<PAGE> 1
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-12311
2,300,000 SHARES
(LOGO) MEDIRISK
COMMON STOCK
All of the shares of Common Stock of Medirisk, Inc. (the "Company" or
"Medirisk") offered hereby (the "Offering") are being sold by the Company. Prior
to the Offering, there has been no public market for the Common Stock of the
Company (the "Common Stock"). See "Underwriting" for a discussion of the factors
considered in determining the initial offering price. The Common Stock has been
approved for quotation on the Nasdaq Stock Market's National Market under the
symbol "MDMD."
---------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share......................... $11.00 $0.77 $10.23
- -------------------------------------------------------------------------------------------------------------
Total(3).......................... $25,300,000 $1,771,000 $23,529,000
- -------------------------------------------------------------------------------------------------------------
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</TABLE>
(1) See "Underwriting" for a description of the indemnification arrangements
with the Underwriters.
(2) Before deducting expenses of the Offering, payable by the Company, estimated
at $750,000.
(3) The Company has granted the Underwriters a 30-day over-allotment option to
purchase up to an additional 345,000 shares of Common Stock on the same
terms and conditions as set forth above, solely to cover over-allotments,
if any. If such option is exercised in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $29,095,000,
$2,036,650 and $27,058,350, respectively. See "Underwriting."
---------------------
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that delivery of certificates
representing the Common Stock will be made on or about January 31, 1997.
EQUITABLE SECURITIES CORPORATION JEFFERIES & COMPANY, INC.
The date of this Prospectus is January 28, 1997.
<PAGE> 2
[SAMPLE COMPUTER SCREEN [SAMPLE COMPUTER SCREEN
FOR CAPITATION RATES] FOR CANDIDATE SEARCH]
[SAMPLE PHYSICIAN DATA]
[SAMPLE COMPUTER SCREEN FOR PROCEDURES] [CHART OF HMO FACILITIES OUTCOMES]
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET, OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus.
THE COMPANY
Medirisk is a leading provider of proprietary databases and related
decision-support software and analytical services to the health care industry in
the United States. The Company's products and services enable payers and
providers to make objective comparisons of the financial costs and clinical
outcomes of physician-mediated services to customer-specific and industry
benchmarks and to access information concerning specific physicians. Such
capabilities assist payers and providers in pricing managed care contracts,
evaluating physician fee schedules and utilization of physician-mediated
services, comparing provider outcomes and performance, and recruiting
physicians. Medirisk actively sells its products to over 750 major customers,
including leading health plans, insurers, hospitals and larger physician groups,
as well as to more than 700 smaller customers, including single-specialty
physician groups. The Company believes it is the U.S. leading provider of
clinical and financial databases comprised of physician-oriented content.
Medirisk's health care information products and services consist of
financial products, clinical performance products and physician database
products.
Financial Products. Medirisk's financial products provide customers
with comprehensive proprietary information regarding physician fees and
health care utilization patterns in the United States. The Company's
financial products enable payers and providers to analyze health care cost
and utilization data and compare, by procedure and geographic location,
pricing and utilization trends.
Clinical Performance Products. Medirisk's clinical performance
products allow customers to measure outcomes across a full range of care
within a variety of medical specialties. The Company's clinical performance
products enable both payers and providers to measure clinical outcomes and
apply that information to attract and retain managed care arrangements and
to improve quality of clinical care.
Physician Database Products. Medirisk offers a database comprised of
detailed information concerning U.S. physicians who are candidates for new
practice affiliations. The Company licenses its physician database products
to assist customers in cost-effective in-house physician recruiting.
Medirisk built its core databases by collecting, standardizing and
normalizing more than three billion health care transaction records. Medirisk's
databases include records submitted by the Company's customers under its ongoing
data collection plan and the results of regular proprietary surveys of managed
care plans and other payers. The Company believes that the long-standing
relationships under which it collects these data and the data interpretation
methodologies used by the Company represent significant competitive advantages.
Medirisk's objective is to enhance its position as a leading provider of
proprietary databases and related decision-support software and analytical
services to payers, providers and other health care industry participants. To
attain this objective, Medirisk seeks to: (i) leverage the Company's existing
customer base to cross sell additional products; (ii) emphasize recurring
revenue; (iii) develop new products; and (iv) acquire and integrate
complementary products and businesses. To capitalize on the fragmentation of the
industry and to support its acquisition strategy, Medirisk has corporate
resources dedicated to identifying, analyzing and pursuing appropriate
acquisition candidates. The Company is currently tracking a database of more
than 300 companies, of which more than 100 currently meet Medirisk's primary
acquisition criteria for product type, revenue and customer base.
3
<PAGE> 4
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk. In addition to the other information presented or referenced herein, the
discussion of risk factors on pages 6 to 10 of this Prospectus should be
considered carefully in evaluating an investment in the Common Stock. The risks
associated with an investment in the Company include the following factors:
History of Operating Losses and Uncertain Profitability; Risks Related to
Growth; Risks of Integration of Acquired Operations; Dependence on Data Sources
and AMA Licenses; Dependence on Intellectual Property Rights; Uncertainty and
Consolidation in the Health Care Industry; Risks of Rapid Technological Change;
Intense Competition; Risks of Customer Concentration; Potential for System
Defects; Concentration of Ownership; Dependence on Key Personnel; Variable
Quarterly Operating Results and Seasonality; No Prior Public Market and Possible
Volatility of Stock Price; Potential Adverse Effects of Substantial Number of
Shares Eligible for Future Sale; Adverse Impact of Anti-takeover Provisions;
Substantial Dilution; No Dividends; and Risks Associated with Unspecified Use of
Proceeds. See "Risk Factors."
THE OFFERING
Common Stock being offered.............. 2,300,000 shares(1)
Common Stock to be outstanding after the
Offering................................ 4,031,752 shares(1)(2)
Use of proceeds......................... To repay indebtedness, to pay
accrued dividends on the Company's
Series A and Series B Convertible
Preferred Stock, and for working
capital and general corporate
purposes, including potential
acquisitions and development of
additional products. See "Use of
Proceeds."
Nasdaq National Market symbol........... "MDMD"
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(1) Does not include 345,000 shares of Common Stock that may be sold by the
Company pursuant to the Underwriters' over-allotment option. See
"Underwriting."
(2) Based on the number of shares of Common Stock outstanding as of January 28,
1997. Includes 1,021,809 shares of Common Stock issuable upon the automatic
conversion upon completion of the Offering of the Company's Series A
Convertible Preferred Stock and Series B Convertible Preferred Stock
(collectively, the "Convertible Preferred Stock"). Excludes 811,958 shares
of Common Stock issuable upon the exercise of options and warrants
outstanding as of January 28, 1997 with a weighted average exercise price
of $0.58 per share. See "Capitalization," "Management -- Executive
Compensation," "Description of Capital Stock" and Notes 5 and 8 of Notes to
Consolidated Financial Statements of the Company.
---------------------
Unless otherwise indicated, information in this Prospectus(i) assumes no
exercise of the Underwriters' option to purchase from the Company up to 345,000
additional shares of Common Stock to cover over-allotments, if any,(ii) gives
effect to the automatic conversion upon completion of the Offering of the
Convertible Preferred Stock into 1,021,809 shares of Common Stock, and(iii)
reflects a 0.6496-for-one reverse stock split with respect to the Common Stock
to be effected prior to the completion of the Offering. See "Description of
Capital Stock," "Underwriting" and Notes 8 and 11 of Notes to Consolidated
Financial Statements of the Company.
This Prospectus contains references to a number of registered and
unregistered trademarks and service marks, including marks owned by Medirisk.
Windows(R) and Excel(R) are registered trademarks of Microsoft Corporation;
Lotus 1-2-3(R) is a registered trademark of Lotus Development Corporation;
FoxPro(R) is a registered trademark of Fox Holdings, Inc.; Quattro(R) is a
registered trademark of Quattro Corporation; Dbase(R) is a registered trademark
of Ashton-Tate; and Nasdaq National Market(R) is a registered trademark of The
Nasdaq Stock Market, Inc.
4
<PAGE> 5
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
----------------------------------- ---------------------------
1993 1994 1995 1995 1996
------ ------ ----------------- ------ ------------------
PRO PRO
ACTUAL FORMA(1) ACTUAL FORMA(1)
------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue............................. $2,447 $2,894 $3,655 $9,184 $2,450 $ 6,254 $ 7,058
Salaries, wages and benefits........ 1,675 1,893 2,578 4,943 1,886 4,388 4,796
Other operating expenses............ 507 731 956 3,165 700 1,585 1,859
Depreciation and amortization....... 75 143 193 712 143 550 635
Acquired in-process research and
development costs(2).............. -- -- -- -- -- 6,180 --
------ ------ ------ ------ ------ ------- -------
Operating income (loss)............. 190 127 (72) 364 (279) (6,449) (232)
Interest income (expense), net...... (41) (54) (66) (898) (44) (482) (649)
Other income (expense).............. 18 -- -- -- -- (40) (40)
------ ------ ------ ------ ------ ------- -------
Net income (loss)................... $ 167 $ 73 (138) (534) (323) (6,971) (921)
====== ======
Accretion of Series A Convertible
Preferred Stock................... (92) (92) (69) -- --
Series A Convertible Preferred Stock
dividend requirement.............. (202) (202) (151) (151) (151)
------ ------ ------ ------- -------
Net loss applicable to common
stock............................. $ (432) $ (828) $ (543) $(7,122) $(1,072)
====== ====== ====== ======= =======
Unaudited pro forma loss per common
share(3).......................... $(0.20) $(0.37) $ (3.25) $ (0.49)
====== ====== ======= =======
Unaudited pro forma weighted average
number of common shares used in
calculating unaudited net loss per
share of Common Stock(3).......... 2,212 2,212 2,191 2,191
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
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AS
ACTUAL ADJUSTED(4)
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<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)................................... $(2,164) $13,013
Total assets................................................ 8,093 21,158
Long-term debt and capital lease obligations, excluding
current installments...................................... 7,198 298
Stockholders' equity (deficit).............................. (4,520) 17,420
</TABLE>
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(1) Gives effect to the Company's acquisition of Formations in Health Care, Inc.
("Formations"), which occurred on January 9, 1996, and PracticeMatch, Inc.
("PracticeMatch"), which occurred on March 14, 1996, as if each transaction
had occurred on January 1, 1995. As a result of these acquisitions, the
Company's historical statements of operations are not representative of
financial results to be expected for future periods. See "The Company" and
"Unaudited Pro Forma Financial Data."
(2) In connection with the acquisition of Formations and PracticeMatch, the
Company recorded a nonrecurring charge related to acquired in-process
research and developments costs. Exclusive of this charge, operating loss,
net loss and loss per share for the nine months ended September 30, 1996
would have been $(269,000), $(791,000), and $(0.43) respectively. See "The
Company," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 2 of Notes to Consolidated Financial
Statements of the Company.
(3) Computed on the basis described in Note 1 of Notes to Consolidated Financial
Statements of the Company. Historical losses per share are not presented as
they are not meaningful due to the mandatory conversion of all outstanding
shares of the Series A and Series B Convertible Preferred Stock into Common
Stock upon completion of the Offering.
(4) Gives effect to the sale of the shares of Common Stock offered hereby and
the application of the net proceeds therefrom. See "Use of Proceeds."
5
<PAGE> 6
RISK FACTORS
An investment in the Common Stock involves a high degree of risk. In
addition to the other information in this Prospectus, prospective investors
should carefully consider the following risk factors relating to the Company and
the Common Stock before making an investment.
HISTORY OF OPERATING LOSSES; UNCERTAIN PROFITABILITY. The Company incurred
net losses in the year ended December 31, 1995 and in the nine months ended
September 30, 1996 and expects such losses to continue at least through the
three months ended December 31, 1996. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Quarterly Results of
Operations". The Company had an accumulated deficit at September 30, 1996 of
$9.5 million. In view of the Company's prior operating history, there can be no
assurance that the Company will be able to achieve profitability on a quarterly
or annual basis or that it will be able to sustain or increase its revenue
growth in future periods. Furthermore, in applying the provisions of Statement
of Financial Accounting Standards No. 109 ("SFAS 109") to the Company,
particularly considering the Company's history of net losses, the Company was
unable to support a conclusion that it is more likely than not that its deferred
tax assets will be realized for purposes of SFAS 109; as a result, the Company
has provided a full valuation allowance against its net deferred tax assets. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations and Note 7 of Notes to Consolidated Financial Statements of the
Company."
RISKS RELATED TO GROWTH. The Company's strategy is to grow aggressively,
both internally and through acquisitions. This strategy is likely to place
significant demands on the Company's financial, operational and management
resources and to expose the Company to a variety of risks, including the risk
that the Company will be unable to retain the personnel or obtain the financial
and other resources necessary to pursue and manage such growth. The Company's
growth has resulted in an increase in the level of responsibility for the
Company's key personnel, several of whom were hired recently. Expenses arising
from the Company's efforts to complete acquisitions, develop new products or
increase its existing market penetration could have an adverse impact on the
Company's results of operations and financial condition. Furthermore, there can
be no assurance that the Company will be able to identify, acquire or integrate
acquisition candidates successfully or to manage profitably any additional
products and services resulting from such acquisitions. Acquired businesses,
products or services may not contribute to the Company's overall strategy or
produce returns that justify the related investment or implementation by the
Company. In addition, the Company's growth may involve the acquisition of
companies or the development of products or services in areas in which the
Company does not currently operate. Such acquisition or development may require
the Company's management to develop expertise in new areas and to attract a new
customer base and could adversely affect the Company's business, results of
operations and financial condition. There can be no assurance that the Company
will be able to implement its growth strategy successfully or, if successful in
consummating acquisitions, to manage its expanded operations effectively and
profitably. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business -- Business Strategy" and "Management."
Implementation of the Company's growth strategy will require significant
capital resources. Capital is needed for both internal growth and the
acquisition and integration of new businesses, products and services. If the
Company does not have sufficient cash resources or if the Common Stock is not
attractive to target businesses, the Company's growth could be limited, and its
existing operations impaired, unless it is able to obtain additional capital
through subsequent debt or equity financings. Any debt financings could result
in the imposition on the Company of operational or financial restrictions, and
any equity financings could result in dilution to holders of Common Stock. The
Company has entered into a commitment letter with NationsBank N.A. (South)
("NationsBank") contemplating the establishment of a $10 million revolving
credit facility (the "NationsBank Revolver"). This commitment is subject to
certain conditions including the completion of the Offering, and there can be no
assurance that such conditions will be met or that the Company will be able to
obtain financing in the future or that, if available, such financing will be on
terms acceptable to the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
6
<PAGE> 7
RISKS OF INTEGRATION OF ACQUIRED OPERATIONS. In the first quarter of 1996,
the Company completed the acquisition of Formations in Health Care, Inc., which
develops and markets outcomes measurement databases and software applications,
and PracticeMatch, Inc., which develops and markets a database of physician
information. The process of integrating management services, administrative
organizations, facilities, management information systems and other operational
aspects of acquired businesses, product lines or services can be time consuming
and costly and may distract management from day-to-day operations. The
difficulties of integration may be increased by challenges in coordinating
geographically separated organizations, integrating personnel with disparate
business backgrounds and combining different corporate cultures. If Medirisk is
to realize the anticipated benefits of past and future acquisitions, the
operations of the acquired entities must be combined and integrated successfully
and efficiently. There can be no assurance that the Company's integration
processes will be successful or that the anticipated benefits of any past or
future acquisitions will be realized. In addition, acquisitions by the Company
have resulted, and may in the future result, in the creation of substantial
goodwill or other intangible assets. There can be no assurance that such assets
will prove to be beneficial or that the amortization schedules associated with
such assets will continue to be appropriate. Any future write-off, or
acceleration of the amortization, of such assets could have a material adverse
effect on the Company's business, results of operations and financial condition.
Furthermore, there can be no assurance that there will not be substantial
unanticipated costs or other material adverse effects associated with past or
future acquisitions and integration activities conducted by the Company. See
"The Company," "Unaudited Pro Forma Financial Data" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON DATA SOURCES AND AMA LICENSES. The Company incorporates the
Physicians' Current Procedural Terminology ("CPT") codes of the American Medical
Association (the "AMA") into its financial products under a nonexclusive
five-year license with the AMA that expires in 2000. The CPT code system is
considered to be the current industry standard for identifying physician
procedures, and the loss of the AMA CPT code license would have a material
adverse effect on the business, results of operations and financial condition of
Medirisk. In addition, the Company relies in large part on data from outside
payer and provider sources to generate its proprietary databases, including data
received from customers under the Company's data contribution program and other
acquired data (including physician information). There can be no assurance that
the Company's sources will continue to provide data in the future. In addition,
the Company's data sources generally are not subject to exclusive agreements
with the Company; therefore, data included in the Company's data products may
also be included in data products of the Company's competitors. The Company
supplements its physician database with information from the AMA under a
separate exclusive three-year license agreement with the AMA that expires in
December 1998. Pursuant to this license, the Company obtains information
concerning practicing physicians who may be seeking positions, which information
would be difficult and expensive to obtain from alternative sources. In the
event that any of the Company's sources of data becomes unavailable, the Company
could be forced to purchase data from other sources, which could result in
increased costs. Moreover, there can be no assurance that alternative sources of
data would be available or that the Company could purchase such data in a
cost-efficient manner.
On August 21, 1996, Congress passed the Health Insurance Portability and
Accountability Act of 1996. This legislation requires the Secretary of Health
and Human Services to adopt national standards for health information
transactions and the data elements used in such transactions. In addition, the
Secretary is required to adopt safeguards to ensure the integrity and
confidentiality of health information. Violation of the standards is punishable
by fines and, in the case of wrongful disclosure of individually identifiable
health information, imprisonment. The Secretary is required to issue standards
not later than February 21, 1998. A number of states are also considering the
adoption of rules to protect the privacy of patient records. These requirements,
if adopted, may substantially affect the means used by the Company to collect
data. Such requirements, if adopted, could have an adverse effect on the
availability of data to the Company or on the Company's use of data.
DEPENDENCE ON INTELLECTUAL PROPERTY RIGHTS. The Company does not own any
patents or federally-registered copyrights relating to its databases or software
applications. The Company relies largely on copyright law, its license
agreements with customers and its own security systems, confidentiality
procedures
7
<PAGE> 8
and employee nondisclosure agreements to maintain the confidentiality and trade
secrecy of its proprietary procedures and resources. Policing unauthorized use
of the Company's products is difficult, and piracy is a potential problem. The
Company is aware that from time to time there have been limited breaches of the
confidentiality provisions of customers' agreements with the Company, and there
can be no assurance that the precautions taken by the Company will be adequate
to prevent further breaches or misappropriation of the Company's proprietary
information. In addition, the Company cannot prevent the independent development
or implementation of functionally equivalent or superior systems, products or
methodologies. Misappropriation of the Company's information or independent
development of similar products may have a material adverse effect on the
Company's competitive position. There can be no assurance that third parties
will not assert infringement claims against the Company in the future or that a
license or similar agreement will be available on reasonable terms in the event
of an unfavorable ruling on any such claim.
