitors of the Company. While the Company believes that the terms of such license are adequate to protect the Company's investment in Episode Profiler, any factor adversely affecting the Company's ability to retain the benefits of such license or to obtain the updated Episode Treatment Groups would have a material adverse effect on the Company's results of operations, financial condition and business. Risk of Inability to Grow Through Acquisitions. The Company has grown, and intends to continue to grow, in part through acquisitions of products, technologies and businesses. The Company's ability to expand successfully through acquisitions depends on many factors, including the successful identification and acquisition of products, technologies and businesses and management's ability to effectively integrate and operate the new products, technologies or businesses. There is significant competition for acquisition opportunities in the industry, which may intensify due to consolidation in the industry, increasing the costs of capitalizing on such opportunities. The Company competes for acquisition opportunities with other companies that have significantly greater financial and management resources. 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. 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 adversely affect the Company's results of operations, financial condition or business. Inability to Retain or Attract Customers Due to Competition and Consolidation. The market in which HPR's products are licensed is highly competitive. Most of the Company's competitors have significantly greater financial, technical, product development and marketing resources than the Company. The Company's potential competitors for customers include healthcare information companies and large data processing and information companies that may have more diverse product offerings covering a broader spectrum of the healthcare industry. Many of these competitors have substantial installed customer bases in the healthcare industry and the ability to fund significant product development and acquisition efforts. In addition, the Company has noted a trend towards consolidation of customers within its market. While this consolidation results in substantially larger potential customers, the Company also is faced with a risk of existing customers being acquired by entities that use a competitor's product. The Company continues to believe that the principal competitive factors in its market are clinical credibility and integrity and product innovation. These factors address both customer needs for cost containment tools and increasing industry concerns about quality control. Other important competitive factors include product reputation and reliability, system features, client service, price, and the effectiveness of marketing and sales efforts. There can be no assurance that future competition will not have a material adverse effect on the Company's results of operations, financial condition or business. Dependence on Proprietary Software and Clinical Knowledge-Bases. The Company's success is dependent to a significant extent on its ability to maintain the proprietary and confidential software and clinical knowledge-bases incorporated in CodeReview, ProMatch, Patterns Review, Episode Profiler, Quality Profiler, Referral Profiler, HealthPlan Reporter, Patterns Profiler, CRMS Fundamentals, CCMS Core and other products as they are released. The Company relies on a combination of patent, trade secret, copyright and contractual protections to establish and protect its proprietary rights. There can, however, be no assurance that the legal protections and the precautions taken by the Company will be adequate to prevent misappropriation of the Company's technology. Any infringement or misappropriation of the Company's proprietary software and clinical knowledge-bases would disadvantage the Company in its efforts to retain and attract new customers in a highly competitive market, and could cause the Company to lose revenues or incur substantial litigation expense. In addition, these protections and precautions do not prevent independent third-party development of competitive technology or products. Further, the Company depends on third-party suppliers to license to HPR necessary technology that is incorporated into certain of the Company's products, including Episode Profiler. The inability of the Company for any reason to continue using or otherwise acquire such technology could prevent distribution of such products, which would have a material adverse effect on the Company's results of operations, financial condition or business. Dependence on Certain 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. The Company does not have employment agreements with any of its officers or key employees providing for their employment for any specific term. The Company does not have "key person" life insurance on any of its personnel other than Marcia J. Radosevich, the Company's Chairman of the Board, Chief Executive Officer, and President. The loss of key personnel or the inability to hire or retain qualified personnel could have a material adverse effect on the Company's results of operations, financial condition or business. Uncertainty in the Healthcare Industry. The healthcare industry is subject to changing political, economic and regulatory influences that may affect the procurement practices and operation of healthcare organizations. The Company's products are designed to function within the structure of the current national healthcare financing and reimbursement system currently being used in the United States. The Company believes that the commercial value and appeal of its products may be adversely affected if that system were to be materially changed. During the past several years, the United States healthcare industry has been subject to an increase in governmental regulation of, among other things, reimbursement rates. Proposals to reform the United States healthcare system are from time to time under consideration by the U.S. Congress. These programs may contain proposals to increase government involvement in healthcare and otherwise change the operating environment for the Company's customers. Healthcare organizations may react to these proposals and the uncertainty surrounding such proposals by curtailing or deferring investments in cost containment tools and related technology such as the Company's products. The Company cannot predict what impact, if any, such factors might have on its results of operations, financial condition or business. In addition, many healthcare providers are consolidating to create integrated healthcare delivery systems with greater regional market power. As a result, these emerging systems could have greater bargaining power, which may lead to price erosion of the Company's products. The failure of the Company to maintain adequate price levels would have a material adverse effect on the Company's results of operations, financial condition or business. Other legislative or market-driven reforms could have unpredictable effects on the Company's results of operations, financial condition or business. Risk of Product Liability Claims. The Company's products provide information that relates to payment of healthcare claims and to the appropriateness of medical treatment in particular cases and in general. Any failure by the Company's products to process such claims or to review such treatments accurately could result in claims against the Company by its customers. Further, successful use of the Company's products could influence the treatments rendered by providers and give rise to claims against the Company by patients or providers. The Company maintains insurance to protect against certain claims associated with the use of its products, but there can be no assurance that its insurance coverage would adequately cover any claim asserted against the Company. A successful claim brought against the Company in excess of, or excluded from, its insurance coverage could have a material adverse effect on the Company's results of operations, financial condition or business. Even unsuccessful claims could result in the Company's expenditure of funds in litigation and management time and resources. While to date the Company has not experienced any product liability claims against it, the Company is aware of claims made against payors by patients for coverage decisions which adversely influenced medical treatment. There can be no assurance that the Company will not be subject to product liability claims, that such claims will not result in liability in excess of its insurance coverage, that the Company's insurance will cover such claims or that appropriate insurance will continue to be available to the Company in the future at commercially reasonable rates. In addition, if liability of the Company were to be established, substantial revisions to its products could be required that may cause the Company to incur additional unanticipated research and development expenses. Possible Volatility of Stock Price. Prior to August 10, 1995, there was no public market for the Common Stock, and there can be no assurance that an active trading market will be sustained or that the market price of the Common Stock will not decline below its current 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 could also be subject to significant fluctuations in response to variations in quarterly results of operations, announcements of new products or acquisitions 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. The market price of the Common Stock may be significantly affected by factors such as announcements of new products by the Company's competitors, as well as variations in the market conditions in the medical cost containment or software industries in general. The market price may also be affected by movements in prices of equity securities in general. Item 8. Financial Statements and Supplementary Data HPR Inc. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Accountants............................................29 Consolidated Balance Sheets as of June 30, 1996 and 1997 ....................30 Consolidated Statements of Operations for the fiscal years ended June 30, 1995, 1996 and 1997..........................................................31 Consolidated Statements of Stockholders' Equity for the fiscal years ended June 30, 1995, 1996 and 1997.................................................32 Consolidated Statements of Cash Flows for the fiscal years ended June 30, 1995, 1996 and 1997..........................................................33 Notes to Consolidated Financial Statements...................................34 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of HPR Inc: We have audited the accompanying consolidated balance sheets of HPR Inc. as of June 30, 1996 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended June 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of HPR Inc. as of June 30, 1996 and 1997 and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 1997, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Boston, Massachusetts August 1, 1997 HPR Inc. CONSOLIDATED BALANCE SHEETS June 30, ---------------------------
1996 1997 ------------ ------------ ASSETS: Current Assets: Cash and cash equivalents (Note 2) ................ $ 8,479,122 $ 13,943,693 Investments in marketable securities (Note 4) ..... 9,016,146 10,842,696 Accounts receivable, net of allowances for doubtful accounts of $603,000 and $651,500 for 1996 and .. 4,491,065 6,952,573 1997 Contract receivables .............................. 3,142,680 6,890,342 Deferred income taxes (Note 7) .................... 415,149 698,022 Prepaid expenses and other current assets ......... 727,044 1,257,276 ------------ ------------ Total current assets ....................... 26,271,206 40,584,602 Investments in marketable securities (Note 4) ....... 5,394,340 2,984,465 Property and equipment, net (Note 5) ................ 1,964,164 2,509,775 Software development costs, net (Note 2) ............ 873,427 1,347,654 Other assets ........................................ 100,332 104,570 ------------ ------------ Total assets ............................... $ 34,603,469 $ 47,531,066 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY: Current Liabilities: Accounts payable .................................. $ 607,259 $ 749,138 Accrued royalties ................................. 456,521 1,025,979 Accrued expenses .................................. 581,524 1,181,450 Accrued support costs ............................. 1,425,191 1,792,584 Accrued employee compensation and benefits ........ 1,323,973 2,247,295 Deferred revenue .................................. 698,029 1,498,147 Income taxes payable .............................. 438,758 -- Sales taxes payable ............................... 275,022 209,067 ------------ ------------ Total current liabilities .................. 5,806,277 8,703,660 Deferred income taxes (Note 7) ...................... 882,173 558,791 ------------ ------------ Total liabilities .......................... 6,688,450 9,262,451 ------------ ------------ Commitments and contingencies (Note 6) Stockholders' Equity: Convertible preferred stock, par value $0.10, 3,000,000 shares authorized; zero shares outstanding at June 30, 1996 and 1997 .................................... -- -- Common stock, par value $0.01, 35,000,000 shares authorized; 17,918,625 and 15,325,303 shares issued and 15,012,375 and 15,325,303 shares outstanding at June 30, 1996 and 1997, respectively ............ 179,185 153,253 Additional paid-in capital ........................ 15,972,680 18,335,055 Less treasury stock, at cost: 2,906,250 and zero shares at June 30,1996 and 1997, respectively ............. (2,843,900) -- Retained earnings ................................. 14,607,054 19,780,307 ------------ ------------ Total stockholders' equity ................. 27,915,019 38,268,615 ------------ ------------ Total liabilities and stockholders' equity . $ 34,603,469 $ 47,531,066 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. HPR Inc. CONSOLIDATED STATEMENTS OF OPERATIONS Fiscal Year Ended June 30, 1995 1996 1997 ------------- ------------- --------- Revenues......................... $18,263,831 $28,310,272 $39,101,380 Expenses: Cost of revenues............... 4,234,427 7,348,354 7,900,286 Marketing and sales............ 4,664,362 6,328,282 8,672,199 Research and development....... 3,257,268 3,891,381 7,010,839 General and administrative..... 2,036,644 3,594,331 4,774,084 Cost of acquisition (Note 12) . -- 335,544 -- -- ------- -- Total expenses................... 14,192,701 21,497,892 28,357,408 ---------- ---------- ---------- Operating income................. 4,071,130 6,812,380 10,743,972 Interest income (expense), net... 301,412 877,377 1,240,066 Gain on settlement of litigation (Note 11)...................... 5,800,223 -- -- --------- -- -- Income before provision for income taxes.......................... 10,172,765 7,689,757 11,984,038 Provision for income taxes....... 4,105,277 3,167,894 4,973,385 --------- --------- --------- Net income....................... $6,067,488 $4,521,863 $7,010,653 ========== ========== ========== Net income per share............. $0.43 $0.29 $0.44 Weighted average common shares and equivalents (1)................ 14,175,000 15,840,000 16,103,000 (1) All share and earnings per share amounts have been restated to reflect the stock split effected in the form of a 100% stock dividend granted on May 6, 1996 to all shareholders of record on April 26, 1996. The accompanying notes are an integral part of the consolidated financial statements. HPR Inc. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Fiscal Year Ended June 30, 1995, 1996 and 1997
Preferred Stock Common Common Additional Treasury Treasury Total Shares Stock Stock Paid-in Retained Stock Stock Stockholders' Issued Amount Issued Amount Capital Earnings Shares Amount Equity ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Balance at June 30, 2,762,500 $ 276,250 8,835,900 $ 88,359 $ 3,606,576 $ 3,928,199 (2,906,250) $(2,843,900) $ 5,055,484 1994 Issuance of common stock 25,000 250 16,000 16,250 Options exercised 1,465,000 14,650 127,880 142,530 Net income ....... 6,067,488 6,067,488 ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- ----------- Balance at June 30, 1995 .............. 2,762,500 276,250 10,325,900 103,259 3,750,456 9,995,687 (2,906,250) (2,843,900) 11,281,752 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Pooling of interests with The Integrity Group, Inc. .. 260,001 2,600 119,900 89,504 212,004 Balance as restated 2,762,500 276,250 10,585,901 105,859 3,870,356 10,085,191 (2,906,250) (2,843,900) 11,493,756 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Conversion of preferred stock... (2,762,500) (276,250) 5,525,000 55,250 221,000 -- Issuance of common stock in initial public offering 1,077,052 10,770 8,002,578 8,013,348 Expenses related to initial public offering ...... (858,896) (858,896) Issuance of common stock in second 288,596 2,886 4,645,545 4,648,431 public offering Expenses related to second public .... (424,420) (424,420) offering Options exercised .. 442,076 4,420 164,632 169,052 Tax benefits on stock options exercised...... 351,885 351,885 Net income ...... 4,521,863 4,521,863 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Conversion of Balance at June 30, 1996 .............. -- -- 17,918,625 179,185 15,972,680 14,607,054 (2,906,250) (2,843,900) 27,915,019 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Options exercised 325,180 3,252 399,349 402,601 Purchase of Treasury Stock (12,252) (7,922) (7,922) Tax benefits on stock options 2,948,264 2,948,264 exercised Retirement of (2,918,502) (29,184) (985,238 (1,837,400) 2,918,502 2,851,822 -- Treasury Stock Net income 7,010,653 7,010,653 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Balance at June 30, 1997 ........ -- $ 0 15,325,303 $ 153,253 $18,335,055 $19,780,307 -- $ 0 $38,268,615 =========== =========== =========== =========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. HPR Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS Fiscal Year Ended June 30, 1995 1996 1997 ------------ ------------ -------- Cash flows from operating activities: Net income........................ $6,067,488 $4,521,863 $7,010,653 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization.. 1,074,491 1,254,119 1,467,972 Provision for doubtful accounts 210,000 321,302 425,000 Loss on disposal of equipment.. 124,488 -- -- Amortization of discount on investments.................. -- (114,242) (203,353) Change in operating assets and liabilities: Accounts receivable............ (1,867,568) (1,785,004) (6,634,170) Prepaid expenses............... (970,859) 490,502 (530,232) Other assets................... 76,191 -- (4,238) Accounts payable and other accrued liabilities.................. 1,130,196 322,411 2,601,978 Sales taxes payable............ (123,944) 128,403 (65,955) Deferred revenue............... (62,258) (90,895) 800,118 Deferred income taxes.......... 373,364 (1,026,570) (606,255) Income taxes payable........... (705,401) 438,758 (438,758) --------- ------- --------- Net cash provided by operating activities................ 5,326,188 4,460,647 3,822,760 --------- --------- --------- Cash flows for investing activities: Capitalized software development costs.......................... (591,261) (366,332) (1,025,009) Capital expenditures.............. (664,330) (1,732,624) (1,462,801) Sale of marketable securities..... -- 15,276,906 18,763,596 Purchase of marketable securities. -- (29,573,130) (17,976,918) -- ------------ ------------ Net cash used in investing activities................ (1,255,591) (16,395,180) (1,701,132) ----------- ------------ ----------- Cash flows from financing activities: Proceeds from initial public offering....................... -- 8,013,348 -- Expenses related to initial public offering....................... -- (858,896) -- Proceeds from second public offering....................... -- 4,648,431 -- Expenses related to second public offering....................... -- (424,420) -- Proceeds from sale of common stock 16,250 -- -- Proceeds from exercise of stock options........................ 142,530 169,052 402,601 Payments to acquire treasury stock -- -- (7,922) Payments on long-term debt........ (91,860) -- -- Tax benefits from exercise of stock options...................... -- 351,885 2,948,264 -- ------- --------- Net cash provided by financing activities...... 66,920 11,899,400 3,342,943 ------ ---------- --------- Net increase (decrease) in cash and cash equivalents....................... 4,137,517 (35,133) 5,464,571 --------- -------- --------- Cash and cash equivalents, beginning of period............................ 4,348,545 8,486,062 8,479,122 Cash and cash equivalents provided by the acquisition of The Integrity -- 28,193 -- Group, Inc. ........................ Adjusted cash and cash equivalents, beginning of period............... 4,348,545 8,514,255 8,479,122 --------- --------- --------- Cash and cash equivalents, end of period............................ $8,486,062 $8,479,122 $13,943,693 ========== ========== =========== The accompanying notes are an integral part of the consolidated financial statements HPR Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Description of Business HPR develops and markets software and proprietary database products incorporating clinical knowledge that enable payors and providers of healthcare services to better manage the financial risk associated with the delivery of healthcare and the quality of care. HPR products are used to manage healthcare costs and quality of care by clinically evaluating providers' claims for payment; measuring efficiency, quality, and medical outcomes; determining appropriate utilization of medical services; influencing physician referral patterns and profiling practice patterns; assisting in HEDIS(R) reporting; and managing and supporting the physician credentialing and accreditation processes. The Company's clinical knowledge bases are developed and maintained by a full time medical staff in consultation with board-certified physicians serving on Company-organized panels. The Company's products are designed to meet the needs of parties assuming financial risk for the delivery of healthcare. HPR believes that providing clinical knowledge in usable form is essential to its customers. The Company believes it can be distinguished from its competitors through the depth and integrity of its "clinical knowledge bases. HPR is currently marketing its CodeReview(R), Medicare CodeReview(TM), ProMatch(TM), Patterns Review(R), CRMS Fundamentals(TM), Episode Profiler(TM), Quality Profiler(TM), Referral Profiler(TM), Patterns Profiler(TM), HealthPlan Reporter(TM), Credentialer(TM), and CCMS Core(TM) products. HPR markets its products through a combination of a national direct sales force and third-party marketing agreements. The Company was incorporated on September 28, 1987 in Massachusetts under the name HPR, Inc. The Company re-incorporated in Delaware on December 20, 1991, under the name Health Payment Review, Inc. On July 24, 1995, the name of the Company was changed to HPR Inc. Unless the context otherwise requires, references herein to the "Company" and "HPR" refer to HPR Inc., a Delaware corporation, its wholly-owned subsidiaries and HPR, Inc., its Massachusetts predecessor. On June 3, 1992, Concurrent Review Technology, Inc., a California corporation, was merged into the Company's wholly-owned subsidiary, Concurrent Review Technology, Inc., a Delaware corporation. On August 16, 1995 the Company established a wholly-owned subsidiary, HPR Securities Corp., a Massachusetts corporation. On April 30, 1996, the Company acquired The Integrity Group, Inc., an Alabama corporation, which became a wholly-owned subsidiary of HPR. On April 18, 1997 the Company established a wholly-owned subsidiary, HPR International, Inc., a Barbados corporation. (2) Summary of Significant Accounting Policies Principles of Consolidation The accompanying financial statements include the accounts of the Company and its wholly-owned subsidiaries, Concurrent Review Technology, Inc., HPR Securities Corp., The Integrity Group, Inc., and HPR International, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation. Financial Statement Presentation On July 20, 1995, the stockholders of the Company approved a 2.5-for-1 stock split of the Company's common stock and preferred stock and approved an increase of the authorized number of common shares to 35,000,000 and of preferred shares to 3,000,000. On April 16, 1996, the Company announced a stock split effected in the form of a 100% stock dividend to all shareholders of record on April 26, 1996. The stock dividend was granted on May 6, 1996. Accordingly, all share and per share amounts have been adjusted to reflect the stock splits as though they had occurred at the beginning of the initial period presented. Reclassification Certain reclassifications have been made to prior year's financial statements to conform to the fiscal 1997 presentation. Cash and Cash Equivalents The Company considers all highly liquid instruments purchased with original maturities of three months or less at the time of acquisition to be cash equivalents. Cash and cash equivalents include U.S. government obligations and U.S. government money market mutual funds used for temporary cash management purposes. Investments in Marketable Securities In accordance with FAS 115, the Company determines the appropriate classification of its investments in debt and equity securities at the time of purchase and reevaluates such determination at each balance sheet date. Debt securities which the Company has the intent or ability to hold to maturity are classified as held to maturity. The Company held no investments in equity securities at June 30, 1996 and 1997. Securities held to maturity are carried at amortized cost which approximates fair market value. At June 30, 1997 the Company had no investments that qualified as trading or available for sale. The Company classifies investments that mature greater than 12 months from the balance sheet date as long term investments. Concentration of Credit Risk Financial instruments which potentially expose the Company to concentrations of credit risk consist primarily of cash, investments, and accounts and contract receivables. The Company places its temporary cash investments in three financial institutions. The Company has not experienced any losses on these investments to date. The Company has not experienced significant losses related to receivables from individual customers or groups of customers in the healthcare industry or by geographic area. Property and Equipment Property and equipment are stated at cost. Depreciation is computed on a straight-line basis over a two-to five year estimated useful life for all property and equipment with the exception of leasehold improvements, which are amortized over the shorter of the life of the improvement or the remaining life of the lease. Repairs and maintenance costs are charged to expense as incurred. Upon retirement or sale, the cost of the assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the determination of net income. Software Development Costs The Company capitalizes software costs for internally developed software in accordance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed." These costs relate primarily to the development of new products and extending existing applications to new markets or platforms using existing technologies and programming methods. All costs incurred to establish technological feasibility are charged to expenses as incurred. Internally developed software costs capitalized were $591,261, $366,332 and $1,025,009 for fiscal years 1995, 1996, and 1997, respectively. The capitalized costs are amortized on a straight-line basis over their estimated useful lives (typically three years), commencing when each product is available to the market. Amortization of these software development costs is included in costs of revenues. Amortization expense for computer software was $608,285, $578,125 and $550,782 during 1995, 1996, and 1997, respectively. Accumulated amortization of software development costs was $1,438,254, $2,016,379 and $2,567,161 at June 30, 1995, 1996, and 1997, 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 products. In performing its evaluation, the Company must make estimates of anticipated future gross revenues as well as the remaining economic life of the product. It is reasonably possible that those estimates could be reduced in the near term as a result of items such as competitive pressures. As a result, the carrying amount of the capitalized software costs for a particular product line may be reduced materially in the near term. Revenue Recognition The Company licenses its products primarily pursuant to multi-year non-cancellable agreements that provide for payment of equal annual license fees over their terms. The Company recognizes revenue in accordance with Statement of Position No. 91-1, "Software Revenue Recognition," issued by the American Institute of Certified Public Accountants. Revenue from software license agreements is recognized upon execution of a contract and shipment of the software provided that no significant vendor obligations remain outstanding and the related receivable is due within one year of the contract date and collection is deemed probable by management. For recurring license fees, revenues are recognized on the contract anniversary date. The Company also accrues incidental support costs associated with these licenses when revenues are recognized. Revenues from services are recognized when the services are delivered. In fiscal 1995, the Company retroactively changed its method of recognizing renewal or recurring revenue from the recognition of the annual contract amount ratably over the renewal period to the recognition of the entire recurring amount on the contract anniversary date. The change was made in accordance with the Accounting Principles Board Opinion No. 20 in contemplation of an initial public distribution of the financial statements. The financial statements for all periods presented have been restated to reflect the change in accounting. The effect of the restatement was an increase to revenue of $1,703,000 for the year ended June 30, 1995. The effect of the restatement was an increase to net income and net income per share of $987,000 or $0.07. Customer payment terms vary. Amounts billed in advance of satisfying revenue recognition criteria are classified in current and long term liabilities as deferred revenue in the accompanying balance sheets. Costs and earnings recognized in advance of billing are classified in current assets as contract receivables. Research and Development Research and development costs are charged to expense as incurred. Income Taxes Under the liability method specified by SFAS No. 109, a deferred tax asset or liability is determined based on the difference between the financial statement and tax basis of assets and liabilities, as measured by the enacted tax rates expected to apply when these differences reverse. SFAS No. 109 also requires a valuation allowance against net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Net Income Per Share Net income per share of common stock is computed for each year based upon the weighted average number of common shares outstanding and dilutive common stock equivalents. For purposes of this calculation, outstanding options are considered common stock equivalents (using the treasury stock method). Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83, common and common equivalent shares issued during the 12 month period prior to the date of the initial filing of the Company's Registration Statement have been included in the calculation, using the treasury stock method, as if they were outstanding for all periods presented. Fair market value for the purpose of this calculation was assumed to be $6.75, which is the midpoint of the initial public offering price range. The number of shares used in this calculation has been adjusted to reflect a 2.5-for-1 stock split in July 1995 and a 2 for 1 stock split effected in the form of a 100% stock dividend in May 1996. Use of Estimates in the Preparation of the Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (3) Line of Credit On February 1, 1997, the Company received an extension and modification of its revolving bank credit facility from $5,000,000 to $7,500,000 with an expiration date of December 30, 1997. The $7,500,000 bank line is an uncollateralized borrowing line. The current and prior agreements require the Company to achieve certain levels of tangible net worth and to maintain certain financial ratios. Borrowings under the new agreement bear interest at prime rate, 8.50% at June 30, 1997. During 1996 and 1997 the line of credit was unused; therefore, no interest was paid. (5) Property and Equipment Property and equipment, at cost, consist of the following: June 30, ------------------------- 1996 1997 Computer equipment......... $1,272,852 $2,112,785 Computer software.......... 367,643 455,918 Furniture and fixtures..... 612,366 646,034 Office equipment........... 323,081 436,047 Leasehold improvements..... 433,576 811,354 ------- ------- 3,009,518 4,462,138 Less accumulated (1,045,354) (1,952,363) ----------- ----------- depreciation............... $1,964,164 $2,509,775 Depreciation expense was $332,624, $675,967 and $917,190 in 1995, 1996, and 1997 respectively. (6) Commitments and Contingencies The Company has entered into operating leases of office facilities, which expire at various dates through 2003. Certain leases include renewal options and escalation clauses for increases in real estate taxes and operating expenses. Future minimum rental payments under the operating leases as of June 30, 1997 are as follows: Minimum Lease Payments Due Year 1998 $1,118,004 1999 1,146,399 2000 1,104,375 2001 1,119,829 2002 1,258,375 Thereafter 1,500,297 Total rent expense under noncancelable operating leases was approximately $437,000, $667,000, and $868,900 during 1995, 1996, and 1997, respectively. The Company's Executive Separation Benefits Plan provides for severance payments to be made to members of its senior management in the event of termination of the eligible employee's employment. The Plan provides for payment for up to 24 months of annual base salary upon termination by the Company for reasons other than disability or "good cause" as defined therein. The Company's Non-Executive Separation Benefits Plan for key contributors and other employees as defined therein provides for payment of up to six months annual base salary upon termination by the Company for reasons other than disability or "good cause" as defined. The Company has also entered into non-competition agreements with certain of its executive officers. These agreements provide that upon termination of such officer's employment by the Company, he or she will refrain for a period of up to 24 months, to be determined by the Company, from certain competitive activities with respect to the Company. If the Company exercises its option to restrain any such officer from competitive activity, it will pay such officer 33% of his or her monthly salary as of termination for each month for which the executive officer agrees to refrain from competing with the Company. The Company has third party royalty and marketing agreements for certain of its products. The agreements call for the payment of predetermined royalty amounts over the life of the Company's software license agreements with customers. All amounts due under such agreements have been accrued as of June 30, 1997. (7) Income Taxes The Company follows SFAS No. 109, "Accounting for Income Taxes". Under SFAS 109, deferred tax assets and deferred tax liabilities are recognized based on temporary differences between the basis of assets and liabilities using statutory rates. June 30, June 30, 1996 1997 Gross deferred tax assets: Reserves and certain accrued $995,566 $1,197,630 expenses.................... -------- ---------- Subtotal...... 995,566 1,197,630 Gross deferred tax liabilities: Property and equipment depreciation.............. (13,762) (20,537) Deferred revenue............ (1,086,813) (499,609) Capitalized software amortization.............. (351,729) (538,253) Other................ (10,286) - -------- --------- Subtotal..... (1,462,590) (1,058,399) --------- --------- Net deferred tax (liability)/asset. $(467,024) $139,231 ========== ======== The provision for income taxes consists of the following: Fiscal Year Ended June 30, 1995 1996 1997 ---------- ------------ -------- Current: Federal............... $2,845,133 $3,276,743 $4,540,134 State................. 886,780 917,722 1,039,506 ------- ------- --------- 3,731,913 4,194,465 5,579,640 Deferred Federal............... 285,285 (784,396) (644,925) State................. 88,079 (242,175) 38,670 ------ --------- ------ 373,364 (1,026,571) (606,255) ------- ----------- --------- Provision for income taxes.................. $4,105,277 $3,167,894 $4,973,385 ========= ========== ========== . A reconciliation between the Company's effective rate and the U.S. statutory rate is as follows: Fiscal Year Ended June 30, 1995 1996 1997 -------- -------------- U.S. statutory rate........... 34.0% 34.0% 35% State taxes, net of federal 6.3 5.9 5.0 benefit....................... Goodwill...................... 0.5 -- -- Other......................... 0.5 2.1 2.3 Research and development credits (0.9) -- -- Federal rate differential..... -- -- (0.8) Acquisition of The Integrity -- (0.8) -- Group, Inc. ----- ----- ----- 40.4% 41.2% 41.5% ===== ===== ===== Total tax payments made in the fiscal years ended June 30, 1995, 1996 and 1997 were $4,708,000, $3,187,000, and $3,390,000 respectively. In fiscal years ended June 30, 1996 and 1997, the Company recognized $351,900 and $2,948,300 of tax benefits associated with the exercise of employee stock options. (8) Stockholders' Equity Preferred Stock Holders of the Company's outstanding convertible preferred stock are entitled to convert each share into one share of common stock, subject to certain antidilutive adjustments. In the event of liquidation of the Company the holders of preferred stock are entitled to receive, before distribution to common stockholders, $1.02 per share. There were no outstanding shares of preferred stock as of June 30, 1997. Treasury Stock During 1997, the Company retired 2,918,438 common stock shares held in treasury. The excess of cost over par value was charged proportionally to Additional Paid in Capital and Retained Earnings. Stock Option Plans 1991 Stock Plan. The Company's 1991 Stock Plan (the "1991 Stock Plan") provides for the grant of nonqualified and incentive stock options to employees and others to purchase up to 1,160,000 shares of the Company's common stock. Options granted under the plan are exercisable at the fair market value of the stock at the date of grant, are exercisable in full at any time, vest over three to four years and expire ten years from the date of grant. 1995 Stock Plan. The Company's 1995 Stock Plan (the "1995 Stock Plan") was approved by the Board of Directors on June 26, 1995, and by the Company's stockholders on July 20, 1995, and amended by the Board of Directors on July 22, 1996 and approved (as amended) by the Company's stockholders on November 1, 1996. The 1995 Stock Plan provides for the grant or award of stock options, restricted stock, stock appreciation rights and other performance awards which may or may not be denominated in shares of Common Stock or other securities (collectively, the "Awards"). Stock options granted under the 1995 Stock Plan may be either incentive stock options or non-qualified options. The purpose of the 1995 Stock Plan is to attract and retain outstanding employees through the incentives of stock ownership and monetary payments. Every regular full-time employee of the Company, including officers but excluding directors who are not officers, is eligible to receive awards. The 1995 Stock Plan is administered by the Compensation Committee of the Board of Directors. Subject to the provisions of the 1995 Stock Plan and approval by the Board of Directors, the Compensation Committee has the authority to designate participants, determine the types of Awards to be granted, the number of shares to be covered by each Award, the time at which each Award is exercisable or may be settled, the method of payment and any other terms and conditions of the Awards. All Awards are evidenced by an Award Agreement between the Company and the participant. While the Compensation Committee determines the prices at which options and other Awards may be exercised under the 1995 Stock Plan, the exercise price per share of an incentive stock option shall be at least 100% of the fair market value (as determined under the terms of the 1995 Stock Plan) of a share of Common Stock on the date of grant. The aggregate number of shares of Common Stock available for awards under the Plan is 2,035,000. The maximum term for Awards under the 1995 Stock Plan is ten years, and no Awards may be made under the 1995 Stock Plan after June 25, 2005. During 1996 employees of The Integrity Group, Inc. were granted options to purchase 8,254 shares of common stock at a price per share of $0.49 which was below the fair market value at the date of the grant. This discount from fair market value has been recorded as deferred compensation and charged to expense ratably over the four year vesting period of the options. 1995 Eligible Directors Stock Plan. The Company's 1995 Eligible Directors Stock Plan (the "Directors Stock Plan") was approved by the Board of Directors on June 26, 1995, and by the Company's stockholders on July 20, 1995, and amended by the Board of Directors July 22, 1996 and approved (as amended) by the Company's stockholders on November 1, 1996. Under the Directors Stock Plan and subject to the approval by the Board of Directors, each director who is not an officer or employee of the Company or any subsidiary of the Company (an "outside director") will be granted, upon first being elected to the Board of Directors, an option to purchase 10,000 shares of Common Stock at an exercise price equal to the fair market value on the date of the grant. In addition, upon re-election, each outside director will be granted an option on the thirtieth day following the date of each annual meeting of stockholders to purchase 4,000 shares of Common Stock at an exercise price equal to the fair market value on the date of grant. A total of 150,000 shares of Common Stock are available for awards under the Directors Stock Plan, as amended July 22, 1996 and approved by shareholders on November 1, 1996. The options granted under the Directors Stock Plan will vest in five equal annual installments commencing one year after the date of grant. The maximum term for Awards under the 1995 Eligible Directors Stock Plan is ten years, and no Awards may be made under the 1995 Stock Plan after June 25, 2005. As of June 30, 1997, the Company has reserved 3,345,000 shares of common stock for issuance under all of its stock option plans. A summary of the Company's stock option activity as of June 30, 1995, 1996 and 1997 is presented below. 1995 1996 1997 --------------------------- ------------------------- ---------------------------
Weighted Weighted Weighted Average Average Average Shares Exercise Price Shares Exercise Price Shares Exercise Price Outstanding at beginning of year... 2,363,166 $0.13 1,878,366 $2.51 1,502,553 $3.64 Granted 1,105,700 3.80 68,256 14.17 1,034,400 14.33 Exercised (1,465,000) 0.10 (441,941) 0.38 (325,180) 1.24 Expired (125,500) 0.18 (2,128) 1.07 (234,398) 9.21 --------- ---- ------- ---- --------- ---- Outstanding at end of year................ 1,878,366 $2.51 1,502,553 $3.64 1,977,375 $8.95 ========= ===== ========= ===== ========= ===== Options exercisable at year-end........... 408,630 $0.18 543,469 $1.75 512,328 $3.25 Weighted-average fair value of options granted during the year................... 1,105,700 $3.80 68,256 $14.17 1,034,400 $14.33
The following table summarizes information about the Company's stock options plans at June 30, 1997: Options Outstanding Options Exercisable ------------------------------------------------------- ----------------------------------
Range of Shares Weighted-Average Shares Exercise Outstanding at Remaining Weighted-Average Exercisable Weighted-Average Prices June 30, 1997 Contractual Life Exercise Price at June 30 , 1997 Exercise Price - ------ ------------- ---------------- -------------- ----------------- -------------- $0.11 - $4.99 414,975 5.6 $0.72 269,178 $0.57 $5.00 - $9.99 569,500 8.0 $5.60 228,750 $5.60 $10.00 - $16.38 992,900 9.4 $16.10 14,400 $14.30
In October of 1995, the FASB issued SFAS No. 123, "Accounting for Stock Based Compensation," which is effective for periods beginning after December 15, 1995. SFAS 123 requires that companies either recognize compensation expense for grants of stock, stock options and other equity instruments based on fair value, or provide pro forma disclosure of net income and earnings per share in the notes of the financial statements. The Company adopted the disclosure provisions of SFAS 123 effective July 1, 1996 and has applied APB Opinion 25 and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for stock options issued to employees at fair market value. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates as calculated in accordance with SFAS 123, the Company's net income and earnings per share for the years ended June 30, 1996 and 1997 would have been adjusted to the pro forma amounts indicated below: 1996 1997 --------------------------------------- ---------------------------------------
As Reported Pro Forma As Reported Pro Forma Net income $4,521,863 $4,494,140 $7,010,653 $6,542,563 Net income per share $0.29 $0.28 $0.44 $0.41
The fair value of each stock option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for the years ended June 30, 1996 and 1997: 1996 1997 ---- ---- Risk-free interest rate 5.47% 6.36% Expected life 5 years 5 years Expected volatility 50% 50% Dividend yield 0% 0% The effects of applying SFAS 123 in this pro forma disclosure are not likely to be representative of the effects on reported net income for future years. Additional awards in future years are anticipated. SFAS 123 does not apply to awards prior to 1995. (10) Employee Benefits The Health Payment Review, Inc. 401(k) Plan is a defined contribution plan available to substantially all of HPR's employees. The 401(k) Plan was established effective June 1, 1993 under section 401(k) of the Internal Revenue Code. Under the Plan, employees may make voluntary contributions based on a percentage of their pretax earnings. HPR contributions to the Plan are established each year at the discretion of the Board of Directors. No Company contributions were made to the Plan in fiscal 1995, 1996, and 1997. The Company paid administrative costs on behalf of the Plan of $6,500, $12,500, and $15,000 in fiscal 1995, 1996 and 1997, respectively. (11) Legal Proceedings On January 31, 1994, a suit was filed in the U.S. District Court for the Eastern District of Pennsylvania by GMIS, Inc. ("GMIS") against the Company, alleging that the Company's patent relating to its CodeReview product was invalid, not infringed, and unenforceable. GMIS also alleged that the Company interfered with the business relationships of GMIS and sued for damages of an unspecified amount. The Company filed a patent infringement counterclaim on March 25, 1994 alleging, among other things, that GMIS' product, ClaimCheck, infringed upon the patent. On January 23, 1995 the Company settled all of its outstanding claims with GMIS. Pursuant to the settlement, the terms of which were undisclosed, the Company granted GMIS a nonexclusive license under the patent, and GMIS acknowledged the validity of the patent and made a one-time payment to the Company. The payment was recorded by the Company net of legal and other costs. (12) Acquisitions On April 30, 1996 the Company acquired The Integrity Group, Inc. ("TIG"), an Alabama corporation, in a transaction accounted for as a pooling of interests under which all of the capital stock of TIG was exchanged for 260,001 shares of HPR Inc. common stock. TIG is a vendor of provider credentialing, accreditation support, Healthcare Employer Data Information Set (HEDIS) reporting and data warehousing tools and support for effective provider network management. The accompanying financial statements for periods prior to 1996 do not include the amounts for this acquisition as they were deemed to be immaterial. Only 1996 financial information has been restated as if the transaction had occurred as of July 1, 1995. TIG was a Subchapter S corporation for income tax purposes and, therefore, did not pay U.S. federal income taxes. TIG has been included in the Company's U.S. federal income tax return effective April 30, 1996. (12) Recent Accounting Pronouncements The FASB issued Statement No. 128 ("SFAS 128"), "Earnings per Share," which modifies the way in which earnings per share ("EPS") is calculated and disclosed. Currently, the Company discloses primary EPS. Upon adoption of this standard for the fiscal period ending June 30, 1998, the Company will be required to disclose either basic EPS or both basic and dilutive EPS. The principal difference being that common stock equivalents would not be considered in the computation of basic EPS. The impact of adoption of SFAS 128 has not yet been determined. The FASB recently issued Statement No. 130 ("SFAS 130"), "Reporting Comprehensive Income". This statement requires changes in comprehensive income to be shown in a financial statement that is displayed with the same prominence as other financial statements. While not mandating a specific financial statement format, the Statement requires that an amount representing total comprehensive income be reported. Comprehensive income components include: unrealized gains and losses on available-for-sale investments in debt and equity securities, foreign currency translation adjustments, and minimum pension liability adjustments. The Statement will become effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods is required for comparative purposes. The Company does not believe that this will have a material impact on the results of operations. In June 1997, the Financial Accounting Standard Board issued Statement of Financial Accounting No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS No. 131). SFAS No. 131 specifies new guidelines for determining a company's operating segments and related requirements for disclosure. The Company does not believe that this statement will have an impact on the presentation of the financial statements and the disclosures therein. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None PART II Item 10. Directors and Executive Officers of the Registrant The information required by this item is incorporated herein by reference to the section entitled "Election of Directors" included in the Company's Proxy Statement for the Annual Meeting of Stockholders to be held on October 31, 1997, which will be filed with the Securities and Exchange Commission within 120 days after the end of the Company's fiscal year to which this Annual Report on Form 10-K relates. Certain information concerning the registrant's executive officers is included under the caption "Executive Officers of the Registrant" at pages 14-15 following Part I, Item 1 of this report. Item 11. Executive Compensation The information required by this item is incorporated herein by reference to the section entitled "Executive Compensation" included in the Company's Proxy Statement for the Annual Meeting of Stockholders to be held on October 31, 1997, which will be filed with the Securities and Exchange Commission within 120 days after the end of the Company's fiscal year to which this Annual Report on Form 10-K relates. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by this item is incorporated herein by reference to the section entitled "Voting Securities" included in the Company's Proxy Statement for the Annual Meeting of Stockholders to be held on October 31, 1997, which will be filed with the Securities and Exchange Commission within 120 days after the end of the Company's fiscal year to which this Annual Report on Form 10-K relates. Item 13. Certain Relationships and Related Transactions The information required by this item is incorporated herein by reference to the section "Compensation Committee Interlocks, Insider Participation and Certain Transactions" included in the Company's Proxy Statement for the Annual Meeting of Stockholders to be held on October 31, 1997, which will be filed with the Securities and Exchange Commission within 120 days after the end of the Company's fiscal year to which this Annual Report on Form 10-K relates. Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K a. (1) Financial Statements All financial statements are included in Item 8 hereof. a. (2) Financial Statement Schedules None a. (3) Exhibits
Exhibit Number Description of Document 3.1* -- Amended and Restated Certificate of Incorporation of the Company approved by the directors of the Company on June 26, 1995, as adopted by the stockholders on July 20, 1995. 3.2* -- By-laws of the Company, as amended effective on August 16, 1995. 4.1* -- Article Fourth of the Certificate of Incorporation of the Company (included in Exhibit 3.1). 10.1* -- Lease dated June 2, 1995, between Riverview Building Combined Limited Partnership and the Company, for premises located at the Riverview Complex, 245 First Street, Cambridge, Massachusetts. 10.2 -- The Company's 1991 Stock Plan, as amended effective November 1, 1996, and related forms of stock option agreements. 10.3 -- The Company's 1995 Stock Plan, as amended effective November 1, 1996, and related forms of stock option agreements. 10.4 -- The Company's 1995 Eligible Directors Stock Plan, as amended effective November 1, 1996, and related form of stock option agreement. 10.5* -- Software Development and License Agreement between the Company and Caterpillar, Inc. dated August 15, 1988. 10.6*+ -- Product License Agreement between the Company and Symmetry Health Data Systems, Inc. dated as of November 17, 1994, as amended. 10.7* -- Stock Purchase Agreement for shares of Series A Convertible Preferred Stock purchased by Greylock Limited Partnership dated December 20, 1991, as amended on June 26, 1995. 10.8* -- Stock Purchase Agreements for shares of Series A Convertible Preferred Stock purchased by Marcia J. Radosevich dated October 7, 1992 and November 2, 1992. 10.9* -- Registration Rights Agreement dated as of June 3, 1992. 10.10* -- Noncompetition Agreement between the Company and Dr. Robert D.Hertenstein, dated April 13, 1992, as amended on June 2, 1995. 10.11* -- Letter Agreement between the Company and Marcia J. Radosevich dated December 6, 1989, as amended on June 26, 1995. 10.12* -- Letter Agreement between the Company and Douglas R. Percy dated April 22, 1992. 10.13* -- Letter Agreement between the Company and Thomas M. McNamara dated November 2,1992. 10.14* -- Agreement Pertaining to Certain Activities between the Company and Marcia J.Radosevich dated December 20, 1991. 10.15* -- Noncompetition agreements with Douglas R. Percy, Brian D. Cahill,Thomas M. McNamara, Lawrence G. Miller, Steven J. Rosenberg and James B. Stowe. 10.16* -- Consulting Agreement between the Company and Richard H. Egdahl dated January 1, 1992, as amended on June 26, 1995. 10.17* -- Form of Indemnification Agreement between the Company and its directors and executive officers 10.18 -- Sublease dated April 17, 1997 between Open Market and the Company, for premises located at the Riverview Complex, 245 First Street, Cambridge,Massachusettes. 10.19 -- Lease dated April 17, 1997 between Beacon Management and the Company, for premises located at the Riverview Complex, 245 First Street, Cambridge, Massachusettes. 10.20 -- Executive Separation Benefits Plan dated January 1, 1997 10.21 -- Non-Executive Separation Benefits Plan effective as of January 1, 1997 10.22 -- Director Termination Benefits Plan effective as of January 1, 1997 10.23 -- Second Amendment to Product License Agreement with Symmetry Health Data Systems, Inc. dated December 12, 1996. 11.1 -- Statement re computation of earnings per share. 21.1 -- Subsidiaries of the Company. 23.1 - Consent of Coopers & Lybrand L.L.P., independent accountants 27.1 Financial Data Schedule + Confidential treatment has been requested and granted with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission. * Incorporated by reference from the Company's registration statement on Form S-1 No. 33-94132 filed with the Securities and Exchange Commission on June 30, 1995, as amended on July 25, August 1 and August 7, 1995.