UNCERTAINTY AND CONSOLIDATION IN THE HEALTH CARE INDUSTRY. The health care
industry is subject to changing political, economic and regulatory influences
that may affect the procurement practices and operation of health care providers
and payers. The Company's products and services are designed to function within
the current structure of the U.S. health care financing and reimbursement
system; therefore, the commercial value of the Company's products could be
adversely affected if there were material changes in the current U.S. health
care financing and reimbursement system. Many federal and state legislators have
announced that they intend to propose programs to reform the U.S. health care
system at both the federal and state levels. These programs may contain
proposals to increase governmental involvement in health care, lower
reimbursement rates and otherwise change health care delivery and payment
systems. Participants in the health care market may react to these proposals and
the uncertainty surrounding such proposals by curtailing or deferring
investments, including investments in the Company's products and services. In
addition, in response to this changing environment, many market participants
(particularly providers and managed care plans) are consolidating to create
larger health care delivery organizations. This consolidation reduces the number
of potential customers for the Company's products and services and may increase
the bargaining power of these organizations, which could lead to reduced prices
for Medirisk's products. The impact of these developments in the health care
industry is difficult to predict and could have a material adverse effect on the
Company's business, operating results and financial condition.
RISKS OF RAPID TECHNOLOGICAL CHANGE. The health care information market is
characterized by rapid technological change, changing customer needs and
evolving industry standards. The Company believes that as the market for its
current products matures, its future success will depend on its ability to
enhance its current products and to develop, acquire and introduce new products
to keep pace with technological developments and emerging industry standards. In
addition, the introduction of competing products embodying new technologies and
the emergence of new industry standards could render the Company's existing
products obsolete or unmarketable. Accordingly, the Company anticipates that
significant amounts of future revenue may be derived from products and product
enhancements that do not exist today or have not been sold in large enough
quantities to measure accurately market acceptance. There can be no assurance
that the Company will not experience difficulties that could delay or prevent
the successful development and introduction of product enhancements or new
products, or that such enhancements or new products will adequately meet the
requirements of the marketplace or achieve market acceptance. If the Company is
unable to develop and introduce product enhancements and new products in a
timely and cost-efficient manner in response to changing market conditions or
customer requirements, the Company's business, operating results and financial
condition will likely be adversely affected.
INTENSE COMPETITION. The health care information market is intensely
competitive and rapidly changing. The Company believes that the principal
competitive factors in its target markets include the breadth and quality of
database and applications offerings, access to proprietary data, the proprietary
nature of methodologies and technical resources, price and the effectiveness of
marketing and sales efforts. Competitors vary in size and in scope and breadth
of product and service offerings, and the Company competes with various
competitors in each of its target markets. In addition, other major information
companies not presently offering health care information services competitive
with the Company's products and services may in the future enter the markets in
which the Company competes. Many of the Company's competitors have, and
8
<PAGE> 9
many of its potential competitors may have, significantly greater financial,
technical, product development and marketing resources than the Company. The
Company also competes with the internal information resources and systems of
certain of its prospective and existing customers. There can be no assurance
that competitive pressures will not have a material adverse effect on the
Company. See "Business -- Competition."
RISKS OF CUSTOMER CONCENTRATION. The Company derives a substantial portion
of its revenue from rehabilitation clinical performance products provided to
HEALTHSOUTH Corporation ("HEALTHSOUTH") under a year-to-year contract, the
current term of which expires in May 1997. Contracts with HEALTHSOUTH accounted
for approximately 9% and 13% of the Company's revenues for fiscal 1995 and the
nine months ended September 30, 1996, respectively, in each case on a pro forma
basis giving effect to the acquisition of Formations and PracticeMatch as if
such transactions had occurred on January 1, 1995. The loss of, or a significant
decrease in, business from HEALTHSOUTH could have a material adverse effect on
the Company's business, results of operations and financial condition.
POTENTIAL FOR SYSTEM DEFECTS. The information products offered by the
Company may contain undetected errors or failures. Errors or failures that are
not detected until after the commencement of commercial shipments of a product
could result in a loss of, or delay in, market acceptance of the product and in
claims against the Company. The Company also depends on the accuracy of the data
received from its data sources. If a statistically significant number of medical
records, transactions or physician profiles were found to have been altered or
incorrectly entered, or otherwise contain flawed data, there could be a loss of,
or delay in, market acceptance of the product and possible claims against the
Company.
CONCENTRATION OF OWNERSHIP. Upon the completion of the Offering, the
Company's executive officers and directors, together with their respective
affiliates, will own approximately 22.9% of the outstanding Common Stock (21.1%
if the Underwriters' over-allotment option is exercised in full). See
"Management" and "Principal Stockholders." Such persons acting together could
have significant influence on the outcome of any matter requiring approval by
the stockholders of the Company, including the election of directors, mergers
and other extraordinary corporate events.
DEPENDENCE ON KEY PERSONNEL. The Company depends on the services of Mark
A. Kaiser, its Chairman of the Board, Chief Executive Officer and President, and
on certain other officers and key personnel. The Company's growth and success
will depend in large part on its ability to attract, motivate and retain
qualified management, technical, sales and marketing personnel. Competition for
such personnel is intense. The loss of the services of one or more of the
Company's key personnel or the inability to attract and retain qualified
personnel could have a material adverse effect on the Company. See "Use of
Proceeds" and "Management -- Employment Agreements."
VARIABLE QUARTERLY OPERATING RESULTS; SEASONALITY. The Company's quarterly
revenue and operating results have varied significantly in the past and are
likely to vary substantially from quarter to quarter in the future. Quarterly
results may fluctuate as a result of a variety of factors including: the
Company's sales cycle; demand for the Company's products; the timing of
significant new customer contracts; the nonrenewal of significant customer
contracts; the timing of acquisitions; competitive conditions in the industry;
changes in customer budgets; and general economic factors. Furthermore, the
Company has experienced a seasonal pattern in its operating results, with a
greater proportion of the Company's revenue and operating profitability
occurring in the second half of the year. Accordingly, results of operations for
any particular quarter may not be indicative of results of operations for future
periods. Additionally, a significant portion of the Company's expenses are
relatively fixed, and the amount and timing of increases in such expenses are
based in large part on the Company's expectations concerning future revenue. If
revenue is below expectations in any given quarter, the adverse effect may be
magnified by the Company's inability to adjust spending quickly enough to
compensate for the revenue shortfall. Accordingly, even a small variation from
expected revenue could have a material adverse effect on the Company's results
of operations for a given quarter. Fluctuations in the Company's revenue and
operating results could have a material adverse effect on the market price for
the Common Stock. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
9
<PAGE> 10
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. Prior to the
Offering, there has been no public market for the Common Stock. Although the
Common Stock has been approved for quotation on the Nasdaq Stock Market's
National Market, there can be no assurance that an active trading market will
develop or be sustained after the Offering or that the market price of the
Common Stock will not decline below the initial public offering price. The
initial public offering price of the Common Stock has been determined by
negotiations between the Company and the Representatives of the Underwriters and
may not be indicative of the market price of the Common Stock after the
Offering. For a description of the factors considered in determining the initial
public offering price, see "Underwriting." The future market price of the Common
Stock is likely to depend upon a variety of events, including quarter-to-quarter
variations in operating results, news announcements, trading volume, general
market trends and other factors. Additionally, in recent years the stock market
has experienced substantial price and volume volatility, and market prices for
the stock of many companies (particularly of small and emerging growth
companies) have experienced wide fluctuations, which have not necessarily been
related to their operating performance. These broad market fluctuations could
have a material adverse effect on the market price of the Common Stock.
POTENTIAL ADVERSE EFFECTS OF SUBSTANTIAL NUMBER OF SHARES ELIGIBLE FOR
FUTURE SALE. Sales of substantial amounts of Common Stock in the public market
following the Offering could adversely affect prevailing market prices for the
Common Stock. Upon completion of the Offering, there will be 4,031,752 shares of
Common Stock outstanding (based on the number of shares of Common Stock
outstanding as of January 28, 1997). The 2,300,000 shares (or 2,645,000 shares,
if the Underwriters' over-allotment option is exercised in full) offered hereby
will be freely tradable by persons that are not affiliates of Medirisk without
restriction under the Securities Act of 1933, as amended (the "Securities Act").
The remaining 1,731,752 shares of Common Stock are deemed "restricted
securities" pursuant to Rule 144 under the Securities Act and may be sold only
pursuant to an effective registration statement or an exemption to the
registration requirements of the Securities Act, including the exemption made
available by Rule 144. See "Management" and "Shares Eligible for Future Sale."
ADVERSE IMPACT OF ANTI-TAKEOVER PROVISIONS. Certain provisions of the
Company's Certificate of Incorporation and Bylaws and of Delaware law could have
the effect of delaying, deterring or preventing a change of control involving
the Company. See "Description of Capital Stock -- Preferred Stock" and
"-- Anti-takeover Effects of Provisions of the Bylaws and Delaware Law."
SUBSTANTIAL DILUTION. The public offering price is substantially higher
than the net tangible book value per share of the Common Stock. Accordingly,
investors purchasing shares of Common Stock in the Offering will incur immediate
dilution of $7.60 per share. See "Dilution."
NO DIVIDENDS. It is the policy of the Company's Board of Directors to
retain earnings, if any, to finance the continued growth of the Company rather
than to pay dividends. The Company has not paid any cash dividends on its Common
Stock since 1991. See "Dividend Policy."
RISKS ASSOCIATED WITH UNSPECIFIED USE OF PROCEEDS. Approximately $13.7
million, or 59.9%, ($17.2 million, or 65.3%, if the Underwriters' over-allotment
option is exercised in full) of the net proceeds of the Offering will be
available for working capital and general corporate purposes, including
potential acquisitions of health care information businesses and development of
additional products. The Company's management, subject to approval by the Board
of Directors, will have absolute discretion with respect to the use of such
proceeds of the Offering. See "Use of Proceeds."
10
<PAGE> 11
THE COMPANY
Medirisk, Inc. was incorporated in Florida on June 17, 1983 and has
provided proprietary health care information products and services that track
the price and utilization of medical procedures during its 13-year history. In
January 1996, the Company acquired all of the outstanding stock of Formations, a
developer of clinical performance products that allow customers to measure
outcomes across a full range of care within a variety of medical specialties. In
March 1996, the Company acquired all of the outstanding stock of PracticeMatch,
which provides an on-line database of physician information for use by in-house
physician recruiters. The names of Formations In Health Care, Inc. and
PracticeMatch, Inc. were changed subsequent to the acquisition of such companies
to Medirisk of Illinois, Inc. and Medirisk of Missouri, Inc., respectively.
Medirisk was reincorporated in Delaware in September 1996, and in
connection with such reincorporation, the Company's treasury stock was
cancelled. The Company's principal executive offices are located at Two Piedmont
Center, Suite 400, 3565 Piedmont Road, N.E., Atlanta, Georgia 30305-1502, and
its telephone number at that address is (404) 364-6700. Unless the context
suggests otherwise, references in this Prospectus to the "Company" or "Medirisk"
mean Medirisk, Inc. and its subsidiaries and predecessor entities.
DIVIDEND POLICY
It is the policy of the Company's Board of Directors to retain earnings to
support operations and to finance continued growth of the Company rather than to
pay dividends. The Company has not declared or paid any cash dividends or
distributions on its Common Stock since 1991. Payments of future dividends, if
any, will be at the discretion of the Company's Board of Directors after taking
into account various factors, including the Company's earnings, financial
position, capital requirements and surplus, contractual restrictions and other
relevant business conditions, and there can be no assurance that dividends will
be paid. The commitment letter for the NationsBank Revolver contemplates certain
restrictions on the payment of dividends. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
11
<PAGE> 12
USE OF PROCEEDS
The net proceeds to be received by Medirisk from the Offering, after
deducting estimated underwriting discounts and offering expenses payable by the
Company, are approximately $22.8 million ($26.3 million if the Underwriters'
over-allotment option is exercised in full). Of such net proceeds, the Company
intends to use approximately (i) $6.9 million to prepay certain senior
subordinated notes (the "Senior Subordinated Notes"); (ii) $1.1 million to
prepay certain notes issued in connection with the Company's acquisition of
PracticeMatch (the "Acquisition Notes"); (iii) $645,000 ($568,000 as of
September 30, 1996) to pay accrued and unpaid dividends on the Company's Series
A and Series B Preferred Stock and (iv) $507,000 ($331,000 as of September 30,
1996) to repay short-term bank debt (the "Bridge Loan").
The Company has no specific plans with respect to the use of the remaining
$13.7 million or 59.9% ($17.2 million or 65.3% if the Underwriters'
over-allotment option is exercised in full) of the net proceeds of the Offering.
In addition to repaying debt, paying accrued preferred dividends and raising
equity capital, the Company is conducting the Offering at this time in order to
create a market for the Company's Common Stock, to facilitate future access by
the Company to public equity markets, and to enhance the Company's ability to
use its Common Stock as consideration for acquisitions and as a means of
attracting and retaining key employees. The Company anticipates that the net
proceeds of the Offering remaining after the repayment of debt and payment of
accrued preferred dividends described above will be used principally for working
capital and general corporate purposes, for potential acquisitions of
complementary businesses or products in the health care information industry and
for the development of additional products. Although the Company continually
seeks suitable acquisition candidates with complementary businesses and products
in the health care information industry, it is not currently a party to any
definitive agreement or letter of intent regarding any acquisition; as a result,
the Company cannot precisely determine the timing or relative size of any
potential acquisition. The cost, timing and amounts of funds required for the
uses of the remaining net proceeds of the Offering are in management's
discretion, will depend upon business conditions as and when appropriate uses
develop and, consequently, cannot be precisely determined by the Company at this
time. Pending the application of the net proceeds as described above, the
Company intends to invest the net proceeds in short-term, interest-bearing,
investment-grade securities.
The Senior Subordinated Notes are held by HealthPlan Services Corporation
("HPSC") and were issued pursuant to a Securities Purchase Agreement dated
January 8, 1996, between the Company and HPSC (the "Securities Purchase
Agreement"). The Senior Subordinated Notes bear interest at a nominal rate of
10% per annum and an effective rate of 10.9% per annum and mature on January 8,
2003, subject to certain provisions of the Securities Purchase Agreement that
require the prepayment of the Senior Subordinated Notes upon the occurrence of
certain events, including the closing of an initial public offering. The
proceeds from the sale of the Senior Subordinated Notes were used to fund the
acquisition of Formations and PracticeMatch. When the Company issued the Senior
Subordinated Notes, it issued to HPSC warrants to purchase an aggregate of
298,150 shares of Common Stock at an exercise price of $0.015 per share and
recorded the estimated fair value of these warrants, $573,000, as a discount on
the issuance of debt at the time of their issuance. As a result of the
application of a portion of the net proceeds to repay this indebtedness, the
Company will incur a one-time, noncash charge of approximately $795,000 with
respect to the accelerated amortization of such discount and of related deferred
financing costs, which charge will be recorded in the period in which the
Offering is completed.
The Acquisition Notes are held by the former shareholders of PracticeMatch
and were issued to them as partial consideration for the Company's purchase of
the stock of PracticeMatch. The Acquisition Notes bear interest at the rate of
10% per annum. Of the principal amount of the Acquisition Notes, 30% is payable
on April 1, 1997, with the balance due September 14, 1997, subject to the terms
of the stock purchase agreement pursuant to which such Acquisition Notes were
issued, which effectively require their prepayment upon the prepayment of the
Senior Subordinated Notes.
12
<PAGE> 13
The Bridge Loan is held by NationsBank and was incurred in the fourth
quarter of 1996 pursuant to a promissory note, which, as amended to date,
permits aggregate borrowings of up to $850,000, of which $507,000 was
outstanding on January 28, 1997. The Bridge Loan bears interest at NationsBank's
prime rate plus 2% per annum and matures upon the earlier of completion of the
Offering or March 31, 1997. The Bridge Loan was established to extinguish debt
assumed in connection with the PracticeMatch acquisition, and the remainder of
the Bridge Loan is available for general corporate purposes.
For further discussion of the Acquisition Notes, the Senior Subordinated
Notes, the Bridge Loan and the Convertible Preferred Stock, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Notes 2, 4, 5 and 8 of Notes to Consolidated Financial Statements of the
Company.
13
<PAGE> 14
CAPITALIZATION
The following table sets forth at September 30, 1996 (i) the capitalization
of the Company; (ii) the pro forma capitalization of the Company giving effect
to the conversion of all outstanding shares of Convertible Preferred Stock into
1,021,809 shares of Common Stock upon completion of the Offering; and (iii) the
pro forma capitalization of the Company as adjusted to give effect to the sale
of the shares of Common Stock offered hereby and the application of the net
proceeds therefrom as described under "Use of Proceeds." This table should be
read in conjunction with the Company's Consolidated Financial Statements and
Notes included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------------------------
PRO FORMA,
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -----------
<S> <C> <C> <C>
Short-term debt(1).............................................. $ 1,591,255 $ 1,591,255 $ 184,145
=========== =========== ===========
Long-term debt and capital lease obligations, excluding
current portions(1)........................................... $ 7,197,744 $ 7,197,744 $ 297,744
Dividends payable............................................... 567,608 567,608 --
----------- ----------- -----------
Stockholders' equity (deficit):
Preferred Stock, $.001 par value, 4,400,000 shares
authorized, actual; and 1,000,000 shares
authorized, pro forma and pro forma as adjusted(2):
Series A Convertible Preferred Stock, 3,000,000
shares authorized; 1,292,359 shares issued and
outstanding, actual; and no shares issued or
outstanding, pro forma and pro forma as
adjusted................................................. 1,292 -- --
Series B Convertible Preferred Stock, 400,000
shares authorized; 280,623 shares issued and outstanding,
actual; and no shares issued or outstanding, pro forma
and pro forma as adjusted................................ 281 -- --
Common Stock, $.001 par value, 20,000,000 shares
authorized; 700,199 shares issued and outstanding,
actual; 1,722,008 shares issued and outstanding,
pro forma; and 4,022,008 shares issued and
outstanding, pro forma as adjusted(3)...................... 700 1,722 4,022
Additional paid-in capital.................................... 5,015,806 5,016,357 27,793,057
Accumulated deficit........................................... (9,537,729) (9,537,729) (10,377,465)
----------- ----------- -----------
Total stockholders' equity (deficit).................. (4,519,650) (4,519,650) 17,419,614
----------- ----------- -----------
Total capitalization.................................. $ 3,245,702 $ 3,245,702 $17,717,358
=========== =========== ===========
</TABLE>
- ---------------
(1) Short-term debt includes current maturities of long-term debt and capital
lease obligations. See Note 4 of Notes to Consolidated Financial Statements
of the Company for a description of the Company's indebtedness.
(2) Pro forma and pro forma as adjusted amounts give effect to the
reincorporation of the Company in September 1996 and the resulting changes
in its authorized capital stock. See "The Company" and "Description of
Capital Stock."
(3) Excludes 318,928 shares of Common Stock issuable upon exercise of options
outstanding as of January 28, 1997 with a weighted average exercise price
of $0.51 per share and 493,030 shares of Common Stock issuable upon
exercise of outstanding warrants with a weighted average exercise price of
$0.62 per share.
14
<PAGE> 15
DILUTION
The pro forma net tangible book value (deficit) of the Company at September
30, 1996 was $(9,100,740), or $(5.28) per share. Pro forma net tangible book
value (deficit) per share is determined by dividing the net tangible book value
(total tangible assets less total liabilities) of the Company by the number of
shares of Common Stock outstanding, giving pro forma effect to the conversion of
all outstanding shares of Convertible Preferred Stock into 1,021,809 shares of
Common Stock. Without taking into account any changes in the pro forma net
tangible book value of the Company after September 30, 1996, other than to give
effect to the sale of the shares of Common Stock offered hereby and the
application of the net proceeds therefrom, the adjusted pro forma net tangible
book value of the Company at September 30, 1996 would have been $13,678,260, or
$3.40 per share. This represents an immediate dilution in net tangible book
value of $7.60 per share to new investors purchasing shares in the Offering and
an immediate increase in net tangible book value of $8.68 per share to existing
stockholders. The following table illustrates this per share dilution.
<TABLE>
<S> <C> <C>
Public offering price per share............................. $11.00
Pro forma net tangible book value (deficit) per share at
September 30, 1996..................................... $(5.28)
Increase per share attributable to new investors.......... 8.68
------
Pro forma net tangible book value per share after the
Offering.................................................. 3.40
------
Dilution per share to new investors......................... $ 7.60
======
</TABLE>
The following table sets forth as of September 30, 1996 (giving pro forma
effect to the conversion of all outstanding shares of Convertible Preferred
Stock into 1,021,809 shares of Common Stock) the number of shares of Common
Stock purchased from the Company, the total consideration paid (before deduction
of estimated underwriting discounts and commissions and offering expenses) and
the average price per share paid by existing stockholders and by new investors.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............... 1,722,008 42.8% $ 5,568,470 18.0% $ 3.23
New investors....................... 2,300,000 57.2 25,300,000 82.0 $11.00
--------- ----- ----------- -----
Total..................... 4,022,008 100.0% $30,868,470 100.0%
========= ===== =========== =====
</TABLE>
The foregoing tables assume no exercise of outstanding options or warrants.
At September 30, 1996, there were outstanding options to purchase 328,672 shares
of Common Stock at a weighted average exercise price of $0.51 per share and
warrants to purchase 493,030 shares of Common Stock at a weighted average
exercise price of $0.62 per share. To the extent that any of these options or
warrants are exercised, there will be further dilution to new investors. See
"Management -- Executive Compensation" and Note 8 of Notes to Consolidated
Financial Statements of the Company.
15
<PAGE> 16
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below as of and for the
years ended December 31, 1991, 1992, 1993, 1994 and 1995 have been derived from
the audited consolidated financial statements of the Company and its
subsidiaries. The consolidated financial statements and notes thereto as of
December 31, 1994 and 1995 and for each of the years in the three-year period
ended December 31, 1995, and as of June 30, 1996 and for the six-month period
ended June 30, 1996, together with the related report of KPMG Peat Marwick LLP,
independent certified public accountants, are included elsewhere herein. The
selected consolidated financial data presented below for the nine months ended
September 30, 1995 and 1996 have been derived from the unaudited consolidated
financial statements of the Company which, in the opinion of management, include
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of the information included therein. Operating results for
the nine months ended September 30, 1996 are not necessarily indicative of
results to be obtained for the full year. As a result of the acquisition of
PracticeMatch and Formations, the Company's historical financial statements are
not representative of financial results to be expected for future periods. The
selected consolidated financial data should be read in conjunction with
"Unaudited Pro Forma Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements of the Company and Notes included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------------------ -------------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------ ------ ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue....................................... $1,056 $1,458 $2,447 $2,894 $3,655 $2,450 $ 6,254
Salaries, wages and benefits.................. 834 1,368 1,675 1,893 2,578 1,886 4,388
Other operating expenses...................... 520 578 507 731 956 700 1,585
Depreciation and amortization................. 31 48 75 143 193 143 550
Acquired in-process research and development
costs(1).................................... -- -- -- -- -- -- 6,180
------ ------ ------ ------ ------ ------ -------
Operating income (loss)....................... (329) (536) 190 127 (72) (279) (6,449)
Interest income (expense), net................ (26) (18) (41) (54) (66) (44) (482)
Other income (expense)........................ -- -- 18 -- -- -- (40)
Income taxes.................................. -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ -------
Net income (loss)............................. $ (355) $ (554) $ 167 $ 73 (138) (323) (6,971)
====== ====== ====== ======
Accretion of Series A Convertible Preferred
Stock....................................... (92) (69) --
Series A Convertible Preferred Stock dividend
requirement................................. (202) (151) (151)
------ ------ -------
Net loss applicable to common stock........... $ (432) $ (543) $(7,122)
====== ====== =======
Unaudited pro forma loss per common
share(2).................................... $(0.20) $ (3.25)
====== =======
Unaudited pro forma weighted average number of
common shares used in calculating unaudited
pro forma net loss per share of common
stock(2).................................... 2,212 2,191
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------- SEPTEMBER 30,
1991 1992 1993 1994 1995 1996
---- ------- ------- ------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)........................ $190 $ (110) $ 33 $ 321 $ 197 $(2,164)
Total assets..................................... 592 516 1,035 1,111 1,263 8,093
Long-term debt and capital lease obligations
excluding current installments................. 51 61 127 172 151 7,198
Redeemable preferred stock....................... -- 1,824 1,838 2,210 2,302 --
Stockholders' equity (deficit)................... 319 (1,809) (1,714) (1,928) (2,333) (4,520)
</TABLE>
- ---------------
(1) In connection with the acquisition of Formations and PracticeMatch the
Company recorded a nonrecurring charge related to acquired in-process
research and development costs. Exclusive of this charge, operating loss,
net loss and loss per share for the nine months ended September 30, 1996
would have been $(269,000), $(791,000), and $(0.43), respectively. See "The
Company" and Note 2 of Notes to Consolidated Financial Statements of the
Company.
(2) Computed on the basis described in Note 1 of Notes to Consolidated Financial
Statements of the Company. Historical losses per share are not presented as
they are not meaningful due to the mandatory conversion of all outstanding
shares of the Series A and Series B Convertible Preferred Stock into Common
Stock upon completion of the Offering.
16
<PAGE> 17
UNAUDITED PRO FORMA FINANCIAL DATA
The unaudited pro forma financial data set forth below for the nine-month
period ended September 30, 1996 and the year ended December 31, 1995 give effect
to the Company's acquisition of (i) Formations on January 9, 1996 and (ii)
PracticeMatch on March 14, 1996 as if they had occurred on January 1, 1995.
Except as included in the table below, the pro forma adjustments with respect to
Formations for the nine months ended September 30, 1996 are considered by the
Company to be immaterial and have not been included for such period in the pro
forma financial data set forth below. Each of the Formations and PracticeMatch
acquisitions has been accounted for using the purchase method of accounting. The
pro forma financial data should be read in conjunction with the historical
financial statements and notes of PracticeMatch and Formations, which are
included elsewhere in this Prospectus, and "Management's Discussion and Analysis
of Financial Condition and Results of Operations." The pro forma combined
results are not necessarily indicative of the results that would have been
achieved had the acquisitions of Formations and PracticeMatch occurred on
January 1, 1995 or of future operations.
NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
PRACTICEMATCH
(PERIOD FROM
1/1/96 PRO FORMA PRO FORMA
MEDIRISK TO 3/14/96) ADJUSTMENTS RESULTS
-------- ------------- ------------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenue..................................................... $ 6,254 $804 $ -- $ 7,058
Salaries, wages and benefits................................ 4,388 408 -- 4,796
Other operating expenses.................................... 1,585 274 -- 1,859
Depreciation and amortization............................... 550 37 48(1) 635
Acquired in-process research and development costs.......... 6,180 -- (6,180)(2) --
------- ---- ------- -------
Operating income (loss)..................................... (6,449) 85 6,132 (232)
Interest income (expense), net.............................. (482) (7) (160)(3) (649)
Other income (expense)...................................... (40) -- -- (40)
Income taxes................................................ -- -- -- --
------- ---- ------- -------
Net income(loss)............................................ (6,971) 78 5,972 (921)
Series A Convertible Preferred Stock dividend requirement... (151) -- -- (151)
------- ---- ------- -------
Net income (loss) applicable to Common Stock................ (7,122) $ 78 $ 5,972 $(1,072)
======= ==== ======= =======
Net loss per common share(4)................................ $ (3.25) $ (0.49)
======= =======
Weighted average number of common shares used in calculating
net loss per share of Common Stock(4)..................... 2,191 2,191
</TABLE>
See accompanying Notes to Unaudited Pro Forma Financial Data.
17
<PAGE> 18
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRACTICE- PRO FORMA PRO FORMA
MEDIRISK FORMATIONS MATCH ADJUSTMENTS RESULTS
-------- ---------- --------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenue............................................. $3,655 $1,566 $3,963 $ -- $9,184
Salaries, wages and benefits........................ 2,578 707 1,658 -- 4,943
Other operating expenses............................ 956 711 1,498 -- 3,165
Depreciation and amortization....................... 193 52 143 262(1) 650
62(5) 62
Acquired in-process research and development
costs............................................. -- -- -- -- --
------ ------ ------ ------- ------
Operating income (loss)............................. (72) 96 664 (324) 364
Interest income (expense), net...................... (66) (13) (19) (800)(3) (898)
Income taxes........................................ -- -- -- -- --
------ ------ ------ ------- ------
Net income (loss)................................... (138) 83 645 (1,124) (534)
Accretion of Series A Convertible Preferred Stock... (92) -- -- -- (92)
Series A Convertible Preferred Stock dividend
requirements...................................... (202) -- -- -- (202)
------ ------ ------ ------- ------
Net income (loss) applicable to common stock........ $ (432) $ 83 $ 645 $(1,124) $ (828)
====== ====== ====== ======= ======
Net loss per common share(4)........................ $(0.20) $(0.37)
====== ======
Weighted average number of common shares used in
calculating net loss per share of Common
Stock(4).......................................... 2,212 2,212
</TABLE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL DATA
(1) Reflects the additional amortization of intangible assets recorded as a
result of the allocation of the purchase price for the PracticeMatch
acquisition, as if the transaction was effective as of January 1, 1995. These
intangible assets and their lives are as follows:
<TABLE>
<S> <C> <C>
Technological know-how...................................... $ 350,000 5 years
Goodwill.................................................... $2,887,000 15 years
</TABLE>
(2) Reflects the reversal of the nonrecurring acquired in-process research
and development costs, $1,040,000 for Formations and $5,140,000 for
PracticeMatch, respectively.
(3) Reflects the interest expense related to the Acquisition Notes and
Senior Subordinated Notes issued in connection with the PracticeMatch
acquisition.
(4) Net loss per share of Common Stock has been computed on the basis
described in Note 1 of Notes to Consolidated Financial Statements of the
Company.
(5) Reflects the additional amortization of intangible assets recorded as a
result of the allocation of the purchase price for the Formations acquisition.
These intangible assets and their lives are as follows:
<TABLE>
<S> <C> <C>
Technological know-how...................................... $170,000 5 years
Goodwill.................................................... $422,000 15 years
</TABLE>
18
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the information
contained in the Consolidated Financial Statements, including the related Notes.
OVERVIEW
Medirisk is a leading provider of proprietary databases and related
decision-support software and analytical services to the health care industry in
the United States. The Company's health care information products and services
consist of financial products, clinical performance products and physician
database products. Prior to 1996, the Company provided only financial products
consisting of comprehensive, objective physician-related information regarding
medical fees and health care utilization patterns to both payers and providers.
In 1996, the Company undertook an acquisition strategy to expand its
product offerings. The Company acquired Formations and PracticeMatch in January
and March 1996, respectively. Formations offers clinical performance products
that allow customers to measure treatment outcomes across a range of care within
a variety of medical specialties. PracticeMatch offers physician database
products to assist customers in cost-effective in-house physician recruiting. As
a result of these acquisitions, the Company's historical financial statements
are not representative of financial results to be expected for future periods.
See "Unaudited Pro Forma Financial Data" and Note 2 of Notes to Consolidated
Financial Statements of the Company.
In connection with the Company's 1996 acquisitions, the Company acquired
intangible assets which are being amortized over various useful lives. The
amortization periods are based on, among other things, the nature of the
products and markets, the competitive position of the acquired companies and the
adaptability to changing market conditions of the acquired companies. The
Company recorded amortization expense for the nine months ended September 30,
1996 relative to intangible assets of $189,000. Giving pro forma effect to these
acquisitions as if they had occurred at January 1, 1995 amortization expenses
relating to these intangibles would have been $324,000 and $243,000 for 1995 and
the nine months ended September 30, 1996, respectively.
Also in connection with these acquisitions, the Company recorded
nonrecurring charges related to in-process research and development costs of
$1.0 million for Formations and $5.1 million for PracticeMatch. The amount of
each of these nonrecurring charges was equal to the estimated current fair
value, based on the adjusted cash flows (discounted by a risk adjusted weighted
average cost of capital of 19% for Formations and 20% for PracticeMatch), of
specifically identified technologies for which technological feasibility had not
yet been established pursuant to Statement of Financial Accounting Standards No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," and for which future alternative uses did not exist.
Similar charges could result in the future as a result of acquisitions accounted
for as purchases.
Medirisk's products are licensed pursuant to single-year and multi-year
agreements. Revenue from licenses of financial products is recognized upon the
delivery of the data and, in the case of multi-year agreements, on the
anniversary of the date of delivery. Revenue from licenses of clinical
performance products is recognized over the life of the contract as services are
performed. Revenue from licenses of physician database products is recognized
ratably over the life of the customer contract. Customer service revenue for all
product sets is recognized ratably over the term of the service contract. All
other revenue, including training, consulting fees and other miscellaneous
services, is recognized upon the performance of the applicable services. Because
a higher proportion of financial products historically have been licensed in the
second half of the year, the Company may experience sequentially higher revenues
in the third and fourth calendar quarters and, consequently, sequentially lower
revenues in the first calendar quarter.
The Company's revenue is composed of both recurring revenue from the
Company's current customer base as well as revenue from new customers. The
Company defines its recurring revenue percentage with respect to any particular
period as the quotient, expressed as a percentage, of (i) revenue recognized
during such period from a sale of a product to a customer who purchased a
similar product in the prior period, divided
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<PAGE> 20
by (ii) the Company's total revenue in the prior period. In determining its
recurring revenue percentage, the Company includes in its revenue the revenue of
entities acquired during the period as if such acquisitions had occurred at the
beginning of the prior period. The Company does not include revenue in its
recurring revenue percentage to the extent that such revenue exceeds total
revenue in the prior period. The Company's recurring revenue percentage for the
years ended December 31, 1994 and 1995 was approximately 73% and 71%,
respectively, and was approximately 72% for the nine months ended September 30,
1996.
In addition to acquisitions, the Company seeks to expand its product
offerings through internal product development. The Company has historically
expensed internal development costs; however, based on the Company's current
development plans, the Company anticipates capitalizing future internal product
development costs incurred after technological feasibility has been established
and prior to general product release. PracticeMatch has historically capitalized
software development costs, and capitalized development costs for PracticeMatch
totaled $74,000, net of accumulated amortization, at September 30, 1996.
As a result of the application of a portion of the net proceeds of the
Offering to repay indebtedness, the Company will incur a one-time, noncash
charge of $795,000 with respect to accelerated amortization of original issue
discount on the Senior Subordinated Notes and of related deferred financing
costs, which charge will be recorded in the period in which the Offering is
completed.
RESULTS OF OPERATIONS
The following table sets forth, for the fiscal periods indicated, certain
items from the statements of operations of the Company expressed as a percentage
of revenue:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- --------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS:
Revenue......................................... 100% 100% 100% 100% 100%
Salaries, wages and benefits.................... 68 65 71 77 70
Other operating expenses........................ 21 25 26 28 25
Depreciation and amortization................... 3 5 5 6 9
Acquired in-process research and development
costs......................................... -- -- -- -- 99
--- --- --- --- ----
Operating income (loss)......................... 8 5 (2) (11) (103)
Interest income (expense), net.................. (2) (2) (2) (2) (8)
Other income (expense).......................... 1 -- -- -- (1)
Income taxes.................................... -- -- -- -- --
--- --- --- --- ----
Net income (loss)............................... 7% 3% (4)% (13)% (112)%
=== === === === ====
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1995
Revenue. Revenue for the first nine months of 1996 was $6.3 million, an
increase of $3.8 million or 155% over the first nine months of 1995. The
increase was primarily attributable to the acquisitions of Formations and
PracticeMatch, effective in January and March 1996, respectively. Revenue
recognized by these acquired companies represented approximately $3.5 million,
or 93% of the total increase. The Company's revenue without the impact of the
revenue from the acquired companies increased 11% for the first nine months of
1996 over the same period in 1995 as a result of a combination of factors,
including increases in the volume of financial products licensed and revenue
attributable to an increase in the Company's sales and marketing personnel. The
volume increase was principally attributable to licenses to new and existing
customers as a result of product enhancements and extensions.
Salaries, wages and benefits. Salaries, wages and benefits for the first
nine months of 1996 were $4.4 million, an increase of $2.5 million or 133% over
the first nine months of 1995. This increase was primarily the result of the
acquisitions of Formations and PracticeMatch and, to a lesser extent, growth in
the Company's
20
<PAGE> 21
financial products revenue. Salaries, wages and benefits decreased as a
percentage of revenue during the nine months ended September 30, 1996 to 70% as
compared to 77% for the same period in 1995. This decrease resulted primarily
from leveraging the Company's existing administrative, sales and marketing
personnel as revenue increased through both acquisitions and internal growth.
Salaries, wages and benefits as a percentage of revenue were also favorably
impacted by the less seasonal nature of the revenue of PracticeMatch and
Formations. Financial product revenue has typically been higher in the third and
fourth quarters; consequently, salaries, wages and benefits historically have
been higher as a percentage of revenue during the first and second quarters.
Quarterly revenue for the acquired companies has not been as seasonal. As a
result, inclusion of these entities in the Company's results of operations
resulted in a decrease in salary, wage and benefit expenses as a percentage of
revenue in the 1996 period as compared to the 1995 period and, the Company
believes, should moderate seasonality in future periods.
Other operating expenses. Other operating expenses for the first nine
months of 1996 were $1.6 million, an increase of $885,000 or 127% over the first
nine months of 1995, principally as a result of the acquisition of Formations
and PracticeMatch. Other operating expenses decreased to 25% of revenue in the
first nine months of 1996 as compared to 28% for the same period in 1995. This
decrease was principally the result of the changes in seasonality in revenue
described above.
Depreciation and amortization. Depreciation and amortization for the first
nine months of 1996 was $550,000, an increase of $406,000 or 283% over the first
nine months of 1995. This increase resulted from the two 1996 acquisitions. As a
percentage of revenue, depreciation and amortization for each of the nine-month
periods ended September 30, 1996 and 1995 was 9% and 6%, respectively.