b. Reports on Form 8-K None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, Section 13 or 15(d), the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HPR INC. Dated: August 21, 1997 By: /s/ Marcia J. Radosevich ------------------------ Marcia J. Radosevich Chairman of the Board, Chief Executive Officer and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated below on the 21st day of August, 1997. Signature Title /s/ Marcia J. Radosevich Chairman of the Board, Chief Executive (Marcia J. Radosevich) Officer, President and Director (Principal Executive Officer) /s/ Brian D. Cahill Chief Operating Officer, Chief Financial (Brian D. Cahill) Officer, and Vice President, Corporate (Principal Financial and Accounting Finance and Planning Officer) /s/ Richard H. Egdahl Vice Chairman of the Board and Director (Richard H. Egdahl) /s/ Harris A. Berman Director (Harris A. Berman) /s/ Howard E. Cox, Jr. Director (Howard E. Cox, Jr.) /s/ William G. Nelson Director (William G. Nelson) EX-99 2 EXHIBIT 10.2 HPR INC. AMENDED AND RESTATED HPR 1991 STOCK PLAN 1. Purpose. The purpose of this HPR 1991 Stock Plan (the "Plan") is to advance the interests of HPR Inc., a Delaware corporation (the "Company"), by strengthening the ability of the Company to attract, retain and motivate key employees, consultants and other individual contributors of or to the Company or any present or future parent or subsidiary of the Company (the "Company Group") by providing them with an opportunity to purchase or receive as bonuses stock of the Company and thereby permitting them to share in the Company's success. It is intended that this purpose will be effected by granting (i) incentive stock options ("Incentive Options") which are intended to qualify under the provisions of Section 422 of the Internal Revenue Code of 1986, as heretofore and hereafter amended (the "Code"), and non-statutory stock options ("Nonqualified Options") which are not intended to meet the requirements of Section 422 of the Code and which are intended to be taxed under Section 83 of the Code (both Incentive Options and Nonqualified Options shall be collectively referred to as "Options"), (ii) stock purchase authorizations ("Purchase Authorizations") and (iii) stock bonus awards ("Bonuses"). (Items (i) through (iii) above shall collectively be referred to herein as "Awards".) 2. Effective Date. This Plan was adopted by the Board of Directors of the Company (the "Board") on December 17, 1991 (the "effective date" of the Plan). This Plan retitles and replaces in its entirety the 1991 Stock Option Plan of the Company, which was amended and restated, effective March 31, 1992, the date of adoption of such amendment and restatement by the Board. The Plan was further amended on April 7, 1995 and June 26, 1995. This Plan restates in its entirety the HPR 1991 Stock Plan, which was amended and restated by the Board on July 22, 1996, such amendment and restatement to be effective on November 1, 1996, subject to approval by the stockholders on or before July 22, 1997. 3. Stock Covered by the Plan. Subject to adjustment as provided in Sections 10 and 11 below, the shares that may be made subject to Awards under this Plan ("Shares") shall not exceed in the aggregate 1,160,000 shares of the common stock, $0.01 par value, of the Company ("Common Stock"). Any Shares subject to an Option or Purchase Authorization which for any reason expires or is terminated unexercised as to such Shares and any Shares reacquired by the Company pursuant to forfeiture or a repurchase right hereunder may again be the subject of an Award under the Plan. The Shares purchased pursuant to Purchase Authorizations or the exercise of Options under this Plan or issued as Bonuses may, in whole or in part, be either authorized but unissued Shares or issued Shares reacquired by the Company. 4. Administration. This Plan shall be administered by the Board of Directors, whose construction and interpretation of the Plan's terms and provisions shall be final and conclusive. The Board shall have the authority to delegate to the Compensation Committee of he Board (the "Committee") the authority to administer this Plan as set forth in this Section 4 and to recommend that the Board grant Awards hereunder. Each member of the Committee shall be, and shall have been at all times within the one-year period ending on the date of his or her appointment to the Committee, a person who in opinion of counsel to the Company is an "outside director" as such term is used in proposed regulation 1.162-27(e)(3) under Section 162(m) of the Code. The Board shall have authority, subject to the express provisions of the Plan, to construe the Plan and the respective Awards and related agreements, to prescribe, amend and rescind rules and regulations relating to the Plan, to determine the terms and provisions of the respective Awards and related agreements, and to make all other determinations in the judgment of the Board necessary or desirable for the administration of the Plan. The Board may correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any Award or related agreement in the manner and to the extent it shall deem expedient to carry the Plan into effect, and it shall be the sole and final judge of such expediency. No member of the Board and no delegate of the Board shall be liable for any action or determination under the Plan made in good faith. Notwithstanding the foregoing, the Board, or the Committee as its delegate, shall have authority to establish guidelines for the grant of Awards to key employees of the Company Group who are not executive officers of the Company and to delegate to the Company's Chief Executive Officer the authority to recommend to the Board the grant of Awards, within such guidelines, to such eligible non-executive key employees. 5. Approval by Board of Directors. Notwithstanding anything in this Plan to the contrary, including without limitation the delegation of authority to the Committee, all grants of Awards shall be approved by the Board of Directors. 6. Eligible Recipients. Awards may be granted to such key employees, consultants or other individual contributors of or to the Company Group, including without limitation members of the Board who are employees (but, effective July 1, 1995, excluding members of the Board who are not employees) and members of any medical, scientific or technical advisory boards, as are selected by the Board or (except as to employees who are Company executive officers) by the Board's delegate pursuant to section 4 above (a "Participant"); provided, that only employees of the Company Group shall be eligible for grant of an Incentive Option. 7. Duration of the Plan. This Plan shall terminate ten (10) years from the effective date hereof, unless terminated earlier pursuant to Section 14 hereafter, and no Awards may be granted or made thereafter. 8. Terms and Conditions of Options, Purchase Authorizations and Bonuses. Awards granted or made under this Plan shall be evidenced by agreements in such form and containing such terms and conditions as the Board shall determine; provided, however, that such agreements shall evidence among their terms and conditions the following: (a) Price. The purchase price per Share payable upon the exercise of each Option or the purchase pursuant to each Purchase Authorization granted or made hereunder shall be determined by the Board at the time the Option or Purchase Authorization is granted or made. Subject to the condition of paragraph 8(j)(i), if applicable, the purchase price per Share payable upon the exercise of each Incentive Option granted hereunder shall not be less than one hundred percent (100%) of the Market Price (as such term is defined below) per Share of the Common Stock on the day the Incentive Option or Purchase Authorization is granted or made. The purchase price per Share payable on exercise of each Nonqualified Option or upon the purchase of Shares pursuant to each Purchase Authorization granted hereunder shall be not less than eighty-five percent (85%) of the Market Price per Share of the Common Stock on the date of the grant. Fair market value shall be determined by the Board in accordance with applicable provisions of the Code then in effect. Bonus Shares shall be issued in consideration of services previously rendered, which shall be valued for such purposes by the Board. No Share shall be issued for less than its par value, paid in cash, property or services. As used herein, "Market Price" shall mean the closing price of the Common Stock as reported on the Nasdaq National Market System for the relevant date (or, if such date is not a trading date or if no trades took place on such date, then such closing price for the last previous trading date or the last previous date on which a trade occurred, as the case may be); provided that if the Common Stock is no longer traded on the Nasdaq National Market System on the relevant date, then the Market Price as of such date shall be determined by the Board equal to the fair market value of the Common Stock in accordance with applicable provisions of the Code then in effect. (b) Number of Shares. Each agreement shall specify the number of Shares to which it pertains. (c) Exercise of Options. Each Option shall be exercisable for the full amount or for any part thereof and at such intervals or in such installments as the Board may determine or as the Committee may determine at the time it recommends that the Board grant such Option; provided, however, that no Option shall be exercisable with respect to any Shares later than ten (10) years after the date of the grant of such Option (or five (5) years in the case of Incentive Options to which paragraph 8(j)(ii) applies). An Option shall be exercisable only by delivery of a written notice to the Company's Treasurer, or any other officer of the Company designated by the Board to accept such notices on its behalf, specifying the number of Shares for which the Option is exercised and accompanied by either (i) payment or (ii) if permitted by the Board, irrevocable instructions to a broker to promptly deliver to the Company full payment in accordance with paragraph 8(d)(ii) below of the amount necessary to pay the aggregate exercise price. With respect to an Incentive Option, the permission of the Board referred to in clause (ii) of the preceding sentence must be granted at the time the Incentive Option is granted. (d) Payment. Payment shall be made in full (i) at the time the Option is exercised, (ii) promptly after the Participant forwards the irrevocable instructions referred to in paragraph 8(c)(ii) above to the appropriate broker, if exercise of an Option is made pursuant to paragraph 8(c)(ii) above, or (iii) at the time the purchase pursuant to a Purchase Authorization is made. Payment shall be made either (a) in cash, (b) by check, (c) if permitted by the Board (with respect to an Incentive Option, such permission to have been granted at the time of the Incentive Option grant), by delivery and assignment to the Company of shares of Company stock having a Market Price (as determined by the Board) equal to the exercise or purchase price, (d) if permitted by the Board, stated in the agreement evidencing the Option or Purchase Authorization, and to the extent permitted by any applicable law, by the Participant's recourse promissory note, which note must be due and payable not more than five (5) years after the date the Option or Purchase Authorization is exercised, or (e) by a combination of (a), (b), (c) and/or (d). If shares of Company stock are to be used to pay the exercise price of an Incentive Option, the Company prior to such payment must be furnished with evidence satisfactory to it that the acquisition of such shares and their transfer in payment of the exercise price satisfy the requirements of Section 422 of the Code and other applicable laws. Notwithstanding the foregoing, the purchase or exercise price of an Option or Purchase Authorization may not be paid by delivery and assignment to the Company of shares of Company stock or through irrevocable instructions to a broker as referred to in Paragraph 8(c)(ii) above to the extent that such delivery and assignment or the execution of such irrevocable instructions would constitute a violation of the provisions of any law (including without limitation Section 16 of the Exchange Act) or related regulation or rule, or any agreement or policy of the Company, restricting the transfer or redemption of the Company's stock. (e) Withholding Taxes; Delivery of Shares. The Company's obligation to deliver Shares upon exercise of an Option or upon purchase pursuant to a Purchase Authorization or issuance pursuant to a Bonus shall be subject to the Participant's satisfaction of all applicable federal, state and local income and employment tax withholding obligations. Without limiting the generality of the foregoing, the Company shall have the right to deduct from payments of any kind otherwise due to the Participant any federal, state or local taxes of any kind required by law to be withheld with respect to any Shares issued upon exercise of Options or purchased or issued pursuant to Purchase Authorizations or Bonuses. The Participant may elect to satisfy such obligation(s), in whole or in part, by (i) delivering to the Company a check for the amount required to be withheld or (ii) if the Board in its sole discretion approves in any specific or general case, having the Company withhold Shares or delivering to the Company already-owned shares of Common Stock, having a value equal to the amount required to be withheld, as determined by the Board. (f) Non-Transferability. No Option or Purchase Authorization shall be transferable by the Participant otherwise than by will or the laws of descent or distribution, and each Option or Purchase Authorization shall be exercisable during the Participant's lifetime only by the Participant, provided, however, that the Board may permit a Participant to transfer a Award if such transfer is made pursuant to uniformly applied criteria, established by the Board prior to such transfer. (g) Termination of Options and Purchase Authorizations. Nothing in this Plan or in any agreement representing any Award shall restrict the right of any member of the Company Group to terminate the employment of any Participant at any time and for any reason, with or without notice. Each Purchase Authorization shall terminate and may no longer be exercised if the Participant ceases for any reason to provide services to a member of the Company Group. Except to the extent the Board provides specifically in an agreement evidencing an Option for a lesser period (or a greater period, provided that in the case of Incentive Options such period shall not exceed three months), each Option shall terminate and may no longer be exercised if the Participant ceases for any reason to provide services to a member of the Company Group in accordance with the following provisions: (i) if the Participant ceases to perform services for any reason other than death or disability (as defined in Section 22(e)(3) of the Code), the Participant may, at any time within a period of one month after the date of such cessation of the performance of services, exercise the Option to the extent that the Option was exercisable on the date of such cessation; (ii) if the Participant ceases to perform services because of disability (as defined in Section 22(e)(3) of the Code), the Participant may, at any time within a period of six months after the date of such cessation of the performance of services, exercise the Option to the extent that the Option was exercisable on the date of such cessation; and (iii) if the Participant ceases to perform services because of death, the Option, to the extent that the Participant was entitled to exercise it on the date of death, may be exercised within a period of six months after the Participant's death by the person or persons to whom the Participant's rights under the Option pass by will or by the laws of descent or distribution; provided, however, that no Option, or Purchase Authorization may be exercised to any extent by anyone after the date of its expiration; and provided, further, that Options and Purchase Authorizations may be exercised only as to Vested Shares (as defined in the applicable agreement with the Participant) after the Participant has ceased to perform services for any member of the Company Group. (h) Rights as Stockholder. A Participant shall have no rights as a stockholder with respect to any Shares covered by an Award until the date of issuance of a stock certificate, if any, in the Participant's name for such Shares. (i) Repurchase of Shares by the Company. Any Shares purchased or acquired upon exercise of an Option or pursuant to a Purchase Authorization or Bonus may in the discretion of the Board be subject to repurchase by or forfeiture to the Company if and to the extent and at the repurchase price, if any, specifically set forth in the option, purchase, or bonus agreement pursuant to which the Shares were purchased or acquired. Certificates representing Shares subject to such repurchase or forfeiture may be subject to such escrow and stock legending provisions as may be set forth in the option, purchase, or bonus agreement pursuant to which the Shares were purchased or acquired. (j) 10% Stockholder. If any Participant to whom an Incentive Option is granted pursuant to the provisions of the Plan is on the date of grant the owner of stock (as determined under Section 424(d) of the Code) possessing more than 10% of the total combined voting power or value of all classes of stock of the Company, its parent, if any, or subsidiaries, then the following special provisions shall be applicable: (i) The exercise price per Share subject to such Option shall not be less than 110% of the fair market value of each Share on the date of grant; and (ii) The Option shall not have a term in excess of five years from the date of grant. (k) Confidentiality Agreements. Each Participant shall execute, prior to or contemporaneously with the grant of any Award hereunder, the Company's then standard form of agreement relating to nondisclosure of confidential information, assignment of inventions and related matters. (l) Aggregate Limitation. The maximum number of Shares with respect to which any Awards may be granted under the Plan to any individual during each successive twelve-month period commencing on the effective date of the Plan shall not exceed 500,000 shares. 9. Restrictions on Incentive Options. Incentive Options granted under this Plan shall be specifically designated as such and shall be subject to the additional restriction that the aggregate Market Price, determined as of the date the Incentive Option is granted, of the Shares with respect to which Incentive Options are exercisable for the first time by a Participant during any calendar year shall not exceed $100,000. If an Incentive Option which exceeds the $100,000 limitation of this paragraph 9 is granted, the portion of such Option which is exercisable for shares in excess of the $100,000 limitation shall be treated as a Nonqualified Option pursuant to Section 422(d) of the Code. In the event that such Participant is eligible to participate in any other stock incentive plans of the Company, its parent, if any, or a subsidiary which are also intended to comply with the provisions of Section 422 of the Code, such annual limitation shall apply to the aggregate number of shares for which options may be granted under all such plans. 10. Stock Dividends; Stock Splits; Stock Combinations; Recapitalizations. Appropriate adjustment shall be made by the Board in the maximum number of Shares subject to the Plan and in the number, kind, and exercise or purchase price of Shares covered by outstanding Options and Purchase Authorizations granted hereunder to give effect to any stock dividends, stock splits, stock combinations, recapitalizations and other similar changes in the capital structure of the Company after the effective date of the Plan. 11. Merger; Sale of Assets. In the event of a change of the Common Stock resulting from a merger or similar reorganization as to which the Company is the surviving corporation, the number and kind of Shares which thereafter may be purchased pursuant to an Option or Purchase Authorization under the Plan and the number and kind of Shares then subject to Options or Purchase Authorizations granted hereunder and the price per Share thereof shall be appropriately adjusted in such manner as the Board may deem equitable to prevent dilution or enlargement of the rights available or granted hereunder. Except as otherwise determined by the Board, a merger or a similar reorganization which the Company does not survive, or a sale of all or substantially all of the assets of the Company, shall cause every Option and Purchase Authorization hereunder to terminate, to the extent not then exercised, unless any surviving entity agrees to assume the obligations hereunder; provided, however, that, in the case of such a merger or similar reorganization, or such a sale of all or substantially all of the assets of the Company, if there is no such assumption, the Board may provide that some or all of the unexercised portion of any one or more of the outstanding Options or Purchase Authorizations and some or all of the unvested Shares acquired upon exercise of any one or more of such Options or Purchase Authorizations or acceptance of any one or more of the outstanding Bonuses shall be immediately exercisable and vested or no longer subject to repurchase rights as of such date prior to such merger, similar reorganization or sale of assets as the Board determines. 12. Investment Representations; Transfer Restrictions. The Company may require Participants, as a condition of purchasing Shares pursuant to the exercise of an Option or to a Purchase Authorization or receipt of shares as a Bonus, to give written assurances in substance and form satisfactory to the Company to the effect that such person is acquiring the Shares for the Participant's own account for investment and not with any present intention of selling or otherwise distributing the same, unless there shall be an effective registration statement under the Securities Act of 1933, as amended (the "1933 Act"), with respect thereto, and to such other effects as the Company deems necessary or appropriate (including without limitation confirmation that the Participant is aware of any applicable restrictions on transfer of the Shares, as specified in the by-laws of the Company or otherwise) in order to comply with federal and applicable state securities laws. 13. Definitions. (a) The term "employee" shall have, for purposes of this Plan, the meaning ascribed to "employee" under Section 3401(c) of the Code and the regulations promulgated thereunder. (b) The term "Exchange Act" shall mean the Securities Exchange Act of 1934, as heretofore and hereafter amended. (c) The term "parent" shall have, for purposes of this Plan, the meaning ascribed to it under Section 424(e) of the Code and the regulations promulgated thereunder. (d) The term "subsidiary" shall have, for all purposes under this Plan, the meaning ascribed to it under Section 424(f) of the Code and the regulations promulgated thereunder. 14. Termination or Amendment of Plan. The Board may at any time terminate the Plan or make such changes in or additions to the Plan as it deems advisable without further action on the part of the stockholders of the Company, provided: (a) that no such termination or amendment shall adversely affect or impair any then outstanding Award or related agreement without the consent of the Participant holding such Award or related agreement; and (b) that no such amendment which, pursuant to the Code or regulations thereunder, requires action by the stockholders may be made without obtaining, or being conditioned upon, stockholder approval. With the consent of the Participant affected, the Board may amend outstanding Awards or related agreements in a manner not inconsistent with the Plan. The Board shall have the right to amend or modify the terms and provisions of the Plan and of any outstanding Incentive Options granted under the Plan to the extent necessary to qualify any or all such Options for such favorable federal income tax treatment (including deferral of taxation upon exercise) as may be afforded incentive stock options under Section 422 of the Code. Name of Optionee HPR INC. INCENTIVE STOCK OPTION AGREEMENT (HPR 1991 Stock Plan) THIS AGREEMENT is entered into by and between HPR Inc., a Delaware corporation with its principal office at 245 First Street, Cambridge, Massachusetts 02142 (hereinafter the "Company"), and the undersigned employee of the Company (hereinafter the "Optionee"). WHEREAS, the Optionee renders important services to the Company, and the Company desires to grant an incentive stock option to the Optionee; NOW, THEREFORE, in consideration of the foregoing and the mutual agreements herein contained, the parties hereto hereby agree as follows: 1. Grant, Exercisability and Term of Option. (a) The Company hereby grants to the Optionee pursuant to the HPR 1991 Stock Plan (the "Plan") the option to purchase from the Company upon the terms and conditions hereinafter set forth the number of shares ("Shares") of the $.01 par value common stock ("Common Stock") of the Company set forth on the signature page below at the purchase price per Share so set forth (the "Option Price"). The date of grant of this option is the date set forth at the execution page of this Agreement as the "Option Date." (b) Subject to the provisions of Section 5 hereof, this option is exercisable in full or in part and shall remain exercisable until it expires on the tenth anniversary of the Option Date, unless the option is sooner terminated as hereinafter specified. Only whole Shares may be purchased pursuant to this option. 2. Conditions and Limitations. (a) The option is granted on the condition that the purchase of shares hereunder shall be for investment purposes and not with a view to resale or distribution, except that such condition shall be inoperative if the offering of Shares subject to the option is registered under the Securities Act of 1933, as amended, or if in the opinion of counsel for the Company such Shares may be resold without registration. At the time of the exercise of the option or any installment thereof, the Optionee will execute such further agreements as the Company may require to implement the foregoing condition and to acknowledge the Optionee's familiarity with restrictions on the resale of the Shares under applicable securities laws, and the Company may stamp such legend on the certificate representing the Shares as may be necessary or appropriate in light of the foregoing condition. (b) The Company will furnish upon request of the Optionee copies of the certificate of incorporation of the Company, as amended, and by-laws of the Company, as amended, and such publicly available financial and other information concerning the Company and its business and prospects as may be reasonably requested by the Optionee in connection with exercise of this option. (c) The option shall not be transferable otherwise than by will or by the laws of descent and distribution, and except as provided in Section 4 the option shall be exercisable during the lifetime of the Optionee by the Optionee only. Notwithstanding the foregoing, however, if the Optionee is determined to be mentally incompetent and a guardian or conservator (or other similar person) is appointed by a court of competent jurisdiction to manage the Optionee's affairs, the guardian or conservator (or other similar person) may exercise the option on behalf of the Optionee, provided that such exercise is made within the time limits prescribed herein. (d) The option granted in this Agreement is subject to the terms, conditions and definitions of the Plan, a copy of which is attached hereto. To the extent that the terms, conditions and definitions of this Agreement are inconsistent with those of the Plan, those of this Agreement shall govern. The Optionee hereby accepts this option subject to all such provisions of the Plan and agrees that all decisions under, and interpretations of, such provisions of the Plan by the Board of Directors of the Company (the "Board") or the Committee, as defined in the Plan, shall be final, binding and conclusive upon the Optionee and his or her heirs. (e) In the event that the Company, upon the advice of counsel, deems it necessary to list upon official notice of issuance any shares to be issued pursuant to the Plan on a national securities exchange or to register under the Securities Act of 1933 or other applicable federal or state statute any shares to be issued pursuant to the Plan, or to qualify any such shares for exemption from the registration requirements of the Securities Act of 1933 under the rules and regulations of the Securities and Exchange Commission or for similar exemption under state law, then the Company shall notify the Optionee to that effect and no Shares shall be issued until such registration, listing or exemption has been obtained. The Company shall make prompt application for any such registration, listing or exemption pursuant to federal or state law or rules of such securities exchange which it deems necessary and shall make reasonable efforts to cause such registration, listing, or exemption to become and remain effective. 3. Exercise of Option; Withholding Taxes. (a) Written notice of the exercise of the option or any installment thereof shall be given to the Company specifying the number of shares for which the option is exercised and accompanied by payment in full of the Option Price. Payment shall be made (a) in cash, (b) by check, (c) by Immediate Sales Proceeds, as defined below, (d) by delivery and assignment to the Company of shares of Company stock owned by the Optionee (which shares have a Market Price not less than the Option Price), or (e) by any combination of the foregoing. As used herein, "Market Price" shall mean the closing price of the Common Stock as reported on the Nasdaq National Market for the relevant date (or, if such date is not a trading date or if no trades took place on such date, then such closing price for the last previous trading date or the last previous date on which a trade occurred, as the case may be); provided that if the Common Stock is no longer traded on the Nasdaq National Market on the relevant date, then the Market Price as of such date shall be determined by the Committee. Notwithstanding the foregoing, this option may not be exercised by delivery and assignment to the Company of shares of Company stock to the extent that such delivery and assignment would constitute a violation of the provisions of any law, or related regulation or rule, or any agreement or Company policy, restricting the transfer or redemption of the Company's stock. As used herein, the term "Immediate Sales Proceeds" shall mean the assignment in form acceptable to the Company of the proceeds of a sale of the Shares acquired on the exercise of this option pursuant to a procedure approved by the Company. The Company reserves the right to decline to approve any such procedure in the Company's sole and absolute discretion. (b) The Company's obligation to deliver Shares upon exercise of an option shall be subject to the Optionee's satisfaction of all applicable federal, state and local income and employment tax withholding obligations. Without limiting the generality of the foregoing, the Company shall have the right to deduct from payments of any kind otherwise due to the Optionee any federal, state or local taxes of any kind required by law to be withheld with respect to any Shares issued upon exercise of the option. 4. Termination of Option. In the event that the Optionee ceases to be employed by the Company or any parent or subsidiary of the Company (collectively, the "Company Group") at any time prior to the exercise of this option in full, this option shall terminate according to the following provisions: (a) If the Optionee ceases to be employed for any reason other than death or disability (as defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (the "Code")), the Optionee may at any time within a period of one (1) month after the date of such cessation of employment exercise the option to the extent that the option was exercisable on the date of such cessation; (b) If the Optionee ceases to be employed because of disability (as defined in Section 22(e)(3) of the Code), the Optionee may at any time within a period of six months after the date of such cessation of employment exercise the option to the extent that the option was exercisable on the date of such cessation; and (c) If the Optionee ceases to be employed because of death, the option, to the extent that the Optionee was entitled to exercise it on the date of death, may be exercised within a period of six months after the Optionee's death by the person or persons to whom the Optionee's rights under the option shall pass by will or by the laws of descent and distribution; provided, however, that this option may not be exercised to any extent by anyone after the date of its expiration. 5. Exercisability of Option. So long as Optionee remains an employee of the Company, this Option may be exercised only as follows: (i) commencing on the first anniversary hereof, only to the extent of one fifth of the Shares; and (ii) thereafter, at the end of each subsequent quarter, to the extent of an additional five per cent of the Shares; less the number of Shares as to which this Option has been exercised. 6. A. "Market Stand Off" Agreement. The Optionee, if requested by the Company or any managing underwriter of the Company's securities, shall agree not to sell or otherwise transfer or dispose of any Shares of the Company held by the Optionee during the period up to 180 days, as requested by the Company or such underwriter, following the effective date of a registration statement of the Company filed under the Securities Act of 1933 (except for any Company securities held by the Optionee sold pursuant to such registration statement). Such agreement shall be in writing in form satisfactory to the Company or such underwriter. The Company may impose stop-transfer instructions with respect to the Shares subject to the foregoing restriction until the end of such period. B. Exceptions for Transfers to Family. The provisions contained in this Section 6 shall not apply to any transfer of Shares to or in trust for the sole benefit of the Optionee, or any member of the immediate family of the Optionee, including for this purpose the undersigned's spouse, parents, parents-in-law, issue, nephews, nieces, brothers, brothers-in-law, sisters, sisters-in-law, children-in-law and grandchildren-in-law, provided that such transferee agrees in writing to be subject to the terms of Section 6. 7. Notice of Disposition of Shares. The Optionee hereby agrees to notify the Company promptly if the Optionee disposes of any Shares within one (1) year after the date the Optionee exercises all or part of this option or within two (2) years after the Option Date. At any time during the one or two year periods set forth above, the Company may place a legend on any certificate representing Shares requesting the transfer agent for the Company's stock to notify the Company of any such transfer. The obligation of the Optionee to notify the Company of any such transfer shall continue notwithstanding that a legend has been placed on the certificate pursuant to the preceding sentence. Optionees are urged to review the description of the Plan provided by the Company for a more detailed discussion of the Federal tax consequences of such a disposition under current law. Additionally, if the Optionee is subject to Section 16(b) of the Securities Exchange Act of 1934, as amended, or the rules and regulations promulgated thereunder, any disposition by the Optionee of the Optioned Shares purchased under the Option within six months of the date of grant may deprive the Optionee of the protection from 16(b) liability which the provisions of the Plan seek to provide. 8. $100,000 Limitation. Under Section 422 of the Code, the aggregate Market Price of the shares with respect to which incentive stock options granted by any member of the Company Group first become exercisable by an employee during any calendar year cannot exceed $100,000 (the "$100,000 limitation"). To the extent, if any, that the $100,000 limitation is exceeded by reason of the grant of this option, this option shall be deemed, to the maximum extent possible, if any, to be an incentive stock option, and the portion of this option that is exercisable for shares in excess of the $100,000 limitation shall be treated as a non-qualified option pursuant to Section 422(d) of the Code. 9. Notices. All notices or demands given pursuant to this Agreement shall be in writing and shall be deemed to have been sufficiently given if delivered by hand or sent by certified or registered mail, postage prepaid, addressed to the Company at its principal office or to the Optionee (or the Optionee's legal representatives) at the address stated in the Optionee's (or their) notice or at the Optionee's address appearing on the books of the Company. 10. No Employment Commitment; Tax Treatment. Nothing herein contained shall be deemed to be or constitute an agreement or commitment by the Company or any other member of the Company Group to continue the Optionee in its employ. Although the option granted hereunder is intended to qualify as an incentive stock option under Section 422 of the Code, the Company makes no representation about the tax treatment to the Optionee with respect to receipt or exercise of the option or acquiring, holding or disposing of the Shares, and the Optionee represents that the Optionee has had the opportunity to discuss such treatment (including the possible application of Section 83 of the Code) with the Optionee's tax adviser. The Optionee shall have no rights as a stockholder with respect to the shares subject to the option until the exercise of the option and the issuance of a stock certificate for the Shares with respect to which the option shall have been exercised. 11. Adjustment in Shares, etc. (a) Appropriate adjustment shall be made by the Committee in number, kind, and exercise price of Shares covered by the option granted hereunder to give effect to any stock dividends, stock splits, stock combinations, recapitalizations and other similar changes in the capital structure of the Company after the Option Date. (b) In the event of a change of the Common Stock resulting from a merger or similar reorganization as to which the Company is the surviving corporation, the number and kind of Shares which thereafter may be purchased pursuant to the option granted hereunder, and the number and kind of Shares then subject to the option granted hereunder and the price per Share thereof shall be appropriately adjusted in such manner as the Committee may deem equitable to prevent dilution or enlargement of the rights available or granted hereunder. Except as otherwise determined by the Committee, a merger or a similar reorganization which the Company does not survive, or a sale of all or substantially all of the assets of the Company, shall cause this option to terminate, to the extent not then exercised, unless any surviving entity agrees to assume the obligations hereunder. 12. Miscellaneous. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of The Commonwealth of Massachusetts. This Agreement shall be binding upon and inure to the benefit of the heirs and legal representatives of the Optionee and the successors and assigns of the Company, but shall not be assigned by the Optionee at any time without the prior written permission of the Company, and any such attempted assignment shall be void. IN WITNESS WHEREOF the parties have executed this Stock Option Agreement as of the Option Date. ---------------------------------- Optionee [Sign name] [Print name] Address: _________________________ ---------------------------------- Option Date: No. of Shares: Option Price: Accepted, as the issuer of the Shares, in accordance with the terms of the foregoing Option Agreement as of the foregoing Option Date. HPR INC. By:______________________________ Chairman of the Board Name of Optionee HPR INC. NON-QUALIFIED STOCK OPTION AGREEMENT (HPR 1991 Stock Plan) THIS AGREEMENT is entered into by and between HPR Inc., a Delaware corporation with its principal office at 245 First Street, Cambridge, Massachusetts 02142 (hereinafter the "Company"), and the undersigned consultant of the Company (hereinafter the "Optionee"). WHEREAS, the Optionee renders important services to the Company (such services to be collectively herein referred to as "Service"), and the Company desires to grant a non-qualified stock option to the Optionee; NOW, THEREFORE, in consideration of the foregoing and the mutual agreements herein contained, the parties hereto hereby agree as follows: 1. Grant, Exercisability and Term of Option. (a) The Company hereby grants to the Optionee pursuant to the HPR 1991 Stock Plan (the "Plan") the option to purchase from the Company upon the terms and conditions hereinafter set forth the number of shares ("Shares") of the $.01 par value common stock ("Common Stock") of the Company set forth on the signature page below at the purchase price per Share so set forth (the "Option Price"). The date of grant of this option is the date set forth at the execution page of this Agreement as the "Option Date." (b) Subject to the provisions of Section 5 hereof, this option is exercisable in full or in part and shall remain exercisable until it expires on the tenth anniversary of the Option Date, unless the option is sooner terminated as hereinafter specified. Only whole Shares may be purchased pursuant to this option. 2. Conditions and Limitations. (a) The option is granted on the condition that the purchase of shares hereunder shall be for investment purposes and not with a view to resale or distribution, except that such condition shall be inoperative if the offering of Shares subject to the option is registered under the Securities Act of 1933, as amended, or if in the opinion of counsel for the Company such Shares may be resold without registration. At the time of the exercise of the option or any installment thereof, the Optionee will execute such further agreements as the Company may require to implement the foregoing condition and to acknowledge the Optionee's familiarity with restrictions on the resale of the Shares under applicable securities laws, and the Company may stamp such legend on the certificate representing the Shares as may be necessary or appropriate in light of the foregoing condition. (b) The Company will furnish upon request of the Optionee copies of the certificate of incorporation of the Company, as amended, and by-laws of the Company, as amended, and such publicly available financial and other information concerning the Company and its business and prospects as may be reasonably requested by the Optionee in connection with exercise of this option. (c) The option shall not be transferable otherwise than by will or by the laws of descent and distribution, and except as provided in Section 4 the option shall be exercisable during the lifetime of the Optionee by the Optionee only. Notwithstanding the foregoing, however, if the Optionee is determined to be mentally incompetent and a guardian or conservator (or other similar person) is appointed by a court of competent jurisdiction to manage the Optionee's affairs, the guardian or conservator (or other similar person) may exercise the option on behalf of the Optionee, provided that such exercise is made within the time limits prescribed herein. (d) The option granted in this Agreement is subject to the terms, conditions and definitions of the Plan, a copy of which is attached hereto. To the extent that the terms, conditions and definitions of this Agreement are inconsistent with those of the Plan, those of this Agreement shall govern. The Optionee hereby accepts this option subject to all such provisions of the Plan and agrees that all decisions under, and interpretations of, such provisions of the Plan by the Board of Directors of the Company (the "Board") or the Committee, as defined in the Plan, shall be final, binding and conclusive upon the Optionee and his or her heirs. (e) In the event that the Company, upon the advice of counsel, deems it necessary to list upon official notice of issuance any shares to be issued pursuant to the Plan on a national securities exchange or to register under the Securities Act of 1933 or other applicable federal or state statute any shares to be issued pursuant to the Plan, or to qualify any such shares for exemption from the registration requirements of the Securities Act of 1933 under the rules and regulations of the Securities and Exchange Commission or for similar exemption under state law, then the Company shall notify the Optionee to that effect and no Shares shall be issued until such registration, listing or exemption has been obtained. The Company shall make prompt application for any such registration, listing or exemption pursuant to federal or state law or rules of such securities exchange which it deems necessary and shall make reasonable efforts to cause such registration, listing, or exemption to become and remain effective. 