Acquired in-process research and development costs. As discussed above, in
connection with the acquisition of Formations and PracticeMatch the Company
acquired the ongoing research and development activities of each entity. At the
effective date of each acquisition the Company recorded nonrecurring charges
resulting from expensing acquired in-process research and development costs.
These charges totaled $6.2 million, or 99% of revenue, in the nine months ended
September 30, 1996.
Net interest expense. Net interest expense for the first nine months of
1996 was $482,000, an increase of $438,000 or 989% over the first nine months of
1995. The increase was a result of interest due on the Senior Subordinated Notes
issued during 1996 to finance the acquisition of PracticeMatch as well as the
interest expense on the Acquisition Notes issued to the sellers of
PracticeMatch.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenue. Revenue in 1995 was $3.7 million, an increase of $761,000 or 26%
over 1994. This increase in revenue was attributable to increased licenses of
financial products to both new and existing customers.
Salaries, wages and benefits. Salaries, wages and benefits in 1995 were
$2.6 million, an increase of $685,000 or 36% over 1994. Salaries, wages and
benefits increased to 71% of revenue in 1995, compared to 65% in 1994. These
increases were primarily related to the addition of sales and marketing
personnel.
Other operating expenses. Other operating expenses in 1995 were $1.0
million, an increase of $226,000 or 31% over 1994. The increase in other
operating expenses was attributable to non-salary expenses associated with the
expansion of the Company's sales and marketing organization. Other operating
expenses were 26% of revenue in 1995, compared to 25% in 1994. The increase was
primarily related to higher costs associated with growth in the administrative,
sales and marketing infrastructure of the Company.
Depreciation and amortization. Depreciation and amortization expenses in
1995 were $193,000, an increase of $50,000 or 35% over 1994. This increase was
primarily attributable to the impact of a full year of depreciation of capital
expenditures associated with facilities expansion during 1994. Depreciation and
amortization expenses were 5% of revenue in 1995 and 1994.
21
<PAGE> 22
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Revenue. Revenue for 1994 was $2.9 million, an increase of $447,000 or 18%
over 1993. The increase in revenue was attributable to improved sales
performance and the introduction of new products.
Salaries, wages and benefits. Salaries, wages and benefits in 1994 were
$1.9 million, an increase of $218,000 or 13% over 1993. This increase was
primarily related to growth in the number of employees. As a percentage of
revenue, salaries, wages and benefits decreased from 68% in 1993 to 65% in 1994
as a result of leveraging the Company's existing administrative and sales and
marketing infrastructure.
Other operating expenses. Other operating expenses in 1994 were $731,000,
an increase of $223,000 or 44% over 1993. Other operating expenses increased to
25% of revenue in 1994 from 21% in 1993. These increases were due to costs
associated with the relocation and expansion of the corporate offices.
Depreciation and amortization. Depreciation and amortization expenses in
1994 were $143,000, an increase of $68,000 or 91% over 1993. Depreciation and
amortization expense increased to 5% in 1994 from 3% of revenue in 1993.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly financial data
for 1994, 1995 and the first three quarters of 1996. In the opinion of the
Company's management this unaudited information has been prepared on the same
basis as the audited information and includes all adjustments necessary to
present fairly the information set forth therein. The operating results for any
quarter are not necessarily indicative of results for any future period:
<TABLE>
<CAPTION>
1994 QUARTER ENDED 1995 QUARTER ENDED
-------------------------------------- --------------------------------------
STATEMENTS OF OPERATIONS: MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
- ------------------------- ------- ------- -------- ------- ------- ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue.................. $487 $780 $794 $833 $ 470 $ 686 $1,294 $1,205
Salaries, wages and
benefits............... 417 473 485 518 563 622 701 692
Other operating
expenses............... 124 211 180 216 226 270 204 256
Depreciation and
amortization........... 22 38 42 41 42 47 54 50
Acquired in-process
research and
development costs...... -- -- -- -- -- -- -- --
---- ---- ---- ---- ----- ----- ------ ------
Operating income
(loss)............... (76) 58 87 58 (361) (253) 335 207
Interest income
(expense),
net.................... (8) (23) (17) (6) (14) (13) (17) (22)
Other income (expense)... -- -- -- -- -- -- -- --
Income taxes............. -- -- -- -- -- -- -- --
---- ---- ---- ---- ----- ----- ------ ------
Net income (loss)...... $(84) $ 35 $ 70 $ 52 $(375) $(266) $ 318 $ 185
==== ==== ==== ==== ===== ===== ====== ======
<CAPTION>
1996 QUARTER ENDED
----------------------------
STATEMENTS OF OPERATIONS: MAR. 31 JUNE 30 SEPT. 30
- ------------------------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenue.................. $ 1,577 $2,297 $2,380
Salaries, wages and
benefits............... 1,121 1,637 1,630
Other operating
expenses............... 356 650 579
Depreciation and
amortization........... 96 226 228
Acquired in-process
research and
development costs...... 6,180 -- --
------- ------ ------
Operating income
(loss)............... (6,176) (216) (57)
Interest income
(expense),
net.................... (52) (214) (216)
Other income (expense)... -- (37) (3)
Income taxes............. -- -- --
------- ------ ------
Net income (loss)...... $(6,228) $ (467) $ (276)
======= ====== ======
</TABLE>
The Company's quarterly revenues and operating results have varied
significantly in the past. Quarterly results have fluctuated as a result of a
variety of factors, including: the Company's sales cycle; staffing changes in
the Company's sales and marketing organization; changes in the Company's
resources; demand for the Company's products; the timing of significant new
customer contracts; the nonrenewal of significant customer contracts; the timing
of acquisitions; competitive conditions in the industry; changes in customer
budgets; and general economic factors. Furthermore, the Company has experienced
a seasonal pattern in its operating results, with a greater proportion of the
Company's revenue and operating profitability occurring in the second half of
the year. The Company attributes this seasonality to a combination of factors
including budgeting and other factors affecting the health care industry
generally, the compounding effect of historical renewal schedules (which
typically result in greater license renewals in the third and fourth quarters)
and internal staffing and growth issues. The Company believes its financial
products are more seasonal than its other
22
<PAGE> 23
products and expects the addition of new products, including those from the
acquisitions of Formations and PracticeMatch, to moderate, but not end, this
seasonal effect.
A significant portion of the Company's expenses are relatively fixed, and
the amount and timing of increases in such expenses are based in large part on
the Company's expectations concerning future revenue. If revenues are below
expectations in any given quarter, the adverse effect may be magnified by the
Company's inability to adjust spending quickly enough to compensate for the
revenue shortfall. Accordingly, even a small variation from expected revenue
could have a material adverse effect on the Company's results of operations for
a given quarter.
INCOME TAXES
The Company has not recorded any income tax expense or benefit during 1993,
1994, 1995 or the first nine months of 1995 or 1996 due to operating losses or
the utilization of net operating loss carryforwards to offset taxable income. At
September 30, 1996, the Company had net operating loss carryforwards of
approximately $1.3 million for federal income tax purposes. The net operating
loss carryforwards expire beginning in 2006 through 2011. The total gross
deferred tax asset was approximately $3.0 million as of September 30, 1996 and
has been reduced to zero by a valuation allowance.
Deferred tax assets and liabilities are determined based on differences
between the financial reporting and the tax bases of assets and liabilities and
are measured using the enacted tax rates and laws that will be in effect when
the differences are expected to reverse. Applying the provisions of SFAS 109 to
the Company, particularly considering the Company's history of net losses, the
Company was unable to support a conclusion consistent with SFAS 109 that it is
more likely than not that it will generate future taxable income during the loss
carryforward periods; therefore, the Company has provided a full valuation
allowance against its net deferred tax assets. In determining that a valuation
allowance was required, management primarily considered such factors as the
Company's history of operating losses and expected near-term future losses and
earnings, the nature of the Company's deferred tax assets, the absence of
significant excess of appreciated asset value over the tax basis of the
Company's net assets, the absence of taxable income in prior carryback years and
the potential for deferred tax assets resulting from future business
acquisitions. Although management's operating plans assume taxable and operating
income in future periods, historical performance has produced an accumulated
deficit of $9.5 million at September 30, 1996. Consequently, the Company has
provided a full valuation allowance against its net deferred tax assets until
such time as the Company produces sufficient taxable and operating income to
support a lower valuation allowance.
The amount of the Company's net operating loss carryforwards may be limited
if the Company has an "ownership change" as defined in Section 382 of the
Internal Revenue Code of 1986, as amended. See Note 7 of Notes to Consolidated
Financial Statements of the Company. Changes in share ownership of the Company
as a result of, or arising after, the Offering, such as the exercise of
registration rights and subsequent sales of Common Stock, will likely cause an
"ownership change" to occur. If an ownership change occurs, the Company's net
operating loss carryforwards, which currently may be used to offset taxable
income without limitation, will become subject to limitation. The amount of any
such limitation would depend on numerous factors, some of which are not
determinable at this time.
LIQUIDITY AND CAPITAL RESOURCES
In January 1996 the Company and HPSC entered into the Securities Purchase
Agreement. Under that agreement, HPSC purchased 280,623 shares of Series B
Convertible Preferred Stock for $2.0 million and agreed to purchase up to $10.0
million in original principal amount of the Senior Subordinated Notes. In
connection with the issuance of the Senior Subordinated Notes, the Company
agreed to issue warrants to purchase up to 432,101 shares of Common Stock. In
March 1996, the Company issued $6.9 million in original principal amount of the
Senior Subordinated Notes to HPSC and warrants to purchase 298,150 shares of
Common Stock. The Company used $1.5 million of the proceeds from the sale of
Series B Convertible Preferred Stock to complete the acquisition of Formations.
Medirisk used approximately $5.4 million of the proceeds from the issuance of
the Senior Subordinated Notes to complete the acquisition of PracticeMatch.
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<PAGE> 24
In addition, in connection with the PracticeMatch acquisition, the Company
issued the Acquisition Notes to the sellers in an aggregate amount of $1.1
million. Under the terms of the Acquisition Notes, the Company must maintain at
least $1.1 million in borrowing capacity under the Securities Purchase Agreement
until the Acquisition Notes are repaid in full. In addition, the terms of the
Bridge Loan require the Company to maintain at least $850,000 of borrowing
capacity under the Securities Purchase Agreement until the Bridge Loan is repaid
in full. Upon completion of the Offering and repayment of the Senior
Subordinated Notes, HPSC's obligation to purchase additional Senior Subordinated
Notes will terminate.
For the years ended December 31, 1993, 1994 and 1995 the Company generated
cash flow from operations of $157,000, $51,000 and $15,000 respectively. For the
nine months ended September 30, 1995 and 1996, cash flow used in operations
totaled $64,000 and $606,000, respectively. These amounts primarily represent
net income (loss) adjusted for the noncash charges of depreciation and
amortization, and, in 1996, write off of in-process research and development
costs, partially offset by changes in working capital.
Net cash used in investing activities during the foregoing periods
consisted predominantly of $6.9 million used in the nine months ended September
30, 1996 to fund the acquisitions of Formations and PracticeMatch.
Net cash provided by (used in) financing activities during the years ended
December 31, 1993, 1994 and 1995 and the nine months ended September 30, 1995
and 1996, was $212,000, $(192,000), $(140,000), $(102,000) and $8.1 million,
respectively. The net cash provided by financing activities during 1993
consisted primarily of the proceeds of the issuance of notes payable, partially
offset by payments on long-term debt and obligations under capital leases. The
net cash used in financing activities during the years ended December 31, 1994
and 1995 and the nine months ended September 30, 1995 consisted principally of
payments on long-term debt and obligations under capital leases and, in 1994, a
repurchase of Common Stock, offset in part, in 1994, by the proceeds from the
issuance of a promissory note. The net cash provided by financing activities for
the nine months ended September 30, 1996 resulted from the HPSC financing,
offset in part by payments on long-term debt and obligations under capital
leases and stock and debt issuance costs.
For the years ended December 31, 1993, 1994 and 1995, the Company acquired
fixed assets of $158,000, $217,000 and $192,000, respectively. For the nine
month periods ended September 30, 1995 and 1996, the Company acquired fixed
assets of $192,000 and $295,000, respectively. These assets were almost
completely financed through capital leases. Outstanding obligations under
capital leases for the same periods were $163,000, $288,000 and $324,000,
$373,000 and $338,000, respectively.
The Company's cash flow from operations has generally been sufficient to
fund liquidity needs of the Company other than acquisitions and new product
development. The Company has indebtedness of $507,000 outstanding under the
Bridge Loan as of January 28, 1997. The remainder of the Bridge Loan is
available for general corporate purposes. The net proceeds of the Offering will
be used to repay certain senior subordinated notes and certain notes issued in
connection with the Company's acquisition of PracticeMatch, to pay accrued and
unpaid dividends on the Company's Series A and Series B Preferred Stock and to
repay the Bridge Loan. The Company intends to use the balance of the net
proceeds of the Offering for working capital and general corporate purposes
including potential acquisitions of health care information businesses and
development of additional products. See "Use of Proceeds."
NationsBank and the Company have entered into a commitment letter regarding
the establishment of a $10.0 million revolving credit facility upon the closing
of the Offering. The NationsBank Revolver will be secured by substantially all
of the Company's assets. The commitment letter contemplates the establishment of
the NationsBank Revolver under which the Company may, subject to customary
terms, conditions and covenants, borrow up to $10.0 million to fund working
capital needs as well as new product development and acquisitions. The
commitment letter provides that the NationsBank Revolver will bear interest at
varying rates based on LIBOR and NationsBank's prime rate and will mature two
years after closing of the establishment of the NationsBank revolver. While the
Company and NationsBank have executed the commitment letter, the establishment
of the NationsBank Revolver is subject to a number of conditions, including the
closing of the Offering, negotiation and execution of acceptable documentation
and further due diligence by NationsBank. As a result, no assurances can be
given that the NationsBank Revolver will be established, and, if established,
what the terms of the facility will be.
24
<PAGE> 25
After the application of the net proceeds from the Offering, the Company
believes that the remaining proceeds, borrowings under the NationsBank Revolver
and cash generated from operations will be sufficient to meet the capital
expenditure and working capital needs for the Company's operations for the next
12 months. The Company's future liquidity and cash requirements will depend on a
wide range of factors, including development costs associated with new products,
enhancements of existing products and acquisitions. Although the Company has no
present commitments or agreements regarding acquisitions, the Company's strategy
is to acquire additional complementary products and businesses. If the proceeds
of the Offering, borrowings under the NationsBank Revolver and cash flow from
operations are not sufficient to fund such acquisitions, the Company will be
required to seek additional financing, and there can be no assurance that such
financing will be available in amounts and at terms acceptable to the Company.
EFFECTS OF INFLATION
Management does not believe that inflation has had a material impact on
results of operations for the periods presented. Substantial increases in costs,
particularly the cost of labor for product development, marketing and sales,
could have an adverse impact on the Company and the health care information
industry.
25
<PAGE> 26
BUSINESS
Medirisk is a leading provider of proprietary databases and related
decision-support software and analytical services to the health care industry in
the United States. The Company's products and services enable payers and
providers in the United States to make objective comparisons of the financial
costs and clinical outcomes of physician-mediated services to customer-specific
and industry benchmarks and to access information concerning specific
physicians. These capabilities assist payers and providers in pricing managed
care contracts, evaluating physician fee schedules and utilization of
physician-mediated services, comparing provider outcomes and performance, and
recruiting physicians. Medirisk actively sells its products to over 750 major
customers in the United States, including leading health plans, insurers,
hospitals and larger physician groups, as well as to more than 700 smaller
customers, including single-specialty physician groups. Medirisk does not
currently sell its products to persons outside the United States. The Company
believes it is the leading provider of clinical and financial databases
comprised of physician-oriented content.
Medirisk's health care information products and services consist of
financial products, clinical performance products and physician database
products. The Company's financial products enable customers to compare, by
procedure and geographic location, data concerning the cost and utilization of
health care services in the United States and to analyze trends in these data.
The Company's clinical performance products allow customers to measure clinical
outcomes across a range of care within a variety of medical specialties. The
Company's physician database aids customers in conducting cost-effective
in-house physician recruiting.
Based on the Company's database of acquisition candidates and competitors,
internal market research and published sources, Medirisk believes that its share
of the market for financial products, outsourced clinical performance products
and physician database products, based on the current level of market
penetration, is approximately 22%, 31% and 51%, respectively. The Company
believes that no single competitor offers information in all three of these
areas.
Medirisk built its core databases by collecting, standardizing and
normalizing more than three billion health care transaction records. Medirisk's
databases include records submitted by the Company's customers under its ongoing
data collection plan and the results of regular proprietary surveys of managed
care plans and other payers. The Company believes that the long-standing
relationships under which it collects these data and the data interpretation
methodologies used by the Company represent significant competitive advantages.
INDUSTRY BACKGROUND
The U.S. health care industry has grown dramatically in recent years.
According to the Health Care Financing Administration ("HCFA"), health care
expenditures have increased from less than $250 billion, or approximately 9% of
the gross domestic product, in 1980 to almost $1.0 trillion, or approximately
14% of the gross domestic product, in 1994. Payers are responding to escalating
costs by seeking to transfer the financial risk associated with the delivery of
health care to providers under capitated or other managed care arrangements. As
managed care arrangements become increasingly prevalent, both payers and
providers are under intense pressure to deliver health care at the lowest total
cost while ensuring quality results for their patients. To achieve this goal,
payers and providers must understand likely procedure utilization rates and the
competitive costs of health care services. In addition, the Company believes
that the ongoing development of managed care has increased the number of
physicians willing to change their practice affiliations and the demand for
primary care physicians. The Company believes that as a result of these factors,
payers and providers must understand how clinical outcomes affect total cost and
patient satisfaction levels, must evaluate means to achieve the most desirable
outcomes, and must conduct physician recruiting based on detailed criteria, all
on a cost-effective basis.
Traditional health care information systems, which have been designed to
capture only information concerning procedures performed and to generate bills,
have focused on the administrative aspects of health care. The Company believes
that there is a growing awareness that most health care costs are related to the
clinical (rather than administrative) aspects of the delivery of care, which has
resulted in a growing demand for databases incorporating clinical knowledge, and
that this demand is likely to intensify as managed care techniques become more
sophisticated. While some payers and providers have recently adopted new
information systems that allow them to capture cost, utilization and clinical
outcomes data regarding their own
26
<PAGE> 27
businesses, they generally have not been able to use the data collected
effectively. In order for payers and providers to gain perspective on the
marketplace and to analyze effectively managed care and other arrangements, the
Company believes that they must have access to benchmark data against which they
can compare the data they have collected regarding their own businesses, as well
as information relating to statistical differences in health care costs among
urban, suburban and rural markets. Furthermore, while broad, public-sector
information was formerly the only information practicably available, payers and
providers are increasingly seeking a more complete, region-specific picture of
the health care market, which requires access to both private- and public-sector
benchmark data.