3. Exercise of Option; Withholding Taxes. (a) Written notice of the exercise of the option or any installment thereof shall be given to the Company specifying the number of shares for which the option is exercised and accompanied by payment in full of the Option Price. Payment shall be made (a) in cash, (b) by check, (c) by Immediate Sales Proceeds, as defined below, (d) by delivery and assignment to the Company of shares of Company stock owned by the Optionee (which shares have a Market Price not less than the Option Price), or (e) by any combination of the foregoing. As used herein, "Market Price" shall mean the closing price of the Common Stock as reported on the Nasdaq National Market for the relevant date (or, if such date is not a trading date or if no trades took place on such date, then such closing price for the last previous trading date or the last previous date on which a trade occurred, as the case may be); provided that if the Common Stock is no longer traded on the Nasdaq National Market on the relevant date, then the Market Price as of such date shall be determined by the Committee. Notwithstanding the foregoing, this option may not be exercised by delivery and assignment to the Company of shares of Company stock to the extent that such delivery and assignment would constitute a violation of the provisions of any law, or related regulation or rule, or any agreement or Company policy, restricting the transfer or redemption of the Company's stock. As used herein, the term "Immediate Sales Proceeds" shall mean the assignment in form acceptable to the Company of the proceeds of a sale of the Shares acquired on the exercise of this option pursuant to a procedure approved by the Company. The Company reserves the right to decline to approve any such procedure in the Company's sole and absolute discretion. (b) The Company's obligation to deliver Shares upon exercise of an option shall be subject to the Optionee's satisfaction of all applicable federal, state and local income and employment tax withholding obligations. Without limiting the generality of the foregoing, the Company shall have the right to deduct from payments of any kind otherwise due to the Optionee any federal, state or local taxes of any kind required by law to be withheld with respect to any Shares issued upon exercise of the option. 4. Termination of Option. In the event that the Optionee ceases to perform Service at any time prior to the exercise of this option in full, this option shall terminate according to the following provisions: (a) If the Optionee ceases to perform Service for any reason other than death or disability (as defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (the "Code")), the Optionee may at any time within a period of one (1) month after the date of such cessation of Service exercise the option to the extent that the option was exercisable on the date of such cessation; (b) If the Optionee ceases to perform Service because of disability (as defined in Section 22(e)(3) of the Code), the Optionee may at any time within a period of six months after the date of such cessation of Service exercise the option to the extent that the option was exercisable on the date of such cessation; and (c) If the Optionee ceases to perform Service because of death, the option, to the extent that the Optionee was entitled to exercise it on the date of death, may be exercised within a period of six months after the Optionee's death by the person or persons to whom the Optionee's rights under the option shall pass by will or by the laws of descent and distribution; provided, however, that this option may not be exercised to any extent by anyone after the date of its expiration. 5. Exercisability of Option. So long as Optionee performs Service, this Option may be exercised only as follows: (i) commencing on the first anniversary hereof, only to the extent of one fifth of the Shares; and (ii) thereafter, at the end of each subsequent quarter, to the extent of an additional five per cent of the Shares; less the number of Shares as to which this Option has been exercised. 6. A. "Market Stand Off" Agreement. The Optionee, if requested by the Company or any managing underwriter of the Company's securities, shall agree not to sell or otherwise transfer or dispose of any Shares of the Company held by the Optionee during the period up to 180 days, as requested by the Company or such underwriter, following the effective date of a registration statement of the Company filed under the Securities Act of 1933 (except for any Company securities held by the Optionee sold pursuant to such registration statement). Such agreement shall be in writing in form satisfactory to the Company or such underwriter. The Company may impose stop-transfer instructions with respect to the Shares subject to the foregoing restriction until the end of such period. B. Exceptions for Transfers to Family. The provisions contained in this Section 6 shall not apply to any transfer of Shares to or in trust for the sole benefit of the Optionee, or any member of the immediate family of the Optionee, including for this purpose the undersigned's spouse, parents, parents-in-law, issue, nephews, nieces, brothers, brothers-in-law, sisters, sisters-in-law, children-in-law and grandchildren-in-law, provided that such transferee agrees in writing to be subject to the terms of this Section 6. 7. Notices. All notices or demands given pursuant to this Agreement shall be in writing and shall be deemed to have been sufficiently given if delivered by hand or sent by certified or registered mail, postage prepaid, addressed to the Company at its principal office or to the Optionee (or the Optionee's legal representatives) at the address stated in the Optionee's (or their) notice or at the Optionee's address appearing on the books of the Company. 8. No Service Commitment; Tax Treatment. Nothing herein contained shall be deemed to be or constitute an agreement or commitment by the Company or any other member of the Company Group to continue the Optionee in Service. The option granted hereunder is not intended to qualify as an incentive stock option under Section 422 of the Code, and the Company makes no representation about the tax treatment to the Optionee with respect to receipt or exercise of the option or acquiring, holding or disposing of the Shares. The Optionee represents that the Optionee has had the opportunity to discuss such treatment with the Optionee's tax adviser. The Optionee shall have no rights as a stockholder with respect to the shares subject to the option until the exercise of the option and the issuance of a stock certificate for the Shares with respect to which the option shall have been exercised. 9. Adjustment in Shares, etc. (a) Appropriate adjustment shall be made by the Committee in number, kind, and exercise price of Shares covered by the option granted hereunder to give effect to any stock dividends, stock splits, stock combinations, recapitalizations and other similar changes in the capital structure of the Company after the Option Date. (b) In the event of a change of the Common Stock resulting from a merger or similar reorganization as to which the Company is the surviving corporation, the number and kind of Shares which thereafter may be purchased pursuant to the option granted hereunder, and the number and kind of Shares then subject to the option granted hereunder and the price per Share thereof shall be appropriately adjusted in such manner as the Committee may deem equitable to prevent dilution or enlargement of the rights available or granted hereunder. Except as otherwise determined by the Committee, a merger or a similar reorganization which the Company does not survive, or a sale of all or substantially all of the assets of the Company, shall cause this option to terminate, to the extent not then exercised, unless any surviving entity agrees to assume the obligations hereunder. 10. Miscellaneous. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of The Commonwealth of Massachusetts. This Agreement shall be binding upon and inure to the benefit of the heirs and legal representatives of the Optionee and the successors and assigns of the Company, but shall not be assigned by the Optionee at any time without the prior written permission of the Company, and any such attempted assignment shall be void. IN WITNESS WHEREOF the parties have executed this Stock Option Agreement as of the Option Date. ---------------------------------- Optionee [Sign name] [Print name] Address: _________________________ ---------------------------------- Option Date: No. of Shares: Option Price: Accepted, as the issuer of the Shares, in accordance with the terms of the foregoing Option Agreement as of the foregoing Option Date. HPR INC. By:_______________________ Chairman of the Board EX-99 3 EXHIBIT 10.3 HPR INC. AMENDED AND RESTATED HPR 1995 STOCK PLAN 1. Purpose. The purpose of this HPR 1995 Stock Plan (the "Plan") is to advance the interests of HPR Inc., a Delaware corporation (the "Company"), by strengthening the ability of the Company to attract, retain and motivate key employees, consultants and other individual contributors of or to the Company or any present or future parent or subsidiary of the Company (the "Company Group") by providing them with an opportunity to purchase or receive as bonuses stock of the Company and thereby permitting them to share in the Company's success. It is intended that this purpose will be effected by granting (i) incentive stock options ("Incentive Options") which are intended to qualify under the provisions of Section 422 of the Internal Revenue Code of 1986, as heretofore and hereafter amended (the "Code"), and non-statutory stock options ("Nonqualified Options") which are not intended to meet the requirements of Section 422 of the Code and which are intended to be taxed under Section 83 of the Code (both Incentive Options and Nonqualified Options shall be collectively referred to as "Options"), (ii) stock purchase authorizations ("Purchase Authorizations"), (iii) stock bonus awards ("Bonuses") and (iv) Stock Appreciation Rights ("SARs"). (Items (i) through (iv) above shall collectively be referred to herein as "Awards".) 2. Effective Date. This Plan was adopted by the Board of Directors of the Company (the "Board") on June 26, 1995 (the "effective date" of the Plan) and approved by the stockholders on July 20, 1995. This Plan was amended and restated by the Board of Directors on July 22, 1996, such amendment and restatement to be effective on November 1, 1996, subject to approval by the stockholders on or before July 22, 1997. 3. Stock Covered by the Plan. Subject to adjustment as provided in Sections 10 and 11 below, the shares that may be made subject to Awards under this Plan ("Shares") shall not exceed in the aggregate 2,035,000 shares of the common stock, $.01 par value, of the Company ("Common Stock"). Any Shares subject to an Option, SAR or Purchase Authorization which for any reason expires or is terminated unexercised as to such Shares, any Shares reacquired by the Company pursuant to forfeiture or a repurchase right hereunder, and any Shares subject to an SAR which are not issued upon exercise of the SAR may again be the subject of an Award under the Plan. The Shares purchased pursuant to Purchase Authorizations or the exercise of Options under this Plan or issued as Bonuses or pursuant to SARs may, in whole or in part, be either authorized but unissued Shares or issued Shares reacquired by the Company. 4. Administration. This Plan shall be administered by the Board of Directors, whose construction and interpretation of the Plan's terms and provisions shall be final and conclusive. The Board shall have the authority to delegate to the Compensation Committee of the Board (the "Committee") the authority to administer this Plan as set forth in this Section 4 and to recommend that the Board grant Awards. Each member of the Committee shall be, and shall have been at all times within the one-year period ending on the date of his or her appointment to the Committee, a person who in the opinion of counsel to the Company is an "outside director" as such term is used in proposed regulation 1.162-27(e)(3) under Section 162(m) of the Code. The Board shall have authority, subject to the express provisions of the Plan, to construe the Plan and the respective Awards and related agreements, to prescribe, amend and rescind rules and regulations relating to the Plan, to determine the terms and provisions of the respective Awards and related agreements, and to make all other determinations in the judgment of the Board necessary or desirable for the administration of the Plan. The Board may correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any Award or related agreement in the manner and to the extent it shall deem expedient to carry the Plan into effect, and it shall be the sole and final judge of such expediency. No member of the Board and no delegate of the Board shall be liable for any action or determination under the Plan made in good faith. Notwithstanding the foregoing, the Board, or the Committee as its delegate, shall have authority to establish guidelines for the grant of Awards to key employees of the Company Group who are not executive officers of the Company and to delegate to the Company's Chief Executive Officer the authority to recommend to the Board the grant of Awards, within such guidelines, to such eligible non-executive key employees. 5. Approval by Board of Directors. Notwithstanding anything in this Plan to the contrary, including without limitation the delegation of authority to the Committee, all grants of Awards shall be approved by the Board of Directors. 6. Eligible Recipients. Awards may be granted to such key employees, consultants or other individual contributors of or to the Company Group, including without limitation members of the Board who are employees and members of any medical scientific or technical advisory boards, as are selected by the Board or (except as to employees who are Company executive officers) by the Board's delegate pursuant to section 4 above (a "Participant"); provided, that only employees of the Company Group shall be eligible for grant of an Incentive Option. 7. Duration of the Plan. This Plan shall terminate ten (10) years from the effective date hereof, unless terminated earlier pursuant to Section 14 hereafter, and no Awards may be granted or made thereafter. 8. Terms and Conditions of Options, Purchase Authorizations, SARs and Bonuses. Awards granted or made under this Plan shall be evidenced by agreements in such form and containing such terms and conditions as the Board shall determine; provided, however, that such agreements shall evidence among their terms and conditions the following: (a) Price. The purchase price per Share payable upon the exercise of each Option or the purchase pursuant to each Purchase Authorization granted or made hereunder shall be determined by the Board at the time the Option or Purchase Authorization is granted or made. Subject to the condition of paragraph 8(k)(i), if applicable, the purchase price per Share payable upon the exercise of each Incentive Option granted hereunder shall not be less than one hundred percent (100%) of the Market Price (as such term is defined below) per Share of the Common Stock on the day the Incentive Option is granted. The purchase price per Share payable on exercise of each Nonqualified Option or upon the purchase of Shares pursuant to each Purchase Authorization granted hereunder shall be not less than eighty-five percent (85%) of the Market Price per Share of the Common Stock on the date of the grant. Bonus Shares shall be issued in consideration of services previously rendered, which shall be valued for such purposes by the Board. No Share shall be issued for less than its par value, paid in cash, property or services. As used herein, "Market Price" shall mean the closing price of the Common Stock as reported on the Nasdaq National Market System for the relevant date (or, if such date is not a trading date or if no trades took place on such date, then such closing price for the last previous trading date or the last previous date on which a trade occurred, as the case may be); provided that if the Common Stock is no longer traded on the Nasdaq National Market System on the relevant date, then the Market Price as of such date shall be determined by the Board equal to the fair market value of the Common Stock in accordance with applicable provisions of the Code then in effect. (b) Stock Appreciation Rights. Stock Appreciation Rights shall be grants entitling a Participant to receive an amount in cash or Shares or a combination thereof having a value equal to or less than the excess of the Market Price per share of the Company's Common Stock on the date of exercise over the Market Price per share of the Company's Common Stock on the date of grant, multiplied by the number of Shares with respect to which the SAR shall have been exercised. (c) Number of Shares. Each agreement shall specify the number of Shares to which it pertains. (d) Exercise of Options. Each Option shall be exercisable for the full amount or for any part thereof and at such intervals or in such installments as the Board may determine or as the Committee may determine at the time it recommends that the Board grant such Option; provided, however, that no Option shall be exercisable with respect to any Shares later than ten (10) years after the date of the grant of such Option (or five (5) years in the case of Incentive Options to which paragraph 8(k)(ii) applies). An Option shall be exercisable only by delivery of a written notice to the Company's Treasurer, or any other officer of the Company designated by the Board to accept such notices on its behalf, specifying the number of Shares for which the Option is exercised and accompanied by either (i) payment or (ii) if permitted by the Board, irrevocable instructions to a broker to promptly deliver to the Company full payment in accordance with paragraph 8(e)(ii) below of the amount necessary to pay the aggregate exercise price. With respect to an Incentive Option, the permission of the Board referred to in clause (ii) of the preceding sentence must be granted at the time the Incentive Option is granted. (e) Payment. Payment shall be made in full (i) at the time the Option is exercised, (ii) promptly after the Participant forwards the irrevocable instructions referred to in paragraph 8(d)(ii) above to the appropriate broker, if exercise of an Option is made pursuant to paragraph 8(d)(ii) above, or (iii) at the time the purchase pursuant to a Purchase Authorization is made. Payment shall be made either (a) in cash, (b) by check, (c) if permitted by the Board (with respect to an Incentive Option, such permission to have been granted at the time of the Incentive Option grant), by delivery and assignment to the Company of shares of Company stock having a Market Price (as determined by the Board) equal to the exercise or purchase price, (d) if permitted by the Board, stated in the agreement evidencing the Option or Purchase Authorization, and to the extent permitted by any applicable law, by the Participant's recourse promissory note, which note must be due and payable not more than five (5) years after the date the Option or Purchase Authorization is exercised, or (e) by a combination of (a), (b), (c) and/or (d). If shares of Company stock are to be used to pay the exercise price of an Incentive Option, the Company prior to such payment must be furnished with evidence satisfactory to it that the acquisition of such shares and their transfer in payment of the exercise price satisfy the requirements of Section 422 of the Code and other applicable laws. Notwithstanding the foregoing, the purchase or exercise price of an Option or Purchase Authorization may not be paid by delivery and assignment to the Company of shares of Company stock or through irrevocable instructions to a broker as referred to in Paragraph 8(d)(ii) above to the extent that such delivery and assignment or the execution of such irrevocable instructions would constitute a violation of the provisions of any law (including without limitation Section 16 of the Exchange Act) or related regulation or rule, or any agreement or policy of the Company, restricting the transfer or redemption of the Company's stock. (f) Withholding Taxes; Delivery of Shares. The Company's obligation to deliver Shares upon exercise of an Option or SAR or upon purchase pursuant to a Purchase Authorization or issuance pursuant to a Bonus shall be subject to the Participant's satisfaction of all applicable federal, state and local income and employment tax withholding obligations. Without limiting the generality of the foregoing, the Company shall have the right to deduct from payments of any kind otherwise due to the Participant any federal, state or local taxes of any kind required by law to be withheld with respect to any Shares issued upon exercise of Options or SARs or purchased or issued pursuant to Purchase Authorizations or Bonuses. The Participant may elect to satisfy such obligation(s), in whole or in part, by (i) delivering to the Company a check for the amount required to be withheld or (ii) if the Board in its sole discretion approves in any specific or general case, having the Company withhold Shares or delivering to the Company already-owned shares of Common Stock, having a value equal to the amount required to be withheld, as determined by the Board. (g) Non-Transferability. No Option, SAR or Purchase Authorization shall be transferable by the Participant otherwise than by will or the laws of descent or distribution, and each Option, SAR or Purchase Authorization shall be exercisable during the Participant's lifetime only by the Participant, provided, however, that the Board may permit a Participant to transfer an Award if such transfer is made pursuant to uniformly applied criteria established by the Board prior to such transfer. (h) Termination of Options, SARs and Purchase Authorizations. Nothing in this Plan or in any agreement representing any Award shall restrict the right of any member of the Company Group to terminate the employment of any Participant at any time and for any reason, with or without notice. Each Purchase Authorization and SAR shall terminate and may no longer be exercised if the Participant ceases for any reason to provide services to a member of the Company Group. Except to the extent the Board provides specifically in an agreement evidencing an Option for a lesser period (or a greater period, provided that in the case of Incentive Options such period shall not exceed three months), each Option shall terminate and may no longer be exercised if the Participant ceases for any reason to provide services to a member of the Company Group in accordance with the following provisions: (i) if the Participant ceases to perform services for any reason other than death or disability (as defined in Section 22(e)(3) of the Code), the Participant may, at any time within a period of one month after the date of such cessation of the performance of services, exercise the Option to the extent that the Option was exercisable on the date of such cessation; (ii) if the Participant ceases to perform services because of disability (as defined in Section 22(e)(3) of the Code), the Participant may, at any time within a period of six months after the date of such cessation of the performance of services, exercise the Option to the extent that the Option was exercisable on the date of such cessation; and (iii) if the Participant ceases to perform services because of death, the Option, to the extent that the Participant was entitled to exercise it on the date of death, may be exercised within a period of six months after the Participant's death by the person or persons to whom the Participant's rights under the Option pass by will or by the laws of descent or distribution; provided, however, that no Option, SAR or Purchase Authorization may be exercised to any extent by anyone after the date of its expiration; and provided, further, that Options, SARs and Purchase Authorizations may be exercised only as to Vested Shares (as defined in the applicable agreement with the Participant) after the Participant has ceased to perform services for any member of the Company Group. (i) Rights as Stockholder. A Participant shall have no rights as a stockholder with respect to any Shares covered by an Award until the date of issuance of a stock certificate, if any, in the Participant's name for such Shares. (j) Repurchase of Shares by the Company. Any Shares purchased or acquired upon exercise of an Option or SAR or pursuant to a Purchase Authorization or Bonus may in the discretion of the Board be subject to repurchase by or forfeiture to the Company if and to the extent and at the repurchase price, if any, specifically set forth in the option, purchase, SAR or bonus agreement pursuant to which the Shares were purchased or acquired. Certificates representing Shares subject to such repurchase or forfeiture may be subject to such escrow and stock legending provisions as may be set forth in the option, purchase, SAR or bonus agreement pursuant to which the Shares were purchased or acquired. (k) 10% Stockholder. If any Participant to whom an Incentive Option is granted pursuant to the provisions of the Plan is on the date of grant the owner of stock (as determined under Section 424(d) of the Code) possessing more than 10% of the total combined voting power or value of all classes of stock of the Company, its parent, if any, or subsidiaries, then the following special provisions shall be applicable: (i) The exercise price per Share subject to such Option shall not be less than 110% of the fair market value of each Share on the date of grant; and (ii) The Option shall not have a term in excess of five years from the date of grant. (l) Confidentiality Agreements. Each Participant shall execute, prior to or contemporaneously with the grant of any Award hereunder, the Company's then standard form of agreement relating to nondisclosure of confidential information, assignment of inventions and related matters. (m) Aggregate Limitation. The maximum number of Shares with respect to which any Awards may be granted under the Plan to any individual during each successive twelve-month period commencing on the effective date of the Plan shall not exceed 400,000 shares. 9. Restrictions on Incentive Options. Incentive Options granted under this Plan shall be specifically designated as such and shall be subject to the additional restriction that the aggregate Market Price, determined as of the date the Incentive Option is granted, of the Shares with respect to which Incentive Options are exercisable for the first time by a Participant during any calendar year shall not exceed $100,000. If an Incentive Option which exceeds the $100,000 limitation of this paragraph 9 is granted, the portion of such Option which is exercisable for shares in excess of the $100,000 limitation shall be treated as a Nonqualified Option pursuant to Section 422(d) of the Code. In the event that such Participant is eligible to participate in any other stock incentive plans of the Company, its parent, if any, or a subsidiary which are also intended to comply with the provisions of Section 422 of the Code, such annual limitation shall apply to the aggregate number of shares for which options may be granted under all such plans. 10. Stock Dividends; Stock Splits; Stock Combinations; Recapitalizations. Appropriate adjustment shall be made by the Board in the maximum number of Shares subject to the Plan and in the number, kind, and exercise or purchase price of Shares covered by outstanding Options, SARs and Purchase Authorizations granted hereunder to give effect to any stock dividends, stock splits, stock combinations, recapitalizations and other similar changes in the capital structure of the Company after the effective date of the Plan. 11. Merger; Sale of Assets. In the event of a change of the Common Stock resulting from a merger or similar reorganization as to which the Company is the surviving corporation, the number and kind of Shares which thereafter may be purchased pursuant to an Option, SAR or Purchase Authorization under the Plan and the number and kind of Shares then subject to Options, SARs or Purchase Authorizations granted hereunder and the price per Share thereof shall be appropriately adjusted in such manner as the Board may deem equitable to prevent dilution or enlargement of the rights available or granted hereunder. Except as otherwise determined by the Board, a merger or a similar reorganization which the Company does not survive, or a sale of all or substantially all of the assets of the Company, shall cause every Option, SAR and Purchase Authorization hereunder to terminate, to the extent not then exercised, unless any surviving entity agrees to assume the obligations hereunder; provided, however, that, in the case of such a merger or similar reorganization, or such a sale of all or substantially all of the assets of the Company, if there is no such assumption, the Board may provide that some or all of the unexercised portion of any one or more of the outstanding Options, SARs or Purchase Authorizations and some or all of the unvested Shares acquired upon exercise of any one or more of such Options, SARs or Purchase Authorizations or acceptance of any one or more of the outstanding Bonuses shall be immediately exercisable and vested or no longer subject to repurchase rights as of such date prior to such merger, similar reorganization or sale of assets as the Board determines. 12. Investment Representations; Transfer Restrictions. The Company may require Participants, as a condition of purchasing Shares pursuant to the exercise of an Option or SAR or to a Purchase Authorization or receipt of shares as a Bonus, to give written assurances in substance and form satisfactory to the Company to the effect that such person is acquiring the Shares for the Participant's own account for investment and not with any present intention of selling or otherwise distributing the same, unless there shall be an effective registration statement under the Securities Act of 1933, as amended (the "1933 Act"), with respect thereto, and to such other effects as the Company deems necessary or appropriate (including without limitation confirmation that the Participant is aware of any applicable restrictions on transfer of the Shares, as specified in the by-laws of the Company or otherwise) in order to comply with federal and applicable state securities laws. 13. Definitions. (a) The term "employee" shall have, for purposes of this Plan, the meaning ascribed to "employee" under Section 3401(c) of the Code and the regulations promulgated thereunder. (b) The term "Exchange Act" shall mean the Securities Exchange Act of 1934, as heretofore and hereafter amended. (c) The term "parent" shall have, for purposes of this Plan, the meaning ascribed to it under Section 424(e) of the Code and the regulations promulgated thereunder. (d) The term "subsidiary" shall have, for all purposes under this Plan, the meaning ascribed to it under Section 424(f) of the Code and the regulations promulgated thereunder. 14. Termination or Amendment of Plan. The Board may at any time terminate the Plan or make such changes in or additions to the Plan as it deems advisable without further action on the part of the stockholders of the Company, provided: (a) that no such termination or amendment shall adversely affect or impair any then outstanding Award or related agreement without the consent of the Participant holding such Award or related agreement; and (b) that no such amendment which, pursuant to the Code or regulations thereunder, requires action by the stockholders may be made without obtaining, or being conditioned upon, stockholder approval. With the consent of the Participant affected, the Board may amend outstanding Awards or related agreements in a manner not inconsistent with the Plan. The Board shall have the right to amend or modify the terms and provisions of the Plan and of any outstanding Incentive Options granted under the Plan to the extent necessary to qualify any or all such Options for such favorable federal income tax treatment (including deferral of taxation upon exercise) as may be afforded incentive stock options under Section 422 of the Code. Name of Optionee HPR INC. INCENTIVE STOCK OPTION AGREEMENT (Amended and Restated HPR 1995 Stock Plan) THIS AGREEMENT is entered into by and between HPR Inc., a Delaware corporation with its principal office at 245 First Street, Cambridge, Massachusetts 02142 (hereinafter the "Company"), and the undersigned employee of the Company (hereinafter the "Optionee"). WHEREAS, the Optionee renders important services to the Company, and the Company desires to grant an incentive stock option to the Optionee; NOW, THEREFORE, in consideration of the foregoing and the mutual agreements herein contained, the parties hereto hereby agree as follows: 1. Grant, Exercisability and Term of Option. (a) The Company hereby grants to the Optionee pursuant to the Amended and Restated HPR 1995 Stock Plan (the "Plan") the option to purchase from the Company upon the terms and conditions hereinafter set forth the number of shares ("Shares") of the $.01 par value common stock ("Common Stock") of the Company set forth on the signature page below at the purchase price per Share so set forth (the "Option Price"). The date of grant of this option is the date set forth at the execution page of this Agreement as the "Option Date." (b) Subject to the provisions of Section 5 hereof, this option is exercisable in full or in part and shall remain exercisable until it expires on the tenth anniversary of the Option Date, unless the option is sooner terminated as hereinafter specified. Only whole Shares may be purchased pursuant to this option. 2. Conditions and Limitations. (a) The option is granted on the condition that the purchase of shares hereunder shall be for investment purposes and not with a view to resale or distribution, except that such condition shall be inoperative if the offering of Shares subject to the option is registered under the Securities Act of 1933, as amended, or if in the opinion of counsel for the Company such Shares may be resold without registration. At the time of the exercise of the option or any installment thereof, the Optionee will execute such further agreements as the Company may require to implement the foregoing condition and to acknowledge the Optionee's familiarity with restrictions on the resale of the Shares under applicable securities laws, and the Company may stamp such legend on the certificate representing the Shares as may be necessary or appropriate in light of the foregoing condition. (b) The Company will furnish upon request of the Optionee copies of the certificate of incorporation of the Company, as amended, and by-laws of the Company, as amended, and such publicly available financial and other information concerning the Company and its business and prospects as may be reasonably requested by the Optionee in connection with exercise of this option. (c) The option shall not be transferable otherwise than by will or by the laws of descent and distribution, and except as provided in Section 4 the option shall be exercisable during the lifetime of the Optionee by the Optionee only. Notwithstanding the foregoing, however, if the Optionee is determined to be mentally incompetent and a guardian or conservator (or other similar person) is appointed by a court of competent jurisdiction to manage the Optionee's affairs, the guardian or conservator (or other similar person) may exercise the option on behalf of the Optionee, provided that such exercise is made within the time limits prescribed herein. (d) The option granted in this Agreement is subject to the terms, conditions and definitions of the Plan, a copy of which is attached hereto. To the extent that the terms, conditions and definitions of this Agreement are inconsistent with those of the Plan, those of this Agreement shall govern. The Optionee hereby accepts this option subject to all such provisions of the Plan and agrees that all decisions under, and interpretations of, such provisions of the Plan by the Board of Directors of the Company (the "Board") or the Committee, as defined in the Plan, shall be final, binding and conclusive upon the Optionee and his or her heirs. (e) In the event that the Company, upon the advice of counsel, deems it necessary to list upon official notice of issuance any shares to be issued pursuant to the Plan on a national securities exchange or to register under the Securities Act of 1933 or other applicable federal or state statute any shares to be issued pursuant to the Plan, or to qualify any such shares for exemption from the registration requirements of the Securities Act of 1933 under the rules and regulations of the Securities and Exchange Commission or for similar exemption under state law, then the Company shall notify the Optionee to that effect and no Shares shall be issued until such registration, listing or exemption has been obtained. The Company shall make prompt application for any such registration, listing or exemption pursuant to federal or state law or rules of such securities exchange which it deems necessary and shall make reasonable efforts to cause such registration, listing, or exemption to become and remain effective. 3. Exercise of Option; Withholding Taxes. (a) Written notice of the exercise of the option or any installment thereof shall be given to the Company specifying the number of shares for which the option is exercised and accompanied by payment in full of the Option Price. Payment shall be made (a) in cash, (b) by check, (c) by Immediate Sales Proceeds, as defined below, (d) by delivery and assignment to the Company of shares of Company stock owned by the Optionee (which shares have a Market Price not less than the Option Price), or (e) by any combination of the foregoing. As used herein, "Market Price" shall mean the closing price of the Common Stock as reported on the Nasdaq National Market for the relevant date (or, if such date is not a trading date or if no trades took place on such date, then such closing price for the last previous trading date or the last previous date on which a trade occurred, as the case may be); provided that if the Common Stock is no longer traded on the Nasdaq National Market on the relevant date, then the Market Price as of such date shall be determined by the Committee. Notwithstanding the foregoing, this option may not be exercised by delivery and assignment to the Company of shares of Company stock to the extent that such delivery and assignment would constitute a violation of the provisions of any law, or related regulation or rule, or any agreement or Company policy, restricting the transfer or redemption of the Company's stock. As used herein, the term "Immediate Sales Proceeds" shall mean the assignment in form acceptable to the Company of the proceeds of a sale of the Shares acquired on the exercise of this option pursuant to a procedure approved by the Company. The Company reserves the right to decline to approve any such procedure in the Company's sole and absolute discretion. (b) The Company's obligation to deliver Shares upon exercise of an option shall be subject to the Optionee's satisfaction of all applicable federal, state and local income and employment tax withholding obligations. Without limiting the generality of the foregoing, the Company shall have the right to deduct from payments of any kind otherwise due to the Optionee any federal, state or local taxes of any kind required by law to be withheld with respect to any Shares issued upon exercise of the option. 4. Termination of Option. In the event that the Optionee ceases to be employed by the Company or any parent or subsidiary of the Company (collectively, the "Company Group") at any time prior to the exercise of this option in full, this option shall terminate according to the following provisions: (a) If the Optionee ceases to be employed for any reason other than death or disability (as defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (the "Code")), the Optionee may at any time within a period of one (1) month after the date of such cessation of employment exercise the option to the extent that the option was exercisable on the date of such cessation; (b) If the Optionee ceases to be employed because of disability (as defined in Section 22(e)(3) of the Code), the Optionee may at any time within a period of six months after the date of such cessation of employment exercise the option to the extent that the option was exercisable on the date of such cessation; and (c) If the Optionee ceases to be employed because of death, the option, to the extent that the Optionee was entitled to exercise it on the date of death, may be exercised within a period of six months after the Optionee's death by the person or persons to whom the Optionee's rights under the option shall pass by will or by the laws of descent and distribution; provided, however, that this option may not be exercised to any extent by anyone after the date of its expiration. 5. Exercisability of Option. So long as Optionee remains an employee of the Company, this Option may be exercised only as follows: (i) commencing on the first anniversary hereof, only to the extent of one fifth of the Shares; and (ii) thereafter, at the end of each subsequent quarter, to the extent of an additional five per cent of the Shares; less the number of Shares as to which this Option has been exercised. 6. A. "Market Stand Off" Agreement. The Optionee, if requested by the Company or any managing underwriter of the Company's securities, shall agree not to sell or otherwise transfer or dispose of any Shares of the Company held by the Optionee during the period up to 180 days, as requested by the Company or such underwriter, following the effective date of a registration statement of the Company filed under the Securities Act of 1933 (except for any Company securities held by the Optionee sold pursuant to such registration statement). Such agreement shall be in writing in form satisfactory to the Company or such underwriter. The Company may impose stop-transfer instructions with respect to the Shares subject to the foregoing restriction until the end of such period. B. Exceptions for Transfers to Family. The provisions contained in this Section 6 shall not apply to any transfer of Shares to or in trust for the sole benefit of the Optionee, or any member of the immediate family of the Optionee, including for this purpose the undersigned's spouse, parents, parents-in-law, issue, nephews, nieces, brothers, brothers-in-law, sisters, sisters-in-law, children-in-law and grandchildren-in-law, provided that such transferee agrees in writing to be subject to the terms of Section 6. 7. Notice of Disposition of Shares. The Optionee hereby agrees to notify the Company promptly if the Optionee disposes of any Shares within one (1) year after the date the Optionee exercises all or part of this option or within two (2) years after the Option Date. At any time during the one or two year periods set forth above, the Company may place a legend on any certificate representing Shares requesting the transfer agent for the Company's stock to notify the Company of any such transfer. The obligation of the Optionee to notify the Company of any such transfer shall continue notwithstanding that a legend has been placed on the certificate pursuant to the preceding sentence. Optionees are urged to review the description of the Plan provided by the Company for a more detailed discussion of the Federal tax consequences of such a disposition under current law. 8. $100,000 Limitation. Under Section 422 of the Code, the aggregate Market Price of the shares with respect to which incentive stock options granted by any member of the Company Group first become exercisable by an employee during any calendar year cannot exceed $100,000 (the "$100,000 limitation"). To the extent, if any, that the $100,000 limitation is exceeded by reason of the grant of this option, this option shall be deemed, to the maximum extent possible, if any, to be an incentive stock option, and the portion of this option that is exercisable for shares in excess of the $100,000 limitation shall be treated as a non-qualified option pursuant to Section 422(d) of the Code. 9. Notices. All notices or demands given pursuant to this Agreement shall be in writing and shall be deemed to have been sufficiently given if delivered by hand or sent by certified or registered mail, postage prepaid, addressed to the Company at its principal office or to the Optionee (or the Optionee's legal representatives) at the address stated in the Optionee's (or their) notice or at the Optionee's address appearing on the books of the Company. 10. No Employment Commitment; Tax Treatment. Nothing herein contained shall be deemed to be or constitute an agreement or commitment by the Company or any other member of the Company Group to continue the Optionee in its employ. Although the option granted hereunder is intended to qualify as an incentive stock option under Section 422 of the Code, the Company makes no representation about the tax treatment to the Optionee with respect to receipt or exercise of the option or acquiring, holding or disposing of the Shares, and the Optionee represents that the Optionee has had the opportunity to discuss such treatment (including the possible application of Section 83 of the Code) with the Optionee's tax adviser. The Optionee shall have no rights as a stockholder with respect to the shares subject to the option until the exercise of the option and the issuance of a stock certificate for the Shares with respect to which the option shall have been exercised. 11. Adjustment in Shares, etc. (a) Appropriate adjustment shall be made by the Committee in number, kind, and exercise price of Shares covered by the option granted hereunder to give effect to any stock dividends, stock splits, stock combinations, recapitalizations and other similar changes in the capital structure of the Company after the Option Date. (b) In the event of a change of the Common Stock resulting from a merger or similar reorganization as to which the Company is the surviving corporation, the number and kind of Shares which thereafter may be purchased pursuant to the option granted hereunder, and the number and kind of Shares then subject to the option granted hereunder and the price per Share thereof shall be appropriately adjusted in such manner as the Committee may deem equitable to prevent dilution or enlargement of the rights available or granted hereunder. Except as otherwise determined by the Committee, a merger or a similar reorganization which the Company does not survive, or a sale of all or substantially all of the assets of the Company, shall cause this option to terminate, to the extent not then exercised, unless any surviving entity agrees to assume the obligations hereunder. 12. Miscellaneous. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of The Commonwealth of Massachusetts. This Agreement shall be binding upon and inure to the benefit of the heirs and legal representatives of the Optionee and the successors and assigns of the Company, but shall not be assigned by the Optionee at any time without the prior written permission of the Company, and any such attempted assignment shall be void. IN WITNESS WHEREOF the parties have executed this Stock Option Agreement as of the Option Date. ---------------------------------- Optionee [Sign name] [Print name] Address: _________________________ ---------------------------------- Option Date: No. of Shares: Option Price: Accepted, as the issuer of the Shares, in accordance with the terms of the foregoing Option Agreement as of the foregoing Option Date. HPR INC. By:_______________________ Chairman of the Board Name of Optionee HPR INC. NON-QUALIFIED STOCK OPTION AGREEMENT (Amended and Restated HPR 1995 Stock Plan) THIS AGREEMENT is entered into by and between HPR Inc., a Delaware corporation with its principal office at 245 First Street, Cambridge, Massachusetts 02142 (hereinafter the "Company"), and the undersigned consultant of the Company (hereinafter the "Optionee"). WHEREAS, the Optionee renders important services to the Company (such services to be collectively herein referred to as "Service"), and the Company desires to grant a non-qualified stock option to the Optionee; NOW, THEREFORE, in consideration of the foregoing and the mutual agreements herein contained, the parties hereto hereby agree as follows: 1. Grant, Exercisability and Term of Option. (a) The Company hereby grants to the Optionee pursuant to the Amended and Restated HPR 1995 Stock Plan (the "Plan") the option to purchase from the Company upon the terms and conditions hereinafter set forth the number of shares ("Shares") of the $.01 par value common stock ("Common Stock") of the Company set forth on the signature page below at the purchase price per Share so set forth (the "Option Price"). The date of grant of this option is the date set forth at the execution page of this Agreement as the "Option Date." (b) Subject to the provisions of Section 5 hereof, this option is exercisable in full or in part and shall remain exercisable until it expires on the tenth anniversary of the Option Date, unless the option is sooner terminated as hereinafter specified. Only whole Shares may be purchased pursuant to this option. 2. Conditions and Limitations. (a) The option is granted on the condition that the purchase of shares hereunder shall be for investment purposes and not with a view to resale or distribution, except that such condition shall be inoperative if the offering of Shares subject to the option is registered under the Securities Act of 1933, as amended, or if in the opinion of counsel for the Company such Shares may be resold without registration. At the time of the exercise of the option or any installment thereof, the Optionee will execute such further agreements as the Company may require to implement the foregoing condition and to acknowledge the Optionee's familiarity with restrictions on the resale of the Shares under applicable securities laws, and the Company may stamp such legend on the certificate representing the Shares as may be necessary or appropriate in light of the foregoing condition. (b) The Company will furnish upon request of the Optionee copies of the certificate of incorporation of the Company, as amended, and by-laws of the Company, as amended, and such publicly available financial and other information concerning the Company and its business and prospects as may be reasonably requested by the Optionee in connection with exercise of this option. (c) The option shall not be transferable otherwise than by will or by the laws of descent and distribution, and except as provided in Section 4 the option shall be exercisable during the lifetime of the Optionee by the Optionee only. Notwithstanding the foregoing, however, if the Optionee is determined to be mentally incompetent and a guardian or conservator (or other similar person) is appointed by a court of competent jurisdiction to manage the Optionee's affairs, the guardian or conservator (or other similar person) may exercise the option on behalf of the Optionee, provided that such exercise is made within the time limits prescribed herein. (d) The option granted in this Agreement is subject to the terms, conditions and definitions of the Plan, a copy of which is attached hereto. To the extent that the terms, conditions and definitions of this Agreement are inconsistent with those of the Plan, those of this Agreement shall govern. The Optionee hereby accepts this option subject to all such provisions of the Plan and agrees that all decisions under, and interpretations of, such provisions of the Plan by the Board of Directors of the Company (the "Board") or the Committee, as defined in the Plan, shall be final, binding and conclusive upon the Optionee and his or her heirs. (e) In the event that the Company, upon the advice of counsel, deems it necessary to list upon official notice of issuance any shares to be issued pursuant to the Plan on a national securities exchange or to register under the Securities Act of 1933 or other applicable federal or state statute any shares to be issued pursuant to the Plan, or to qualify any such shares for exemption from the registration requirements of the Securities Act of 1933 under the rules and regulations of the Securities and Exchange Commission or for similar exemption under state law, then the Company shall notify the Optionee to that effect and no Shares shall be issued until such registration, listing or exemption has been obtained. The Company shall make prompt application for any such registration, listing or exemption pursuant to federal or state law or rules of such securities exchange which it deems necessary and shall make reasonable efforts to cause such registration, listing, or exemption to become and remain effective. 3. Exercise of Option; Withholding Taxes. (a) Written notice of the exercise of the option or any installment thereof shall be given to the Company specifying the number of shares for which the option is exercised and accompanied by payment in full of the Option Price. Payment shall be made (a) in cash, (b) by check, (c) by Immediate Sales Proceeds, as defined below, (d) by delivery and assignment to the Company of shares of Company stock owned by the Optionee (which shares have a Market Price not less than the Option Price), or (e) by any combination of the foregoing. As used herein, "Market Price" shall mean the closing price of the Common Stock as reported on the Nasdaq National Market for the relevant date (or, if such date is not a trading date or if no trades took place on such date, then such closing price for the last previous trading date or the last previous date on which a trade occurred, as the case may be); provided that if the Common Stock is no longer traded on the Nasdaq National Market on the relevant date, then the Market Price as of such date shall be determined by the Committee. Notwithstanding the foregoing, this option may not be exercised by delivery and assignment to the Company of shares of Company stock to the extent that such delivery and assignment would constitute a violation of the provisions of any law, or related regulation or rule, or any agreement or Company policy, restricting the transfer or redemption of the Company's stock. As used herein, the term "Immediate Sales Proceeds" shall mean the assignment in form acceptable to the Company of the proceeds of a sale of the Shares acquired on the exercise of this option pursuant to a procedure approved by the Company. The Company reserves the right to decline to approve any such procedure in the Company's sole and absolute discretion. (b) The Company's obligation to deliver Shares upon exercise of an option shall be subject to the Optionee's satisfaction of all applicable federal, state and local income and employment tax withholding obligations. Without limiting the generality of the foregoing, the Company shall have the right to deduct from payments of any kind otherwise due to the Optionee any federal, state or local taxes of any kind required by law to be withheld with respect to any Shares issued upon exercise of the option. 4. Termination of Option. In the event that the Optionee ceases to perform Service at any time prior to the exercise of this option in full, this option shall terminate according to the following provisions: (a) If the Optionee ceases to perform Service for any reason other than death or disability (as defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (the "Code")), the Optionee may at any time within a period of one (1) month after the date of such cessation of Service exercise the option to the extent that the option was exercisable on the date of such cessation; (b) If the Optionee ceases to perform Service because of disability (as defined in Section 22(e)(3) of the Code), the Optionee may at any time within a period of six months after the date of such cessation of Service exercise the option to the extent that the option was exercisable on the date of such cessation; and (c) If the Optionee ceases to perform Service because of death, the option, to the extent that the Optionee was entitled to exercise it on the date of death, may be exercised within a period of six months after the Optionee's death by the person or persons to whom the Optionee's rights under the option shall pass by will or by the laws of descent and distribution; provided, however, that this option may not be exercised to any extent by anyone after the date of its expiration. 5. Exercisability of Option. So long as Optionee performs Service, this Option may be exercised only as follows: (i) commencing on the first anniversary hereof, only to the extent of one fifth of the Shares; and (ii) thereafter, at the end of each subsequent quarter, to the extent of an additional five per cent of the Shares;less the number of Shares as to which this Option has been exercised. 6. A. "Market Stand Off" Agreement. The Optionee, if requested by the Company or any managing underwriter of the Company's securities, shall agree not to sell or otherwise transfer or dispose of any Shares of the Company held by the Optionee during the period up to 180 days, as requested by the Company or such underwriter, following the effective date of a registration statement of the Company filed under the Securities Act of 1933 (except for any Company securities held by the Optionee sold pursuant to such registration statement). Such agreement shall be in writing in form satisfactory to the Company or such underwriter. The Company may impose stop-transfer instructions with respect to the Shares subject to the foregoing restriction until the end of such period. B. Exceptions for Transfers to Family. The provisions contained in this Section 6 shall not apply to any transfer of Shares to or in trust for the sole benefit of the Optionee, or any member of the immediate family of the Optionee, including for this purpose the undersigned's spouse, parents, parents-in-law, issue, nephews, nieces, brothers, brothers-in-law, sisters, sisters-in-law, children-in-law and grandchildren-in-law, provided that such transferee agrees in writing to be subject to the terms of this Section 6. 7. Notices. All notices or demands given pursuant to this Agreement shall be in writing and shall be deemed to have been sufficiently given if delivered by hand or sent by certified or registered mail, postage prepaid, addressed to the Company at its principal office or to the Optionee (or the Optionee's legal representatives) at the address stated in the Optionee's (or their) notice or at the Optionee's address appearing on the books of the Company. 8. No Service Commitment; Tax Treatment. Nothing herein contained shall be deemed to be or constitute an agreement or commitment by the Company or any other member of the Company Group to continue the Optionee in Service. The option granted hereunder is not intended to qualify as an incentive stock option under Section 422 of the Code, and the Company makes no representation about the tax treatment to the Optionee with respect to receipt or exercise of the option or acquiring, holding or disposing of the Shares. The Optionee represents that the Optionee has had the opportunity to discuss such treatment with the Optionee's tax adviser. The Optionee shall have no rights as a stockholder with respect to the shares subject to the option until the exercise of the option and the issuance of a stock certificate for the Shares with respect to which the option shall have been exercised. 9. Adjustment in Shares, etc. (a) Appropriate adjustment shall be made by the Committee in number, kind, and exercise price of Shares covered by the option granted hereunder to give effect to any stock dividends, stock splits, stock combinations, recapitalizations and other similar changes in the capital structure of the Company after the Option Date. (b) In the event of a change of the Common Stock resulting from a merger or similar reorganization as to which the Company is the surviving corporation, the number and kind of Shares which thereafter may be purchased pursuant to the option granted hereunder, and the number and kind of Shares then subject to the option granted hereunder and the price per Share thereof shall be appropriately adjusted in such manner as the Committee may deem equitable to prevent dilution or enlargement of the rights available or granted hereunder. Except as otherwise determined by the Committee, a merger or a similar reorganization which the Company does not survive, or a sale of all or substantially all of the assets of the Company, shall cause this option to terminate, to the extent not then exercised, unless any surviving entity agrees to assume the obligations hereunder. 10. Miscellaneous. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of The Commonwealth of Massachusetts. This Agreement shall be binding upon and inure to the benefit of the heirs and legal representatives of the Optionee and the successors and assigns of the Company, but shall not be assigned by the Optionee at any time without the prior written permission of the Company, and any such attempted assignment shall be void. IN WITNESS WHEREOF the parties have executed this Stock Option Agreement as of the Option Date. ---------------------------------- Optionee [Sign name] [Print name] Address: _________________ -------------------------- Option Date: No. of Shares: Option Price: Accepted, as the issuer of the Shares, in accordance with the terms of the foregoing Option Agreement as of the foregoing Option Date. HPR, INC. By:_______________________ Chairman of the Board EX-99 4 EXHIBIT 10.4 HPR INC. HPR 1995 ELIGIBLE DIRECTORS STOCK PLAN 1. Purpose. The purpose of this plan (the "Plan") is to grant options to purchase shares of the common stock, $.01 par value (the "Common Stock"), of HPR Inc. (the "Company") to Eligible Directors (as defined in Section 5 of the Plan) of the Company at market value on the date of grant. The Company believes that the granting of such options (the "Options") will serve to enhance the Company's ability to attract and retain the services of such persons, to provide additional incentives to them and to encourage the highest level of performance by them by offering them a proprietary interest in the Company's success. The Company also believes that the Plan will encourage directors to make greater equity investment in the Company, more closely aligning the interests of the directors and the stockholders. 2. Effective Date. This Plan was adopted by the Board of Directors of the Company (the "Board") on June 26, 1995 (the "effective date" of the Plan) and approved by the stockholders on July 20, 1996 and amended July 22, 1996 to be effective November 1, 1996, subject to approval of such amendment by the stockholders of the Company on or before July 22, 1997. 3. Stock Covered by the Plan. Subject to the adjustment provided in Section 8, the aggregate number of shares of Common Stock which may be issued and sold pursuant to Options granted under the Plan shall not exceed 150,000 shares, which may be either authorized but unissued shares or treasury shares. If any Option granted under the Plan shall terminate or expire without being fully exercised, the shares which have not been purchased thereunder will again become available for purposes of the Plan. 4. Administration. The Plan shall be administered by the Board of Directors, whose construction and interpretation of the Plan's terms and provisions shall be final and conclusive. The Board shall have the authority to delegate to the Compensation Committee of the Board (the "Committee") the authority to administer this Plan as set forth in this Section 4 and to recommend that the Board grant Options. No members of the Board or the Committee shall be held liable for any action or determination under the Plan made in good faith with respect to the Plan or any Option granted thereunder. 5. Approval by Board of Directors. Notwithstanding anything in this Plan to the contrary, including without limitation the delegation of authority to the Committee, all grants of Options under the Plan shall be approved by the Board of Directors. 6. Option Grants. "Eligible Directors" shall mean directors of the Company who are directors on the date of grant, and who are not employees of the Company. All Options granted under the Plan shall be non-statutory stock options which are not intended to meet the requirements of Section 422 of the Internal Revenue Code of 1986 as amended (the "Code") and which are intended to be taxed under Section 83 of the Code. After June 30, 1996, each Eligible Director on the 30th day following the date on which the first Annual Meeting of the Stockholders of the Company (the "Annual Meeting") in which he is elected as a director is held shall, upon approval by the Board of Directors, be granted an Option to purchase 10,000 shares of Common Stock. After June 30, 1996, each Eligible Director who is such on the 30th day following the date on which each subsequent Annual Meeting is held during the term of the Plan shall on such 30th day, upon approval by the Board of Directors, be granted an Option to purchase 4,000 shares of Common Stock. Each such Option is referred to herein as a "Regular Option." The date of grant of an Option to an Eligible Director under the Plan shall be the applicable day referred to immediately above. 7. Option Price. The price per share at which each Regular Option granted under the Plan to an Eligible Director may be exercised ("Regular Option Price") shall be the Market Price of the Common Stock as determined by the closing price of such Common Stock as reported on the Nasdaq National Market for the relevant date (or, if such date is not a trading date or if no trades took place on such date, then such closing price for the last previous trading date or the last previous date on which a trade occurred, as the case may be); provided that if the Common Stock is no longer traded on the Nasdaq National Market on the relevant date, then the Market Price as of such date shall be determined by the Committee. In no event shall the Option Price per share for any Option under the Plan be less than the par value per share. 8. Terms and Conditions of Options. Each Option granted under the Plan shall be evidenced by and subject to the terms and conditions of an Option Grant attached hereto as Exhibit A. Each Option Grant executed and delivered to an Eligible Director shall contain the following terms and conditions: (a) Exercise of Options. Each Option shall expire 10 years from the date of grant of such Option. (b) Payment. Each Eligible Director to whom an Option is granted may exercise such Option from time to time, in whole or in part, during the period that it is exercisable, by payment of the Option Price of each share purchased, in cash, or by delivery to the Company of a number of shares of Common Stock having an aggregate Market Price of not less than the product of the Option Price multiplied by the number of shares the participant intends to purchase upon exercise of the Option on the date of delivery. Notwithstanding the foregoing, the exercise price of an Option may not be paid by delivery to the Company of shares of Common Stock to the extent that such delivery would constitute a violation of the provisions of any law (including without limitation Section 16 of the Act) or related regulation or rule. (c) Transfer Restrictions. The shares of Common Stock issued upon exercise of an Option granted under this Plan will be acquired for investment and not with a view to distribution thereof unless there shall be an effective registration statement under the Securities Act of 1933, as amended (the "1933 Act"), with respect thereto. In the event that the Company, upon the advice of counsel, deems it necessary to list upon official notice of issuance shares to be issued pursuant to the Plan on a national securities exchange or to register under the 1933 Act or other applicable federal or state statute any shares to be issued pursuant to the Plan, or to qualify any such shares for exemption from the registration requirements of the 1933 Act under the Rules and Regulations of the Securities and Exchange Commission or for similar exemption under state law, then the Company shall notify each Eligible Director to that effect and no shares of Common Stock subject to an Option shall be issued until such registration, listing or exemption has been obtained. The Company shall make prompt application for any such registration, listing or exemption pursuant to federal or state law or rules of such securities exchange which it deems necessary and shall make reasonable efforts to cause such registration, listing or exemption to become and remain effective. The shares of Common Stock issued on exercise of the Option shall be subject to any restrictions on transfer then in effect pursuant to the Certificate of Incorporation or By-laws of the Company. (d) Non-Transferability. No Option may be transferred by the Optionee, other than by will or the laws of descent and distribution. An Option can be exercised during such individual's lifetime only by him or her, provided, however, that the Board may permit an Eligible Director to transfer an Option if such transfer is made pursuant to uniformly applied criteria established by the Board prior to such transfer. (e) Termination of Directorship. Nothing in this Plan or in any Option Grant shall confer upon any Eligible Director the right to continue as a director of the Company. An Eligible Director's right to participate in the Plan shall automatically terminate if and when such Director becomes an employee of the Company. Each Option shall terminate and may no longer be exercised if the Eligible Director ceases to provide services to the Company in accordance with the following provisions: (i) Options granted to an Eligible Director shall cease to be exercisable 12 months after the date such Director ceases to be a director for any reason other than death, but in no event after the expiration of the Option. (ii) If an Eligible Director ceases to be a director on account of his death, any Option previously granted to him, whether or not exercisable at the date of death, may be exercised by his executor, administrator or the person or persons to whom his rights under the Option shall pass by will or the applicable laws of descent and distribution, at any time within 12 months after the date of death, but in no event after the expiration of the Option. 9. Stock Dividends; Stock Splits; Stock Combinations; Recapitalizations. The aggregate number and kind of shares reserved under the Plan, the maximum number of shares as to which Options may be granted to any individual and the Option Price per share shall be appropriately adjusted by the Committee in the event of any recapitalization, stock split, stock dividend, combination of shares, or other similar change in the capitalization of the Company which occurs after the expiration date of the Plan, but no adjustment in the Option Price shall be made which would reduce the Option Price per share to less than the par value per share. 10. Merger; Sale of Assets. Prior to a dissolution, liquidation, merger, consolidation, or reorganization of the Company (the "Event"), the Committee may decide to terminate each outstanding Option. If the Committee so decides, such Option shall terminate as of the effective date of the Event, but the Committee shall suspend the exercise of all outstanding Options a reasonable time prior to the Event, giving each Optionee not less than fourteen days written notice of the date of suspension, prior to which an Optionee may purchase in whole or in part the shares available to him as of the date of receipt of the notice. If the Event is not consummated, the suspension shall be removed and all Options shall continue in full force and effect subject to the terms of their respective Option Grants. 11. Termination or Amendment of Plan. The Committee may amend, suspend, or terminate the Plan, including the form of Option Grant incorporated herein by reference. No such action, however, may be taken without approval or ratification by the stockholders if such approval or ratification is required under Section 162(m) of the Code. No such action may, without the consent of the holder of the Option, alter or impair any Option previously granted. In any event, the Plan shall terminate 10 years from the date of adoption by the Board of Directors, or if earlier, from the date of approval by the stockholders. Any shares remaining under the Plan at the time of termination which are not subject to outstanding Options and any shares which thereafter become available because of the expiration or termination of an Option shall cease to be reserved for purposes of the Plan. Name of Optionee HPR INC. ELIGIBLE DIRECTORS OPTION GRANT THIS AGREEMENT is entered into by and between HPR Inc., a Delaware corporation with its principal office at 245 First Street, Cambridge, Massachusetts 02142 (hereinafter the "Company"), and the undersigned non-employee director of the Company (hereinafter the "Optionee"). WHEREAS, the Optionee renders important services to the Company (such services to be collectively herein referred to as "Service"), and the Company desires to grant a non-qualified stock option to the Optionee; NOW, THEREFORE, in consideration of the foregoing and the mutual agreements herein contained, the parties hereto hereby agree as follows: 1. Grant, Exercisability and Term of Option. (a) The Company hereby grants to the Optionee pursuant to the HPR 1995 Eligible Directors Stock Plan (the "Plan") the option to purchase from the Company upon the terms and conditions hereinafter set forth the number of shares ("Shares") of the $.01 par value common stock ("Common Stock") of the Company set forth on the signature page below at the purchase price per Share so set forth (the "Option Price"). The date of grant of this option is the date set forth at the execution page of this Agreement as the "Option Date." (b) Subject to the provisions of Section 5 hereof, this option is exercisable in full or in part and shall remain exercisable until it expires on the tenth anniversary of the Option Date, unless the option is sooner terminated as hereinafter specified. Only whole Shares may be purchased pursuant to this option. 2. Conditions and Limitations. (a) The option is granted on the condition that the purchase of shares hereunder shall be for investment purposes and not with a view to resale or distribution, except that such condition shall be inoperative if the offering of Shares subject to the option is registered under the Securities Act of 1933, as amended, or if in the opinion of counsel for the Company such Shares may be resold without registration. At the time of the exercise of the option or any installment thereof, the Optionee will execute such further agreements as the Company may require to implement the foregoing condition and to acknowledge the Optionee's familiarity with restrictions on the resale of the Shares under applicable securities laws, and the Company may stamp such legend on the certificate representing the Shares as may be necessary or appropriate in light of the foregoing condition. (b) The Company will furnish upon request of the Optionee copies of the certificate of incorporation of the Company, as amended, and by-laws of the Company, as amended, and such publicly available financial and other information concerning the Company and its business and prospects as may be reasonably requested by the Optionee in connection with exercise of this option. (c) The option shall not be transferable otherwise than by will or by the laws of descent and distribution, and except as provided in Section 4 the option shall be exercisable during the lifetime of the Optionee by the Optionee only. Notwithstanding the foregoing, however, if the Optionee is determined to be mentally incompetent and a guardian or conservator (or other similar person) is appointed by a court of competent jurisdiction to manage the Optionee's affairs, the guardian or conservator (or other similar person) may exercise the option on behalf of the Optionee, provided that such exercise is made within the time limits prescribed herein. (d) The option granted in this Agreement is subject to the terms, conditions and definitions of the Plan, a copy of which is attached hereto. To the extent that the terms, conditions and definitions of this Agreement are inconsistent with those of the Plan, those of this Agreement shall govern. The Optionee hereby accepts this option subject to all such provisions of the Plan and agrees that all decisions under, and interpretations of, such provisions of the Plan by the Board of Directors of the Company (the "Board") or the Committee, as defined in the Plan, shall be final, binding and conclusive upon the Optionee and his or her heirs. (e) In the event that the Company, upon the advice of counsel, deems it necessary to list upon official notice of issuance any shares to be issued pursuant to the Plan on a national securities exchange or to register under the Securities Act of 1933 or other applicable federal or state statute any shares to be issued pursuant to the Plan, or to qualify any such shares for exemption from the registration requirements of the Securities Act of 1933 under the rules and regulations of the Securities and Exchange Commission or for similar exemption under state law, then the Company shall notify the Optionee to that effect and no Shares shall be issued until such registration, listing or exemption has been obtained. The Company shall make prompt application for any such registration, listing or exemption pursuant to federal or state law or rules of such securities exchange which it deems necessary and shall make reasonable efforts to cause such registration, listing, or exemption to become and remain effective. 3. Exercise of Option; Withholding Taxes. (a) Written notice of the exercise of the option or any installment thereof shall be given to the Company specifying the number of shares for which the option is exercised and accompanied by payment in full of the Option Price. Payment shall be made (a) in cash, (b) check, (c) by Immediate Sales Proceeds, as defined below, (d) by delivery and assignment to the Company of shares of Company stock owned by the Optionee (which shares have a Market Price not less than the Option Price); or (e) by any combination of the foregoing. As used herein, "Market Price" shall mean the closing price of the Common Stock as reported on the Nasdaq National Market for the relevant date (or, if such date is not a trading date or if no trades took place on such date, then such closing price for the last previous trading date or the last previous date on which a trade occurred, as the case may be); provided that if the Common Stock is no longer traded on the Nasdaq National Market on the relevant date, then the Market Price as of such date shall be determined by the Committee. Notwithstanding the foregoing, this option may not be exercised by delivery and assignment to the Company of shares of Company stock to the extent that such delivery and assignment would constitute a violation of the provisions of any law, or related regulation or rule, or any agreement or Company policy, restricting the transfer or redemption of the Company's stock. As used herein, the term "Immediate Sales Proceeds" shall mean the assignment in form acceptable to the Company of the proceeds of a sale of the Shares acquired on the exercise of this option pursuant to a procedure approved by the Company. The Company reserves the right to decline to approve any such procedure in the Company's sole and absolute discretion. (b) The Company's obligation to deliver Shares upon exercise of an option shall be subject to the Optionee's satisfaction of all applicable federal, state and local income and employment tax withholding obligations. Without limiting the generality of the foregoing, the Company shall have the right to deduct from payments of any kind otherwise due to the Optionee any federal, state or local taxes of any kind required by law to be withheld with respect to any Shares issued upon exercise of the option. 4. Termination of Option. In the event that the Optionee ceases to be a director at any time prior to the exercise of this option in full, this option shall terminate according to the following provisions: (a) If the Optionee ceases be a director for any reason other than death or disability (as defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (the "Code")), the Optionee may at any time within a period of twelve months after the date of such cessation of service as a director exercise the option to the extent that the option was exercisable on the date of such cessation; (b) If the Optionee ceases to be a director because of disability (as defined in Section 22(e)(3) of the Code), the Optionee may at any time within a period of twelve months after the date of such cessation of service as a director exercise the option to the extent that the option was exercisable on the date of such cessation; and (c) If the Optionee ceases to be a director because of death, the option, to the extent that the Optionee was entitled to exercise it on the date of death, may be exercised within a period of twelve months after the Optionee's death by the person or persons to whom the Optionee's rights under the option shall pass by will or by the laws of descent and distribution; provided, however, that this option may not be exercised to any extent by anyone after the date of its expiration. 5. Exercisability of Option. So long as Optionee is an Eligible Director, this Option may be exercised only as follows: (i) commencing on the first anniversary hereof, only to the extent of one-fifth of the Shares; and (ii) thereafter, at the end of each subsequent year, to the extent of an additional twenty per cent of the Shares; less the number of Shares as to which this Option has been exercised. 6. A. "Market Stand Off" Agreement. The Optionee, if requested by the Company or any managing underwriter of the Company's securities, shall agree not to sell or otherwise transfer or dispose of any Shares of the Company held by the Optionee during the period up to 180 days, as requested by the Company or such underwriter, following the effective date of a registration statement of the Company filed under the Securities Act of 1933 (except for any Company securities held by the Optionee sold pursuant to such registration statement). Such agreement shall be in writing in form satisfactory to the Company or such underwriter. The Company may impose stop-transfer instructions with respect to the Shares subject to the foregoing restriction until the end of such period. B. Exceptions for Transfers to Family. The provisions contained in this Section 6 shall not apply to any transfer of Shares to or in trust for the sole benefit of the Optionee, or any member of the immediate family of the Optionee, including for this purpose the undersigned's spouse, parents, parents-in-law, issue, nephews, nieces, brothers, brothers-in-law, sisters, sisters-in-law, children-in-law and grandchildren-in-law, provided that such transferee agrees in writing to be subject to the terms of this Section 6. 7. Notices. All notices or demands given pursuant to this Agreement shall be in writing and shall be deemed to have been sufficiently given if delivered by hand or sent by certified or registered mail, postage prepaid, addressed to the Company at its principal office or to the Optionee (or the Optionee's legal representatives) at the address stated in the Optionee's (or their) notice or at the Optionee's address appearing on the books of the Company. 8. No Service Commitment; Tax Treatment. Nothing herein contained shall entitle the Optionee to remain a director of HPR or an Eligible Director under the plan. The option granted hereunder is not intended to qualify as an incentive stock option under Section 422 of the Code, and the Company makes no representation about the tax treatment to the Optionee with respect to receipt or exercise of the option or acquiring, holding or disposing of the Shares. The Optionee represents that the Optionee has had the opportunity to discuss such treatment with the Optionee's tax adviser. The Optionee shall have no rights as a stockholder with respect to the shares subject to the option until the exercise of the option and the issuance of a stock certificate for the Shares with respect to which the option shall have been exercised. 9. Adjustment in Shares, etc. (a) Appropriate adjustment shall be made by the Committee in number, kind, and exercise price of Shares covered by the option granted hereunder to give effect to any stock dividends, stock splits, stock combinations, recapitalizations and other similar changes in the capital structure of the Company after the Option Date. (b) In the event of a change in the Common Stock resulting from a merger or similar reorganization as to which the Company is the surviving corporation, the number and kind of Shares which thereafter may be purchased pursuant to the option granted hereunder, and the number and kind of Shares then subject to the option granted hereunder and the price per Share thereof shall be appropriately adjusted in such manner as the Committee may deem equitable to prevent dilution or enlargement of the rights available or granted hereunder. Except as otherwise determined by the Committee, a merger or similar reorganization which the Company does not survive, or a sale of all or substantially all of the assets of the Company, shall cause this option to terminate, to the extent not then exercised, unless any surviving entity agrees not to assume the obligations hereunder. 10. Miscellaneous. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of The Commonwealth of Massachusetts. This Agreement shall be binding upon and inure to the benefit of the heirs and legal representatives of the Optionee and the successors and assigns of the Company, but shall not be assigned by the Optionee at any time without the prior written permission of the Company, and any such attempted assignment shall be void. IN WITNESS WHEREOF the parties have executed this Stock Option Agreement as of the Option Date. ---------------------- Optionee [Sign name] [Print name] Address: _____________ ------------------------- Option Date: No. of Shares: Option Price: Accepted, as the issuer of the Shares, in accordance with the terms of the foregoing Option Agreement as of the foregoing Option Date. HPR INC. By:_______________________ Chairman of the Board EX-99 5 EXHIBIT 10.18 SUBLEASE This Sublease (this "Sublease") is entered into as of the 11th day of April, 1997, by and between OPEN MARKET, INC., a Delaware corporation (the "Landlord"), having a business address of 245 First Street, Cambridge, Massachusetts 02142 and HPR INC., a Delaware corporation (the "Tenant"), having a business address of 245 First Street, Cambridge, Massachusetts 02142. 1. Premises: Landlord hereby leases the Premises (as hereinafter defined) to Tenant, and Tenant hereby rents from Landlord said Premises, upon the terms and conditions hereinafter set forth. The Premises consist of approximately 20,069 square feet located on the third (3rd) floor of the building commonly known as The Riverview Complex, 245 First Street, Cambridge, Massachusetts (the "Building"), which Premises are shown outlined on the floor plan annexed hereto and made a part hereof by reference. Subject to and in accordance with the terms and provisions of Section 14.2 of the Prime Lease (as hereinafter defined), as an appurtenance to the Premises, beginning on the Commencement Date and ending as of the Parking Termination Date (as defined in the Prime Lease), as and to the extent received by the Landlord from the Prime Landlord, Landlord shall provide to Tenant, and Tenant agrees to pay for, Garage Parking Permits (as defined in the Master Lease) for twenty-eight (28) automobiles in the parking garage of the Building. The obligation of the Landlord to provide such Garage Parking Permits is expressly subject to the receipt of said Garage Parking Permits from the Prime Landlord in accordance with the terms and provisions of the Prime Lease. Without limitation, Tenant shall pay the Parking Charges (as defined in the Prime Lease) assessed with respect to each of the Garage Parking Permits received by Tenant, on a monthly basis, as additional rent, in accordance with the requirements set forth in Section 14.2(b) of the Prime Lease. The use of the garage by the Tenant, and the use of the Garage Parking Permits, shall be subject to and in accordance with all of the terms, conditions, and restrictions set forth in the Prime Lease, including, without limitation, the provisions of Article 14 thereof. 2. Sublease: Reference is hereby made to that certain Lease, between Riverview Building Combined Limited Partnership, as landlord (the "Prime Landlord"), and Open Market, Inc., as tenant, originally dated March 9, 1995, as modified by that certain Letter Agreement, dated March 14, 1995, that certain Letter Agreement, dated April 18, 1995, that certain Amendment No. 1 to Lease, dated April 15, 1995 and that certain Amendment No. 2 to Lease, dated October __, 1995 (collectively, the "Prime Lease"). The Premises subleased hereunder comprise a portion of the space leased to Landlord, as tenant, under the Prime Lease. Except as otherwise expressly provided herein, this Sublease is subject to all of the terms, conditions and provisions of the Prime Lease, and Tenant shall (a) be bound with respect to the Premises by all of the terms, covenants and conditions of the Prime Lease and (b) assume as to the Premises all obligations and liabilities of Landlord, as tenant, under the Prime Lease, including, without limitation, all obligations of maintenance, repair and indemnity. Tenant shall not do or permit to be done anything, or omit to do anything, or permit to be omitted to be done anything, which is, or with the giving of notice or the passage of time or both would be, a default under the Prime Lease or could cause such a default. Tenant agrees to abide by and perform all of the covenants and conditions of the Prime Lease as if the same were fully set forth herein to the extent that said covenants and conditions pertain to the Premises and/or the occupancy and use thereof by Tenant. Tenant agrees, with respect to the Premises, to be bound by and to perform and to comply with the Prime Lease as if it were the "tenant" thereunder and as if the "premises" as demised under the Prime Lease were the Premises demised under this Sublease. If the Prime Lease shall terminate for any reason prior to the termination or expiration of this Sublease, this Sublease shall terminate as if such date were the termination date of this Sublease. 3. Term: The term of this Sublease shall commence on April 15, 1997, and, unless earlier terminated as herein provided, shall end on January 31, 2001. 