BUSINESS STRATEGY
Medirisk's objective is to enhance its position as a leading provider of
proprietary databases and related decision-support software and analytical
services to payers, providers and other health care industry participants in the
United States. To attain this objective, Medirisk seeks to:
Leverage its Existing Customer Base. Medirisk believes that
increasing demand for health care information, coupled with its broad
customer base, provides a substantial opportunity for internal growth. The
Company has long-standing relationships with customers, and Medirisk
believes it has developed a reputation for providing objective clinical and
financial information products. The Company intends to leverage these
relationships by: (i) selling higher value products within the same product
line to existing customers; (ii) cross selling additional products and
services across product lines to existing customers; and (iii) increasing
product sales to existing customers through sales to other operating units,
departments or divisions of existing customers.
Emphasize Recurring Revenue. Medirisk seeks to maximize recurring
revenues by emphasizing multi-year contracts and contract renewals.
Substantially all of Medirisk's revenues are generated by the licensing of
products on an annual or multi-year basis. The Company believes that its
high rate of recurring revenue results principally from significant revenue
enhancements, or cost savings, derived by Medirisk's customers when they
use the Company's products, as well as from the ongoing need for current
information resulting from the continuing evolution of the health care
industry.
Develop New Products. Medirisk actively develops new products and
enhances existing offerings. In recent years, the Company has introduced
numerous new products and product extensions and enhancements, and intends
to introduce several new products and product extensions and enhancements
during 1997. Ultimately, the Company intends to cross-correlate its
existing and future databases. Medirisk believes that by linking its
financial, clinical performance and physician database products, cost and
quality can be evaluated together with outcomes for specific physicians,
thus permitting true management of care by allowing customers to compare
the financial costs and expected outcomes of competing treatment regimens
or providers.
Acquire Complementary Products and Businesses. Medirisk intends to
acquire additional companies, product lines, databases and other resources
to expand into related areas and to increase market share within the
Company's existing product lines. Medirisk believes that acquisitions of
new products and customer bases provide additional cross-selling
opportunities and can lead to the development of new products based on
cross-correlation of existing and acquired products. In the first quarter
of 1996, the Company completed the acquisition of two companies with
complementary databases and products: Formations, which develops and
markets outcomes measurement databases and software applications, and
PracticeMatch, which develops and licenses a database of physician-related
information.
MEDIRISK PRODUCTS AND SERVICES
Medirisk provides a variety of products and services designed to enable its
customers to measure and assess the financial and clinical performance of health
care services in the United States. At the core of the Company's products and
services are several proprietary databases. These databases include information
on (i) reimbursement and utilization rates for over 7,400 physician-mediated
medical procedures; (ii) clinical outcomes in six medical specialty areas; and
(iii) physician recruiting information regarding over 88,000
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<PAGE> 28
physicians. The Company also provides decision-support software that enhances
the utility of its databases and analytical services. Customers can license the
specific information they need based on variables such as geographic region,
medical specialty, clinical procedure or timeframe.
In designing its products and services, Medirisk emphasizes quality and
ease of use. Medirisk uses proprietary data engineering methodologies to
standardize and interpret data to ensure that its products are as comprehensive,
accurate and current as possible. The detailed nature of the Company's databases
provides precise data that customers can use to address their specific
decision-making needs and offers Medirisk's customers competitive advantages.
For example, Medirisk's financial database includes information concerning over
7,400 medical procedures in 287 distinct geographic market areas in the United
States. The Company believes that the resulting detail regarding statistical
differences between health care costs in urban, suburban and rural markets is
important to its customers due to the local nature of health care delivery and
the corresponding impact on costs and reimbursement rates.
Furthermore, Medirisk's data engineering methodologies are designed to
ensure that its databases are free of bias. The resulting objectivity of
Medirisk's benchmark data allows the Company to market its products to both
payers and providers and improves the credibility of the databases as
benchmarking tools.
In addition, Medirisk's databases are regularly updated to reflect changes
in the industry and take into consideration secondary factors, such as
co-morbidity, case mix and demographics. These attributes permit customers to
compare their financial and clinical performance to industry or
customer-specific benchmarks contained in the Company's databases with
specificity and precision. Because Medirisk's information products typically
have frequent new releases, the Company can perform trend analyses of the data
over time. Further, while Medirisk's databases include public-sector data, they
focus primarily on private-sector data derived from transaction data and
clinical records contributed by Medirisk's customers and obtained from other
sources. These private- and public-sector data are not commingled, thus
permitting more precise benchmarking of data relevant to the private health care
marketplace. Medirisk obtains data through contractual contribution programs
with its customers, as well as through the Company's regular surveys of more
than 1,200 managed care organizations. The Company believes that private-sector
data is more useful for payers' and providers' comparison purposes than
public-sector data and that Medirisk's comprehensive compilation of
private-sector data represents a competitive advantage for the Company.
Medirisk has developed its databases and decision-support software for ease
of use. All of the Company's decision-support software, with the exception of
PracticeTrack, is Microsoft Windows-based and is compatible with a variety of
hardware and software applications. The Company is currently in the process of
migrating PracticeTrack to a Windows-based platform. The Company's databases can
be imported into standard software programs including Microsoft Excel, Lotus
1-2-3, FoxPro, Quattro Pro, Dbase and others, and can be imported and exported
to separate decision-support and practice administration programs provided by
companies such as HBO & Company and Medic Computer Systems, Inc.
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<PAGE> 29
Medirisk's products and services fall into three broad categories:
financial products, clinical performance products and physician database
products. The following table outlines Medirisk's products and services by
category and the related customer applications:
<TABLE>
<CAPTION>
MEDIRISK'S
INFORMATION
PRODUCTS FINANCIAL PRODUCTS CLINICAL PERFORMANCE PRODUCTS PHYSICIAN DATABASE PRODUCTS
<S> <C> <C> <C>
Benchmark Physician Fee Clinical Outcomes Physician Database(1)
Databases Database(SM) Database(1)
Procedure Utilization
Database(SM)
Decision - Capitation Manager(TM) Standardized Treatment PracticeMatch(TM)
Support Tools Fee Manager(TM) Scales PracticeTrack(SM)
Formations(SM) Clinical
Outcomes Systems
Services Decision Support Clinical Analytical TeleMatch(SM)
Services Services
Customer Managed Care Measure Efficiency and Identify Physicians
Applications Contracting Effectiveness Reduce Recruiting Cost
Market-based Pricing of Identify Under- Organize Recruiting
Procedures Performing Facilities Process
Quantify Capitation Demonstrate Quality to
Risk Managed Care
</TABLE>
(1) Used by the Company in the development of other clinical or physician
database products; not offered on a stand-alone basis.
Financial Products
Medirisk's financial products provide customers with comprehensive
proprietary information regarding physician fees and health care utilization
patterns in the United States. The following is a description of the Company's
primary financial products:
Physician Fee Database(SM). The Physician Fee Database reports
reimbursement rates for medical procedures for a variety of types of payers
performed in specific geographic markets across the United States. The
Physician Fee Database provides data concerning reimbursement levels that
providers are accepting from managed care plans and other payers, rather
than fees charged by those providers, a distinction critical to an accurate
understanding of market conditions. Fee data in the Physician Fee Database
are tracked by the AMA's CPT codes, which define all current medical
procedures, and are segregated into 287 separate market areas in the United
States (compared to 89 market areas that will be tracked by HCFA in 1997).
Medirisk believes that the Physician Fee Database divides the United States
into more geographic markets than most competing products, thereby allowing
customers to make more precise fee decisions. A customer can license data
for a specific market, state, region or the entire United States. Included
in the Physician Fee Database is pricing information for (i) reasonable and
customary charges; (ii) managed indemnity fees; (iii) three different
managed care reimbursement levels (high, typical and low); (iv) the
current-year Medicare fee schedule; (v) the current-year Medicaid fee
schedule; (vi) state-mandated levels for workers' compensation claims;
(vii) state-mandated levels for automobile personal liability claims; and
(viii) three different national/state levels (national high fee, national
average fee and state average fee). The Physician Fee Database is marketed
to payers, providers and consultants to assist in evaluating pricing and
reimbursement policies relative to other payers and providers in various
market areas.
Procedure Utilization Database(SM). The Procedure Utilization
Database provides frequently updated utilization data for all medical
procedures included in the Company's Physician Fee Database. This database
can be used to model the anticipated utilization of a specific service for
a certain population
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<PAGE> 30
profile. The database is offered on a region-specific basis and can be
adjusted for age and gender. The Procedure Utilization Database is marketed
principally to health care providers, payers and consultants who use it to
analyze expected utilization patterns when negotiating managed care
arrangements.
Capitation Manager(TM). Capitation Manager is a Windows-based
decision-support application that integrates Medirisk's Physician Fee
Database and Procedure Utilization Database and calculates capitation rates
based on customer-provided pricing and demographic assumptions. Using
Capitation Manager, the customer enters the demographic profile of a group
proposed to be covered in a capitated arrangement, the services to be
provided and proposed pricing for those services. Using these assumptions
in combination with the Company's databases, Capitation Manager calculates
the expected utilization of the services to be provided and compares the
proposed capitated pricing to managed care, fee-for-service, Medicare and
other fee benchmarks tracked by the Company within a specific U.S. market.
Capitation Manager was introduced in 1995 and is marketed to both providers
and payers to analyze capitated managed care arrangements.
Fee Manager(TM). Fee Manager is a Windows-based decision-support
software system that health care providers can use to evaluate fees,
forecast revenues and appeal claims reductions. Fee Manager integrates the
fee data contained in Medirisk's Physician Fee Database with three
decision-support software modules. The fee-evaluation software provides an
easy-to-use and objective method for reviewing and comparing providers'
fees with six of the levels of fees contained in the Physician Fee Database
and for evaluating managed care fee schedules. The revenue forecasting
module is designed to maximize provider revenue by identifying procedures
priced below market, allowing providers to project revenue by patient class
and analyze the impact of fee decisions. The claims appeal software helps
providers appeal patient claim reductions by utilizing Medirisk's
market-based data to generate documentation that supports and substantiates
the original charge.
Decision-Support Services. The Company also provides analytical
services designed to assist customers in reviewing more complex price and
utilization issues. The Company works with the customer, often using
standardized project formats, to address the customer's specific needs. For
example, Medirisk might analyze a payer's claims and transaction data to
identify areas of overpayment due to excess fees, over-utilization or
billing or coding errors. In providing these analytical services, the
Company uses or develops tools that have been or can be standardized for
similar future projects. In addition, in providing these services, the
Company can often identify opportunities to develop new products or enhance
existing products.
Clinical Performance Products
The Company offers clinical performance products that allow customers to
measure clinical outcomes across a full range of care within a variety of
medical specialties. Clinical outcomes are generally defined as the change in a
patient's health status as a result of therapy or care delivered by a health
care professional. Clinical outcomes are measured empirically using standard
health status scales that can be used to assess the patient at different stages,
including prior to the delivery of therapy or care, while such care is being
delivered and when treatment is terminated. Medirisk's clinical performance
products consist of reports prepared from the Company's clinical outcomes
database. The data included in these products are gathered by Company-certified
clinicians, automated patient information systems and Medirisk's patient
interview staff using standardized outcomes scales. Comparing customer data with
norms derived from Medirisk's database, Medirisk prepares reports detailing
customers' clinical performance based on a number of independent measures,
including patient acuity, medical and functional improvement, resource
utilization, length of stay/duration of treatment, cost of treatment and patient
satisfaction. Medirisk's clinical performance products assist both payers and
providers in (i) measuring and predicting outcomes of treatment regimens; (ii)
making normalized comparisons of facilities and providers; (iii) establishing
benchmarks for clinical quality improvement; (iv) developing standards for
clinical practice; (v) generating analytical reports for communicating with
customers and their constituents; and (vi) negotiating managed care contracts.
Medirisk's clinical performance products are currently available to track
clinical outcomes in the areas of rehabilitation, orthopedics, occupational
health, pain management, neurological care, wound care and
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<PAGE> 31
respiratory care. In addition, the Company is developing clinical performance
products in a number of other areas, including ambulatory surgery, nutrition and
infection therapy. The Company markets its clinical performance products
primarily to health care providers who use them to validate the quality of their
services to payers, to compare the performance of multiple facilities or
providers and to improve their outcomes by standardizing treatment regimens.
Physician Database Products
Medirisk's physician database products enable its customers to perform
cost-effective in-house physician recruiting. The Company's physician database
contains detailed information on more than 88,000 physicians in the United
States who are or have been candidates for a new practice affiliation and is
comprised in part of physician data from the AMA's Physician MasterFile. All
physician information is further validated and enhanced by personal telephone
interviews with the physicians conducted by members of Medirisk's full-time
staff. Current products include:
PracticeMatch(TM). PracticeMatch is a Windows-based decision-support
software system that provides in-house physician recruiters with on-line
access to the Company's physician database. By clicking on a series of
search criteria and selection screens, customers obtain information about
physicians who satisfy specified criteria. The customer can then print or
download the information to PracticeTrack for local use.
PracticeTrack(TM). PracticeTrack is a contact-management software
program that allows customers to build their own databases of physician
information concerning candidates identified using PracticeMatch, to
generate recruiting status reports and to track candidates and associated
recruiting expenses. Users can download information from the PracticeMatch
database and use the mail merge function for easy mailings to candidates.
TeleMatch(SM). TeleMatch is an outsourcing service that allows
PracticeMatch subscribers to contract with Medirisk to increase their
recruiting capabilities without increasing their staff. Under a TeleMatch
contract, the Company's staff uses PracticeMatch to identify candidates
meeting the customer's criteria and contacts these candidates to determine
their level of interest in affiliating with the TeleMatch customer. As a
result, customers can improve recruiting efficiency by focusing efforts on
only physicians who meet the customer's criteria and who have confirmed
their interest in the practice opportunity.
Customer Service Plans
As a complement to its database and decision-support products, Medirisk
offers customer service plans through which customers receive access to
value-added services that include regular updates of their licensed databases,
technical verification of data included in the databases and additional advice
related to product applications. The additional cost of these customer service
plans ranges from 15% to 25% of the related license fee.
DATA ACQUISITION
The Company collects data for inclusion in its databases and related
products in a variety of ways, including its data contribution program and its
regular managed care surveys. Once the data are collected, Medirisk's database
personnel clean and analyze the data before they are included in the Company's
databases. Medirisk uses proprietary processes to validate the data submitted by
standardizing, normalizing and formatting the data and then applies its database
methodologies to segment the data.
Financial Products. Medirisk began tracking negotiated physician fees in
1983 and created custom-negotiated fee schedules for its consulting clients in
over 100 markets before introducing and marketing the Physician Fee Database.
The data used in Medirisk's financial products have been collected through
Medirisk's customer data contribution program, whereby customers provide their
medical claims or other health care transaction data to the Company on a regular
basis, surveys of more than 1,200 managed care
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<PAGE> 32
organizations, purchases of certain data sets and maintenance of a
customer-support database. Included in the Physician Fee Database and Procedure
Utilization Database are approximately 3 billion private sector transaction
records, including actual managed care transaction data and negotiated fee
schedules, that Medirisk has analyzed during the past three years. These 3
billion health care transaction records have been collected from 1983 to the
present, with approximately 2.3 billion having been collected since 1992. In
light of patient privacy issues and related concerns, the Company's customers
and other sources of data do not disclose patient identities to the Company;
therefore the Company is unable to determine to how many patients the 3 billion
records relate. A transaction record is generally defined as the record of a
health care procedure performed by a physician or other health care provider on
a patient, and multiple transaction records are often generated in a single
visit by a patient to a physician or other health care provider. To encourage
customers to participate in its data contribution program, Medirisk offers
customers price discounts in return for access to their raw claims data and
other health care transaction records. Medirisk's managed care surveys are
conducted on a regular basis, with special surveys conducted from time to time
to address new issues and emerging trends.
Clinical Performance Products. Medirisk obtains data for its clinical
outcomes databases from its clinical outcomes customers and other
Company-certified sources. To facilitate collection of outcomes measurements,
the Company provides its customers with data-collection tools that are tailored
to the customer's clinical record-keeping environment. The Company collects the
data through customer submission, automated patient information systems and
direct patient interviews conducted by the Company's clinical interview staff.
Optical scan forms or data-collection software are used to collect data directly
from the clinician in the absence of automated patient systems. To enhance the
reliability and integrity of customer-submitted data, Medirisk trains and
certifies clinicians affiliated with its customers in rating patients'
performance and in data-collection protocols and will only include in its
outcomes database data received from clinicians who are certified by Medirisk.
Physician Database Products. The data used to generate the Company's
physician database products are collected through personal telephone interviews
with each physician. Unlike most alternative sources of physician recruiting
data, Medirisk screens its candidates so as to include only physicians who have
expressed a willingness to change their practice affiliation, thereby
streamlining the recruiting efforts of the Company's customers. Medirisk employs
professional interview personnel who contact physicians directly, gather the
required information, record the information in the automated database and send
a hard copy to each physician for verification. The Company believes that the
fact that each physician profiled in the Company's database has personally
verified the information and knows that he or she is tracked in the
PracticeMatch database ensures the highest quality profile and offers a
significant competitive advantage over unverified databases. In addition, the
Company is the exclusive licensee of the AMA to share and enhance portions of
the AMA's Physician MasterFile. This relationship greatly enhances the quality
and availability of information about practicing physicians.
DATA DELIVERY
The Company's financial products are delivered to customers on magnetic
tapes or diskette, depending upon customer preference. The Company's clinical
performance products produce reports based on customer-provided data, and such
reports are delivered to customers in hard copy and on diskette. The Company's
physician database products are delivered to customers via on-line access. The
Company believes that there are readily available alternative sources of supply
for all of the media on which its products are delivered.
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<PAGE> 33
CUSTOMERS
The unbiased nature of Medirisk's databases enables the Company to market
its products to both payers and providers. The Company's customers include
managed care plans, insurance companies, self-insured companies, hospitals,
physician practices and consultants. None of the Company's customers, other than
HEALTHSOUTH, accounted for a material amount of the Company's revenues in 1995
or 1996, on a pro forma basis giving effect to the acquisition of Formations and
PracticeMatch as if such transactions occurred on January 1, 1995. For purposes
hereof, a major customer is defined as a customer generating annualized revenue
of more than $5,000. Most of the Company's major customers license products in
only one of the product areas offered by the Company. The Company has over 750
major customers, including the following selected major customers:
<TABLE>
<CAPTION>
TYPE SELECTED MAJOR CUSTOMERS
<S> <C> <C>
Managed Care Plans (HMOs, Oxford Health Plans Healthsource
PPOs, etc.) The Prudential Health Care System Aetna
Private Healthcare Systems (PHCS) Kaiser Foundation Health
Plan, Inc.