4. Rent: During the term of this Sublease, commencing on July 15, 1997, and thereafter throughout the term hereof, Tenant shall pay to Landlord, without offset, setoff or deduction, of any kind, base rent at the per annum rate of Four Hundred Twenty-One Thousand, Four Hundred Forty-Nine and 00/100 Dollars ($421,449.00), payable on the first day of each month in monthly installments of Thirty-Five Thousand, One Hundred Twenty and 75/100 Dollars ($35,120.75) and proportionately at the applicable rate for any partial month during the term. Commencing on the Commencement Date and thereafter throughout the term of this Sublease, Tenant shall also pay Landlord, on the first day of each month an amount equal to Tenant's Share (as hereinafter defined) of amounts payable by Landlord to Prime Landlord pursuant to the Master Lease on account of additional rent, including, without limitation, all amounts payable under Articles 5, 6 and 7 of the Prime Lease on account of Operating Costs and Taxes. As used in this Sublease, the "Tenant's Share" is 24.77%, which is the ratio that the approximate rentable area of the Premises bears to 81,020, the area leased by the Landlord, as tenant, pursuant to the Prime Lease. 5. AS-IS CONDITION; Construction: Tenant accepts the Premises in their condition AS IS at the commencement of the term of this Sublease and Landlord shall have no obligation to prepare the Premises, or to make any improvements therein. If Tenant desires to make any additions, alterations, improvements, installations, demolition, remodeling, repainting, decoration or other similar activities in or to the Premises, in each instance it shall first obtain the written consent of Landlord thereto, such consent not to be unreasonably withheld. All such alterations, additions and improvements shall conform to and be governed by the provisions of the Prime Lease, including, without limitation, the provisions of Article 11 of the Prime Lease. In connection with any work performed by Tenant in the Premises, Tenant shall maintain the insurance coverages required under Section 12.1 of the Prime Lease, naming as an additional insured party Landlord as well as Prime Landlord. Tenant shall pay, as additional rent, one hundred percent (l00%) of any increases in real estate taxes on the Building which may result from alterations, additions or improvements to the Premises made by Tenant. Tenant agrees to pay promptly when due the entire cost of any work done on the Premises by Tenant, its agents, employees or independent contractors and not to cause or permit any liens for labor or materials performed or furnished in connection therewith to attach to the Premises or the Building or the Project (as said term is defined in the Prime Lease) and immediately to discharge any such liens which may so attach. 6. Use: The Premises may be used only as permitted pursuant to Subsection 1(j) and Article 9 of the Prime Lease and for no other purpose or purposes. 7. Utilities: Tenant shall pay for all utilities consumed by it in the Premises, such payments to be made directly to the utility company if the utility is metered separately to the Premises. If not separately metered, then Tenant shall pay to Landlord on account of utilities, Tenant's Share of payments made by Landlord to the suppliers of the same, or such greater or lesser percentage as Landlord reasonably determines to be appropriate if Tenant uses a greater or lesser pro-rata quantity of utilities than Landlord and other occupants of Landlord's premises. Landlord shall not in any way be liable or responsible to Tenant for any loss, damage or expense which Tenant may sustain or incur if, during the term of this Sublease, either the quantity or the character of the utilities servicing the Premises is changed or is no longer available or suitable for Tenant's requirements due to a fact or cause beyond Landlord's control. Tenant at its expense shall purchase and install all lamps, tubes, bulbs, starters and ballasts on the Premises. 8. HVAC Charges: Tenant agrees to pay all after-hours HVAC charges payable with respect to the Premises pursuant to Section 10.1(b) of the Prime Lease. 9. Assignment and Subletting: Tenant shall not assign, sublease, mortgage, pledge, encumber, sell, convey, subject to a security interest, license or otherwise transfer, whether voluntarily, involuntarily, by operation of law or otherwise, the Premises, this Sublease or the term and estate hereby granted or any interest herein or therein, in whole or in part, and neither the Premises nor any part thereof will be used or occupied or permitted to be used or occupied by anyone other than Tenant or for any use or purpose other than a use which is permitted hereunder or be offered or advertised for assignment or subletting without, in each instance, having first received the express written consent of Landlord and Prime Landlord, such consent by Landlord not to be unreasonably withheld. The provisions of the foregoing sentence shall apply to a transfer (by one or more transfers) of forty-nine percent (49%) of the common stock of Tenant as if such transfer of the Tenant's stock were an assignment of this Sublease. Whether or not Prime Landlord or Landlord consents, no assignment, sublease, etc. will release or alter the liability of Tenant to pay rent and perform all of Tenant's other obligations under this Sublease. The acceptance of rent by Landlord from any person other than Tenant is not a waiver by Landlord. Consent to one assignment, sublease, etc. will not be deemed to be consent to any subsequent assignment, sublease, etc. If Tenant or any assignee or sublessee, defaults under this Sublease, Landlord may proceed directly against the Tenant or said assignee or sublessee, without proceeding or exhausting its remedies against the other. After any assignment, Landlord may consent to a subsequent assignment, sublease, etc. of or amendments to this Sublease, without notifying Tenant or any other person, without obtaining consent thereto, and without relieving Tenant of its liabilities under this Sublease. As additional rent, Tenant shall reimburse Landlord promptly for reasonable legal and other expenses incurred by Landlord in connection with any requests by Tenant for consent to assignment or subletting. The provisions of Article 17 of the Prime Lease are hereby made expressly applicable to the Tenant, so that any assignment, sublease or other transfer shall be subject to the conditions, provisions and requirements of Article 17 and Landlord shall have against Tenant all the rights and remedies with respect to any assignment or subletting which are afforded to the Prime Landlord pursuant to said Article 17. 10. Maintenance and Repairs: It is understood that Prime Landlord has certain obligations to repair and maintain the Premises and the Building as set forth in Section 10.1 and Articles 15 and 16 of the Prime Lease. Landlord shall have no obligation or liability to Tenant in the event that Prime Landlord fails to perform any such obligations. Tenant agrees that it will keep the Premises neat and clean and maintain the Premises in good order, condition and repair, excepting only for ordinary wear and tear, and damage by fire and other casualty and as a consequence of the exercise of the power of eminent domain. Tenant shall surrender the Premises and all alterations, improvements, and additions thereto at the end of the term of this Sublease in good order, condition and repair, first removing all goods and effects of Tenant and repairing any damage caused by such removal and restoring the Premises and leaving them clean and neat. Tenant shall not permit or commit any waste, and Tenant shall be responsible for the cost of repairs which may be necessary by reason of damages to common areas in the Building or to the Project by Tenant, Tenant's contractors or Tenant's invitees. 11. Landlord's Self-Help: If Tenant shall at any time default in the performance of any obligation under this Sublease, Landlord shall have the right, but shall not be obligated, to enter upon the Premises and to perform such obligation on behalf of the Tenant. In performing such obligation, Landlord may make any payment of money or perform any other act. All sums so paid by Landlord (together with interest at the per annum interest rate of the prime rate as set from time to time by The First National Bank of Boston plus three hundred (300) basis points) and all necessary incidental costs and expenses in connection with the performance of any such act by Landlord, shall be deemed to be additional rent under this Sublease and shall be payable to Landlord immediately on demand. Landlord may exercise the foregoing rights without waiving any other of its rights or releasing Tenant from any of its obligations under this Sublease. 12. No Damage: Landlord shall not be liable to Tenant for any compensation or reduction of rent by reason of inconvenience or annoyance or for loss of business arising from the necessity of Landlord or Prime Landlord or their respective agents entering the Premises for any purpose in the Prime Lease authorized, or for repairing the Premises or any portion of said Building however the necessity may occur. In case Landlord (or Prime Landlord) is prevented or delayed from making any repairs, alterations or improvements, or furnishing any services or performing any other covenant or duty to be performed on its part, by reason of any cause reasonably beyond Landlord's control, including, without limitation, strike, lockout, breakdown, accident, order or regulation of or by any Governmental authority, or failure of supply, or inability by the exercise of reasonable diligence to obtain supplies, parts or employees necessary to furnish such services, or because of war or other emergency, or for any cause due to any act or neglect of Tenant or Tenant's servants, agents, employees, licensees or any person claiming by, through or under Tenant, neither Landlord nor Prime Landlord shall be liable to Tenant therefor, nor, except as expressly otherwise provided in this Sublease, shall Tenant be entitled to any abatement or reduction of rent by reason thereof, nor shall the same give rise to a claim in Tenant's favor that such failure constitutes actual or constructive, total or partial, eviction from the Premises. 13. Indemnity and Insurance: 13.1 To the maximum extent this agreement may be made effective according to law, Tenant agrees to indemnify and save harmless Landlord from and against all claims of whatever nature arising from any act, omission or negligence of Tenant, or Tenant's contractors, licensees, invitees, agents, servants or employees, or arising from any accident, injury or damage whatsoever caused to any person, or to the property of any person, occurring after the date that possession of the Premises is first delivered to Tenant and until the end of the Term of this Sublease and thereafter so long as Tenant is in occupancy of any part of the Premises, in or about the Premises or arising from any accident, injury or damage occurring outside the Premises but within the Building or on the Project, where such accident, injury or damage results, or is claimed to have resulted, from an act or omission on the part of Tenant or Tenant's agents or employees, licensees, invitees or contractors. Without limiting the foregoing, Tenant will indemnify both Landlord and Prime Landlord, and hold Landlord and Prime Landlord harmless from all Liabilities (as defined in the Prime Lease) arising from or in connection with: acts or omissions of Tenant or its Affiliates (as defined in the Prime Lease) or the conduct of Tenant's business; injuries, death or damage occurring in or on the Premises (except if and to the extent caused directly by Landlord's or Prime Landlord's negligence or willful misconduct in breach of this Sublease); Tenant's breach of or default under this Sublease; claims made by Tenant's Affiliates against the Landlord or Prime Landlord if Tenant has waived those claims in this Sublease or Landlord or Prime Landlord would not be responsible to Tenant for such claims if such claims were made by Tenant hereunder; and claims made by or Liabilities to Tenant's Affiliates or other persons if Landlord or Prime Landlord, as applicable, declines to consent to any act, event or document requiring Landlord's or Prime Landlord's consent under this Sublease. The foregoing indemnity and hold harmless agreements shall include indemnity against all costs, expenses and liabilities incurred in or in connection with any such claim or proceeding brought thereon, and the defense thereof with counsel acceptable to Landlord. l3.2 Tenant agrees to maintain in full force from the date upon which Tenant first enters the Premises for any reason, throughout the term of this Sublease, and thereafter, so long as Tenant is in occupancy of any part of the Premises, the policies of general liability and property damage insurance of the type and in the amounts and subject to the conditions which are required of under Section 12.1 of the Prime Lease which policies shall name Landlord and Prime Landlord as insured parties. Tenant agrees that, as a condition to first entering upon the Premises, Landlord shall be furnished with a duplicate original or certificate of the insurance required to be maintained by Tenant under this Section 13.2. 13.3 To the maximum extent that this agreement may be made effective according to law, Tenant agrees to use and occupy the Premises and to use such other portions of the Building and the common areas of the Project as Tenant is here given the right to use at Tenant's own risk; and Landlord shall have no responsibility or liability for any loss of or damage to fixtures or other personal property of Tenant. The provisions of this Section shall be applicable from and after the execution of this Sublease and until the end of the term of this Sublease, and during such further period as Tenant may use or be in occupancy of any part of the Premises or of said Building. 13.4 To the maximum extent that this agreement may be made effective according to law, Tenant agrees that Landlord shall not be responsible or liable to Tenant, or to those claiming by, through or under Tenant, for any loss or damage that may be occasioned by or through the acts or omissions of persons occupying adjoining premises or any part of premises adjacent to or connecting with the Premises or any part of said Building, or otherwise, or for any loss or damage resulting to Tenant or those claiming by, through or under Tenant, or its or their property, from the breaking, bursting, stopping or leaking of electric cables and wires, and water, gas, sewer or steam pipes. Without limiting the foregoing, the Tenant hereby agrees that all of the waivers, limitations, and exculpations set forth in Section 13.2 of the Prime Lease are hereby incorporated herein, and are made by and on behalf of the Tenant as if fully and completely set forth herein. 14. Fire Damage and Taking: If during the term hereof the Premises or the Building shall, in whole or in part, be damaged or destroyed by fire or other casualty or taken by eminent domain, then Tenant may elect to terminate this Sublease by notice to such effect given to Tenant and thereupon this Sublease shall terminate as if the date of termination were the date of expiration hereof. In the event that either Prime Landlord or Landlord terminates the Prime Lease pursuant to Section 15.2 thereof, this Sublease shall terminate as of the date of such termination of the Prime Lease. If, as a result of any damage by fire or other casualty or taking by eminent domain, the Premises are rendered untenantable in whole or in part, and this Sublease is not terminated as aforesaid, the base rent payable hereunder shall be equitably and proportionately abated to the extent the Premises are not useable by Tenant, it being understood that Landlord has no obligation to make any effort to so restore. All proceeds, income, rent, awards and interest in connection with any Condemnation will belong to Prime Landlord and/or Landlord, whether awarded as compensation for diminution of value to the leasehold improvements, or the unexpired portion of this Lease, or otherwise. Tenant waives all claims against Prime Landlord and/or Landlord and the condemning authority with respect thereto, but nothing in this Section prevents Tenant from bringing a separate action against the condemning authority for moving costs or for lost goodwill (as long as this separate action does not diminish Prime Landlord's and/or Landlord's recovery). 15. Default: If (a) Tenant shall fail to pay the fixed rent, additional rent or other charges for which provision is made herein on or before the date on which the same become due and payable, and the same continues for five (5) days after notice from Landlord thereof, or (b) Landlord having rightfully given the notice specified in subdivision (a) above more than twice in a period of 365 days, Tenant shall thereafter in the same 365-day period fail to pay the fixed rent, additional rent or other charges on or before the date on which the same becomes due and payable, or (c) Tenant shall cause a default under the Prime Lease, or (d) Tenant shall fail to perform or observe any other terms or condition contained in this Sublease and Tenant shall not commence to cure such failure within twelve (12) business days after notice from Landlord to Tenant thereof and promptly and diligently complete the curing of the same, or (e) The estate hereby created shall be taken on execution or by other process of law and such taking shall not be discharged within ten (10) days, or if Tenant shall be insolvent, or if any assignment or arrangement shall be made of the property of Tenant for the benefit of creditors, or if a receiver, guardian, conservator, trustee in bankruptcy or other similar officer shall be appointed to take charge of all or any substantial part of Tenant's property by a court of competent jurisdiction and such proceeding is not dismissed within sixty (60) days after such appointment, or if a petition shall be filed for the reorganization of Tenant under any provisions of the Bankruptcy Code now or hereafter enacted and such proceeding is not dismissed within sixty (60) days after it is begun, or if Tenant shall file a petition for such reorganization, or for arrangements under any provisions of the Bankruptcy Code now or hereafter enacted and providing a plan for a debtor to settle, satisfy or extend the time for payment of debts, - -- then, and in any of said cases (notwithstanding any license of a former breach of covenant or waiver of the benefit hereof or consent in a former instance), Landlord lawfully may, immediately or at any time thereafter, and without demand or notice, enter into and upon the Premises or any part thereof in the name of the whole and repossess the same as of Landlord's former estate, and expel Tenant and those claiming through or under Tenant and remove its or their effects without being guilty of any manner of trespass, and without prejudice to any remedies which might otherwise be used for arrears of rent or preceding breach of covenant, and, upon entry as aforesaid, Landlord shall have the right, by suitable notice to Tenant, forthwith to terminate this Sublease; and Tenant covenants and agrees, notwithstanding any entry or re-entry by Landlord, whether by summary proceedings, termination, or otherwise, to pay and be liable for, on the days originally fixed herein for the payment thereof, amounts equal to the several installments of rent and other charges reserved as would, under the terms of this Sublease, become due if this Sublease had not been terminated or if Landlord had not entered or re-entered, as aforesaid, and whether the Premises be relet or remain vacant, in whole or in part, or for a period less than the remainder of the Term of this Sublease, and for the whole thereof, but, in the event the Premises be relet by Landlord, Tenant shall be entitled to a credit in the net amount of rent and other charges received by Landlord in reletting, after deduction of all expenses incurred in reletting the Premises (including, without limitation, remodeling costs, brokerage fees and the like), and in collecting the rent in connection therewith, in the following manner: Amounts received by Landlord after reletting shall first be applied against such Landlord's expenses, until the same are recovered, and until such recovery, Tenant shall pay, as of the day when a payment would fall due under this Sublease, the amount which Tenant is obligated to pay under the terms of this Sublease (Tenant's liability prior to any such reletting and such recovery not in any way to be diminished as a result of the fact that such reletting might be for a rent higher than the rent provided for in this Sublease); when and if such expenses have been completely recovered, the amounts received from reletting by Landlord as have not previously been applied shall be credited against Tenant's obligations as of each day when a payment would fall due under this Sublease, and only the net amount thereof shall be payable by Tenant. No credit of any kind shall be due for any period after the date when the term of this Sublease is scheduled to expire according to its terms. As an alternative, at the election of Landlord, Tenant will, upon such termination, pay to Landlord, as liquidated damages, such a sum as at the time of such termination represents the amount of the excess, if any, of the fixed rent and additional rent which would have accrued to Landlord under this Sublease for the remainder of the Term of this Sublease if the Lease terms had been fully complied with by Tenant, discounted at eight percent (8%) per annum to the date of termination, over and above the then cash rental value (in advance) of the Premises for the balance of the term of this Sublease. Nothing contained in this Sublease shall limit or prejudice the right of Landlord to prove for and obtain in proceedings for bankruptcy or insolvency by reason of the termination of this Sublease, an amount equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the proceedings in which, the damages are to be proved, whether or not the amount be greater, equal to, or less than the amount of the loss or damages referred to above. 16. Miscellaneous. 16.1 Failure on the part of Landlord to complain of any action or non-action on the part of Tenant no matter how long the same may continue, shall never be a waiver by Landlord of any of the Landlord's rights hereunder. Further, no waiver at any time of any of the provisions hereof by Landlord shall be construed as a waiver of any of the other provisions hereof and a waiver at any time of any of the provisions hereof shall not be construed as a waiver at any subsequent time of the same provisions. The consent or approval of Landlord to or of any action by Tenant requiring such consent or approval shall not be construed to waive or render unnecessary Landlord's consent or approval to or of any subsequent similar act by Tenant. No payment by Tenant or acceptance by Landlord of a lesser amount than shall be due from Tenant to Landlord shall be treated otherwise than as a payment on account. Acceptance by Landlord of a check for a lesser amount with endorsement or statement thereon, or upon any letter accompanying such check, that such lesser amount is payment in full, shall be given no effect, and Landlord may accept such check without prejudice of any other rights or remedies which Landlord may have against Tenant. 16.2 No act or thing done by Landlord during the term of this Sublease shall be deemed an acceptance of a surrender of the premises and no agreement to accept such surrender shall be valid, unless in writing signed by Landlord. No employee of Landlord or of Landlord's agent shall have any power to accept the keys to the Premises prior to termination of the Lease and delivery of keys to any employee or agent shall not operate as termination of the Lease or a surrender of the Premises. 16.3 Tenant warrants and represents that Tenant has not dealt with any Broker other than the Columbia Group in connection with this Sublease and hereby agrees to indemnify and hold harmless Landlord with respect to all claims for brokerage commissions or fees arising out of or resulting from this Sublease, excepting only claims made by the Columbia Group. 16.4 If any term or provision of this Sublease or the application thereof to any person or circumstance shall be invalid or unenforceable to any extent, the remainder of this Sublease or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable shall not be affected thereby and each term and provision of this Sublease shall be valid and be in force to the fullest extent permitted by law. 16.5 Tenant, subject to the terms and provisions of this Sublease and to Tenant's timely paying rent and observing and keeping or performing all of the terms and provisions of this Sublease on Tenant's part to be observed, kept and performed, shall lawfully, peaceably and quietly have, hold, occupy and enjoy the Premises during the term of this Sublease without hindrance or objection by any persons claiming under the Landlord to have title to the Premises superior to Tenant. It is understood and agreed that this covenant and any and all other covenants of Landlord contained in this Sublease shall be binding upon Landlord and Landlord's successors only with respect to breaches occurring during Landlord's and Landlord's successor's respective ownership of Landlord's interest hereunder. In no event shall Landlord ever be liable to Tenant for any loss of business or any other direct, indirect, special or consequential damages suffered by Tenant for whatever cause. 16.6 The obligations of this Sublease shall enure to the benefit of and be binding upon the successors and assigns, respectively, of Landlord and Tenant. Each term and each provision of this Sublease to be performed by Tenant shall be construed to both a covenant and a condition. 16.7 Notices shall be deemed given when sent by recognized overnight delivery service such as Federal Express, or registered or certified mail, postage prepaid: if to the Landlord at: 245 First Street Cambridge, Massachusetts 02142 and if to the Tenant at: 245 First Street Cambridge, Massachusetts 02142 All such notices shall be effective when deposited with said delivery services or in the United States mails within the continental United States. Either party may change the address to which notices are to be sent to it by notice to the other party given under this Section 16.7. 16.8 Tenant will promptly furnish to Landlord, or to anyone whom Landlord designates a statement, in writing of the status of any matter pertaining to this Sublease, including without limitation, acknowledgment (to the extent to which) each party is in compliance with its obligations under the terms of this Sublease. 16.9 Any insurance carried by either party with respect to the Premises or property therein or thereon shall if it can be so written without additional premium or with additional premium which the other party agrees to pay, include a clause or endorsement denying to the insurer rights of subrogation against the other party to the extent rights have been waived by the insured prior to occurrence of injury or loss. Each party, notwithstanding any provisions of this Sublease to the contrary, hereby waives any rights of recovery against the other for injury or loss due to assets covered by such insurance. 16.10 This Lease shall be governed exclusively by the provisions hereof and by the law of the Commonwealth of Massachusetts, as the same may from time to time exist. 16.11 Any holding over by Tenant at the expiration of the term of this Sublease shall be treated as a tenancy at sufferance at one hundred and fifty percent (150%) of the rents and other charges herein (pro rated on a daily basis) and shall otherwise be on the terms and conditions set forth in this Sublease as far as applicable. In the event that Tenant enters into a direct agreement with Prime Landlord relating to the Premises for a term which commences on the next day following the expiration of the term of this Sublease, then Tenant's remaining in the Premises shall not be considered a holding over for purposes of this Section 16.11. 16.12 Employees or agents of Landlord have no authority to make or agree to make a lease or any other agreement or undertaking in connection herewith. The submission of this document for examination and negotiation does not constitute an offer to lease, reservation of, or option for the Premises. This document shall become effective and binding only upon the execution and delivery hereof by both Landlord and Tenant, and if the approval of Prime Landlord is necessary thereto, upon the approval of Prime Landlord. WITNESS the execution under seal as of this 11th day of April, 1997. OPEN MARKET, INC. By: /s/ Regina O. Sommer Name: Regina O. Sommer Its: Senior Vice President and Chief Financial Officer Hereunto duly authorized HPR INC. By: /s/ Brian D. Cahill Brian D. Cahill Its: Chief Operating Officer Hereunto duly authorized EX-99 6 EXHIBIT 10.19 The Riverview Complex Riverview I 245 First Street Cambridge, Massachusetts ("the Building") SECOND AMENDMENT April 10, 1997 LANDLORD: Beacon Properties, L.P., successor-in-interest to Riverview Building Combined Limited Partnership TENANT: HPR Inc., formerly known as Health Payment Review, Inc. EXISTING PREMISES: Space on the fifth (5th) floor of the Building, agreed to contain 18,578 square feet of rentable area, and space on the sixth (6th) floor of the Building, agreed to contain 9,422 square feet of rentable area (both as shown in "Exhibit A" to the Lease), for a total of 28,000 square feet of rentable area, plus the mezzanine storage level between the fifth (5th) and sixth (6th) floors of the Building LEASE EXECUTION DATE: June 2, 1995 TERMINATION DATE: August 31, 2003 PREVIOUS LEASE AMENDMENTS: Amendment #1 to Lease dated as of May 16, 1996 SECOND AMENDMENT ADDITIONAL PREMISES: The entire third (3rd) floor of the Building, agreed to contain 20,069 square feet of rentable area, substantially as shown on Exhibit A, Second Amendment, a copy of which is attached hereto and incorporated by reference herein WHEREAS, the Second Amendment Additional Premises, as well as other premises in the Building, are presently leased by Open Market, Inc. ("Open Market") pursuant to a lease dated March 9, 1995, as amended, with Landlord's predecessor in interest; WHEREAS, Tenant is presently negotiating with Open Market to sublease the Second Amendment Additional Premises for a term expiring on January 31, 2001; WHEREAS, Tenant desires to continue to occupy the Second Amendment Additional Premises after the expiration of the term of its sublease with Open Market; and WHEREAS, Landlord is willing to lease the Second Amendment Additional Premises to Tenant on the terms and conditions hereinafter set forth; NOW THEREFORE, the above-described lease, as previously amended ("the Lease"), is hereby further amended as follows: I . DEMISE OF THE SECOND AMENDMENT ADDITIONAL PREMISES Landlord hereby demises and leases to Tenant, and Tenant hereby hires and takes from Landlord, the Second Amendment Additional Premises for a term commencing as of the Rent Commencement Date in respect of the Second Amendment Additional Premises, as hereinafter defined, and expiring as of August 31, 2003. Said demise of the Second Amendment Additional Premises shall be upon all of the same terms and conditions of the Lease applicable to the Existing Premises (including, without limitation, Tenant's obligation to pay utilities pursuant to Article 8 of the Lease and Tenant's extension options as set forth in Addendum #2 of the Lease) except as follows: A. Rent Commencement Date. The Rent Commencement Date in respect of the Second Amendment Additional Premises shall be February 1, 2001, provided however, that if, for any reason the term of the Open Market Lease terminates prior to January 3 1, 2001, then the Rent Commencement Date in respect of the Second Amendment Additional Premises shall be the day immediately following the date as of which the Open Market Lease terminates. B. Annual Base Rent The Annual Base Rent in respect of the Second Amendment Additional Premises shall be as follows: (1) With respect to the period of time (if any) between the Rent Commencement Date in respect of the Second Amendment Additional Premises and January 31, 2001 ("Early Term"), the Annual Base Rent in respect of the Second Amendment Additional Premises shall be Four Hundred Twenty-One Thousand Four Hundred Forty-Nine and OO/100 ($421,449.00) Dollars (i.e. monthly payments of $35,120.75). (2) With respect to the period of time between February 1, 2001 and August 31, 2003, the Annual Base Rent in respect of the Second Amendment Additional Premises shall be Five Hundred Eighty-Seven Thousand Eighteen and 25/100 ($587,018.25) Dollars (i.e. monthly payments of $48,918.19). C. Tenant's Percentage Tenant's Percentage in respect of the Second Amendment Additional Premises shall be 7.63%. For the purposes of Section 6.2(b) of the Lease, Tenant's Percentage in respect of the Second Amendment Additional Premises will be deemed to be 18.41 %. D. Annual Operating Cost Stop With respect to the Early Term (if any), the Annual Operating Cost Stop with respect to the Second Amendment Additional Premises shall be equal to Tenant's share of Operating Costs for the 1996 calendar year. With respect to the period of time between February 1, 2001 and August 31, 2003, the Annual Operating Cost Stop in respect of the Second Amendment Additional Premises shall be equal to Tenant's share of Operating Costs for the 1996 calendar year, as reconciled in accordance with the provisions of the Lease. E. Annual Tax Stop With respect to the Early Term (if any), the Annual Tax Stop with respect to the Second Amendment Additional Premises shall be equal to Tenant's share of Taxes for the 1996 calendar year. With respect to the period of time between February 1, 2001 and August 31, 2003, the Annual Tax Stop in respect of the Second Amendment Additional Premises shall be equal to Tenant's share of Taxes for the 1996 calendar year, as reconciled in accordance with the provisions of the Lease. F. Base Building BVA C Service in Raised Floor Computer Area Landlord shall have no obligation to provide base building HVAC services to the raised floor computer area in the Second Amendment Additional Premises. G. Parking Commencing as of the Rent Commencement Date in respect of the Second Amendment Additional Premises and ending on the Parking Termination Date, as defined in Article 14.2 of the Lease, Landlord shall make available to Tenant, and Tenant agrees to pay for twenty-right (28) additional Garage Parking Permits. The monthly fee payable by Tenant with respect to each additional Garage Parking Permits shall be the same as the monthly fee for the Garage Parking Permits initially granted to Tenant. The provisions of Article 14.2 of the Lease shall apply to Tenant's use of the Garage and said additional Garage Parking Permits. H. Extension Options For the purposes of Paragraph 5(c) of Addendum #2 of the Lease, the term "fair rental value" with respect to the Second Amendment Additional Premises shall be computed as of the date in question at the then current annual rental charge (i.e., the sum of Annual Base Rent plus escalation and other charges), including provisions for subsequent increases and other adjustments for leases or agreements to lease then currently being negotiated, as evidenced by signed letters of intent, or executed in comparable space located in the Building, or if no leases or agreements to lease are then currently being negotiated, as evidenced by signed letters of intent, or executed in the Building, the fair rental value shall be determined by reference to leases or agreements to lease then currently being negotiated or executed for comparable space located elsewhere in first:-class office buildings located in Cambridge. In determining Fair Market Rental Value the following factors, among others, shall be taken into account and given effect: size, location of premises, lease term, condition of building, and services provided by the Landlord. 1. In the event that any of the provisions of the Lease are inconsistent with this Amendment or the state of facts contemplated hereby, the provisions of this Amendment shall control. 2. CONDITION OF SECOND AMENDMENT ADDITIONAL PREMISES Notwithstanding anything to the contrary herein or in the Lease contained, Tenant shall lease the Second Amendment Additional Premises "as-is", in the condition in which the Second Amendment Additional Premises are in as of February 1, 2001, without any obligation on the part of Landlord to prepare or construct the Second Amendment Additional Premises for Tenant's occupancy and without any warranty or representation on the part of Landlord as to the condition of the Second Amendment Additional Premises. Without limiting the foregoing, Paragraph 2 and Exhibit "B" of the Lease shall have no applicability to the Second Amendment Additional Premises. 3. INAPPLICABLE LEASE PROVISIONS Exhibit "C" of the Lease shall have no applicability to nor any force or effect in respect of the Second Amendment Additional Premises. 4. BROKER Tenant represents and warrants that it has no dealings with any agent, broker, finder or other person who is or might be entitled to a commission or other fee from Landlord in connection with this Second Amendment, except for The Columbia Group, and will indemnify Landlord and hold it harmless from any Liabilities for breach of this representation or warranty. Tenant shall be solely responsible for any commissions or other fees due to The Columbia Group. 5. NOTICES For all purposes of the Lease, the notice address for Landlord is as follows: Beacon Properties, L.P. c/o Beacon Properties Corporation 50 Rowes Wharf Boston, MA 02110 Attn: General Partner 6. LANDLORD'S RIGHT TO RELOCATE SECOND AMENDMENT ADDITIONAL PREMISES During the term of the Lease in respect of the Second Amendment Additional Premises, Landlord shall have the right, which right shall be exercisable upon written notice to Tenant, to relocate the Second Amendment Additional Premises to the entirety of the fourth (4th) floor of the Building ("Relocation Premises"). If Landlord exercises such relocation right, the following provisions shall apply. A. Landlord's Relocation Premises Work. Landlord shall perform such work ("Landlord's Relocation Premises Work") in the Relocation Premises as is necessary to make the Relocation Premises substantially equivalent, in construction and finish, to the Second Amendment Additional Premises. The date as of which Landlord's Relocation Premises Work is substantially completed shall be defined as the Substantial Completion Date. Landlord shall give Tenant written notice setting forth Landlord's good faith estimate of when the Substantial Completion Date will occur at least thirty (30) days prior to the Substantial Completion Date. Tenant shall relocate on the date ("Relocation Date") as to which Landlord has given Tenant thirty (30) days' advance notice, provided that the Substantial Completion Date has occurred prior to the Relocation Date. On the Relocation Date, Tenant shall vacate the Second Amendment Additional Premises and deliver them to Landlord and Tenant shall demise the Relocation Premises in lieu of the Second Amendment Additional Premises. B. Landlord's Obligation to Reimburse Tenant for the Unamortized Portion of Tenant's Construction Costs. (1) Landlord shall reimburse Tenant for the Unamortized Portion, as hereinafter defined, of Tenant's Construction Costs, as hereinafter defined.- The Unamortized Portion of Tenant's Construction Costs shall be applied to the cost of Landlord's Relocation Premises Work. Such application shall be effected by check from Landlord made payable to Tenant and to Landlord jointly. Tenant shall, within three (3) days of presentation by Landlord endorse such check to Landlord. If Tenant fails timely to endorse such check, Landlord shall have the right to cancel the submitted check and apply the Unamortized Portion of Tenant's Construction Costs without endorsing a joint check to Tenant as aforesaid. (2) If the Unamortized Portion of Tenant's Construction Costs exceeds the cost of Landlord's Relocation Premises Work, then such excess may be applied to the costs incurred by Tenant for Tenant's Moving Costs, as hereinafter defined. (3) If the Unamortized Portion of Tenant's Construction Costs exceeds the sum of both the cost of Landlord's Relocation Premises Work and Tenant's Moving Costs, then Landlord shall pay such excess to Tenant. (4) Any payment to Tenant under clause (3) of this Subparagraph B shall be made after Tenant has first taken occupancy of the Relocation Premises and the cost of Landlord's Relocation Premises Work has been determined. C. Landlord's Obligation to Pay for Landlord's Relocation Premises Work and to Reimburse Tenant for Tenant's Moving Costs To the extent that the Unamortized Portion of Tenant's Construction Costs is insufficient to pay for the entire cost of Landlord's Relocation Premises Work and/or Tenant's Moving Costs, Landlord shall pay such costs. D. Definitions. (1) "Tenant's Construction Costs" shall be equal to the lesser of. (x) Five Hundred Fifty-One Thousand Eight Hundred Ninety-Seven and 50/100 Dollars ($551,897.50), or (y) the cost of the leasehold improvements installed by Tenant in the Second Amendment Additional Premises. Tenant shall, on or before December 31, 1997, deliver to Landlord paid invoices reasonably satisfactory to Landlord evidencing the amount of Tenant's Construction Costs. If Tenant fails timely to submit evidence of any such cost to Landlord, such cost shall not be included as a Tenant Construction Cost. (2) "Unamortized Portion" shall be defined as the amount of principal which would remain unpaid as of the Relocation Date with respect to a loan with a ten-n running from July 1, 1997 through August 31, 2003 in an original principal amount equal to Tenant's Construction Costs and which is repaid in equal monthly payments of principal and interest at the rate of ten (IO%) percent per annum. (3) "Tenant's Moving Costs" shall be defined as the reasonable cost of physically relocating Tenant's personal property and equipment from the Second Amendment Additional Premises to the Relocation Premises. Landlord shall reimburse Tenant for Tenant's Moving Costs within thirty (30) days after Landlord receives paid invoices from Tenant reasonably satisfactory to Landlord evidencing such costs. 7. CONDITION OF LANDLORDS EXECUTION The parties acknowledge that Landlord and Tenant are only willing to enter into this Second Amendment in the event that Tenant enters into the Sublease with Open Market. Therefore, both parties shall have the right, exercisable upon written notice to the other party, to render the foregoing Second Amendment void and without force or effect, unless all of the following events occur: a. Tenant executes and delivers this Second Amendment to Landlord; b. Open Market enters into the Sublease with Tenant; and c. Landlord grants its written consent to the Sublease. 8. As herein amended, the Lease is ratified, confirmed and approved in all respects. WHEREFORE, the parties have hereunto set their hands and seals as of the date first written above. LANDLORD: TENANT: BEACON PROPERTIES, L.P. HPR INC. By: Beacon Properties Corporation, General Partner By: /s/ Douglas S Mitchell By: /s/ Brian D. Cahill Douglas S Mitchell Brian D. Cahill Senior Vice President Chief Operating Officer Date Signed: 4/11/97 Date Signed: 4/11/97 EX-99 7 EXHIBIT 10.20 HPR INC. EXECUTIVE SEPARATION BENEFITS PLAN Effective January 1, 1997 HPR INC. EXECUTIVE SEPARATION BENEFITS PLAN TABLE OF CONTENTS SECTION 1 - GENERAL INFORMATION 1.1 Adoption and Purpose of Plan 1.2 Status of Plan 1.3 Summary Plan Description 1.4 Effective Date 1.5 Plan Year SECTION 2 - DEFINITIONS 2.1 "Base Pay" 2.2 "Board" 2.3 "Change in Control" 2.4 "Covered Termination" 2.5 "Effective Date" 2.6 "Eligible Employee" 2.7 "Eligibility Conditions" 2.8 "Company" 2.9 "ERISA" 2.10 "Good Cause" 2.11 "Good Reason" 2.12 "Participant" 2.13 "Plan" 2.14 "Plan Administrator" 2.15 "Plan Year" 2.16 "Separation Benefits Period" 2.17 "Separation Pay" 2.18 "Special CIC Benefits" SECTION 3 - BENEFITS UNDER THE PLAN 3.1 Types of Benefits 3.2 Eligibility Conditions; No Mitigation 3.3 Amount of Separation Pay 3.4 Payment of Benefit 3.5 Outplacement Assistance Benefits 3.6 Continued Eligibility For Benefit Programs 3.7 Effect of Certain Covered Terminations on Certain Stock Options 3.8 Individual Arrangements SECTION 4 - PLAN AMENDMENT AND TERMINATION 4.1 Employer's Right to Amend or Terminate Plan 4.2 Method of Amendment or Termination SECTION 5 - PLAN ADMINISTRATION 5.1 Plan Administrator 5.2 Records 5.3 Reliance 5.4 Indemnification SECTION 6 - MISCELLANEOUS MATTERS 6.1 Information Required 6.2 No Guaranty of Employment 6.3 Exclusive Plan 6.4 Sole Source for Payment of Benefits 6.5 Non-Alienation 6.6 No Vesting 6.7 Obligations to Withhold and Pay Taxes 6.8 Governing Law SECTION 7 - CLAIMS PROCEDURE 7.1 Claim for Benefits 7.2 Appeals SECTION 8 - ERISA RIGHTS 8.1 Participants' Rights 8.2 Fiduciary Duties 8.3 Enforcement of Rights SECTION 1 - GENERAL INFORMATION 1.1......Adoption and Purpose of Plan. The Employer hereby adopts this Executive Separation Benefits Plan to provide certain separation benefits to Eligible Employees in accordance with the terms and conditions of the Plan. 1.2......Status of Plan. The Plan and this document are intended to comply with all applicable state and federal laws regarding severance pay plans, specifically Title I of ERISA. The Plan is intended to be a "welfare benefit plan," as defined in ERISA, and not a "pension benefit plan." The Plan does not provide any pension or retirement benefits of any nature to any person. 