Indemnity Insurers Aetna Life Insurance Company Bankers Life & Casualty
John Alden Insurance Company Phoenix Mutual Life Insurance
Pioneer Life Insurance Company Prudential Insurance Company
Blue Cross/Blue Shield Plans in 10 states of
America
Integrated Delivery Allina Health System Duke Health Network
Systems/ Quorum Health Resources OrNda Health Corporation
Hospitals University of Texas Medical Center Adventist Health System
Piedmont Healthcare Organization/Promina
Physician Practices/ Medaphis PhyCor
Management Companies Yale/New Haven Hospital Physician Corporation Johns Hopkins University
Massachusetts General Physicians' Organization School
Vanderbilt University School of Medicine of Medicine
Workers Compensation Beech Street Crawford & Company
Payers Corporate Systems State of Ohio
State of Rhode Island Commonwealth of Kentucky
State of Wisconsin District of Columbia
The Workers' Compensation Research Institute
Consulting Firms Andersen Consulting Coopers & Lybrand LLP
Deloitte & Touche LLP Ernst & Young LLP
KPMG Peat Marwick LLP Price Waterhouse LLP
Hewitt, Coleman & Associates A. Foster Higgins
The Wyatt Company
Specialty Health Care HEALTHSOUTH NovaCare, Inc.
Providers Rehabilitation Management, Inc. Mariner Health
IntegraCare, Inc.
</TABLE>
The Company has standard license agreements for its database and
decision-support software offerings. Customers purchase licenses to use
Medirisk's data for a specified period of time, ranging from one to three years.
The Company's contracts typically require payment of the current year's fee
prior to shipment or installation of the product. Prices to major customers for
Medirisk's current financial products generally fall in the range of $7,000 to
$12,000 per year for a single market, $20,000 to $30,000 per year for an entire
state or region, and $50,000 to $125,000 per year for a national database.
Prices for Medirisk's current clinical outcomes measurement products fall in the
range of $5,000 to $25,000 per facility per year, depending on the number of
clinical specialties and number of patients reviewed. In addition, there are
one-time charges for
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<PAGE> 34
account set-up, user training and special report features. Prices for access to
the PracticeMatch database average approximately $15,000 to $26,000 per year per
site. Initial costs for user training and support are included in the first-year
base license fee for PracticeMatch. Medirisk's marketing and pricing objectives
are focused on generating recurring revenues from multi-year contracts and from
renewing annually renewable contracts, and the Company offers price concessions
for multi-year contracts.
The Company has over 750 major customers that account for more than 90% of
the Company's revenue. These major customers include leading health plans,
insurers, hospitals and larger physician groups. Most of the Company's customers
license products in only one of the product areas offered by the Company. The
Company also has more than 700 smaller customers, including numerous small
single-specialty physician groups and consulting practices. These customers
generally have licenses generating annual license fees of less than $500 per
customer.
SALES AND MARKETING
As of January 28, 1997, Medirisk's sales and marketing department included
27 full-time employees, including 14 account executives, one sales manager and
additional employees involved in market research and support and business
development. Medirisk has developed a marketing model in which its business
development staff (i) identifies and contacts prospective customers via
telephone; (ii) works to define and understand these prospective customers'
information needs to determine whether a prospective customer could benefit from
one of the Company's products; and (iii) inputs this information into a
market-specific prospect profile database. Medirisk's account executives then
contact those potential clients that have an identified need for a Medirisk
product to educate them about how Medirisk's information products and services
could be used to address their specific market and competitive needs. This
marketing model permits the Company's account executives to maximize the time
spent addressing prospective customers' purchasing decisions while minimizing
time spent with unqualified prospects.
ACQUISITIONS
The Company believes that the health care information industry is rapidly
evolving and highly fragmented, characterized by many businesses that have been
created by entrepreneurs who are knowledgeable in the areas of data products and
technology but which lack sophisticated marketing and sales organizations. The
Company believes that many of these businesses represent acquisition
opportunities that could permit the Company to integrate acquired products and
technology into its operations and to leverage its sales and marketing
organization further.
Medirisk has corporate resources dedicated to identifying, analyzing and
pursuing appropriate acquisition candidates. The Company is currently tracking a
database of more than 300 companies, of which more than 100 currently meet
Medirisk's primary acquisition criteria for product type, revenue and customer
base. Four lines of business are of primary interest to the Company: (i)
database products, with an emphasis on companies focused on benchmark data; (ii)
software products and developers that can add value to the Company's data
products or assist the Company in its data collection efforts; (iii) consulting
firms focused on payer and provider effectiveness and profitability; and (iv)
health care focused publications (both paper and electronic) to gain better
access to a broader customer base for the marketing of lower priced data
products and cross selling other products. Medirisk has also incorporated
executive management depth to build the business platform necessary to enable
the Company to be a consolidator in the fragmented health care information
services industry. The Company believes that its existing management and
infrastructure, as well as its experience in acquiring and assimilating new
products and companies, will allow it to continue the acquisition of new
companies, products, databases and other resources.
COMPETITION
The Company faces intense competition in providing health care information
products and services. Competitors vary in size, scope and breadth of product
and service offerings. The Company competes with different competitors in each
of its target markets, and certain of such competitors have substantially
greater
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<PAGE> 35
resources than those of the Company. In addition, several large horizontally
integrated information services companies, including Dow Jones, Dun & Bradstreet
Corporation, First Data Corporation, National Data Corporation and Thomson
Publishing, have developed and are marketing information products and services
to the health care industry. The Company believes that it is likely that one or
more of such companies may become direct competitors of the Company either by
acquiring existing competitors or by developing and marketing their own
products. Many of these larger companies are engaged in the processing of health
care claims and, thus, have access to substantial claims- and cost-related data
from which they could build competing databases or which they could license to
other competitors of the Company. The Company also competes with the internal
information resources and systems of certain of its prospective and existing
customers. The Company believes that the principal competitive factors in its
target markets include the breadth and quality of database and applications
offerings, access to proprietary data, the proprietary nature of methodologies
and technical resources, price and the effectiveness of marketing and sales
efforts.
PROPERTIES
The Company's corporate headquarters occupy approximately 16,000 square
feet of an office building located in Atlanta, Georgia, under a lease expiring
in March 1999, with one five-year renewal term. Medirisk also leases office
space in Chicago, Illinois and St. Louis, Missouri under leases expiring in
December 1999 and March 1999, respectively. The Company believes that such
offices are adequate for the Company's current requirements.
EMPLOYEES
On January 28, 1997, the Company had 111 full-time employees. Of these, 20
were corporate personnel, 27 were sales and marketing personnel and 64 were
involved in operations and product development. None of the Company's employees
is covered by a collective bargaining agreement. The Company considers relations
with its employees to be good.
LEGAL PROCEEDINGS
The Company is involved in various claims arising in the normal course of
business. In the opinion of management of the Company, although the outcomes of
these claims are uncertain, in the aggregate they are not likely to have a
material adverse effect on the Company's business, financial condition and
results of operations.
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<PAGE> 36
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to the
executive officers, directors and director nominees of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Mark A. Kaiser(1).............................. 39 Chairman of the Board, Chief Executive
Officer and President
Paul A. Rodwick................................ 50 Executive Vice President and Chief
Operating Officer
Kenneth M. Goins, Jr........................... 38 Executive Vice President and Chief
Financial Officer
Susan P. Brandt................................ 48 Vice President, Operations
Pamella L. Leiter.............................. 42 Vice President, Product Development
Michael J. Finn(2)............................. 47 Director
James K. Murray, III(1)(2)..................... 34 Director
Robert P. Pinkas(1)(2)......................... 42 Director
Keith O. Cowan................................. 40 Director Nominee
William M. McClatchey, M.D..................... 48 Director Nominee
</TABLE>
- ---------------
(1) Member of the Audit Committee of the Board of Directors.
(2) Member of the Compensation Committee of the Board of Directors.
Mark A. Kaiser joined the Company in 1991 and has served as Chairman of the
Board, Chief Executive Officer and President of the Company. Mr. Kaiser has been
a director of the Company since 1991. Prior to being recruited to Medirisk, Mr.
Kaiser's experience included senior and executive management positions in sales
and marketing for health care and technology companies. Before joining Medirisk,
Mr. Kaiser was Vice President of Sales and Marketing for Charter Medical
Corporation, the nation's largest chain of psychiatric hospitals. Mr. Kaiser was
Senior Vice President of Marketing at TelecomUSA, where he worked from the early
stages of the company until its acquisition by MCI Communications Corporation.
Mr. Kaiser was involved in TelecomUSA's acquisition and consolidation of more
than 50 companies, and he co-managed the consolidation of the TelecomUSA
customer base onto standard MCI products. Mr. Kaiser holds Bachelor of Science
degrees in Computer Science and Mathematics from Furman University.
Paul A. Rodwick has served as Executive Vice President and Chief Operating
Officer since joining Medirisk in December 1996. Prior to joining the Company
from 1985 until November 1996, Mr. Rodwick served in various positions with
Attachmate Corporation ("Attachmate"), a manufacturer and seller of computer
software and hardware products for network applications. From 1995 until
November 1996, Mr. Rodwick was Executive Vice President with responsibility for
several product lines as well as responsibility for Attachmate's worldwide
manufacturing operations. From 1993 to 1995, Mr. Rodwick was President of
Attachmate's Unisys Division, which developed, manufactured and marketed Unisys
connectivity and database access products. From 1991 to 1993, Mr. Rodwick was a
Senior Vice President of Attachmate with responsibility for worldwide technical
support, information systems and operations (including worldwide manufacturing
and materials management). Prior to 1991, Mr. Rodwick was a Vice President of
Attachmate with a variety of manufacturing and management responsibilities.
Prior to joining Attachmate from 1981 to 1985, Mr. Rodwick was Vice President
and General Manager of the Computer Graphics Division of Chromatics, Inc. Mr.
Rodwick holds a Bachelor of Science degree in Mechanical Engineering from Purdue
University and a Masters of Business Administration from Loyola University.
Kenneth M. Goins, Jr., has served as Vice President, Finance and
Administration and Chief Financial Officer of the Company from joining Medirisk
in April 1996 until December 1996 when he was elected Executive Vice President.
Prior to joining the Company from 1985 until April 1996, Mr. Goins served in
various capacities with First Data Corporation ("FDC") and its predecessors
First Financial Management
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<PAGE> 37
Corporation ("FFMC") and MicroBilt Corporation ("MBC"). From 1995 until April
1996, Mr. Goins was Vice President of Financial Planning and Analysis for FDC, a
major financial information services company based in Atlanta. FDC acquired FFMC
in October of 1995, where Mr. Goins served as Vice President of Financial
Planning and Analysis from June 1994 until October 1995. During the last half of
his tenure at FFMC and FDC, Mr. Goins also served as Chief Financial Officer for
Unified Merchant Services, a credit card processing joint venture with
NationsBank. From 1985 until June 1994, when it was acquired by FFMC, Mr. Goins
was an officer of MBC. He served at various times as the Executive Vice
President, Chief Financial Officer and Controller of MBC, an Atlanta-based
computer software services company, from 1985 through its initial public
offering and until MicroBilt was acquired by FFMC. While at MicroBilt and FFMC,
Mr. Goins was involved in a number of acquisitions in the information and
software industries. Prior to his employment with MBC, Mr. Goins was employed in
various capacities by Colonial Life and Accident Insurance Company, based in
Columbia, South Carolina. Mr. Goins holds a Bachelor of Science degree in
Business Administration from the University of South Carolina and is a Licensed
Certified Public Accountant.
Susan P. Brandt has served as Vice President since joining the Company in
March 1996 in connection with the Company's acquisition of PracticeMatch. Ms.
Brandt was with PracticeMatch from 1990 until it was acquired by the Company.
She was general manager of PracticeMatch when it was acquired by Medirisk. Prior
to joining PracticeMatch, Ms. Brandt was a consultant for Cejka & Co., a St.
Louis-based physician search firm. From 1981 to 1986, Ms. Brandt served as a
sales representative for Wang Laboratories and for Racal-Milgo, a data
communications products manufacturer.
Pamella L. Leiter has served as a Vice President since joining the Company
in January 1996 in connection with the Company's acquisition of Formations. Ms.
Leiter founded Formations in 1987 and was its President until its acquisition in
January 1996. Prior to founding Formations, Ms. Leiter managed The New Medico
Rehabilitation at Visitors Hospital in Buchanan, Michigan, managing the
conversion of a rural hospital into a head injury rehabilitation hospital from
1986 through 1987. From 1978 through 1986, Ms. Leiter served in various
rehabilitation positions at Memorial Hospital of South Bend, South Bend,
Indiana. Ms. Leiter holds a Bachelor of Science degree in Occupational Therapy
from the University of Illinois, and a Master of Science in Administration
degree from The University of Notre Dame.
Michael J. Finn has been a Director of the Company since 1992. Mr. Finn has
been a General Partner of Brantley Venture Partners II, L.P., a venture capital
firm located in Cleveland, Ohio since 1995. Prior to joining Brantley from 1987
until 1995, Mr. Finn was Vice President, Equities for Sears Investment
Management Co. Mr. Finn is also a director of Silvon Software, Health Care
Solutions, Inc. and Pediatric Services of America, Inc. Mr. Finn has been an
active investor in small businesses since 1976 and holds Bachelor of Science
degree in Urban Planning and Master of Science degrees in Land Economics and
Finance from Michigan State University.
James K. Murray, III, has been a Director of the Company since January
1996. Since October 1995, Mr. Murray has been Executive Vice President and Chief
Financial Officer of HealthPlan Services Corporation, a Tampa, Florida-based
health care services company providing marketing, distribution, administrative
and cost containment services on behalf of health care payers. Prior to joining
HealthPlan Services from 1990 until October 1995, Mr. Murray was President and
Chief Executive Officer of Plant State Bank, a federally-insured commercial bank
in Hillsborough County, Florida. From 1985 to 1990, Mr. Murray was an accountant
with Arthur Andersen & Co. in Atlanta, Georgia. Mr. Murray is also on the board
of directors of DynaBit U.S.A., Inc., an international value added distributor
of computer parts and components. Mr. Murray holds a Bachelor of Science degree
in Accounting and a Master of Science degree in Finance from the University of
Virginia. Mr. Murray is a Licensed Certified Public Accountant.
Robert P. Pinkas has been a Director of the Company since 1991. Mr. Pinkas
is currently a General Partner and was a founding partner of Brantley Venture
Partners II, L.P., a venture capital firm located in Cleveland, Ohio. Mr. Pinkas
was a founder of Brantley Partners in 1981 and has worked with it and its
related investment partnerships since then. Mr. Pinkas has been a director,
officer and investor in several early-stage businesses since 1981, and he
currently serves as a director of Quad Systems Corporation, Gliatech, Inc.,
Summit Environmental Group, Inc. and Pediatric Services of America, Inc. Mr.
Pinkas holds Bachelor of
37
<PAGE> 38
Arts degree in Government and a Master of Science degree in History from Harvard
University and a Juris Doctor degree from the University of Pennsylvania.
In addition to the executive officers and directors listed above, the
following persons have consented to become directors of the Company upon
completion of the Offering:
Keith O. Cowan, is Vice President -- Corporate Development for BellSouth
Corporation. Mr. Cowan joined BellSouth as an executive officer in May 1996. He
is responsible for managing the merger and acquisition activities of BellSouth
and its operating subsidiaries, including the identification of acquisition
candidates and the structuring and negotiation of transactions. Prior to joining
BellSouth, Mr. Cowan was associated with Alston & Bird, a law firm based in
Atlanta, Georgia, for 14 years, becoming a partner in the firm in 1990. His
experience included the representation of public and private corporate clients
in corporate and securities transactions. During his last five years at Alston &
Bird, Mr. Cowan specialized in the health care and insurance industries. Alston
& Bird is the Company's legal counsel.
William M. McClatchey, M.D., F.A.C.P., F.A.C.R., is a physician practicing
in Atlanta, Georgia, specializing in Primary Care Internal Medicine and
Rheumatology. Dr. McClatchey has practiced medicine at the Piedmont Clinic since
1979. Dr. McClatchey was a member of the Board of Directors of BankSouth
Corporation, N.A., and served as Chairman of its Community Development
Committee. He is a member of the American College of Physicians, serving on its
Committee on Medical Informatics from 1986 until 1992 and as Chairman of that
committee from 1990 to 1992. Dr. McClatchey was a member of the Health Policy
Advisory Committee of the Center for Strategic and International Studies in 1993
and served as Chairman of the Study Group on Preventive Health and
Infrastructure in 1993. Dr. McClatchey is President and serves on the Board of
Trustees of Georgia Health Decisions, Inc. a community-based not-for-profit
organization working for comprehensive health care reform in Georgia. Dr.
McClatchey is a member of the Georgia Coalition for Health, a 32-member group
charged by Governor Zell Miller to devise a proposal to reform Georgia's
Medicaid program. In addition, Dr. McClatchey is a member of the Board of
Directors and Executive Committee of the Georgia Health Policy Center at Georgia
State University and a member of the Information Systems Steering Committee for
Promina Health System, Atlanta, Georgia.
Under the terms of the Company's Bylaws, the members of the Board of
Directors are divided into three classes, each of which serves a term of three
years. Each class is to consist, as nearly as possible, of one-third of the
total number of directors. The terms of Mr. Cowan and Dr. McClatchey will expire
in 1997; the terms of Messrs. Finn and Murray will expire in 1998; and the terms
of Messrs. Kaiser and Pinkas will expire in 1999.
38
<PAGE> 39
EXECUTIVE COMPENSATION
The following table presents certain summary information concerning
compensation paid or accrued by the Company for services rendered in all
capacities during the fiscal year ended December 31, 1996 for the Chief
Executive Officer of the Company and the Chief Financial Officer of the Company.
The Chief Executive Officer and the Chief Financial Officer of the Company are
referred to as the "Named Executive Officers." None of the other executive
officers of the Company received total annual salary and bonus in excess of
$100,000 in 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
NAME AND -----------------------------
PRINCIPAL POSITIONS SALARY BONUS OTHER
------------------- -------- -------- -------
<S> <C> <C> <C>
Mark A. Kaiser.............................................. $190,000 -- $36,000(1)
Chairman of the Board, Chief Executive Officer and $58,335(2)
President
Kenneth M. Goins, Jr. ...................................... $ 92,702 -- $41,667(2)
Chief Financial Officer and Executive Vice President
</TABLE>
- ---------------
(1) Represents forgiveness of certain indebtedness owed by Mr. Kaiser to the
Company in connection with the entry by Mr. Kaiser and the Company into a
new Employment Agreement. See "Certain Transactions."
(2) Represents the difference between the exercise price and the fair market
value of certain options granted in the fiscal year ended December 31, 1996.
OPTION GRANTS IN FISCAL 1996
The following table presents certain summary information concerning options
granted to the Named Executive Officers in the fiscal year ending December 31,
1996:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
NUMBER OF PERCENT OF MARKET ASSUMED ANNUAL RATES OF
SHARES TOTAL VALUE STOCK APPRECIATION FOR
UNDERLYING OPTIONS TO ON OPTION TERM
OPTIONS EMPLOYEES EXERCISE GRANT EXPIRATION -------------------------------
NAME GRANTED IN 1996 PRICE DATE DATE 0%(1) 5% 10%
---- ---------- ---------- -------- ------- ---------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mark A. Kaiser........... 12,992(2) 7.4% $0.6414 $1.9243 2/1/2006 $16,668 $ 32,389 $ 56,511
32,480(2) 18.4% $0.6414 $1.9243 6/1/2006 $41,667 $ 80,974 $141,278
Kenneth M. Goins, Jr. ... 32,480(2) 18.4% $0.6414 $1.9243 4/1/2006 $41,667 $ 80,974 $141,278
</TABLE>
- ---------------
(1) Calculation based on the difference between the exercise price and the
market value of Common Stock on the date of grant.