1.3......Summary Plan Description. The Plan Administrator is hereby authorized to use this document embodying the Plan, as from time to time amended, to satisfy all of the Plan's "summary plan description" requirements pursuant to ERISA. 1.4......Effective Date. The Plan is effective as of January 1, 1997. -------------- 1.5......Plan Year. For recordkeeping and reporting purposes, the Plan Year shall be the twelve-month period ending each December 31. SECTION 2 - DEFINITIONS 2.1......"Base Pay" means an Eligible Employee's highest annual base salary rate paid during the twenty-four months (or total employment, if less) immediately preceding termination of the employee's employment due to a Covered Termination. The term Base Pay shall exclude all other types of compensation or remuneration to an employee, and shall exclude without limitation bonuses of any kind, overtime pay and shift differentials, contributions (other than employee salary-reduction contributions) to any retirement or other employee benefit plans, commissions, profit sharing payments, incentive payments of any kind, special payments of any kind (including without limitation business expense reimbursements, tuition reimbursements and flexible spending account reimbursements) and contingent compensation of any kind. 2.2......"Board" means the Employer's Board of Directors. 2.3......"Change in Control" A Change In Control of the Employer will occur upon: .........(a) The acquisition by any individual, entity or group (within the meaning of Sections 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50 percent or more of either (i) the then outstanding shares of the Employer's common stock (the "Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Employer entitled to vote generally in the election of the directors (the "Outstanding Employer Voting Securities"); provided, however, that the following acquisitions shall not constitute a Change in Control: (A) any acquisition directly from the Employer (excluding an acquisition by virtue of the exercise of a conversion privilege); (B) any acquisition by the Employer or by any corporation controlled by the Employer; (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Employer or any corporation controlled by the Employer; or (D) any acquisition by any corporation pursuant to a consolidation or merger, if, following such consolidation or merger, the conditions described in clauses (i) and (ii) of paragraph (c) of this definition are satisfied; or .........(b) Individuals who, as of the Effective Date, constitute the Board (the "Incumbent Board") ceasing for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the Effective Date whose election, or nomination for election by the Employer's shareholders, was approved by a vote or resolution of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board. .........(c) Adoption by the Board of a resolution approving an agreement of consolidation of the Employer with or merger of the Employer into another corporation or business entity in each case, unless, following such consolidation or merger, (i) more than 50 percent of, respectively, the then outstanding shares of common stock of the corporation resulting from such consolidation or merger and/or the combined voting power of the then outstanding voting securities of such corporation or business entity entitled to vote generally in the election of directors (or other persons having the general power to direct the affairs of such entity) is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Common Stock and Outstanding Employer Voting Securities immediately prior to such consolidation or merger in substantially the same proportions as their ownership, immediately prior to such consolidation or merger, of the Common Stock and/or Outstanding Employer Voting Securities, as the case may be and (ii) at least a majority of the members of the board of directors (or other group of persons having the general power to direct the affairs of the corporation or other business entity) resulting from such consolidation or merger were members of the Incumbent Board at the time of the execution of the initial agreement providing for such consolidation or merger; provided that any right which shall vest by reason of the action of the Board pursuant to this paragraph (c) shall be divested, with respect to any such right not already exercised, upon (A) the rejection of such agreement of consolidation or merger by the stockholders of the Employer or (B) its abandonment by either party thereto in accordance with its terms; or .........(d) Adoption by the requisite majority of the whole Board, or by the holders of such majority of stock of the Employer as is required by law or by the Certificate of Incorporation or By-Laws of the Employer as then in effect, of a resolution or consent authorizing (i) the liquidation or dissolution of the Employer or (ii) the sale or other disposition of all or substantially all of the assets of the Employer, other than to a corporation or other business entity with respect to which, following such sale or other disposition, (A) more than 50 percent of, respectively, the then outstanding shares of common stock of such corporation and/or the combined voting power of the outstanding voting securities of such corporation or other business entity entitled to vote generally in the election of directors (or other persons having the general power to direct the affairs of such entity) is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Common Stock and Outstanding Employer Voting Securities immediately prior to such sale or other disposition in substantially the same proportions as their ownership, immediately prior to such sale or other disposition, of the Common Stock and/or Outstanding Employer Voting securities, as the case may be, and (B) at least a majority of the members of the board of directors (or other group of persons having the general power to direct the affairs of such corporation or other entity) were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition of assets of the Employer; provided that any right which shall vest by reason of the action of the Board or the stockholders pursuant to this paragraph (d) shall be divested, with respect to any such right not already exercised, upon the abandonment by the Employer of such dissolution, or such sale or other disposition of assets, as the case may be. A Change in Control shall not occur upon the mere reincorporation of the Employer in another state. 2.4......"Covered Termination" means the termination of an Eligible Employee's employment (a) either (i) by the Eligible Employee for Good Reason or (ii) involuntarily by the Employer (or its successor following a Change in Control) for a reason other than Good Cause or disability and (b) in the case of eligibility for Special CIC Benefits only, on or after the date on which a Change in Control occurs and on or before the second anniversary of such date. The term Covered Termination shall not include the transfer of the Eligible Employee's employment to the Employer's successor following a Change in Control, provided that such transfer does not constitute or result in the employee having Good Reason to resign. 2.5......"Effective Date" means the date set forth in Subsection 1.4 above. 2.6......"Eligible Employee" means an individual who either (a) is designated on Appendix A to this Plan as of the date of a Covered Termination or (b) was an officer of the Employer on the date of a Change in Control occurring within two years before the Covered Termination. 2.7......"Eligibility Conditions" means the conditions on eligibility for Separation Pay set forth in Subsection 3.2 below. 2.8......"Employer" means HPR Inc., a corporation organized under the laws of Delaware, and its subsidiaries. To the extent required to carry out the intent of this Plan, the term Employer shall also refer to the Employer's successor following a Change in Control. 2.9......"ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 2.10....."Good Cause" means an Eligible Employee's (a) willful and continuing failure substantially to perform duties assigned in good faith from time to time by the Employer (provided that such failure is not solely the result of (i) a disability established to the satisfaction of either the Employer's Chairman or a majority of its Board or (ii) a leave of absence either granted in writing by the Employer or guaranteed by applicable law or (iii) some other reason agreed to in advance by either the Employer's Chairman or a majority of its Board); or (b) willful conduct which is demonstrably and materially injurious to the Employer; or (c) conviction of a felony or a misdemeanor involving the theft, misappropriation or embezzlement of property of the Employer. No termination of an Eligible Employee's employment shall be for Good Cause unless: (a) notice of such Good Cause is provided to the employee by or on behalf of the Board; and (b) no valid prior or simultaneous notice of Good Reason has been given by the employee; and (c) the employee is afforded an opportunity to be heard before the Board, represented by counsel; and (d) a majority of the Board then determines that Good Cause exists for the employee's termination; and (e) only if and to the extent a cure-period is permitted under any separate agreement between the Employer and the employee, the employee has failed to timely cure such asserted Good Cause. The required hearing need not be held before the Eligible Employee's termination occurs, but it must be within 30 days after the required notice of asserted Good Cause is given to the Employee, unless the employee agrees to a postponement. For purposes of this subsection, the term Board shall include the board of directors (or body with a similar function) of the Employer's successor following a Change in Control. .........2.11 "Good Reason" means an Eligible Employee's resignation from his or her employment due to: (a) a substantial reduction imposed by the Employer in the responsibilities of the employee's position with the Employer; or (b) a reduction in the employee's Base Pay; or (c) the elimination or impairment of the employee's eligibility for compensation or benefits programs generally available to other Eligible Employees; or (d) a requirement imposed by the Employer that the employee relocate to a new post at least 50 miles from his or her then-existing post; or (e) only if so provided under any separate agreement between the Employer and the Eligible Employee, the employee has not been offered continued employment with the Employer or its successor following a Change in Control on substantially the same terms and conditions of employment as were in effect for the employee immediately prior to the Change in Control. No resignation by an Eligible Employee shall be for Good Reason unless: (a) notice of such Good Reason is provided to the Board by or on behalf of the Eligible Employee and (b) the Employer fails to cure such asserted Good Reason within thirty days after receipt of such notice; provided that the Employer shall have the sole discretion to determine whether or not (i) to attempt or complete such a cure or (ii) to dispute in good faith or accept the existence of such Good Reason. For purposes of this subsection, the term Board shall include the board of directors (or body with a similar function) of the Employer's successor following a Change in Control. 2.12....."Participant" means an Eligible Employee who is entitled to receive separation benefits under the terms and conditions of the Plan. 2.13....."Plan" means the Employer's Executive Separation Benefits Plan as set forth in this document and in any and all amendments and supplements to this document. 2.14....."Plan Administrator" means the Employer or such other person, entity or committee as may be appointed from time to time by the Employer to administer the Plan. 2.15....."Plan Year" means the annual twelve-month period set forth in Subsection 1.5 above. 2.16....."Separation Benefits Period" means, for any Participant, the period equal to the number of months of Base Pay to be received by the Participant as Separation Pay; provided that a Participant's Separation Benefits Period shall end earlier upon the Participant's failure to continue satisfying all Eligibility Conditions. 2.17....."Separation Pay" means the continuation of a Participant's Base Pay (salary) during the Separation BenefitsPeriod or the payment of an equal amount in a lump sum in accordance with the terms and conditions of the Plan. 2.18....."Special CIC Benefits" means the benefits referred to as such in Section 3 and payable in the event of an Eligible Employee's Covered Termination pursuant to a Change in Control. SECTION 3 - BENEFITS UNDER THE PLAN 3.1......Types of Benefits. An Eligible Employee whose employment with the Employer (or its successor following a Change in Control)is terminated solely due to a Covered Termination and with respect to whom all applicable Eligibility Conditions set forth in Subsection 3.2 below are met shall be entitled under this Plan to the following types of separation benefits: .01......Separation Pay as determined under Subsection 3.3 below; .02......Outplacement assistance as determined under Subsection 3.5 below; .03......Continued eligibility for certain employee benefit programs, as described in Subsection 3.6 below; .04......Certain stock option benefits for Covered Terminations pursuant to a Change in Control, as described in Subsection 3.7 below. 3.2......Eligibility Conditions; No Mitigation. Notwithstanding anything else in this Plan, separation benefits shall be provided under this Plan only to an employee whose employment with the Employer (or its successor following a Change in Control) actually terminates. Furthermore, no employee shall be entitled to commence or continue receiving separation benefits under the Plan unless all of the following conditions are met and (to the extent applicable) continue to be met at all times: .01......The Eligible Employee must agree to and must sign and comply with a separation letter satisfactory to the Employer (or its successor following a Change in Control). The separation letter may include, without limitation: (a) a comprehensive release of all claims of any sort against the Employer (and its present and former parents and subsidiaries and its successor following a Change in Control (collectively, the "Employer Group")) and all agents, employees, advisors and other representatives of the Employer Group in a form reasonably satisfactory to the Employer and (b) an acknowledgment that any then-existing agreements concerning confidentiality and/or non-competition binding on the Eligible Employee will remain in effect in accordance with their terms, but separation benefits under this Plan shall not otherwise be conditioned upon the employee's agreement not to compete with the Employer Group or to solicit any of the Employer Group's customers or employees during the Separation Benefits Period. .02......If not already fully paid or terminated for any other reason, a Participant's Separation Pay and other benefits under this Plan shall cease as of the first date of any breach or other failure if the Participant breaches the terms of any separation letter or non-competition agreement entered into with the Employer pursuant to the requirements of clauses .01 or .02 above or otherwise materially fails to satisfy any obligations of the Participant to the Employer under this Plan. .03......If not already fully paid or terminated for any other reason, a Participant's Separation Pay and other benefits under this Plan shall cease as of the first date of any misconduct if the Employer becomes aware of any instance of the Participant's misconduct that would have constituted Good Cause for termination of the Participant's employment, whether such misconduct occurs prior to or following the Participant's termination of employment with the Employer; but provided that the notice, hearing and Board majority decision requirements of Subsection 2.10 are met promptly after discovery of the misconduct. A Participant shall not be required to seek replacement employment as a condition of receiving separation benefits and separation benefits otherwise payable under this Plan shall not be reduced or terminated on account of any employment undertaken by a Participant during or after his or her Separation Benefits Period. 3.3......Amount of Separation Pay. Effective for Covered Terminations made on or after the Effective Date while this Plan remains in effect and subject to Subsection 3.2, each Participant's Separation Pay shall equal the amount determined under the applicable one of the following clauses: .01......Basic Benefit: Except as otherwise provided in clause .02 of this Subsection 3.3, following his or her Covered Termination, a Participant shall receive Separation Pay equal to twelve months of Base Pay. .02......Special CIC Benefits: In lieu of the benefit provided in clause .01 of this Subsection 3.3, the Separation Pay of a Participant whose Covered Termination was on or after the date on which a Change in Control occurred and on or before the second anniversary of such date shall be a lump sum amount equal to twelve months of Base Pay or such greater amount, if any, as is (as of the date of the Change in Control) either provided for under any separate agreement between the Employer and the Participant or specified for the Participant in Appendix B to this Plan. 3.4......Payment of Benefits. Except in the case of Special CIC Benefits, Separation Pay shall be due and payable until paid in full at the rate of the Participant's Base Pay on each of the Participant's regular pay days during the Separation Benefits Period. If a Participant has on file with the Employer a direct deposit authorization, such authorization will apply to all or a portion of the Participant's Separation Pay, as specified in the direct deposit authorization. To the extent not directly deposited, checks for Separation Pay will be mailed to a Participant's most recent address of which the Plan Administrator has received notice in writing from the Participant. Special CIC Benefits Separation Pay shall be paid to the Participant in one lump sum at the time of (or as soon as possible after) the Participant's Covered Termination. Notwithstanding the foregoing, if the Plan Administrator receives written notice that the Participant is mentally incompetent, the Employer shall pay the balance of the Participant's Separation Pay only to the Participant's duly appointed legal representative. 3.5......Outplacement Assistance Benefits. Individual executive-level outplacement assistance provided by a contractor selected by the Employer shall be provided to each Participant during his or her Separation Benefits Period. 3.6......Continued Eligibility For Benefit Programs. Subject to Subsection 3.2, during a Participant's Separation Benefits Period (or if sooner, for such medical and dental plans as the Participant has continuation rights under ERISA, until the Participant and his or her covered dependents cease to have such coverage continuation rights), the Participant shall be eligible for continued coverage by and participation in the same employee benefit programs (including without limitation, the medical and dental plans) and with the same amount of employer contributions as the Participant was eligible for on the date of the Covered Termination, but only to the extent that such programs allow for continuation of coverage. To the extent continuation coverage is not allowed, the Employer (or its successor following a Change in Control) will pay an amount of additional Separation Pay during the applicable benefits continuation period equal to the amount paid for the discontinued benefits immediately prior to the Participant's Covered Termination. Payroll deductions for the Participant's share of the cost of any contributory benefits (at the rate in effect from time to time for active executive employees of the Employer or its successor following a Change in Control) shall continue to be deducted from the Participant's Separation Pay, provided that if the Separation Pay has been paid in one lump sum, the Participant shall timely pay his or her share by personal check to the Employer. Nothing in this Plan shall affect the Participant's right (if any) under ERISA to elect continuation coverage at the Participant's own expense in the Employer's medical and dental plans after the end of the Separation Benefits Period. 3.7......Effect of Certain Covered Terminations on Certain Stock Options. The following special provisions shall apply to all options to acquire shares of the Employer's capital stock held by a Participant whose Covered Termination was on or after the date on which a Change in Control occurred and on or before the second anniversary of such date, notwithstanding anything to the contrary in the grant of such options or any agreement with respect to such options: .01......Accelerated Vesting. Fifty percent (or such greater percentage, if any, as is--as of the date of the Change in Control--either provided for under any separate agreement between the Employer and the Participant or specified for the Participant in Appendix B to this Plan) of any such options which are not exercisable as of the date of the Participant's Covered Termination shall become immediately exercisable on such date or, if sooner, on the date that the Employer (or its successor following a Change in Control) gives notice that any such non-exercisable options will be terminated in accordance with their terms pursuant to a Change in Control without replacement by substitute options of reasonably equivalent value. .02......Grace Period to Exercise. Subject to clause .03 below, all exercisable options held by the Participant (including those which become exercisable pursuant to clause .01 above) on the date of his or her Covered Termination shall remain exercisable for a period of twelve months after such date (and for any longer period that the options would have remained exercisable in accordance with their terms or as is--as of the date of the Change in Control--either provided for under any separate agreement between the Employer and the Participant or specified for the Participant in Appendix B to this Plan. .03......Termination of Grace Period. Notwithstanding the grace period provided under clause .02 above, a Participant's options will terminate and cease to be exercisable pursuant to this Plan upon the earliest to occur of: .........(a) The date that such options would have expired if the Participant had remained employed by the Employer throughout the grace period; .........(b) The dissolution of the Employer, but any substitute options in the securities of another company shall not be affected by the Employer's dissolution; or .........(c) The date set in any notice given that the options will be terminated in accordance with their terms pursuant to a Change in Control, but any substitute options in the securities of another company shall not be affected by such termination and provided that such substitute options shall be provided under a good-faith reasonable conversion formula if the Employer (or its successor following a Change in Control) is reasonably able to do so. 3.8......Individual Arrangements. Nothing in the Plan shall preclude the Employer from entering into individual arrangements with employees for the payment of severance benefits in addition to the benefits provided under the Plan. No such individual arrangement shall entitle any person not a party thereto to any benefits of any nature. SECTION 4 - PLAN AMENDMENT AND TERMINATION 4.1......Employer's Right to Amend or Terminate Plan. The Employer may amend or terminate the Plan only as provided in the applicable one of the following clauses: .01......During the First Two Years. This Plan shall not be amended or terminated on or before the second anniversary of the Effective Date except as follows: .........(a) To Permit Pooling: The Plan (including its Appendixes) may be terminated or amended as necessary pursuant to a majority vote of the Board taken consistently with an understanding that failure to so terminate or amend the Plan would prevent the Employer from entering into a then-proposed transaction to be accounted for as a pooling of interests with one or more other entities; provided that such understanding is based reasonably and in good faith upon information provided to the Board by any of the following: (i) the independent accountants of the Employer; (ii) the independent accountants of any other party to the proposed transaction; or (iii) the Securities and Exchange Commission. .........(b) To Comply with Law: The Plan (including its Appendixes) may be amended as necessary pursuant to a majority vote of the Board taken consistently with a good-faith opinion of counsel to either the Employer or the Board that such amendment is required by applicable law; provided that the Employer shall thereupon use its best efforts to provide the Eligible Employees and the Participants with the value of the benefits intended under this Plan immediately prior to the effective date of the amendment. .........(c) To Add Eligible Employees and/or Special CIC Benefits in Appendixes A and B: Appendixes A and/or B may be amended as necessary pursuant to a majority vote of the Board to add Eligible Employees and/or Special CIC Benefits. .02......After the Second Year. Following the second anniversary of the Effective Date, the Employer may amend or terminate this Plan as follows: .........(a) Prior to a Change in Control: Prior to the occurrence of a Change in Control and following the second anniversary of the then most recent Change in Control, the Employer may amend the Plan (including its Appendixes) in any manner at any time and from time to time and may terminate the Plan at any time. .........(b) After a Change in Control: After the occurrence of a Change in Control and until the second anniversary of such Change in Control, this Plan shall not be terminated and shall be amended only in accordance with the provisions of clauses .01(b) or .01(c) of this Subsection 4.1. 4.2......Method of Amendment or Termination. Any amendment or termination of the Plan shall be made by a written instrument signed by an officer of the Employer upon due authorization by the Board. SECTION 5 - PLAN ADMINISTRATION 5.1......Plan Administrator. The Plan Administrator shall be a "named fiduciary" for purposes of Section 402(a)(1) of ERISA, with authority to control and manage the operation and administration of the Plan, and shall be the agent for service of process against the Plan. The Plan Administrator shall have full power to administer the Plan in all matters, subject to applicable requirements of law. For this purpose, the Plan Administrator's power shall include, but shall not be limited to the following authority, in addition to all other powers provided by the Plan: .01......To make and enforce such rules and regulations as the Plan Administrator deems necessary or proper for the efficient administration of the Plan, including the establishment of any claims procedures that may be required by applicable provisions of law; .02......To appoint such agents, counsel, accountants, consultants and other persons to participate in the administration of the Plan as the Plan Administrator deems appropriate; .03......To allocate and delegate the responsibilities of the Plan Administrator and to designate other persons to carry out any of the Plan Administrator's responsibilities; provided that any such allocation, delegation or designation shall be in writing and in accordance with applicable requirements of law; .04......To sue or be sued on behalf of the Plan and to appoint additional agents for service of process; and .05......To the fullest extent permitted by law, the Plan Administrator shall have the exclusive responsibility and discretion to decide all matters relating to eligibility, coverage or benefits under the Plan and to interpret all provisions of the Plan and to determine all matters relating to the operation and administration of the Plan. Any determination by the Plan Administrator shall be final and binding, in the absence of clear and convincing evidence that the Plan Administrator acted arbitrarily and capriciously. 5.2......Records. The Plan Administrator shall maintain such records as it deems necessary to determine benefits and eligibility under the Plan and shall make available to each Participant such portions of the records under the Plan as pertain to the Participant, for examination at reasonable times during normal business hours. 5.3......Reliance. In administering the Plan, the Plan Administrator shall be entitled to the extent permitted by law to rely conclusively on all information (including without limitation all tables, valuations, certificates, opinions and reports) which is furnished by or in accordance with the instructions or recommendations of accountants, counsel, actuaries, consultants or other experts employed or engaged by the Plan Administrator. 5.4......Indemnification. Except as prohibited by law, any individual or individuals serving as Plan Administrator (or as a member of any board or committee that serves as Plan Administrator) shall be indemnified in full by the Employer against expenses, including attorneys' fees, and against the amount of any judgment, money decree, fine or penalty, or against the amount of any settlement deemed reasonable by the Board, necessarily paid or incurred by such individual or individuals in connection with or arising out of any claim made, or any civil or criminal action, suit or proceeding of whatever nature brought against such individual, or in which such individual is made a party, or in which such individual is otherwise involved, by reason of being or having been such Plan Administrator (or any member of any such board or committee). Such indemnification shall apply to any such individual even though at the time of such claim, action, suit or proceeding such individual is no longer Plan Administrator (or a member of any such board or committee). SECTION 6 - MISCELLANEOUS MATTERS 6.1......Information Required. Participants and Eligible Employees shall provide the Plan Administrator with such information and evidence, and shall sign such documents, as may be requested from time to time for the purpose of administering the Plan. 6.2......No Guaranty of Employment. This Plan shall not be a contract of employment between the Employer and any employee. Nothing contained in the Plan document nor any action taken in connection with the adoption, operation or maintenance of the Plan shall be construed as a contract of employment between the Employer and any employee or as consideration or inducement for the employment of any employee. Nothing in the Plan or in the adoption, operation or maintenance of the Plan shall give any employee the right to remain in the Employer's employ, nor shall it give the Employer the right to require any employee to remain in its employ, nor shall it interfere with the employee's right to terminate his or her employment at any time. Without limiting the generality of the foregoing, the Employer shall have the right to terminate or change the terms of employment of any employee, Eligible Employee or Participant at any time and for any reason whatsoever, with or without cause or notice. 6.3......Exclusive Plan. Except to the extent otherwise expressly provided herein or in any separate agreement between the Employer (or its successor following a Change in Control) and an Eligible Employee, this Plan shall exclusively govern any claims for any type of severance benefits as a result of any termination of employment due to a Covered Termination on or after the Effective Date, while the Plan remains in effect. Any other generally applicable severance plans of any nature maintained by the Employer shall be terminated as of such Effective Date with respect to any claims for severance benefits as a result of any Covered Termination occurring on or after such Effective Date. 6.4......Sole Source for Payment of Benefits. All benefits provided under the Plan shall be paid solely from the general assets of the Employer. Nothing in the Plan shall be construed to require the Employer or the Plan Administrator to maintain any fund or segregate any amount for the benefit of any Participant, and no Participant or any other person shall have any claim against, right to, or security or other interest in, any fund, account or asset of the Employer from which any payment under the Plan may be made. Neither the Employer nor any director, officer, employee or agent or other representative of the Employer shall be liable, otherwise than as expressly provided in the Plan, for payment of any benefits under the Plan or shall have any other liability to a Participant or to any other person. 6.5......Non-Alienation. No benefit payable under the Plan shall be subject in any manner whatsoever to alienation, sale, transfer, assignment, pledge, attachment or encumbrance of any kind, and each and every attempt to alienate, sell, transfer, assign, pledge, attach or encumber any such benefit under the Plan shall be void and of no force and effect whatsoever. 6.6......No Vesting. No person shall have any vested or non-forfeitable interest at any time in any payment or other benefit provided under the Plan. 6.7......Obligations to Withhold and Pay Taxes. Each Participant shall be liable for all tax obligations, if any, with respect to any sum received or other benefit provided pursuant to the Plan and for accurately reporting all such income and paying in full all such taxes to the appropriate federal, state and local authorities. The Employer shall have the right to deduct and withhold from any payment due under the Plan or from other amounts owed to the Participant all withholding taxes and other amounts required by law. 6.8......Governing Law. The Plan and the rights of all persons under the Plan shall be construed in accordance with and under applicable provisions of the laws of Massachusetts, except to the extent federal laws pre-empt such laws. SECTION 7 - CLAIMS PROCEDURE 7.1......Claim for Benefits. Eligible Employees do not need to file a claim for benefits under the Plan. If an individual believes that he or she is eligible for severance benefits even though no such benefits have been offered, or if an Eligible Employee or Participant believes that his or her benefits have been calculated incorrectly or terminated prematurely or that the Plan has been otherwise violated, the aggrieved individual may file a claim with the Plan Administrator. The Plan Administrator shall advise the claimant either that the claim is allowed, or that the claim is denied, or that the claimant needs to submit additional information. If the claim is denied, the Plan Administrator shall furnish the claimant written notice of such denial within a reasonable time after receipt of the claim, and such notice shall include: .01......the reason for the denial; .02......specific references to Plan provisions on which the denial is based; and .03......information as to how to submit the claim for review. If no notice of denial is furnished within 90 days after receipt of the claim by the Plan Administrator, the claim shall be deemed denied. 7.2......Appeals. If a claim filed under Subsection 7.1 is denied (or deemed denied), the claimant may file a request for review with the Plan Administrator. The claimant shall be entitled to examine pertinent documents, to submit issues and comments in writing and to request a hearing before the Plan Administrator. The appeal of any claim must be submitted in writing within 60 days after (a) the date that the claim was deemed denied or (b) the receipt of notice of denial by the claimant, whichever is applicable. The Plan Administrator shall send the claimant a written decision regarding the appeal. Normally, the decision will be made within 60 days after the appeal is filed, but if the Plan Administrator determines that additional time is reasonably necessary, up to 60 additional days may be taken to resolve the appeal. The decision of the Plan Administrator on such review shall be final. SECTION 8 - ERISA RIGHTS 8.1......Participants' Rights. ERISA guarantees each individual who is a Participant in the Plan certain rights and protections. In summary, ERISA provides that all Participants are entitled to: .01......Examine, without charge, at the Employer's benefits office and at other specified work sites, the Plan document, including copies of all documents filed in connection with the Plan with the U.S. Department of Labor, such as detailed annual reports (if required by applicable law). .02......Obtain copies of all Plan documents and other Plan information upon written request to the Employer's benefits office. The benefits office may make a reasonable charge for such copies. .03......Receive a summary of the Plan's financial report (if required by applicable law). The Employer's benefits office is required by law to furnish each Participant with a copy of each required summary annual report. 8.2......Fiduciary Duties. In addition to creating rights for Participants, ERISA imposes duties upon the people who are responsible for the operation of employee benefit plans. The people who operate the Plan, called "fiduciaries," have a duty to do so prudently and in the interest of Participants and beneficiaries. No one, including the Employer or any other person, may fire anyone or otherwise discriminate against anyone in any way to prevent that individual from obtaining a benefit or exercising rights under ERISA. If a claim for a benefit is denied in whole or in part, a written explanation of the reason for the denial must be given. Individuals also have the right to have the Plan Administrator review and reconsider a claim. 8.3......Enforcement of Rights. Under ERISA, there are steps that any person with rights under the Plan may take to enforce those rights. For example, if a Participant requests materials from the Employer's benefits office and does not receive them within 30 days, he or she may file suit in a federal court. In such case, the court may require the Employer to provide the materials and to pay up to $100 per day until the materials are provided, unless the materials were not provided because of reasons beyond the Employer's control. If a claim for benefits is denied or ignored in whole or in part, the aggrieved individual may file suit in a state or federal court. If the Plan fiduciaries misuse the Plan's money, or if the Plan discriminates against an individual for asserting rights under ERISA, the individual may seek assistance from the U.S. Department of Labor or may file suit in federal court. The court will decide who will pay court costs and legal fees. If the individual is successful, the court may order the person sued to pay those costs and fees. If the individual is unsuccessful, the court may order him or her to pay those costs and fees if, for example, it finds the claim to be frivolous. Questions about the Plan should be directed to the Plan Administrator. Questions about this statement or about an individual's rights under ERISA should be directed to the nearest Area Office of the U.S. Labor-Management Services Administration, Department of Labor. IN WITNESS WHEREOF, the Employer, by its duly authorized officer, has executed this document, under seal. HPR INC. By: /s/ Marcia J. Radosevich Marcia J. Radosevich Chairman, President and Chief Executive Officer Plan Administrator: Employer Identification No.: 04-2985551 HPR INC. Plan No.: ____ c/o Thomas L. Saltonstall 245 First Street Cambridge, MA 02142 Telephone: (617) 679-8000 APPENDIX A TO THE HPR INC. EXECUTIVE SEPARATION BENEFITS PLAN Designation of Eligible Employees as of January 1, 1997, pursuant to Subsection 2.6: 1. Marcia J. Radosevich, Chairman, President and Chief Executive Officer 2. Brian D. Cahill, Chief Operating Officer and Chief Financial Officer 3. Andrew C. Garling, M.D., Vice President and Chief Medical Officer* 4. Thomas L. Saltonstall, Vice President, Human Resources and Corporate Administration 5. Joseph K. Jaeger, Vice President, Sales** 6. James B. Stowe, Vice President, Marketing 7. Matt Ricketson, Vice President, Professional Services 8. Paul W. Brient, Vice President, Product Management*** 9. Steven J. Rosenberg, Vice President, Software Development *Effective 3/3/97, contingent on appointment to this position. **Effective 1/1/97, contingent on appointment to this position. ***Effective 4/14/97, contingent on appointment to this position. APPENDIX B TO THE HPR INC. EXECUTIVE SEPARATION BENEFITS PLAN Special CIC Benefits as of January 1, 1997, pursuant to Clause .02 of Subsection 3.3 (Separation Pay) and Clauses .01 and .02 of Subsection 3.7 (Accelerated Vesting of Stock Options and Grace Period for Exercising Options): Eligible Employee Special CIC Benefits 1. Marcia J. Radosevich Twenty-four months of Base Pay and benefits Acceleration of one-hundred percent of unvested stock options Options remain exercisable until the end of their original terms EX-99 8 EXHIBIT 10.21 HPR INC. NON-EXECUTIVE SEPARATION BENEFITS PLAN Effective January 1, 1997 HPR INC. NON-EXECUTIVE SEPARATION BENEFITS PLAN TABLE OF CONTENTS SECTION 1 - GENERAL INFORMATION 1.1 Adoption and Purpose of Plan 1.2 Status of Plan 1.3 Summary Plan Description 1.4 Effective Date 1.5 Plan Year SECTION 2 - DEFINITIONS 2.1 "Base Pay" 2.2 "Board" 2.3 "Change in Control" 2.4 "Covered Termination" 2.5 "Effective Date" 2.6 "Eligible Employee" 2.7 "Eligibility Conditions" 2.8 "Company" 2.9 "ERISA" 2.10 "Good Cause" 2.11 "Key Director or Contributor" 2.12 "Participant" 2.13 "Plan" 2.14 "Plan Administrator" 2.15 "Plan Year" 2.16 "Separation Pay" 2.17 "Separation Pay Period" 2.18 "Year of Service" SECTION 3 - BENEFITS UNDER THE PLAN 3.1 Types of Benefits 3.2 Eligibility Conditions; No Mitigation 3.3 Amount of Separation Pay 3.4 Payment of Benefits 3.5 Outplacement Assistance Benefits 3.6 Continued Eligibility For Benefit Programs 3.7 Effect of Covered Terminations on Certain Stock Options 3.8 Individual Arrangements SECTION 4 - PLAN AMENDMENT AND TERMINATION 4.1 Employer's Right to Amend or Terminate Plan 4.2 Method of Amendment or Termination SECTION 5 - PLAN ADMINISTRATION 5.1 Plan Administrator 5.2 Records 5.3 Reliance 5.4 Indemnification SECTION 6 - MISCELLANEOUS MATTERS 6.1 Information Required 6.2 No Guaranty of Employment 6.3 Exclusive Plan 6.4 Sole Source for Payment of Benefits 6.5 Non-Alienation 6.6 No Vesting 6.7 Obligations to Withhold and Pay Taxes 6.8 Governing Law SECTION 7 - CLAIMS PROCEDURE 7.1 Claim for Benefits 7.2 Appeals SECTION 8 - ERISA RIGHTS 8.1 Participants' Rights 8.2 Fiduciary Duties 8.3 Enforcement of Rights SECTION 1 - GENERAL INFORMATION 1.1......Adoption and Purpose of Plan. The Employer hereby adopts this Non-Executive Separation Benefits Plan to provide certain separation benefits to Eligible Employees in accordance with the terms and conditions of the Plan. 1.2......Status of Plan. The Plan and this document are intended to comply with all applicable state and federal laws regarding severance pay plans, specifically Title I of ERISA. The Plan is intended to be a "welfare benefit plan," as defined in ERISA, and not a "pension benefit plan." The Plan does not provide any pension or retirement benefits of any nature to any person. 1.3......Summary Plan Description. The Plan Administrator is hereby authorized to use this document embodying the Plan, as from time to time amended, to satisfy all of the Plan's "summary plan description" requirements pursuant to ERISA. 1.4......Effective Date. The Plan is effective as of January 1, 1997. -------------- 1.5......Plan Year. For recordkeeping and reporting purposes, the Plan Year shall be the twelve-month period ending each December 31. SECTION 2 - DEFINITIONS 2.1......"Base Pay" means that portion which is considered to be base pay pursuant to the Employer's payroll practices of an employee's highest compensation rate paid during the twenty-four months (or total employment, if less) immediately preceding termination of the employee's employment due to a Covered Termination. The term Base Pay shall exclude all other types of compensation or remuneration to an employee, and shall exclude without limitation bonuses of any kind, overtime pay and shift differentials, contributions (other than employee salary-reduction or base hourly wage-reduction contributions) to any retirement or other employee benefit plans, commissions, profit sharing payments, incentive payments of any kind, special payments of any kind (including without limitation business expense reimbursements, tuition reimbursements and flexible spending account reimbursements) and contingent compensation of any kind. The Base Pay determined on a weekly basis of a salaried Eligible Employee shall be the weekly equivalent of the employee's highest annual salary rate received during the relevant employment period under this subsection. For part-time employees the relevant salary rate shall be the highest net rate received after adjusting the equivalent full-time rate pro rata based on the employee's highest percentage of full-time employment while the salary rate was in effect. The Base Pay determined on a weekly basis of an Eligible Employee who is paid hourly wages shall equal the applicable hourly rate times the employee's greatest number of regularly scheduled work-week hours during the relevant employment period under this subsection. 