(2) All options become exercisable as to 20% of the subject shares on each
anniversary of the date of grant.
39
<PAGE> 40
FISCAL YEAR END OPTION VALUES
The following table presents certain information concerning the fiscal
year-end value of unexercised stock options held by the named executive
officers.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1996(#) DECEMBER 31, 1996($)(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Mark A. Kaiser............................ 109,782 50,019 $1,137,188 $518,129
Kenneth M. Goins, Jr. .................... 0 32,480 $ 0 $336,447
</TABLE>
- ---------------
(1) Calculated by determining the difference between the fair market value of
the securities underlying the option at December 31, 1996 ($11.00 per share
as determined by the Board of Directors) and the exercise price of the
Named Executive Officers' options.
STOCK INCENTIVE PLANS
Medirisk Stock Incentive Plan. The Board of Directors of the Company has
adopted and the stockholders of the Company have approved the Medirisk, Inc.
1996 Stock Incentive Plan (the "Incentive Plan"). Pursuant to the Incentive
Plan, awards are permitted to be granted in the form of non-qualified stock
options, incentive stock options, stock appreciation rights and shares of
restricted stock. In addition, the Incentive Plan provides for several types of
equity-based incentive compensation awards, namely performance units,
performance shares, phantom stock, unrestricted bonus stock and dividend
equivalent rights.
The Incentive Plan will be administered by the Compensation Committee of
the Board of Directors. The Compensation Committee will determine the persons to
whom, and the times at which, awards will be granted, the type of awards to be
granted and all other related terms and conditions of the awards, subject to
certain limitations set forth in the Incentive Plan. All officers and key
employees of the Company and its affiliates are eligible to participate in the
Incentive Plan.
A total of 502,693 shares of Common Stock are reserved for issuance
pursuant to the Incentive Plan. In the event of a Change in Control of the
Company (as defined in the Incentive Plan), stock incentives will become fully
vested without regard to the exercisability of the award or any other conditions
or restrictions. Prior to the completion of the Offering, the Company will
attempt to cause all existing outstanding options to be surrendered in exchange
for options with identical terms issued under the Incentive Plan.
Medirisk Non-Management Directors' Stock Option Plan. The Medirisk, Inc.
Non-Management Directors' Stock Option Plan (the "Directors' Plan") provides for
the issuance of non-qualified stock options to directors of the Company who are
not employed by or otherwise affiliated with the Company ("eligible" directors).
A total of 100,000 shares of Common Stock are reserved for issuance pursuant to
the Directors' Plan. The effective date of the Directors' Plan (the "Effective
Date") will be the effective date of the Offering.
The Directors' Plan will be administered by a committee of at least two
directors appointed by the Board. Each eligible director on the Effective Date
will be granted an option as of the Effective Date to purchase a total of 10,000
shares of Common Stock. Each eligible director who is first elected or appointed
to serve as a director following the Effective Date will be granted an option as
of the first business day following his or her first day of service as a
director to purchase 10,000 shares of Common Stock. An option granted under
either of the foregoing circumstances is hereinafter referred to as an "Initial
Option." Thereafter, each eligible director will be granted as of the last
business day of each following fiscal year an option to purchase 5,000 shares of
Common Stock (an "Annual Option"), provided that the eligible director continues
to serve as director as of the last business day of that fiscal year. In
addition, each eligible director will be granted, as of the date of exercise of
any Initial Option or Annual Option, an option to purchase a number of shares
equal to the number, if any, of the shares of Common Stock tendered in payment
of the exercise price as described below, provided that the optionee is a member
of the Board of Directors as of the exercise date. No options will be granted to
an eligible director who is otherwise precluded from receiving a grant of Common
Stock. If
40
<PAGE> 41
the remaining number of shares reserved for issuance under the Directors' Plan
is insufficient to grant options for the appropriate number of shares to all
eligible directors as of any grant date, then no options will be granted as of
that grant date.
The exercise price of an option will be equal to the fair market value of a
share of Common Stock on the date of grant. All options granted under the
Directors' Plan will become exercisable in one-third increments over three years
following the date of grant, provided, however, that in the event of a
director's death or disability, any such option will become exercisable
immediately in full upon the later of (i) the optionee's death or disability or
(ii) six months following the date of grant.
Messrs. Cowan, Finn, Murray and Pinkas and Dr. McClatchey will be eligible
to participate in the Directors' Plan and will each receive an Initial Option to
purchase 10,000 shares on the Effective Date at an exercise price equal to the
initial public offering price per share of the Common Stock.
EMPLOYMENT AGREEMENTS
Mr. Mark A. Kaiser is a party to an employment agreement dated as of May
31, 1996 with Medirisk pursuant to which he serves as Chairman of the Board of
Directors and Chief Executive Officer of the Company. The agreement is for an
initial term of three years, commencing on May 31, 1996, with automatic one-year
renewals thereafter, unless either party gives 60 days' advance notice of
nonrenewal. The agreement provides for an initial annual base salary of
$190,000, which may be increased annually at the discretion of the Compensation
Committee, and an annual target bonus equal to 50% of his base salary for the
applicable year, determined based upon Medirisk's performance with respect to
goals established by the Compensation Committee. Mr. Kaiser is also entitled to
participate in all of the Company's employee benefit plans. In addition, Mr.
Kaiser was granted options to purchase up to 32,480 shares of Common Stock at
$0.64 per share. The agreement provides that the Company shall grant Mr. Kaiser
additional options to purchase 32,480 shares on each of the first and second
anniversaries of the date of the agreement. These subsequent options will have
an exercise price equal to the fair market value of the Common Stock on the date
of grant. All of the options granted under the agreement vest ratably over five
years from the date of grant or immediately upon the sale or other change of
control involving the Company. Mr. Kaiser's agreement contains a nondisclosure
covenant, as well as covenants not to divert business or employees from the
Company for one year following termination. In the event Mr. Kaiser terminates
his employment for good reason, as defined in the agreement (which includes a
voluntary termination by Mr. Kaiser one year after a change of control involving
the Company), or if Medirisk terminates his employment other than for good
cause, as defined in the agreement, Mr. Kaiser shall be entitled to continue to
receive his base salary and all benefits until the later of May 31, 1999, or one
year from the date of termination.
Ms. Pamella L. Leiter is a party to an employment agreement dated as of
January 9, 1996 with Medirisk pursuant to which Ms. Leiter serves as a Vice
President of the Company. The agreement is for a term of two years, commencing
on January 9, 1996. The agreement provides for an initial annual base salary of
$125,000, which salary is subject to increase by the Board of Directors based on
Ms. Leiter's performance and the performance of the Company. Ms. Leiter is also
entitled to participate in benefit plans Medirisk maintains for the benefit of
its executive officers. Ms. Leiter's employment agreement contains (i) a
confidentiality provision that prohibits disclosure of the Company's proprietary
information; and (ii) a covenant not to compete which, upon Ms. Leiter's
termination of employment with Medirisk for any reason, provides that Ms. Leiter
shall not engage, directly or indirectly, in the Company's business in the
United States for a period of two years following such termination. The
agreement also contains covenants prohibiting solicitation of employees or
customers for two years following termination. Ms. Leiter may terminate her
employment at any time upon 30 days' written notice to the Company. In the event
Ms. Leiter terminates her employment for good reason, as defined in the
agreement, or if Medirisk terminates her employment other than for good cause,
as defined in the agreement, Ms. Leiter shall be entitled to continue to receive
her then-effective salary through January 9, 1998.
Ms. Susan P. Brandt is a party to an employment agreement dated as of March
14, 1996 with Medirisk pursuant to which she serves as a Vice President of the
Company. The agreement is for a term of three years,
41
<PAGE> 42
commencing on March 14, 1996. The agreement provides for an initial annual base
salary of $96,000 and provides that Ms. Brandt will be eligible to receive a
target bonus equal to $50,000 for services rendered from March 14, 1996 through
December 31, 1996. The amount of the bonus will be determined based upon the
performance of Medirisk through December 31, 1996. For each year thereafter
during the term of the agreement, Ms. Brandt is entitled to receive an annual
target bonus of $50,000 based upon the Company's achievement of certain pre-tax
profit goals established by the Board of Directors. In addition, Ms. Brandt was
granted options to purchase up to 32,480 shares of Common Stock of the Company
at $0.64 per share. The options vest ratably over five years and expire ten
years after the date of issuance. Ms. Brandt is also entitled to participate in
benefit plans Medirisk maintains for the benefit of its officers. Ms. Brandt's
employment agreement contains substantially the same noncompetition,
nonsolicitation and nondisclosure covenants as Ms. Leiter's employment
agreement. Ms. Brandt may terminate her employment at any time upon 30 days'
written notice to the Company. In the event Ms. Brandt terminates her employment
for good reason, as defined in the agreement, or if Medirisk terminates her
employment for other than good cause, as defined in the agreement, she shall be
entitled to continue to receive her then-effective salary through March 14,
1999.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
James K. Murray, III, is a member of the Compensation Committee of the
Company's Board of Directors and is an Executive Vice President of HPSC. Prior
to Mr. Murray's joining the Board of Directors, the Company and HPSC entered
into the Securities Purchase Agreement, and the Company issued Series B
Convertible Preferred Stock and Senior Subordinated Notes to HPSC during 1996.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." At that time, the Company and
HPSC entered into a Registration Rights Agreement giving HPSC certain demand and
piggyback registration rights, a Shareholders' Agreement and Warrant Agreement.
See "Description of Capital Stock -- Registration Rights" and " -- Designation
of Directors."
CERTAIN TRANSACTIONS
Mark A. Kaiser, Chairman of the Board, Chief Executive Officer and
President of the Company, received a loan of $75,000 from the Company in 1994 in
connection with the purchase of 116,928 shares of Common Stock at a price equal
to $0.64 per share. In connection with such loan, Mr. Kaiser executed a
promissory note providing for the payment of interest at the rate of 8.25% per
annum. Mr. Kaiser made payments of principal and interest in 1994 and 1995,
reducing the principal balance to approximately $36,000. In May 1996, as an
inducement for Mr. Kaiser's execution of a new employment agreement, such
remaining principal balance was forgiven by the Company. In June 1996, the
Company loaned Mr. Kaiser $112,500, and Mr. Kaiser executed an unsecured
promissory note providing for the payment of interest at the rate of 8.25% per
annum.
In connection with and as partial consideration for the acquisition of
PracticeMatch, the Company issued a promissory note to Susan P. Brandt, Vice
President, Operations of the Company, and a former shareholder of PracticeMatch
in the original principal amount of $197,231 and bearing interest at the rate of
10.0% per annum. The note is unsecured. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
42
<PAGE> 43
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of Common Stock as of January 28, 1997 (giving effect to
the conversion of all outstanding shares of Convertible Preferred Stock into
Common Stock), and as adjusted to reflect the sale of the shares offered hereby,
by (i) each person who is known by the Company to beneficially own more than
five percent of the outstanding shares of Common Stock; (ii) each of the
Company's directors; (iii) each executive officer of the Company; and (iv) all
of the Company's executive officers and directors as a group. Unless otherwise
indicated, the business address of each person listed below is care of Medirisk,
Inc., Two Piedmont Center, Suite 400, 3565 Piedmont Road, N.E., Atlanta, Georgia
30305.
<TABLE>
<CAPTION>
PERCENTAGE OWNED
SHARES ---------------------------
BENEFICIALLY BEFORE AFTER
NAME OWNED(1) THE OFFERING THE OFFERING
---- ------------ ------------ ------------
<S> <C> <C> <C>
Brantley Venture Partners II, L.P......................... 522,745(2) 28.6% 12.7%
20600 Chagrin Boulevard
Suite 1150 Tower East
Cleveland, Ohio 44122
Sears Pension Trust....................................... 522,745(2) 28.6 12.7
c/o Chase Manhattan Bank, N.A., Trustee
4 Chase MetroTech Center, 18th Floor
Brooklyn, New York 11245
HealthPlan Services Corporation........................... 480,442(3) 23.7 11.1
3501 Frontage Road
Tampa, Florida 33607
Mark A. Kaiser............................................ 289,722(4) 15.7 7.0
Paul A. Rodwick........................................... 0 * *
Kenneth M. Goins, Jr. .................................... 32,480 1.9 *
Susan P. Brandt........................................... 10,285(5) * *
Pamella L. Leiter......................................... 117,728(6) 6.7 2.9
Michael J. Finn........................................... 522,745(7) 28.6 12.7
James K. Murray, III...................................... 480,442(8) 23.7 11.1
Robert P. Pinkas.......................................... 522,745(7) 28.6 12.7
Laurence H. Powell........................................ 314,357 17.6 7.8
P.O. Box 501085
Atlanta, Georgia 31150
All directors and executive officers as a group (8
members)................................................ 1,453,402 64.2 31.9
</TABLE>
- ---------------
* Less than one percent.
(1) The named stockholders have sole voting and investment power with respect to
all shares shown as being beneficially owned by them, except as otherwise
indicated.
(2) Includes warrants to purchase 97,440 shares of Common Stock.
(3) Includes warrants to purchase 298,150 shares of Common Stock.
(4) Includes options to purchase 114,330 shares of Common Stock.
(5) Includes options to purchase 6,496 shares of Common Stock.
(6) Includes options to purchase 14,473 shares of Common Stock.
(7) Represents shares owned by Brantley Venture Partners II, L.P. Each of
Messrs. Finn and Pinkas is a partner of a partnership which is itself a
general partner of Brantley Venture Partners II, L.P. and, as such, may be
deemed to share voting and investment power with respect to the shares
owned by Brantley Venture Partners II, L.P. See Note 2 above.
(8) Represents shares owned by HPSC. Mr. Murray is an executive officer of HPSC
and, as such, may be deemed to share voting and investment power with
respect to the shares owned by HPSC. See Note 3 above.
43
<PAGE> 44
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
Upon completion of the Offering, the Company's authorized capital stock
will consist of 20,000,000 shares of Common Stock, par value $0.001 per share
(the "Common Stock"), and 1,000,000 shares of Preferred Stock, par value $0.001
per share (the "Preferred Stock"). At January 28, 1997 there were (i) 3,000,000
shares of Series A Preferred Stock authorized and 1,292,359 shares of Series A
Preferred Stock outstanding; (ii) 400,000 shares of Series B Preferred Stock
authorized and 280,623 shares of Series B Preferred Stock outstanding; and (iii)
20,000,000 shares of Common Stock authorized and 709,943 shares outstanding.
Upon completion of the Offering, all of the outstanding shares of Series A
Preferred Stock and Series B Preferred Stock will be converted into shares of
Common Stock, and the Series A Preferred Stock and Series B Preferred Stock will
no longer be included in the authorized capital stock of the Company. All of the
currently outstanding shares of Common Stock, Series A Preferred Stock and
Series B Preferred Stock are validly issued, fully paid and nonassessable under
the Delaware General Corporation Law (the "DGCL").
The following summary describes the capital stock of the Company to be
authorized on completion of the Offering. This summary describes the material
elements of the Company's Certificate of Incorporation as it relates to the
Company's capital stock but does not purport to be complete and is subject to,
and qualified in its entirety by, the provisions of the Company's Certificate of
Incorporation (the "Certificate") and by the provisions of applicable law,
including the DGCL.
COMMON STOCK
Dividends and Other Distributions. Subject to the preferential rights of
the Preferred Stock, the holders of shares of Common Stock are entitled to
receive dividends, when and if declared by the Board of Directors, out of the
assets of the Company which are by law available therefor. In the event of
dissolution of the Company, after distribution of the preferential amounts to be
distributed to the holders of shares of the Preferred Stock, holders of Common
Stock are entitled to receive all of the remaining assets of the Company ratably
in proportion to the number of shares of Common Stock held by them respectively.
Voting Rights. Except as otherwise required by law or the Certificate,
each holder of Common Stock votes together with all other classes and series of
stock of the Company as a single class and has one vote in respect of each share
of stock held by the stockholder of record on the books of the Company for the
election of directors and on all matters submitted to a vote of stockholders of
the Company. Holders of Common Stock do not have cumulative voting rights.
Preemptive Rights. No holder of Common Stock has any preemptive or
preferential right to purchase or subscribe for shares of Company capital stock
of any class.
Other. All preferences, voting powers, relative, participating, optional
or other special rights and privileges, and qualifications, limitations, or
restrictions of the Common Stock are expressly made subject and subordinate to
those that may be fixed with respect to any shares of the Preferred Stock. There
is no provision for redemption or conversion of Common Stock.
PREFERRED STOCK
The Certificate provides that the Board of Directors of the Company is
authorized to issue Preferred Stock in series and to fix and state the voting
powers, full or limited, or no voting powers, and such designations, preferences
and relative participating, optional or other special rights of the shares of
each such series and the qualifications, limitations and restrictions thereof.
Such action may be taken by the Board of Directors without shareholder approval.
Under the Certificate, each share of each series of Preferred Stock is to have
the same relative rights as, and be identical in all respects to, all other
shares of the same series. While providing flexibility in connection with
possible financings, acquisitions and other corporate purposes, the issuance of
Preferred Stock, among other things, could adversely affect the voting power of
the holders of Common Stock and, under certain circumstances, be used as a means
of discouraging, delaying or preventing
44
<PAGE> 45
a change of control of the Company. There will be no shares of Preferred Stock
outstanding upon completion of the Offering, and the Company has no present
intention of issuing shares of its Preferred Stock.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE BYLAWS AND DELAWARE LAW
Bylaws. The Company's Bylaws provide that the Board of Directors will be
divided into three classes of directors, each class constituting approximately
one-third of the total number of directors and with the classes serving
staggered three-year terms. The Bylaws provide that the Company's stockholders
may call a special meeting of stockholders only upon a request of stockholders
owning at least 50% of the Company's capital stock. These provisions of the
Bylaws could discourage potential acquisition proposals and could delay or
prevent a change in control of the Company. These provisions are intended to
enhance the likelihood of continuity and stability in the composition of the
Board of Directors and in the policies formulated by the Board of Directors and
to discourage certain types of transactions that may involve an actual or
threatened change of control of the Company. These provisions are designed to
reduce the vulnerability of the Company to an unsolicited acquisition proposal.
The provisions also are intended to discourage certain tactics that may be used
in proxy fights. However, such provisions could have the effect of discouraging
others from making tender offers for the Company's shares and, as a consequence,
they also may inhibit fluctuations in the market price of the Company's shares
that could result from actual or rumored takeover attempts. Such provisions also
may have the effect or preventing changes in the management of the Company. See
"Risk Factors -- Adverse Impact of Anti-takeover Provisions" and "Description of
Capital Stock -- Preferred Stock."