2.2......"Board" means the Employer's Board of Directors. 2.3......"Change in Control" A Change In Control of the Employer will occur upon: .........(a) The acquisition by any individual, entity or group (within the meaning of Sections 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50 percent or more of either (i) the then outstanding shares of the Employer's common stock (the "Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Employer entitled to vote generally in the election of the directors (the "Outstanding Employer Voting Securities"); provided, however, that the following acquisitions shall not constitute a Change in Control: (A) any acquisition directly from the Employer (excluding an acquisition by virtue of the exercise of a conversion privilege); (B) any acquisition by the Employer or by any corporation controlled by the Employer; (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Employer or any corporation controlled by the Employer; or (D) any acquisition by any corporation pursuant to a consolidation or merger, if, following such consolidation or merger, the conditions described in clauses (i) and (ii) of paragraph (c) of this definition are satisfied; or .........(b) Individuals who, as of the Effective Date, constitute the Board (the "Incumbent Board") ceasing for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the Effective Date whose election, or nomination for election by the Employer's shareholders, was approved by a vote or resolution of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board. .........(c) Adoption by the Board of a resolution approving an agreement of consolidation of the Employer with or merger of the Employer into another corporation or business entity in each case, unless, following such consolidation or merger, (i) more than 50 percent of, respectively, the then outstanding shares of common stock of the corporation resulting from such consolidation or merger and/or the combined voting power of the then outstanding voting securities of such corporation or business entity entitled to vote generally in the election of directors (or other persons having the general power to direct the affairs of such entity) is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Common Stock and Outstanding Employer Voting Securities immediately prior to such consolidation or merger in substantially the same proportions as their ownership, immediately prior to such consolidation or merger, of the Common Stock and/or Outstanding Employer Voting Securities, as the case may be and (ii) at least a majority of the members of the board of directors (or other group of persons having the general power to direct the affairs of the corporation or other business entity) resulting from such consolidation or merger were members of the Incumbent Board at the time of the execution of the initial agreement providing for such consolidation or merger; provided that any right which shall vest by reason of the action of the Board pursuant to this paragraph (c) shall be divested, with respect to any such right not already exercised, upon (A) the rejection of such agreement of consolidation or merger by the stockholders of the Employer or (B) its abandonment by either party thereto in accordance with its terms; or .........(d) Adoption by the requisite majority of the whole Board, or by the holders of such majority of stock of the Employer as is required by law or by the Certificate of Incorporation or By-Laws of the Employer as then in effect, of a resolution or consent authorizing (i) the liquidation or dissolution of the Employer or (ii) the sale or other disposition of all or substantially all of the assets of the Employer, other than to a corporation or other business entity with respect to which, following such sale or other disposition, (A) more than 50 percent of, respectively, the then outstanding shares of common stock of such corporation and/or the combined voting power of the outstanding voting securities of such corporation or other business entity entitled to vote generally in the election of directors (or other persons having the general power to direct the affairs of such entity) is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Common Stock and Outstanding Employer Voting Securities immediately prior to such sale or other disposition in substantially the same proportions as their ownership, immediately prior to such sale or other disposition, of the Common Stock and/or Outstanding Employer Voting securities, as the case may be, and (B) at least a majority of the members of the board of directors (or other group of persons having the general power to direct the affairs of such corporation or other entity) were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition of assets of the Employer; provided that any right which shall vest by reason of the action of the Board or the stockholders pursuant to this paragraph (d) shall be divested, with respect to any such right not already exercised, upon the abandonment by the Employer of such dissolution, or such sale or other disposition of assets, as the case may be. A Change in Control shall not occur upon the mere reincorporation of the Employer in another state. 2.4......"Covered Termination" means the involuntary termination by the Employer (or its successor following a Change in Control) of an Eligible Employee's employment (a) for a reason other than Good Cause or disability and (b) on or after the date on which a Change In Control occurs and on or before the second anniversary of such date. The term Covered Termination shall not include the transfer of the Eligible Employee's employment to the Employer's successor following a Change in Control. 2.5......"Effective Date" means the date set forth in Subsection 1.4 above. 2.6......"Eligible Employee" means an individual (a) who is not eligible for participation in the Executive Separation Benefits Plan and (b) who is classified by the Employer as a regular employee with a regularly scheduled work week of at least 30 hours as of the date of a Change in Control. No individual classified by the Employer as a temporary employee, a consultant, or an independent contractor shall be an Eligible Employee. 2.7......"Eligibility Conditions" means the conditions on eligibility for Separation Pay set forth in Subsection 3.2 below. 2.8......"Employer" means HPR Inc., a corporation organized under the laws of Delaware, and its subsidiaries. To the extent required to carry out the intent of this Plan, the term Employer shall also refer to the Employer's successor following a Change in Control. 2.9......"ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 2.10....."Good Cause" means an Eligible Employee's (a) willful and continuing failure substantially to perform duties assigned in good faith from time to time by the Employer (provided that such failure is not solely the result of (i) a disability established to the satisfaction of either the Employer's Chairman or a majority of its Board or (ii) a leave of absence either granted in writing by the Employer or guaranteed by applicable law or (iii) some other reason agreed to in advance by either the Employer's Chairman or a majority of its Board); or (b) willful conduct which is demonstrably and materially injurious to the Employer; or (c) conviction of a felony or a misdemeanor involving the theft, misappropriation or embezzlement of property of the Employer. No termination of an Eligible Employee's employment shall be for Good Cause unless: (a) notice of such Good Cause is provided to the employee by or on behalf of the Board; and (b) the employee is afforded an opportunity to be heard before the Board, represented by counsel; and (c) a majority of the Board then determines that Good Cause exists for the employee's termination. The required hearing need not be held before the Eligible Employee's termination occurs, but it must be within 30 days after the notice of asserted Good Cause is given to the employee, unless the employee agrees to a postponement. For purposes of this subsection, the term Board shall include the board of directors (or body with a similar function) of the Employer's successor following a Change in Control. 2.11....."Key Director or Contributor" means an Eligible Employee who is at any time designated as such by the Board after nomination by the Employer's Chairman (and provided that such designation has not been revoked by a majority of the Board prior to the date on which a Change in Control occurs). No Eligible Employee who has been designated as a Key Director or Contributor shall have such designation revoked during the period between the date on which a Change in Control occurs and the second anniversary of such date. Key Directors and Contributors may be listed on Appendix A to this Plan, which shall be amended as necessary to reflect decisions of the Board to add or delete Eligible Employees as Key Directors or Contributors, but only such Board action shall determine an employee's status as a Key Director or Contributor. Inclusion or omission of an employee's name on Appendix A shall not determine or affect the employee's status as a Key Director or Contributor. 2.12....."Participant" means an Eligible Employee who is entitled to receive separation benefits under the terms and conditions of the Plan. 2.13....."Plan" means the Employer's Non-Executive Separation Benefits Plan as set forth in this document and in any and all amendments and supplements to this document. 2.14....."Plan Administrator" means the Employer or such other person, entity or committee as may be appointed from time to time by the Employer to administer the Plan. 2.15....."Plan Year" means the annual twelve-month period set forth in Subsection 1.5 above. 2.16....."Separation Pay" means the continuation of a Participant's Base Pay (wages or salary) during the Separation Pay Period in accordance with the terms and conditions of the Plan. 2.17....."Separation Pay Period" means, for any Participant, the period equal to the number of weeks of Base Pay to be received by the Participant as Separation Pay; provided that a Participant's Separation Pay Period shall end earlier upon the Participant's failure to continue satisfying all Eligibility Conditions. 2.18....."Year of Service" means each twelve full months of an employee's continuous employment with the Employer, measured from the employee's first day of work for the Employer and each anniversary of such date during a continuous-employment period which ends due to a Covered Termination. Except as otherwise required by law, service during any leave of absence shall not be included in an employee's continuous service time for purposes of determining his or her Separation Pay or other separation benefits. However, an absence which does not extend beyond the length of a leave of absence either granted in writing by the Employer or required by law shall not break an employee's period of continuous service for purposes of determining his or her number of Years of Service. SECTION 3 - BENEFITS UNDER THE PLAN 3.1......Types of Benefits. An Eligible Employee whose employment with the Employer (or its successor following a Change in Control) is terminated solely due to a Covered Termination and with respect to whom all applicable Eligibility Conditions set forth in Subsection 3.2 below are met shall be entitled under this Plan to the following types of separation benefits: .01......Separation Pay as determined under Subsection 3.3 below; .02......Outplacement assistance as determined under Subsection 3.5 below; .03......Continued eligibility for certain employee benefit programs, as described in Subsection 3.6 below; .04......Certain stock option benefits for Participants who are Key Directors or Contributors, as described in Subsection 3.7 below. 3.2......Eligibility Conditions; No Mitigation. Notwithstanding anything else in this Plan, separation benefits shall be provided under this Plan only to an employee whose employment with the Employer (or its successor following a Change in Control) actually terminates. Furthermore, no employee shall be entitled to commence or continue receiving separation benefits under the Plan unless all of the following conditions are met and (to the extent applicable) continue to be met at all times: .01......The Eligible Employee must agree to and must sign and comply with a separation letter satisfactory to the Employer (or its successor following a Change in Control). The separation letter may include, without limitation: (a) a comprehensive release of all claims of any sort against the Employer (and its present and former parents and subsidiaries and its successor following a Change in Control (collectively, the "Employer Group")) and all agents, employees, advisors and other representatives of the Employer Group in a form reasonably satisfactory to the Employer (or its successor following a Change in Control) and (b) an acknowledgment that any then-existing agreements concerning confidentiality and/or non-competition binding on the Eligible Employee will remain in effect in accordance with their terms, but separation benefits under this Plan shall not otherwise be conditioned upon the employee's agreement not to compete with the Employer Group or to solicit any of the Employer Group's customers or employees during the Separation Pay Period. .02......If not already fully paid or terminated for any other reason, a Participant's Separation Pay and other benefits under this Plan shall cease as of the first date of any breach or other failure if the Participant breaches the terms of any separation letter entered into with the Employer pursuant to the requirements of clause .01 above or otherwise materially fails to satisfy any obligations of the Participant to the Employer under this Plan. .03......If not already fully paid or terminated for any other reason, a Participant's Separation Pay and other benefits under this Plan shall cease as of the first date of any misconduct if the Employer becomes aware of any instance of the Participant's misconduct that would have constituted Good Cause for termination of the Participant's employment, whether such misconduct occurs prior to or following the Participant's termination of employment with the Employer; but provided that the notice, hearing and Board majority decision requirements of Subsection 2.10 are met promptly after discovery of the misconduct. A Participant shall not be required to seek replacement employment as a condition of receiving separation benefits and separation benefits otherwise payable under this Plan shall not be reduced or terminated on account of any employment undertaken by a Participant during or after his or her Separation Pay Period. 3.3......Amount of Separation Pay. Effective for Covered Terminations made on or after the Effective Date while this Plan remains in effect and subject to Subsection 3.2, each Participant's Separation Pay shall equal the amount determined under the applicable one of the following clauses: .01......Non-Key Directors or Contributors: The Separation Pay of a Participant who was not designated as a Key Director or Contributor at the time of his or her Covered Termination shall equal (a) thirteen weeks of Base Pay plus (b) two weeks of Base Pay per Year of Service, up to a maximum benefit of twenty-six weeks of Base Pay. .02......Key Directors or Contributors: The Separation Pay of a Participant who was designated as a Key Director or Contributor at the time of his or her Covered Termination shall equal twenty-six weeks of Base Pay. 3.4......Payment of Benefits. Separation Pay shall be due and payable until paid in full at the rate of the Participant's Base Pay on each of the Participant's regular pay days during the Separation Pay Period. If a Participant has on file with the Employer a direct deposit authorization, such authorization will apply to all or a portion of the Participant's Separation Pay, as specified in the direct deposit authorization. To the extent not directly deposited, checks for Separation Pay will be mailed to a Participant's most recent address of which the Plan Administrator has received notice in writing from the Participant. Notwithstanding the foregoing, if the Plan Administrator receives written notice that the Participant is mentally incompetent, the Employer shall pay the balance of the Participant's Separation Pay only to the Participant's duly appointed legal representative. 3.5......Outplacement Assistance Benefits. Outplacement assistance shall be provided to each Participant as determined under the applicable one of the following clauses: .01......Non-Key Directors or Contributors: Participants who were not designated as Key Directors or Contributors at the time of their Covered Terminations shall receive group outplacement assistance . .02......Key Directors or Contributors: Each Participant who was designated as a Key Director or Contributor at the time of his or her Covered Termination shall receive individual outplacement assistance provided by a contractor selected by the Employer during his or her Separation Pay Period. 3.6......Continued Eligibility For Benefit Programs. Except as specifically provided below or in a benefit program document or as specifically required by law, no former employee of the Employer will be eligible after termination of employment with the Employer for any of the Employer's employee benefit programs. Subject to Subsection 3.2, a Participant will be eligible for continued participation in the Employer's employee benefit programs only as follows: .01......Medical and Dental Plans: Medical and dental plan coverage (as in effect and with the same employer contributions as were made immediately prior to the Participant's termination of employment) will remain in effect through the Separation Pay Period (or if sooner, until the Participant and his or her covered dependents cease to have coverage continuation rights pursuant to ERISA), but only to the extent that such plans allow for continuation of coverage. To the extent continuation coverage is not available, the Employer (or its successor following a Change in Control) will pay an amount of additional Separation Pay during this benefits continuation period equal to the amount paid for the discontinued benefits immediately prior to the Participant's Covered Termination. Payroll deductions for the Participant's share of premiums (at the rate in effect from time to time for active employees of the class of which the Participant was a member) shall continue to be deducted from the Participant's Separation Pay. Nothing in this Plan shall affect the Participant's right (if any) under ERISA to elect continuation coverage at the Participant's own expense in the Employer's medical and dental plans after the end of the benefits continuation period under this Subsection. .02......Vacation Pay: This Plan does not change the Employer's vacation policy, which is a non-accrual policy. No amount for unused vacation time will be added to any Participant's Separation Pay. Except as required by law, no Participant shall be eligible for any of the Employer's foregoing benefit programs at a time when any of the Eligibility Conditions specified in Subsection 3.2 above is not met. 3.7......Effect of Covered Terminations on Certain Stock Options. The following special provisions shall apply to all options to acquire shares of the Employer's capital stock held by a Participant who was designated as a Key Director or Contributor at the time of his or her Covered Termination, notwithstanding anything to the contrary in the grant of such options or any agreement with respect to such options: .01......Accelerated Vesting. Fifty percent of any such options which are not exercisable as of the date of the Participant's Covered Termination shall become immediately exercisable on such date or, if sooner, on the date that the Employer (or its successor following a Change in Control) gives notice that any such non-exercisable options will be terminated in accordance with their terms pursuant to a Change in Control without replacement by substitute options of reasonably equivalent value. .02......Grace Period to Exercise. Subject to clause .03 below, all exercisable options held by the Participant (including those which become exercisable pursuant to clause .01 above) on the date of his or her Covered Termination shall remain exercisable for a period of three months after such date. .03......Termination of Grace Period. Notwithstanding the grace period provided under clause .02 above, a Participant's options will terminate and cease to be exercisable pursuant to this Plan upon the earliest to occur of: .........(a) The date that such options would have expired if the Participant had remained employed by the Employer throughout the grace period; .........(b) The dissolution of the Employer, but any substitute options in the securities of another company shall not be affected by the Employer's dissolution; or .........(c) The date set in any notice given that the options will be terminated in accordance with their terms pursuant to a Change in Control, but any substitute options in the securities of another company shall not be affected by such termination and provided that such substitute options shall be provided under a good-faith reasonable conversion formula if the Employer (or its successor following a Change in Control) is reasonably able to do so. 3.8......Individual Arrangements. Nothing in the Plan shall preclude the Employer from entering into individual arrangements with employees for the payment of severance benefits in addition to the benefits provided under the Plan. No such individual arrangement shall entitle any person not a party thereto to any benefits of any nature. SECTION 4 - PLAN AMENDMENT AND TERMINATION 4.1......Employer's Right to Amend or Terminate Plan. The Employer may amend or terminate the Plan only as provided in the applicable one of the following clauses: .01......During the First Two Years. This Plan shall not be amended or terminated on or before the second anniversary of the Effective Date except as follows: .........(a) To Permit Pooling: The Plan may be terminated or amended as necessary pursuant to a majority vote of the Board taken consistently with an understanding that failure to so terminate or amend the Plan would prevent the Employer from entering into a then-proposed transaction to be accounted for as a pooling of interests with one or more other entities; provided that such understanding is based reasonably and in good faith upon information provided to the Board by any of the following: (i) the independent accountants of the Employer; (ii) the independent accountants of any other party to the proposed transaction; or (iii) the Securities and Exchange Commission. .........(b) To Comply with Law: The Plan may be amended as necessary pursuant to a majority vote of the Board taken consistently with a good-faith opinion of counsel to either the Employer or the Board that such amendment is required by applicable law; provided that the Employer shall thereupon use its best efforts to provide the Eligible Employees and the Participants with the value of the benefits intended under this Plan immediately prior to the effective date of the amendment. .02......After the Second Year. Following the second anniversary of the Effective Date, the Employer may amend or terminate this Plan as follows: .........(a) Prior to a Change in Control: Prior to the occurrence of a Change in Control and following the second anniversary of the then most recent Change in Control, the Employer may amend the Plan in any manner at any time and from time to time and may terminate the Plan at any time. .........(b) After a Change in Control: After the occurrence of a Change in Control and until the second anniversary of such Change in Control, this Plan shall not be terminated and shall be amended only in accordance with the provisions of clause .01(b) of this Subsection 4.1. 4.2......Method of Amendment or Termination. Any amendment or termination of the Plan shall be made by a written instrument signed by an officer of the Employer upon due authorization by the Board. SECTION 5 - PLAN ADMINISTRATION 5.1......Plan Administrator. The Plan Administrator shall be a "named fiduciary" for purposes of Section 402(a)(1) of ERISA, with authority to control and manage the operation and administration of the Plan, and shall be the agent for service of process against the Plan. The Plan Administrator shall have full power to administer the Plan in all matters, subject to applicable requirements of law. For this purpose, the Plan Administrator's power shall include, but shall not be limited to the following authority, in addition to all other powers provided by the Plan: .01......To make and enforce such rules and regulations as the Plan Administrator deems necessary or proper for the efficient administration of the Plan, including the establishment of any claims procedures that may be required by applicable provisions of law; .02......To appoint such agents, counsel, accountants, consultants and other persons to participate in the administration of the Plan as the Plan Administrator deems appropriate; .03......To allocate and delegate the responsibilities of the Plan Administrator and to designate other persons to carry out any of the Plan Administrator's responsibilities; provided that any such allocation, delegation or designation shall be in writing and in accordance with applicable requirements of law; .04......To sue or be sued on behalf of the Plan and to appoint additional agents for service of process; and .05......To the fullest extent permitted by law, the Plan Administrator shall have the exclusive responsibility and discretion to decide all matters relating to eligibility, coverage or benefits under the Plan and to interpret all provisions of the Plan and to determine all matters relating to the operation and administration of the Plan. Any determination by the Plan Administrator shall be final and binding, in the absence of clear and convincing evidence that the Plan Administrator acted arbitrarily and capriciously. 5.2......Records. The Plan Administrator shall maintain such records as it deems necessary to determine benefits and eligibility under the Plan and shall make available to each Participant such portions of the records under the Plan as pertain to the Participant, for examination at reasonable times during normal business hours. 5.3......Reliance. In administering the Plan, the Plan Administrator shall be entitled to the extent permitted by law to rely conclusively on all information (including without limitation all tables, valuations, certificates, opinions and reports) which is furnished by or in accordance with the instructions or recommendations of accountants, counsel, actuaries, consultants or other experts employed or engaged by the Plan Administrator. 5.4......Indemnification. Except as prohibited by law, any individual or individuals serving as Plan Administrator (or as a member of any board or committee that serves as Plan Administrator) shall be indemnified in full by the Employer against expenses, including attorneys' fees, and against the amount of any judgment, money decree, fine or penalty, or against the amount of any settlement deemed reasonable by the Board, necessarily paid or incurred by such individual or individuals in connection with or arising out of any claim made, or any civil or criminal action, suit or proceeding of whatever nature brought against such individual, or in which such individual is made a party, or in which such individual is otherwise involved, by reason of being or having been such Plan Administrator (or any member of any such board or committee). Such indemnification shall apply to any such individual even though at the time of such claim, action, suit or proceeding such individual is no longer Plan Administrator (or a member of any such board or committee). SECTION 6 - MISCELLANEOUS MATTERS 6.1......Information Required. Participants and Eligible Employees shall provide the Plan Administrator with such information and evidence, and shall sign such documents, as may be requested from time to time for the purpose of administering the Plan. 6.2......No Guaranty of Employment. This Plan shall not be a contract of employment between the Employer and any employee. Nothing contained in the Plan document nor any action taken in connection with the adoption, operation or maintenance of the Plan shall be construed as a contract of employment between the Employer and any employee or as consideration or inducement for the employment of any employee. Nothing in the Plan or in the adoption, operation or maintenance of the Plan shall give any employee the right to remain in the Employer's employ, nor shall it give the Employer the right to require any employee to remain in its employ, nor shall it interfere with the employee's right to terminate his or her employment at any time. Without limiting the generality of the foregoing, the Employer shall have the right to terminate or change the terms of employment of any employee, Eligible Employee or Participant at any time and for any reason whatsoever, with or without cause or notice. 6.3......Exclusive Plan. The Plan shall exclusively govern any claims for any type of severance benefits as a result of any termination of employment due to a Covered Termination on or after the Effective Date, while the Plan remains in effect. Any other severance plans of any nature maintained by the Employer shall be terminated as of such Effective Date with respect to any claims for severance benefits as a result of any Covered Termination occurring on or after such Effective Date. 6.4......Sole Source for Payment of Benefits. All benefits provided under the Plan shall be paid solely from the general assets of the Employer. Nothing in the Plan shall be construed to require the Employer or the Plan Administrator to maintain any fund or segregate any amount for the benefit of any Participant, and no Participant or any other person shall have any claim against, right to, or security or other interest in, any fund, account or asset of the Employer from which any payment under the Plan may be made. Neither the Employer nor any director, officer, employee or agent or other representative of the Employer shall be liable, otherwise than as expressly provided in the Plan, for payment of any benefits under the Plan or shall have any other liability to a Participant or to any other person. 6.5......Non-Alienation. No benefit payable under the Plan shall be subject in any manner whatsoever to alienation, sale, transfer, assignment, pledge, attachment or encumbrance of any kind, and each and every attempt to alienate, sell, transfer, assign, pledge, attach or encumber any such benefit under the Plan shall be void and of no force and effect whatsoever. 6.6......No Vesting. No person shall have any vested or non-forfeitable interest at any time in any payment or other benefit provided under the Plan. 6.7......Obligations to Withhold and Pay Taxes. Each Participant shall be liable for all tax obligations, if any, with respect to any sum received or other benefit provided pursuant to the Plan and for accurately reporting all such income and paying in full all such taxes to the appropriate federal, state and local authorities. The Employer shall have the right to deduct and withhold from any payment due under the Plan or from other amounts owed to the Participant all withholding taxes and other amounts required by law . 6.8......Governing Law. The Plan and the rights of all persons under the Plan shall be construed in accordance with and under applicable provisions of the laws of Massachusetts, except to the extent federal laws pre-empt such laws. SECTION 7 - CLAIMS PROCEDURE 7.1......Claim for Benefits. Eligible Employees do not need to file a claim for benefits under the Plan. If an individual believes that he or she is eligible for severance benefits even though no such benefits have been offered, or if an Eligible Employee or Participant believes that his or her benefits have been calculated incorrectly or terminated prematurely or that the Plan has been otherwise violated, the aggrieved individual may file a claim with the Plan Administrator. The Plan Administrator shall advise the claimant either that the claim is allowed, or that the claim is denied, or that the claimant needs to submit additional information. If the claim is denied, the Plan Administrator shall furnish the claimant written notice of such denial within a reasonable time after receipt of the claim, and such notice shall include: .01......the reason for the denial; .02......specific references to Plan provisions on which the denial is based; and .03......information as to how to submit the claim for review. If no notice of denial is furnished within 90 days after receipt of the claim by the Plan Administrator, the claim shall be deemed denied. 7.2......Appeals. If a claim filed under Subsection 7.1 is denied (or deemed denied), the claimant may file a request for review with the Plan Administrator. The claimant shall be entitled to examine pertinent documents, to submit issues and comments in writing and to request a hearing before the Plan Administrator. The appeal of any claim must be submitted in writing within 60 days after (a) the date that the claim was deemed denied or (b) the receipt of notice of denial by the claimant, whichever is applicable. The Plan Administrator shall send the claimant a written decision regarding the appeal. Normally, the decision will be made within 60 days after the appeal is filed, but if the Plan Administrator determines that additional time is reasonably necessary, up to 60 additional days may be taken to resolve the appeal. The decision of the Plan Administrator on such review shall be final. SECTION 8 - ERISA RIGHTS 8.1......Participants' Rights. ERISA guarantees each individual who is a Participant in the Plan certain rights and protections. In summary, ERISA provides that all Participants are entitled to: .01......Examine, without charge, at the Employer's benefits office and at other specified work sites, the Plan document, including copies of all documents filed in connection with the Plan with the U.S. Department of Labor, such as detailed annual reports (if required by applicable law). .02......Obtain copies of all Plan documents and other Plan information upon written request to the Employer's benefits office. The benefits office may make a reasonable charge for such copies. .03......Receive a summary of the Plan's financial report (if required by applicable law). The Employer's benefits office is required by law to furnish each Participant with a copy of each required summary annual report. 8.2......Fiduciary Duties. In addition to creating rights for Participants, ERISA imposes duties upon the people who are responsible for the operation of employee benefit plans. The people who operate the Plan, called "fiduciaries," have a duty to do so prudently and in the interest of Participants and beneficiaries. No one, including the Employer or any other person, may fire anyone or otherwise discriminate against anyone in any way to prevent that individual from obtaining a benefit or exercising rights under ERISA. If a claim for a benefit is denied in whole or in part, a written explanation of the reason for the denial must be given. Individuals also have the right to have the Plan Administrator review and reconsider a claim. 8.3......Enforcement of Rights. Under ERISA, there are steps that any person with rights under the Plan may take to enforce those rights. For example, if a Participant requests materials from the Employer's benefits office and does not receive them within 30 days, he or she may file suit in a federal court. In such case, the court may require the Employer to provide the materials and to pay up to $100 per day until the materials are provided, unless the materials were not provided because of reasons beyond the Employer's control. If a claim for benefits is denied or ignored in whole or in part, the aggrieved individual may file suit in a state or federal court. If the Plan fiduciaries misuse the Plan's money, or if the Plan discriminates against an individual for asserting rights under ERISA, the individual may seek assistance from the U.S. Department of Labor or may file suit in federal court. The court will decide who will pay court costs and legal fees. If the individual is successful, the court may order the person sued to pay those costs and fees. If the individual is unsuccessful, the court may order him or her to pay those costs and fees if, for example, it finds the claim to be frivolous. Questions about the Plan should be directed to the Plan Administrator. Questions about this statement or about an individual's rights under ERISA should be directed to the nearest Area Office of the U.S. Labor-Management Services Administration, Department of Labor. IN WITNESS WHEREOF, the Employer, by its duly authorized officer, has executed this document, under seal. HPR INC. By: /s/ Marcia J. Radosevich Marcia J. Radosevich Chairman, President and Chief Executive Officer Plan Administrator: Employer Identification No.: 04-2985551 HPR INC. Plan No.: ____ c/o Thomas L. Saltonstall 245 First Street Cambridge, MA 02142 Telephone: (617) 679-8000 APPENDIX A TO THE HPR INC. NON-EXECUTIVE SEPARATION BENEFITS PLAN DESIGNATION OF KEY DIRECTORS AND CONTRIBUTORS as of January 1, 1997 (except as noted) pursuant to Subsection 2.11 Employee Title Ann C. Brady Director, Finance Kristin Zaepfel Director, Staffing and Employee Relations George A. Abatjoglou Controller Scott J. Seero Director, Sales Operations Peter M. Henderson Director, Corporate Marketing Kathryn S. Grosberg Director, Credentialing Products James L. Merola Regional Support Manager Sydney D. Smith Regional Support Manager Skip Hart Director, Software Development Richard I. Lustig Director, Product Delivery Steven Akillian Manager, Software Development Jose M. Alea Manager, Software Development Todd A. Cestari Manager, Software Development Alfredo D. Zagaroli Project Leader Eugene S. Spector Manager, Documentation Stephen A. Insero Systems Architect Thomas J. Boyle Manager, Audit/Quick Starts Kevin G. Rhodes Project Leader Denise Goldberg Manager, Product Management Paul W. Brient* Director, New Product Development Cynthia T. Egdahl Strategic Planning Consultant David J. Rullo Director, Clinical Product Information Christopher F. O'Reilly Regional Sales Manager Joanne M. Konrath Regional Sales Manger Mark E. Biddle Regional Sales Manger Robert M. Cook** Regional Sales Manager Sean Tierney CCMS Sales Ian Z. Chuang, M.D.*** Director, Clinical Systems Integration * Through 4/13/97, contingent upon appointment as Vice President, Product Management. **Effective 4/1/97, contingent upon appointment to this position. *** Effective 4/1/97, contingent upon appointment to this position. EX-99 9 EXHIBIT 10.22 HPR INC. DIRECTOR TERMINATION BENEFITS PLAN Effective January 1, 1997 HPR INC. DIRECTOR TERMINATION BENEFITS PLAN TABLE OF CONTENTS SECTION 1 - GENERAL INFORMATION 1.1 Adoption and Purpose of Plan 1.2 Status of Plan 1.3 Effective Date 1.4 Plan Year SECTION 2 - DEFINITIONS 2.1 "Board" 2.2 "Change in Control" 2.3 "Company" 2.4 "Covered Termination" 2.5 "Effective Date" 2.6 "Eligible Director" 2.7 "ERISA" 2.8 "Participant" 2.9 "Plan" 2.10 "Plan Administrator" 2.11 "Plan Year" SECTION 3 - BENEFITS UNDER THE PLAN 3.1 Types of Benefits 3.2 Effect of Covered Terminations on Stock Options SECTION 4 - PLAN AMENDMENT AND TERMINATION 4.1 Company's Right to Amend or Terminate Plan 4.2 Method of Amendment or Termination SECTION 5 - PLAN ADMINISTRATION 5.1 Plan Administrator 5.2 Records 5.3 Reliance 5.4 Indemnification SECTION 6 - MISCELLANEOUS MATTERS 6.1 Information Required 6.2 No Guaranty of Board Membership 6.3 Exclusive Plan 6.4 Sole Source for Benefits 6.5 Non-Alienation 6.6 No Vesting 6.7 Obligations to Pay Taxes 6.8 Governing Law SECTION 1 - GENERAL INFORMATION 1.1......Adoption and Purpose of Plan. The Company hereby adopts this Director Termination Benefits Plan to provide certain separation benefits to Eligible Directors in accordance with the terms and conditions of the Plan. 1.2......Status of Plan. The Plan and this document do not provide any benefits that are subject to ERISA. 1.3......Effective Date. The Plan is effective as of January 1, 1997. 1.4......Plan Year. For recordkeeping and reporting purposes, the Plan Year shall be the twelve-month period ending each December 31. SECTION 2 - DEFINITIONS 2.1......"Board" means the Company's Board of Directors. 2.2......"Change in Control" A Change In Control of the Company will occur upon: .........(a) The acquisition by any individual, entity or group (within the meaning of Sections 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50 percent or more of either (i) the then outstanding shares of the Company's common stock (the "Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of the directors (the "Outstanding Company Voting Securities"); provided, however, that the following acquisitions shall not constitute a Change in Control: (A) any acquisition directly from the Company (excluding an acquisition by virtue of the exercise of a conversion privilege); (B) any acquisition by the Company or by any corporation controlled by the Company; (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; or (D) any acquisition by any corporation pursuant to a consolidation or merger, if, following such consolidation or merger, the conditions described in clauses (i) and (ii) of paragraph (c) of this definition are satisfied; or .........(b) Individuals who, as of the Effective Date, constitute the Board (the "Incumbent Board") ceasing for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the Effective Date whose election, or nomination for election by the Company's shareholders, was approved by a vote or resolution of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board. .........(c) Adoption by the Board of a resolution approving an agreement of consolidation of the Company with or merger of the Company into another corporation or business entity in each case, unless, following such consolidation or merger, (i) more than 50 percent of, respectively, the then outstanding shares of common stock of the corporation resulting from such consolidation or merger and/or the combined voting power of the then outstanding voting securities of such corporation or business entity entitled to vote generally in the election of directors (or other persons having the general power to direct the affairs of such entity) is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Common Stock and Outstanding Company Voting Securities immediately prior to such consolidation or merger in substantially the same proportions as their ownership, immediately prior to such consolidation or merger, of the Common Stock and/or Outstanding Company Voting Securities, as the case may be and (ii) at least a majority of the members of the board of directors (or other group of persons having the general power to direct the affairs of the corporation or other business entity) resulting from such consolidation or merger were members of the Incumbent Board at the time of the execution of the initial agreement providing for such consolidation or merger; provided that any right which shall vest by reason of the action of the Board pursuant to this paragraph (c) shall be divested, with respect to any such right not already exercised, upon (A) the rejection of such agreement of consolidation or merger by the stockholders of the Company or (B) its abandonment by either party thereto in accordance with its terms; or .........(d) Adoption by the requisite majority of the whole Board, or by the holders of such majority of stock of the Company as is required by law or by the Certificate of Incorporation or By-Laws of the Company as then in effect, of a resolution or consent authorizing (i) the liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation or other business entity with respect to which, following such sale or other disposition, (A) more than 50 percent of, respectively, the then outstanding shares of common stock of such corporation and/or the combined voting power of the outstanding voting securities of such corporation or other business entity entitled to vote generally in the election of directors (or other persons having the general power to direct the affairs of such entity) is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportions as their ownership, immediately prior to such sale or other disposition, of the Common Stock and/or Outstanding Company Voting securities, as the case may be, and (B) at least a majority of the members of the board of directors (or other group of persons having the general power to direct the affairs of such corporation or other entity) were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition of assets of the Company; provided that any right which shall vest by reason of the action of the Board or the stockholders pursuant to this paragraph (d) shall be divested, with respect to any such right not already exercised, upon the abandonment by the Company of such dissolution, or such sale or other disposition of assets, as the case may be. A Change in Control shall not occur upon the mere reincorporation of the Company in another state. 2.3......"Company" means HPR Inc., a corporation organized under the laws of Delaware, and its subsidiaries. To the extent required to carry out the intent of this Plan, the term Company shall also refer to the Company's successor following a Change in Control. 2.4......"Covered Termination" means (a) the resignation of an Eligible Director or (b) the involuntary termination by action of the Company's shareholders of the Eligible Director's status as a director, in either case as a result of a pending, simultaneous or completed Change in Control, but in the case of resignation by the Eligible Director, only if such resignation either (i) is requested or required by the acquiring or surviving entity as a condition to the Change in Control or (ii) occurs with the substantially simultaneous resignation of substantially all other Eligible Directors. 2.5......"Effective Date" means the date set forth in Subsection 1.3 above. 2.6......"Eligible Director" means an individual who is a non-employee member of the Incumbent Board (as defined in Subsection 2.2) as of the date on which a Change in Control occurs. 2.7......"ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 2.8......"Participant" means an Eligible Director who is entitled to receive termination benefits under the terms and conditions of the Plan. 2.9......"Plan" means the Company's Director Termination Plan as set forth in this document and in any and all amendments and supplements to this document. 2.10....."Plan Administrator" means the Company or such other person, entity or committee as may be appointed from time to time by the Company to administer the Plan. 2.11....."Plan Year" means the annual twelve-month period set forth in Subsection 1.4 above. SECTION 3 - BENEFITS UNDER THE PLAN 3.1......Type of Benefits. An Eligible Director whose status as a director is terminated solely due to a Covered Termination shall be entitled under this Plan to the termination benefits specified in Subsection 3.2 below. 3.2......Effect of Covered Terminations on Stock Options. The following special provisions shall apply to all options to acquire shares of the Company's capital stock held by a Participant at the time of his or her Covered Termination, notwithstanding anything to the contrary in the grant of such options or any agreement with respect to such options: .01......Accelerated Vesting. One-hundred percent of any such options which are not exercisable as of the date of the Participant's Covered Termination shall become immediately exercisable on such date or, if sooner, on the date that the Company (or its successor following a Change in Control) gives notice that any non-exercisable options will be terminated in accordance with their terms pursuant to a Change in Control without replacement by substitute options of reasonably equivalent value. .02......Grace Period to Exercise. Subject to clause .03 below, all exercisable options held by the Participant (including those which become exercisable pursuant to clause .01 above) on the date of his or her Covered Termination shall remain exercisable for a period of twelve months after such date (and for any longer period that the options would have remained exercisable in accordance with their terms). .03......Termination of Grace Period. Notwithstanding the grace period provided under clause .02 above, a Participant's options will terminate and cease to be exercisable pursuant to this Plan upon the earliest to occur of: .........(a) The date that such options would have expired if the Participant had retained his or her status as a director throughout the grace period; .........(b) The dissolution of the Company, but any substitute options in the securities of another company shall not be affected by the Company's dissolution; or .........(c) The date set in any notice given that the options will be terminated in accordance with their terms pursuant to a Change in Control, but any substitute options in the securities of another company shall not be affected by such termination and provided that such substitute options shall be provided under a good-faith reasonable conversion formula if the Company (or its successor following a Change in Control) is reasonably able to do so. SECTION 4 - PLAN AMENDMENT AND TERMINATION 4.1......Company's Right to Amend or Terminate Plan. The Company may amend or terminate the Plan only as provided in the applicable one of the following clauses: .01......During the First Two Years. This Plan shall not be amended or terminated on or before the second anniversary of the Effective Date except as follows: .........(a) To Permit Pooling: The Plan may be terminated or amended as necessary pursuant to a majority vote of the Board taken consistently with an understanding that failure to so terminate or amend the Plan would prevent the Company from entering into a then-proposed transaction to be accounted for as a pooling of interests with one or more other entities; provided that such understanding is based reasonably and in good faith upon information provided to the Board by any of the following: (i) the independent accountants of the Company; (ii) the independent accountants of any other party to the proposed transaction; or (iii) the Securities and Exchange Commission. .........(b) To Comply with Law: The Plan may be amended as necessary pursuant to a majority vote of the Board taken consistently with a good faith opinion of counsel to either the Company or the Board that such amendment is required by applicable law; provided that the Company shall thereupon use its best efforts to provide the Eligible Directors and the Participants with the value of the benefits intended under this Plan immediately prior to the effective date of the amendment. .02......After the Second Year. Following the second anniversary of the Effective Date, the Company may amend or terminate this Plan as follows: .........(a) Prior to a Change in Control: Prior to the occurrence of a Change in Control and following the second anniversary of the then most recent Change in Control, the Company may amend the Plan in any manner at any time and from time to time and may terminate the Plan at any time. .........(b) After a Change in Control: After the occurrence of a Change in Control and until the second anniversary of such Change in Control, this Plan shall not be terminated and shall be amended only in accordance with the provisions of clause .01(b) of this Subsection 4.1. 4.2......Method of Amendment or Termination. Any amendment or termination of the Plan shall be made by a written instrument signed by an officer of the Company upon due authorization by the Board. SECTION 5 - PLAN ADMINISTRATION 5.1......Plan Administrator. The Plan Administrator have the authority to control and manage the operation and administration of the Plan, and shall be the agent for service of process against the Plan. The Plan Administrator shall have full power to administer the Plan in all matters, subject to applicable requirements of law. For this purpose, the Plan Administrator's power shall include, but shall not be limited to the following authority, in addition to all other powers provided by the Plan: .01......To make and enforce such rules and regulations as the Plan Administrator deems necessary or proper for the efficient administration of the Plan, including the establishment of any claims procedures that may be required by applicable provisions of law; .02......To appoint such agents, counsel, accountants, consultants and other persons to participate in the administration of the Plan as the Plan Administrator deems appropriate; .03......To allocate and delegate the responsibilities of the Plan Administrator and to designate other persons to carry out any of the Plan Administrator's responsibilities; provided that any such allocation, delegation or designation shall be in writing and in accordance with applicable requirements of law; .04......To sue or be sued on behalf of the Plan and to appoint additional agents for service of process; and .05......To the fullest extent permitted by law, the Plan Administrator shall have the exclusive responsibility and discretion to decide all matters relating to eligibility, coverage or benefits under the Plan and to interpret all provisions of the Plan and to determine all matters relating to the operation and administration of the Plan. Any determination by the Plan Administrator shall be final and binding, in the absence of clear and convincing evidence that the Plan Administrator acted arbitrarily and capriciously. 5.2......Records. The Plan Administrator shall maintain such records as it deems necessary to determine benefits and eligibility under the Plan and shall make available to each Participant such portions of the records under the Plan as pertain to the Participant, for examination at reasonable times during normal business hours. 5.3......Reliance. In administering the Plan, the Plan Administrator shall be entitled to the extent permitted by law to rely conclusively on all information (including without limitation all tables, valuations, certificates, opinions and reports) which is furnished by or in accordance with the instructions or recommendations of accountants, counsel, actuaries, consultants or other experts employed or engaged by the Plan Administrator. 5.4......Indemnification. Except as prohibited by law, any individual or individuals serving as Plan Administrator (or as a member of any board or committee that serves as Plan Administrator) shall be indemnified in full by the Company against expenses, including attorneys' fees, and against the amount of any judgment, money decree, fine or penalty, or against the amount of any settlement deemed reasonable by the Board, necessarily paid or incurred by such individual or individuals in connection with or arising out of any claim made, or any civil or criminal action, suit or proceeding of whatever nature brought against such individual, or in which such individual is made a party, or in which such individual is otherwise involved, by reason of being or having been such Plan Administrator (or any member of any such board or committee). Such indemnification shall apply to any such individual even though at the time of such claim, action, suit or proceeding such individual is no longer Plan Administrator (or a member of any such board or committee). SECTION 6 - MISCELLANEOUS MATTERS 6.1......Information Required. Participants and Eligible Directors shall provide the Plan Administrator with such information and evidence, and shall sign such documents, as may be requested from time to time for the purpose of administering the Plan. 6.2......No Guaranty of Board Membership. This Plan shall not be a contract for Board membership between the Company and any director. 6.3......Exclusive Plan. The Plan shall exclusively govern any claims for any type of termination benefits as a result of any termination of Board membership due to a Covered Termination on or after the Effective Date, while the Plan remains in effect. 6.4......Sole Source for Benefits. All benefits provided under the Plan shall be provided solely from the general assets of the Company. Neither the Company nor any director, officer, employee or agent or other representative of the Company shall be liable, otherwise than as expressly provided in the Plan, for the provision of any benefits under the Plan or shall have any other liability to a Participant or to any other person. 6.5......Non-Alienation. No benefit under the Plan shall be subject in any manner whatsoever to alienation, sale, transfer, assignment, pledge, attachment or encumbrance of any kind, and each and every attempt to alienate, sell, transfer, assign, pledge, attach or encumber any such benefit under the Plan shall be void and of no force and effect whatsoever. 6.6......No Vesting. No person shall have any vested or non-forfeitable interest at any time in any benefit provided under the Plan. 6.7......Obligations to Pay Taxes. Each Participant shall be liable for all tax obligations, if any, with respect to any benefit provided pursuant to the Plan and for accurately reporting all such income and paying in full all such taxes to the appropriate federal, state and local authorities. 6.8......Governing Law. The Plan and the rights of all persons under the Plan shall be construed in accordance with and under applicable provisions of the laws of Massachusetts, except to the extent federal laws pre-empt such laws. IN WITNESS WHEREOF, the Company, by its duly authorized officer, has executed this document, under seal. HPR INC. By: /s/ Marcia J. Radosevich Marcia J. Radosevich Chairman, President and Chief Executive Officer Exhibit 10.23 Agreement and Second Amendment to PRODUCT LICENSE AGREEMENT THIS AGREEMENT, dated as of the 12th day of December, 1996: (i) further amends the certain Product License Agreement, dated as of the 17th day of November 1994, as amended by the First Amendment to Product License Agreement, dated as of the 28th day of June, 1995, by and between HPR Inc. (formerly known as Health Payment Review, Inc.), a Delaware corporation ("HPR"), having an address at 245 First Street, Cambridge, Massachusetts 02142, and Symmetry Health Data Systems, Inc., an Arizona corporation ("Symmetry"), having an address at 9605 South 48th Street, Suite 2015, Phoenix, Arizona 85044 (such Product License Agreement, as amended by such First Amendment, to be herein referred to as the "Product License Agreement"); and (ii) provides for certain actions to be taken by HPR following the date of this Agreement. Any capitalized term not otherwise defined herein shall have the meaning set forth in the Product License Agreement. In consideration of the obligations herein set forth and for other good and valuable consideration, the sufficiency and receipt of which are hereby acknowledged, Symmetry and HPR hereby agree as follows: 1. Effective on the date of this Agreement, Section 3.6 of the Product License Agreement shall be amended to read in its entirety as follows: 3.6 Usage Data. (a) HPR will make its best efforts to cause all Prospective Licensees (as hereinafter defined) to execute the HPR License Agreement in the form attached as Exhibit B hereto; provided, that such requirement of best efforts shall be deemed satisfied as to any Prospective Licensee if HPR, directly or through a third party reseller, presents for execution the HPR License Agreement containing the language of Exhibit 1 to said Exhibit B, with any changes therein approved in writing by HPR and Symmetry after the date of this Agreement, whether or not such Prospective Licensee executes the same; provided, further, that any purported sublicense of ETG as part of the HPR Product shall be of no force or effect and the requirement of best efforts shall not be deemed satisfied as to any such sublicense unless the executed HPR License Agreement contains at least the following provisions (with any changes therein as are necessary to conform cross references or defined terminology or which Symmetry shall have approved in writing with respect to any specific HPR License Agreement): Licensee shall retain full right and title to its claims and the data contained therein (exclusive of claims and encounter data in a format containing ETG identifiers, which claims and encounter data are subject to the obligations of Licensee as set forth in the following two paragraphs). Except as otherwise required by law or by regulatory agencies or other entities with legal authority to examine the Usage Data, Licensee further agrees not to disclose, permit to be disclosed or otherwise resell or transfer, with or without consideration, all or any portion of the Usage Data to any third party, except that Licensee may disclose the Usage Data to its consultants or agents for the purpose of assisting or advising Licensee; provided, however, that Licensee's consultant or agent shall execute a nondisclosure agreement, in a form consistent with Section 7 of this Agreement, which will prohibit such consultant or agent from using such Usage Data (other than to assist or advise Licensee) and from disclosing such information to any third party. Such nondisclosure agreement must provide that HPR and Symmetry shall be third party beneficiaries of the rights of Licensee thereunder. Licensee and HPR further agree that, in addition to the other rights granted to Symmetry herein, Symmetry shall also be a third party beneficiary of the rights of HPR with respect to the provisions of this Agreement as they relate to the Third Party Software, the Proprietary Information of HPR and the Usage Data. With respect to any period during which Licensee uses the Software, Symmetry shall be expressly entitled to enforce its rights pursuant to the provisions of the Software License Agreement as they relate to the Third Party Software and the Usage Data, regardless of any alleged or actual breach or default hereunder by HPR, claim of offset by Licensee or any expiration or termination of this Agreement. All provisions contained in this Section [7.2] shall survive the termination of this Agreement. As used herein, the term "Prospective Licensee" shall mean a person or entity to which HPR has made, on or after September 16, 1996 and directly or through a third party reseller, a proposal for licensing from HPR the HPR Product. (b) HPR will make its best efforts to cause licensees of the HPR Product to comply with their obligations, if any, pursuant to the applicable HPR License Agreement, to furnish HPR with Usage Data (as defined in the HPR License Agreement) which may be delivered to Symmetry for the purposes specified in Exhibit 1 to Exhibit B to this Agreement. Without limiting the generality of the foregoing, HPR shall request each licensee with an obligation to furnish Usage Data to deliver the same to HPR no less often than annually, the first such request to be made no later than 15 months after the execution of the applicable HPR License Agreement (or February 28, 1997, if later). HPR shall report to Symmetry no less often than semiannually the status of such requests and deliveries, including any delays anticipated by HPR, the reasons therefor, and, if appropriate, the steps being taken to assist the licensee to make the delivery. The sole remedy of Symmetry in the event of a breach or alleged breach by HPR of its obligations contained in the preceding three sentences shall be to pursue its remedies directly against the licensee or licensees in question, as provided in the applicable HPR License Agreement. To the extent provided in the applicable HPR License Agreement, within 60 days of receipt of such Usage Data from such a licensee, HPR will deliver a copy of the same to Symmetry. (c) Symmetry shall have the right to utilize the Usage Data for the purposes and in the form specified in the applicable HPR License Agreement. HPR shall have the right to utilize the Usage Data for the purpose of creating statistical norms only for use with or licensing to HPR customers which licensed the HPR Product; provided, however, that HPR agrees that it will not disclose, permit to be disclosed or otherwise resell or transfer such Usage Data to any person or entity other than HPR customers that have licensed the HPR Product and other than to Symmetry as provided in the applicable HPR License Agreement. 2. Effective on the date of this Agreement, Exhibit B to the Product License Agreement shall be amended to read in the form of Schedule A hereto (including the new language of Section 7.2 and an Exhibit which contains the same language as Exhibit 1 to Schedule A). 3. During the 45 day period commencing with the business day after the date of this Agreement (the "45-day period"), HPR shall undertake to obtain from the Episode Profiler licensees listed in Schedule B to this Agreement (the "Schedule B Licensees") a written agreement (a "Usage Data Agreement") substantially in the form of Schedule C to this Agreement, it being agreed that any Usage Data Agreement will be deemed substantially in such form notwithstanding a modification thereof to permit submission of zip codes, contained in the Usage Data to be delivered thereunder, to be at the three-digit level. HPR shall keep Symmetry informed in writing, no less often than weekly during the 45-day period, of HPR's progress in obtaining such Usage Data Agreements from the Schedule B Licensees. If, prior to the expiration of the 45-day period, HPR fails to obtain Usage Data Agreements from Schedule B Licensees with covered lives, as shown on Schedule B, of at least 2,335,973 in the aggregate (the "50% test") or to present copies thereof to Symmetry within 5 business days following the expiration of the 45-day period (the "5-day period"), then HPR shall, within 15 business days thereafter, pay the sum of $40,000 to Symmetry. Whether or not HPR obtains and furnishes Usage Data Agreements meeting the 50% test (but provided that HPR makes the foregoing $40,000 payment if required by the immediately preceding sentence), Symmetry shall be deemed to have waived any and all claims for alleged breaches by HPR of the Product License Agreement based on acts or omissions of HPR of the type described in letters from Symmetry's counsel to HPR dated August 16, 1996, August 23, 1996 and August 30, 1996 and occurring or allegedly occurring prior to the expiration of the 45-day period. HPR reasonably believes (but has not independently verified) that the aggregate number of covered lives shown on Schedule B is not overstated. 4. During the 45-day period, HPR shall also undertake to obtain a Usage Data Agreement from Medical Service Association of Pennsylvania t/d/b/a Pennsylvania Blue Shield ("Pennsylvania Blue Shield"). If within the applicable 45-day or 5-day periods HPR has failed to obtain and deliver to Symmetry a Usage Data Agreement from Pennsylvania Blue Shield, then the royalties to Symmetry with respect to the HPR License with Pennsylvania Blue Shield, and any renewals thereof, shall be increased, with respect to HPR License fees received by HPR from Pennsylvania Blue Shield after the date of this Agreement, to 175% of the royalties otherwise determined in accordance with paragraphs 1, 2 and 3 of Exhibit G to the Product License Agreement. 5. With respect to any licensee of the HPR Product (i) which first becomes such a licensee after September 15, 1996 and (ii) which does not execute an HPR License Agreement containing a requirement, substantially as provided in Section 7.2 and Exhibit 1 to Schedule A to this Agreement (it being agreed that any such Exhibit 1 will be deemed substantially as so provided notwithstanding a modification thereof to permit the submission of zip codes, contained in the Usage Data to be delivered thereunder, to be at the three-digit level), that the licensee provide Usage Data to HPR, which in turn may provide it to Symmetry for the purposes specified in Exhibit 1 to Schedule A, the royalties payable to Symmetry with respect to such license shall be 150% of the royalties otherwise computed in accordance with paragraphs 1, 2 and 3 of Exhibit G to the Product License Agreement. 6. Effective on the date of this Agreement, subparagraph (a) of Section 4.1 of the Product License Agreement shall be amended to read as follows: .........(a) Use, copy, manufacture, market and distribute ETG, the Documentation and all Enhancements thereto, as incorporated in the HPR Product; provided, however, that such license does not extend to the marketing or distribution of ETG, the Documentation and all Enhancements thereto to manufacturers of pharmaceutical products or pharmacy benefit managers (e.g., Merck/Medco, PCS, etc.); provided, further, that, as soon as practicable, HPR and Symmetry will negotiate in good faith the terms and conditions of an agreement whereby HPR may market to such manufacturers and managers the HPR Product in conjunction with one or more of the products to be developed by Symmetry containing either or both (i) Usage Data obtained by HPR from licensees of the HPR Product, and delivered by HPR to Symmetry, pursuant to HPR License Agreements or (ii) similar usage data obtained by Symmetry from other sources. 7. Effective on the date of this Agreement, the first sentence of Section 4.2 of the Product License Agreement shall be amended to read as follows: Symmetry agrees, after the date of this Agreement, not to enter into any agreement to license ETG or any Enhancements thereof, directly, through a third party reseller, or knowingly through any other indirect means, to any of the competitors of HPR listed on Exhibit F (the "Competitors"). Notwithstanding the foregoing, if the proposed licensee is a legal entity separate from the Competitor, Symmetry may license ETG or any Enhancements thereof to such separate entity (the "Affiliate"), provided that the license Agreement between Symmetry and the Affiliate shall prohibit the Affiliate from marketing and/or licensing ETG or any Enhancements thereof to or as the representative of the Competitor and shall prohibit the disclosure of proprietary information of Symmetry to the Competitor. Such license agreement shall further require the Affiliate to certify annually that the Affiliate is in compliance with the foregoing restrictions set forth in this Section 4.2 and that the failure of the Affiliate to provide such certification shall be deemed grounds for termination of the license agreement by Symmetry; and Symmetry will provide copies of such certifications to HPR promptly upon HPR's written request therefor. Further notwithstanding the foregoing, the restrictions set forth in this Section 4.2 shall not be deemed to prohibit the Affiliate from marketing and/or licensing ETG or any Enhancements thereof for such Affiliate's own account or to or for any person or entity other than the Competitors, nor shall it be deemed a violation of such restrictions in the event of a merger or other combination including such Affiliate and one or more of the Competitors; provided, however, that the Affiliate or some entity other than one of the Competitors is the entity surviving such merger or other combination. Symmetry hereby represents that, to Symmetry's actual knowledge (but without independent investigation), it has not, prior to the date of this Agreement, licensed or entered into any agreement to license ETG or any Enhancements thereof to any Competitor or any entity which has acquired, or agreed to acquire, by merger or otherwise, all or substantially all of the capital stock or assets of any Competitor. 8. Effective on the date of this Agreement, Section 6.1 of the Product License Agreement shall be amended to read as follows: 6.1 Symmetry shall prepare and distribute to HPR an Enhancement within six (6) months after each annual release of new ICD9 (i.e., International Classification of Diseases, 9th Edition) codes, new CPT (i.e., Current Procedural Terminology) codes, or updates of any other codes with respect to which ETG functions in the future. From time to time, Symmetry will evaluate HPR's requests for functional Enhancements to ETG which are in other competitive claims-based episode grouping products in the marketplace and, as reasonably practicable within legal, financial, time, technical and other functional constraints, provide such Enhancements to HPR in a timely manner; provided, that the only remedy which HPR shall have with respect to any failure of Symmetry to provide such Enhancements to HPR in a timely manner following HPR's request shall be that HPR may develop or acquire such functionality (Section 4.3 notwithstanding). Such Enhancements by Symmetry pursuant to this Section 6.1 shall be furnished for inclusion in the HPR Product at no additional cost to HPR and shall become part of ETG and the Documentation for purposes of this Agreement. 9. Effective on the date of this Agreement, the list of companies contained in Exhibit F of the Product License Agreement shall be amended to read as follows: .........GMIS, Inc. .........Electronic Data Systems .........Codman Research 10. Effective on the date of this Agreement, the first sentence of paragraph 1 of Exhibit G to the Product License Agreement shall be amended to delete the words "other than PARS Licensees" at the end thereof. 11. Effective on the date of this Agreement, paragraph 4 of Exhibit G to the Product License Agreement shall be amended to read as follows: Should HPR, through one of its joint marketing agreements with a third party software vendor, including any of those organizations listed on Exhibit F to this Agreement, license an HPR Product to a third party, then HPR will pay a royalty to Symmetry in accordance with the formula in 1 through 3, above, applicable to direct customers of HPR. 12. Effective on the date of this Agreement, Section 5.4 of the Product License Agreement shall be deleted and paragraph 5 of Exhibit G to the Product License Agreement shall be amended to read as follows: 5. HPR will also pay to Symmetry $160,000 per year for the three year period commencing November 17, 1996. Such payments will be due on each November 17 during the applicable period, whether or not this Agreement shall have terminated earlier, the first such payment to be made on or before January 11, 1996. If HPR is able to license the HPR Product to one or more PARS licensees listed on Exhibit E to this Agreement, HPR shall pay to Symmetry annual royalties at the times and in the amounts computed accordance with paragraphs 1, 2 and 3 of this Exhibit G. 13. Except as amended hereby, the Product License Agreement shall remain in full force and effect in accordance with its terms. The provisions of Sections 14.9 and 14.12 of the Product License Agreement shall apply to this Agreement, whether or not the portion or portions of this Agreement in question purport to amend the Product License Agreement. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective duly authorized representatives as set forth below. SYMMETRY HEALTH DATA HPR INC. SYSTEMS, INC. By: /s/ Dennis K. Dang By: /s/ Brian D. Cahill Dennis K. Dang Brian D. Cahill President Vice President, Corporate Finance and Planning SCHEDULE A Standard HPR Software License Agreement [to be inserted] SCHEDULE A (continued) RIDER 7.2 TO HPR INC. SOFTWARE LICENSE AGREEMENT 7.2 Licensee understands and acknowledges that a portion (the "Third Party Software") of the Software has been licensed to HPR from Symmetry Health Data Systems, Inc. ("Symmetry"), a third party proprietor. Licensee agrees to deliver to HPR, upon its request but not more often than semiannually, its claims and encounter data with ETG identifiers resulting from the use by Licensee of the Software, including the Third Party Software (the "Usage Data") for use by HPR in evaluating and improving the Software and for any other uses specified in the Exhibit. Notwithstanding the foregoing sentence or any other provision of this Agreement: Licensee shall retain full right and title to its claims and the data contained therein (exclusive of claims and encounter data in a format containing ETG identifiers, which claims and encounter data are subject to the obligations of Licensee as set forth in the following two paragraphs). Except as otherwise required by law or by regulatory agencies or other entities with legal authority to examine the Usage Data, Licensee further agrees not to disclose, permit to be disclosed or otherwise resell or transfer, with or without consideration, all or any portion of the Usage Data to any third party, except that Licensee may disclose the Usage Data to its consultants or agents for the purpose of assisting or advising Licensee; provided, however, that Licensee's consultant or agent shall execute a nondisclosure agreement, in a form consistent with Section 7 of this Agreement, which will prohibit such consultant or agent from using such Usage Data (other than to assist or advise Licensee) and from disclosing such information to any third party. Such nondisclosure agreement must provide that HPR and Symmetry shall be third party beneficiaries of the rights of Licensee thereunder. Licensee and HPR further agree that, in addition to the other rights granted to Symmetry herein, Symmetry shall also be a third party beneficiary of the rights of HPR with respect to the provisions of this Agreement as they relate to the Third Party Software, the Proprietary Information of HPR and the Usage Data. With respect to any period during which Licensee uses the Software, Symmetry shall be expressly entitled to enforce its rights pursuant to the provisions of the Software License Agreement as they relate to the Third Party Software and the Usage Data, regardless of any alleged or actual breach or default hereunder by HPR, claim of offset by Licensee or any expiration or termination of this Agreement. All provisions contained in this Section 7.2 shall survive the termination of this Agreement. EXHIBIT 1 TO HPR INC. SOFTWARE LICENSE AGREEMENT Section 7 of the HPR software license agreement to which this Exhibit 1 is attached (the "Software License Agreement") requires Licensee to deliver to HPR, no less often than the intervals specified, its Usage Data. Licensee authorizes HPR to deliver a copy of the Usage Data to Symmetry within 60 days following HPR's receipt thereof. The deliveries of Usage Data to HPR and to Symmetry shall be subject to the following terms and conditions: (i) such Usage Data will be in the form of so-called "flat" or similar files of Licensee, but may, at the option of Licensee, be subject to a scrambling algorithm consistently applied within each data submission and across all data submissions for Licensee to preserve the confidentiality of identification of the patients and providers contained therein; and, to the extent requested by Licensee, HPR will provide reasonable amounts of assistance in effecting the scrambling; (ii) notwithstanding the provisions of Section 7 of the Software License Agreement, Symmetry shall have the right, in Symmetry's sole and absolute discretion, to sell, assign, transfer or convey, with or without consideration, the Usage Data received by Symmetry pursuant to the Software License Agreement, or any data, service or products incorporating or derived in whole or in part from such Usage Data, to any one or more third parties; and (iii) Licensee shall retain full right and title to its claims and the data contained therein (exclusive of claims and encounter data in a format containing ETG identifiers, which claims and encounter data are subject to the obligations of Licensee to deliver Usage Data to HPR, to HPR's rights to provide such Usage Data to Symmetry and to the obligations of Licensee as set forth in Section 7.2 of the Software License Agreement). SCHEDULE B USAGE DATA CLIENT LIST
Licensee City/State Covered Lives Aurora Health Care Milwaukee, WI 18,000 BCBS Arkansas Little Rock, AR 500,000 BCBS North Dakota Fargo, ND 360,000 BCBS Tennessee Chattanooga, TN 1,000,000 Berkshire Health Plan Wyomissing, PA 60,000 Carolina Atlantic Charleston, SC 5,000 ChoiceCare Health Plans Cincinnati, OH 290,000 Consumer Health Network Piscataway, NJ 115,000 Cooperative Benefit Administrators Lincoln, NE 61,300 Empire BCBS Albany, NY 250,000 First Florida Macedonia, OH 10,000 Health Care Plan Buffalo, NY 130,000 Health Services Corp. of Central NY Baldwinsville, NY 97,755 Healthcare Oklahoma Oklahoma City, OK 7,000 Healthplan of the Redwoods Santa Rosa, CA 100,000 Holy Cross Notre Dame, IN 25,000 Huron Valley Ann Arbor, MI 85,000 In Health/Nationwide Worthington, OH 40,000 Independent Health Buffalo, NY 380,000 John Muir Medical Walnut Creek, CA 30,000 Key Benefit Administrators Indianapolis, IN 10,000 M-Care Ann Arbor, MI 100,000 MD Health Plan North Haven, CT 200,000 Memorial Sisters of Charity Houston, TX 25,000 Memphis Managed Care Memphis, TN 33,000 National Health Plans Modesto, CA 55,000 NCRIC PO Washington, DC 10,000 Oregon Dental Service Portland, OR 26,000 Pacific Source Health Care Eugene, OR 51,000 PHP Companies Knoxville, TN 100,000 Rockford Health Plans Rockford, IL 44,000 Sagamore Carmel, IN 50,000 SelectCare Troy, MI 218,890 Sierra Health Care Las Vegas, NV 150,000 Welbourn HMO Evansville, IN 35,000 TOTAL PLAN MEMBERSHIP 4,671,945 50% THRESHOLD 2,335,973
SCHEDULE C USAGE DATA AGREEMENT Amendment to HPR Software License Agreement HPR Inc. and the undersigned Licensee are parties to a Software License Agreement covering one or more of the software products of HPR and agree to amend Section 7.2 of the Software License Agreement to read per section I below and to amend the Exhibit to the Software License Agreement to add the language found in section II below (such amendments to be in substitution for any inconsistent provisions of the Software License Agreement): I. 7.2 Licensee understands and acknowledges that a portion (the "Third Party Software") of the Software has been licensed to HPR from Symmetry Health Data Systems, Inc. ("Symmetry"), a third party proprietor. Licensee agrees to deliver to HPR, upon its request but not more often than semiannually, its claims and encounter data with ETG identifiers resulting from the use by Licensee of the Software, including the Third Party Software (the "Usage Data") for use by HPR in evaluating and improving the Software and for any other uses specified in the Exhibit. Notwithstanding the foregoing sentence or any other provision of this Agreement: Licensee shall retain full right and title to its claims and the data contained therein (exclusive of claims and encounter data in a format containing ETG identifiers, which claims and encounter data are subject to the obligations of Licensee as set forth in the following two paragraphs). Except as otherwise required by law or by regulatory agencies or other entities with legal authority to examine the Usage Data, Licensee further agrees not to disclose, permit to be disclosed or otherwise resell or transfer, with or without consideration, all or any portion of the Usage Data to any third party, except that Licensee may disclose the Usage Data to its consultants or agents for the purpose of assisting or advising Licensee; provided, however, that Licensee's consultant or agent shall execute a nondisclosure agreement, in a form consistent with Section 7 of this Agreement, which will prohibit such consultant or agent from using such Usage Data (other than to assist or advise Licensee) and from disclosing such information to any third party. Such nondisclosure agreement must provide that HPR and Symmetry shall be third party beneficiaries of the rights of Licensee thereunder. Licensee and HPR further agree that, in addition to the other rights granted to Symmetry herein, Symmetry shall also be a third party beneficiary of the rights of HPR with respect to the provisions of this Agreement as they relate to the Third Party Software, the Proprietary Information of HPR and the Usage Data. With respect to any period during which Licensee uses the Software, Symmetry shall be expressly entitled to enforce its rights pursuant to the provisions of the Software License Agreement as they relate to the Third Party Software and the Usage Data, regardless of any alleged or actual breach or default hereunder by HPR, claim of offset by Licensee or any expiration or termination of this Agreement. All provisions contained in this Section 7.2 shall survive the termination of this Agreement. II. EXHIBIT 1 TO HPR INC. SOFTWARE LICENSE AGREEMENT Section 7 of the HPR software license agreement to which this Exhibit 1 is attached (the "Software License Agreement") requires Licensee to deliver to HPR, no less often than the intervals specified, its Usage Data. Licensee authorizes HPR to deliver a copy of the Usage Data to Symmetry within 60 days following HPR's receipt thereof. The deliveries of Usage Data to HPR and to Symmetry shall be subject to the following terms and conditions: (i) such Usage Data will be in the form of so-called "flat" or similar files of Licensee, but may, at the option of Licensee, be subject to a scrambling algorithm consistently applied within each data submission and across all data submissions for Licensee to preserve the confidentiality of identification of the patients and providers contained therein; and, to the extent requested by Licensee, HPR will provide reasonable amounts of assistance in effecting the scrambling; (ii) notwithstanding the provisions of Section 7 of the Software License Agreement, Symmetry shall have the right, in Symmetry's sole and absolute discretion, to sell, assign, transfer or convey, with or without consideration, the Usage Data received by Symmetry pursuant to the Software License Agreement, or any data, service or products incorporating or derived in whole or in part from such Usage Data, to any one or more third parties; and (iii) Licensee shall retain full right and title to its claims and the data contained therein (exclusive of claims and encounter data in a format containing ETG identifiers, which claims and encounter data are subject to the obligations of Licensee to deliver UsageData to HPR, to HPR's rights to provide such Usage Data to Symmetry and to the obligations of Licensee as set forth in Section 7.2 of the Software License Agreement). Date of HPR Software License Agreement or applicable exhibit thereto to which this Amendment relates: - ------------------------------- EX-11 10 EXHIBIT 11.1 STATEMENT RE COMPUTATION OF EARNINGS PER SHARE (1) HPR INC. Type of security For the year period June 30, 1997, Common stock outstanding, beginning of period................................................ 15,012,000 Weighted average common stock issued during the period....................................... 180,000 Assumed exercise of common share options..................................................... 1,230,000 Purchase of common stock under the treasury stock method................................... (319,000) Weighted average number of common shares and common equivalent shares outstanding............ 16,103,000 For the year period June 30, 1996, Common stock outstanding, beginning of period................................................ 7,680,000 ........................................................................................... Weighted average common stock issued during the period....................................... 1,235,000 Conversion of Series A Convertible Preferred Stock to Common Stock upon the Initial Public Offering (3).................................................................. 5,525,000 Assumed exercise of common share options..................................................... 1,548,000 Purchase of common stock under the treasury stock method..................................... (148,000) Weighted average number of common shares and common equivalent shares outstanding............ 15,840,000 For the year period June 30, 1995, Common stock outstanding, beginning of period................................................ 5,930,000 Weighted average cheap stock outstanding during the period (2)............................... 436,000 Weighted average common stock issued during the period ...................................... 542,000 Assumed conversion of Series A Convertible Preferred Stock as a Common Stock Equivalent........................................................................... 5,525,000 Assumed exercise of common share options .................................................... 1,779,000 Purchase of common stock under the treasury stock method..................................... (37,000) Weighted average number of common shares and common equivalent shares outstanding............ 14,175,000 (1) All share and earnings per share amounts have been restated to reflect the stock split effected in the form of a 100% stock dividend granted on May 6, 1996 to all shareholders of record on April 26, 1996, a 2.5-for-1 capital stock split in 1995 and a 10-for-1 capital stock split in 1993. (2) In accordance with the Securities and Exchange Commission Staff Accounting Bulletin No. 83, issuances of common stock and equivalents within one year prior to the initial filing date of the registration statement for the initial public offering, at share prices less than the mid-point of the estimated initial public offering price for which this registration statement was prepared, are considered "cheap stock" as defined. Accordingly, these are shown as equity issued and outstanding, using the treasury stock method, for all periods presented prior to the initial public offering. (3) Series A Convertible Preferred Stock was considered a common stock equivalent prior to the initial public offering.
EX-21 11 EXHIBIT 21.1 Exhibit 21.1 Subsidiaries of the Company The Company's subsidiaries are as follows: Concurrent Review Technology, Inc., a Delaware corporation, HPR Securities Corp., a Massachusetts corporation, The Integrity Group, Inc., an Alabama corporation, and HPR International, Inc., a Barbados corporation. EX-23 12 EXHIBIT 23.1 Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of HPR Inc. on Forms S-8 (File Nos. 033-80141, 033-80143, and 033-80145) and Form S-3 (File No. 333-12749) of our report dated August 1, 1997, on our audits of the consolidated financial statements of HPR Inc. as of June 30, 1997 and 1996 and for the years ended June 30, 1997, 1996, and 1995, which report is included in the Annual Report on Form 10-K for the year ended June 30, 1997. We also consent to the reference to our firm under Item 6, Selected Financial Data. COOPERS & LYBRAND L.L.P. Boston, Massachusetts August 21, 1997 EX-27 13 FDS AS OF JUNE 30, 1997
5 12-MOS JUN-30-1997 JUL-01-1996 JUN-30-1997 13,943,693 13,827,161 14,494,415 651,500 0 40,584,602 4,462,138 1,952,363 47,531,066 8,703,660 0 0 0 153,253 38,115,362 47,531,066 39,101,380 39,101,380 7,900,286 28,357,408 0 425,000 0 11,984,038 4,973,385 7,010,653 0 0 0 7,010,653 0.44 0.44
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