Delaware Takeover Statute. The Company is subject to Section 203 of the
Delaware General Corporation Law ("Section 203"), which, subject to certain
exceptions, prohibits a Delaware corporation from engaging in any business
combination with an interested stockholder for a period of three years following
the date that such stockholder became an interested stockholder, unless: (i)
prior to such date, the board of directors of the corporation approved either
the business combination or the transaction that resulted in the stockholder
becoming an interested stockholder; (ii) upon consummation of the transaction
that resulted in the stockholder becoming an interested stockholder, an
interested stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding those shares owned (a) by persons
who are directors and also officers and (b) employee stock plans in which
employee participants do not have the right to determine confidentially whether
the shares held subject to the plan will be tendered in a tender or exchange
offer; or (iii) on or subsequent to such date, the business combination is
approved by the board of directors and authorized at an annual or special
meeting of the stockholders, and not by written consent, by the affirmative vote
of at least 66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, transfer, pledge or other disposition of 10% or more of the assets of the
corporation, involving the interested stockholder; (iii) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation that has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; or (v) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits through the corporation or any subsidiary
thereof.
WARRANTS
In 1993, the Company obtained $300,000 in unsecured credit from Brantley
Venture Partners II, L.P. ("Brantley") and Sears Pension Trust ("Sears"). As
part of such transaction, the Company issued to the lenders warrants to purchase
a total of 194,880 shares of Common Stock (the "1993 Warrants"). The per share
exercise price of the 1993 Warrants is equal to $1.54, subject to various
anti-dilution adjustments. The 1993 Warrants are currently exercisable. The
Company has, as described below, granted Brantley and Sears certain demand and
incidental registration rights with respect to the shares of Common Stock
underlying the 1993 Warrants. The Company is required to bear the expenses of
any such registration.
45
<PAGE> 46
The Company obtained a commitment for up to $10.0 million in unsecured
credit from HealthPlan Services Corporation under a Securities Purchase
Agreement with HPSC dated January 8, 1996 (as amended, the "Securities Purchase
Agreement"). As part of such transaction, the Company agreed to issue to HPSC
warrants to purchase up to 432,101 shares of Common Stock as and when the
Company borrowed funds from such lender (the "HPSC Warrants"). The per share
exercise price of the HPSC Warrants is equal to $0.015, subject to various
anti-dilution adjustments. In March 1996, in connection with borrowing $6.9
million under the Securities Purchase Agreement, the Company issued to HPSC an
HPSC Warrant to purchase 298,150 shares of Common Stock. The HPSC Warrants are
currently exercisable. Assuming the Company makes no further borrowings from
HPSC, as is its current expectation, no further HPSC Warrants will be issued.
The Company has, as described below, granted HPSC certain demand and incidental
registration rights with respect to the shares of Common Stock underlying the
HPSC Warrants. The Company is required to bear the expenses of any such
registration.
REGISTRATION RIGHTS
Brantley, Sears and Laurence Powell, as holders of 1,164,967 shares of
Common Stock upon completion of the Offering and as holders of Common Stock
issuable upon exercise of the 1993 Warrants, or their respective transferees,
are entitled to certain rights with respect to the registration of such shares
(the "Investor Registrable Securities") under the Securities Act. These rights
are provided under the terms of an Investor Registration Agreement dated October
28, 1996 (the "Investor Agreement"). Pursuant to the Investor Agreement, the
Company granted to Brantley, Sears and Powell three demand registrations at the
Company's expense and unlimited demand registrations at the expense of the
holders, subject to certain restrictions, upon the written demand of the holders
at any time after the closing of the Offering. In addition, Brantley, Sears and
Powell are permitted to participate in any offering, subject to certain
restrictions, in the event the Company proposes to register any of its equity
securities under the Securities Act. The Company has agreed under the Investor
Agreement to indemnify the selling holders of the Registrable Securities against
certain liabilities under the Securities Act.
HPSC, as holder of 182,293 shares of Common Stock upon completion of the
Offering and as holder of Common Stock issuable upon exercise of the HPSC
Warrants, or its transferees, is entitled to certain rights with respect to the
registration of such shares (the "HPSC Registrable Securities") under the
Securities Act. These rights are provided under the terms of a Registration
Rights Agreement dated January 8, 1996 (the "HPSC Registration Agreement").
Pursuant to the HPSC Registration Agreement, the Company grants to HPSC one
demand registration per calendar year for a total of two demand registrations,
subject to certain restrictions, upon the written demand of HPSC at any time
after the closing of the Offering. In addition, HPSC is permitted to participate
in any offering in the event the Company proposes to register any of its equity
securities under the Securities Act. The Company has agreed under the HPSC
Registration Agreement to indemnify the selling holders of the HPSC Registrable
Securities against certain liabilities under the Securities Act.
Pamella L. Leiter, as holder of 103,255 shares of Common Stock and as
holder of Common Stock issuable upon exercise of options to purchase Common
Stock issued to her upon the Company's acquisition of the capital stock of
Formations, or her transferees, is entitled to certain rights with respect to
the registration of such shares (the "Leiter Registrable Securities") under the
Securities Act. These rights are provided under the terms of a Registration
Rights Agreement dated January 9, 1996 (the "Leiter Registration Agreement").
The Leiter Registration Agreement provides that if the Company at any time after
its initial public offering proposes to register any of its securities under the
Securities Act, on a form other than Form S-4 or S-8 or any successor form, the
holders of the Leiter Registrable Securities are entitled to have their shares
included in such registration statement on a pro rata basis, subject to certain
limitations and other terms and conditions. The Company has agreed under the
Leiter Registration Agreement to indemnify the selling holders of the Leiter
Registrable Securities against certain liabilities under the Securities Act.
To the extent required, each of the holders of the registration rights
described above has agreed to waive any right they may have to participate in
the Offering and not to exercise such registration rights for a period of 180
days after the date of this Prospectus.
46
<PAGE> 47
DESIGNATION OF DIRECTORS
Under a Shareholders Agreement, each of HPSC, Brantley and Sears currently
has the right, subject to certain limitations and conditions, to name one person
to be nominated to the Board of Directors. Such agreement will terminate as to
Brantley and Sears upon the closing of the Offering. Under the Securities
Purchase Agreement, HPSC will retain the right to name one person to be
nominated to the Board of Directors so long as HPSC owns or has the right to
acquire at least 162,400 shares of Common Stock.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Limitations of Director Liability. Section 102(b)(7) of the DGCL
authorizes corporations to limit or eliminate the personal liability of
directors to corporations and their stockholders for monetary damages for breach
of directors' fiduciary duty of care. Although Section 102(b)(7) does not change
directors' duty of care, it enables corporations to limit available relief to
equitable remedies such as injunction or rescission. The Certificate limits the
liability of directors to the Company or its stockholders to the full extent
permitted by Section 102(b)(7). Specifically, directors of the Company are not
personally liable for monetary damages to the Company or its stockholders for
breach of the director's fiduciary duty as a director, except for liability: (i)
for any breach of the director's duty of loyalty to the Company or its
stockholders; (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law; (iii) for unlawful stock
repurchases or redemptions as provided in Section 174 of the DGCL; or (iv) for
any transaction from which the director derived an improper personal benefit.
The provision does not affect a stockholder's right to sue (or to recover
monetary damages) based upon a director's responsibilities under any other law,
such as federal securities laws or state or federal environmental laws.
Indemnification. To the maximum extent permitted by law, the Bylaws
provide for mandatory indemnification of directors and officers of the Company
against any expense, liability or loss to which they may become subject, or
which they may incur as a result of being or having been a director or officer
of the Company. In addition, the Company must advance or reimburse directors and
officers for expenses incurred by them in connection with indemnification
claims.
The Company has entered into separate indemnification agreements with each
of its directors and officers. Each indemnification agreement provides for,
among other things: (i) indemnification against any and all expenses,
liabilities and losses (including attorneys' fees, judgments, fines, taxes,
penalties and amounts paid in settlement) of any claim against an indemnified
party unless it is determined, as provided in the indemnification agreement,
that indemnification is not permitted under applicable law, and (ii) prompt
advancement of expenses to any indemnified party in connection with his or her
defense against any claim.
REGISTRAR AND TRANSFER AGENT
The registrar and transfer agent for the Common Stock is SunTrust Bank,
Atlanta, in Atlanta, Georgia.
47
<PAGE> 48
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 4,031,752 shares of
Common Stock outstanding (based on the number of shares of Common Stock
outstanding as of January 28, 1997). The 2,300,000 shares sold in the Offering
(or 2,645,000 shares if the Underwriters' over-allotment option is exercised in
full) will be freely tradable without restriction or further registration under
the Securities Act, except to the extent such shares are purchased by
"affiliates" of the Company, as that term is defined under the Securities Act.
The remaining 1,731,752 shares outstanding after the Offering will be
"restricted shares" (the "Restricted Shares") within the meaning of Rule 144
promulgated under the Securities Act and may not be sold except in compliance
with the registration requirements of the Securities Act or pursuant to an
exemption from registration such as the exemption provided by Rule 144 under the
Securities Act.
Of the 1,731,752 Restricted Shares to be outstanding after the Offering,
701,515 shares (all of which are subject to the lock-up agreements described
below) will be eligible for sale in the public market, pursuant to Rule 144,
beginning 90 days after the Offering, subject to the manner of sale, volume and
other restrictions of Rule 144, and 291,487 shares (all of which are subject to
the lock-up agreements described below) will be eligible for sale in the public
market immediately after the Offering pursuant to Rule 144(k) and without the
restrictions of Rule 144.
The Company, its officers and directors and certain other stockholders of
the Company holding in the aggregate 1,731,752 (100%) of the shares of Common
Stock outstanding immediately prior to the Offering, have agreed not to offer,
sell or otherwise dispose of any of their shares in the public market for a
period of 180 days after the date of this Prospectus without the prior consent
of Equitable Securities Corporation (the "Lockup Period"). After the Lockup
Period has lapsed, these shares will be eligible for sale in the public market,
subject to the conditions and restrictions of Rule 144, as described below.
In general, under Rule 144 as currently in effect, a stockholder (or
stockholders whose shares are aggregated) who has beneficially owned for at
least a two-year period (as computed under Rule 144) shares privately acquired
directly or indirectly from the Company or from an "affiliate" of the Company,
and persons who are affiliates of the Company, are entitled to sell within any
three-month period a number of shares that does not exceed the greater of (i) 1%
of the then outstanding shares of Common Stock (approximately 40,318 shares
after giving effect to the Offering) or (ii) the average weekly trading volume
in Common Stock during the four calendar weeks immediately preceding the filing
of a Form 144 with respect to such sale. Sales under Rule 144 are also subject
to certain provisions relating to the manner and notice of sale and the
availability of current public information about the Company. A stockholder (or
stockholders whose shares are aggregated) who is not deemed an affiliate of the
Company at any time during the 90 days immediately preceding a sale, and who has
beneficially owned his shares for at least three years (as computed under Rule
144), is entitled to sell such shares under Rule 144(k) without regard to the
volume and manner of sale limitations described above. Rule 144A under the
Securities Act permits the immediate sale by the current holders of Restricted
Shares of all or a portion of their shares to certain qualified institutional
buyers as defined in Rule 144A.
The Securities and Exchange Commission (the "Commission") has proposed
certain amendments to Rule 144 that would reduce by one year the holding period
for shares subject to Rule 144 to become eligible for sale in the public market.
This proposal, if adopted, would increase the number of shares of Common Stock
eligible for immediate resale following the expiration of the lock up
agreements. No assurance can be given whether or when the proposal to amend Rule
144 will be adopted by the Commission.
The Company has reserved 318,928 shares of Common Stock for issuance upon
the exercise of stock options that are currently outstanding. The Company
intends to file a registration statement under the Securities Act to register
the Common Stock to be issued upon exercise of the above-described options as
soon as practical after the effective date of the registration statement with
respect to the Offering; as soon as such Common Stock is registered such shares
(other than those held by affiliates of the Company) generally may be sold
immediately in the public market, subject to the lock up agreements described
above.
Sales of Common Stock in the public market, or the availability of such
shares for sale, could adversely affect the market price of the Common Stock and
make it more difficult for the Company to sell equity securities in the future
at a time and price which it deems appropriate. The Company is unable to
estimate accurately the number of Restricted Shares that will be sold in the
future under Rule 144 since this will depend in part on the market price for the
Common Stock, the personal circumstances of the sellers and other factors.
48
<PAGE> 49
UNDERWRITING
Under the terms and subject to the conditions contained in the Underwriting
Agreement dated the date hereof, each Underwriter named below has severally
agreed to purchase, and the Company has agreed to sell to such Underwriter,
shares of Common Stock which equal the number of shares set forth opposite the
name of such Underwriter below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER FIRM SHARES
- ----------- -------------
<S> <C>
Equitable Securities Corporation............................ 598,000
Jefferies & Company, Inc.................................... 598,000
Alex. Brown & Sons Incorporated............................. 69,000
Dean Witter Reynolds Inc.................................... 69,000
A.G. Edwards & Sons, Inc.................................... 69,000
Hambrecht & Quist LLC....................................... 69,000
Lehman Brothers Inc......................................... 69,000
Robertson, Stephens & Company LLC........................... 69,000
Smith Barney Inc............................................ 69,000
Punk, Ziegel & Knoell....................................... 69,000
Robert W. Baird & Co. Incorporated.......................... 55,200
Doft & Co., Inc............................................. 55,200
EVEREN Securities, Inc...................................... 55,200
Interstate/Johnson Lane Corporation......................... 55,200
Morgan Keegan & Company, Inc................................ 55,200
Needham & Company, Inc...................................... 55,200
Pacific Growth Equities, Inc................................ 55,200
The Robinson-Humphrey Company, Inc.......................... 55,200
Scott & Stringfellow, Inc................................... 55,200
Wheat First Butcher Singer.................................. 55,200
---------
Total............................................. 2,300,000
=========
</TABLE>
The Company is obligated to sell, and the Underwriters are obligated to
purchase, all shares of Common Stock offered hereby (other than those covered by
the over-allotment option described below) if any such shares are sold and
purchased.
The Underwriters, for whom Equitable Securities Corporation and Jefferies &
Company, Inc. are acting as Representatives, propose initially to offer part of
the shares of Common Stock directly to the public at the public offering price
set forth on the cover page hereof and part to certain dealers at a price that
represents a concession not in excess of $0.42 per share under the public
offering price. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $0.10 per share to other Underwriters or to certain
other dealers. After the initial public offering, the public offering price and
such concessions may be changed by the Underwriters. The Representatives have
informed the Company that the Underwriters do not intend to confirm sales to
accounts over which they exercise discretionary authority.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to an aggregate of 345,000
additional shares of Common Stock at the public offering price set forth on the
cover page hereof less underwriting discounts and commissions. The Underwriters
may exercise such option to purchase additional shares solely for the purpose of
covering over-allotments, if any, incurred in connection with the sale of the
shares offered hereby. To the extent such option is exercised, each Underwriter
will become obligated, subject to certain conditions, to purchase approximately
the same percentage of such additional shares as the number set forth next to
such Underwriter's name in the preceding table bears to the total number of
shares in such table.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act, or will contribute to payments the Underwriters may be required
to make in respect thereof.
The Company, its officers and directors and certain other stockholders of
the Company have agreed that, for a period of 180 days after the date of this
Prospectus, they will not, without the prior written consent of
49
<PAGE> 50
Equitable Securities Corporation, offer, sell, contract to sell or otherwise
dispose of any shares of Common Stock or any securities convertible into, or
exercisable or exchangeable for, Common Stock except, in the case of the
Company, in certain limited circumstances.
Prior to the Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price for the Common Stock was
determined by negotiations between the Company and the Representatives of the
Underwriters. The factors considered in determining the initial public offering
price were the history of, and the prospects for, the Company's business and the
industry in which it competes, an assessment of the Company's management, its
past and present operations, its past and present earnings and the trend of such
earnings, the prospects of earnings of the Company, the present state of the
Company's development, the general condition of the securities market at the
time of the Offering and the market prices and earnings of similar securities of
comparable companies at the time of the Offering.
The Common Stock has been approved for quotation on the Nasdaq Stock
Market's National Market under the symbol "MDMD." There can be no assurance,
however, that an active or orderly trading market will develop for the Common
Stock or that the Common Stock will trade in the public markets subsequent to
the Offering at or above the initial public offering price.
During 1995 and early 1996, Equitable Securities Corporation, one of the
Underwriters of the Offering, acted as financial advisor for the Company in
connection with the proposed private placement of securities of the Company,
which culminated in the sale to HPSC of 280,623 shares of Series B Convertible
Preferred Stock for $2.0 million and HPSC's agreement to purchase up to $10.0
million in Senior Subordinated Notes. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources." For its services, Equitable Securities Corporation received
customary compensation and reimbursement of its related expenses.
From 1994 through early 1996, Punk, Ziegel & Knoell, L.P., one of the
Underwriters of the Offering, acted as a financial advisor for the Company in
connection with the proposed acquisition of PracticeMatch. This activity
culminated in the Company's purchase of all the outstanding stock of
PracticeMatch in March 1996. See "The Company." For its services, Punk, Ziegel &
Knoell, L.P. received customary compensation and reimbursement of its related
expenses.
LEGAL MATTERS
Certain legal matters with respect to the shares of Common Stock offered
hereby will be passed upon for the Company by Alston & Bird, Atlanta, Georgia
and for the Underwriters by Dewey Ballantine, New York, New York.
EXPERTS
The Consolidated Financial Statements of the Company and subsidiaries as of
December 31, 1994 and 1995 and June 30, 1996 and for each of the years in the
three-year period ended December 31, 1995 and the six months ended June 30, 1996
have been included herein in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
The financial statements of the Company's subsidiary Formations as of
December 31, 1995 and for the year then ended have been included herein in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
The financial statements of the Company's subsidiary PracticeMatch as of
December 31, 1995, 1994 and 1993 and for the years then ended have been included
herein in reliance upon the report of Brown Smith Wallace, L.L.C., independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
50
<PAGE> 51
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (herein, together with all exhibits and amendments thereto, called the
"Registration Statement") under the Securities Act, with respect to the shares
of Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement. For further information
with respect to the Company and the Common Stock offered hereby, reference is
made to the Registration Statement, including the exhibits thereto, copies of
which may be inspected, without charge, at the principal office of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's Regional Offices: 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, New York, New York
10048. Copies of such material may also be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. The Registration Statement, including the exhibits and
schedules thereto, is also available on the Commission's Web site at
http://www.sec.gov. Statements contained in the Prospectus concerning the
provisions of certain documents filed as exhibits to the Registration Statement
are of necessity brief descriptions thereof and summarize the material elements
thereof, but they are not necessarily complete and each such statement is
qualified in its entirety by reference to the full text of such document.
The Company intends to furnish holders of the Common Stock with annual
reports containing, among other information, audited consolidated financial
statements certified by an independent public accounting firm and quarterly
reports containing unaudited condensed financial information for the first three
quarters of each fiscal year. The Company also intends to furnish such other
reports as it may determine or as may be required by law.
51
<PAGE> 52
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Medirisk, Inc. and Subsidiaries
Independent Auditors' Report.............................. F-2
Consolidated Balance Sheets as of December 31, 1994 and
1995, June 30, 1996, September 30, 1996 (unaudited) and
September 30, 1996 (unaudited) (pro forma)............. F-3
Consolidated Statements of Operations for the years ended
December 31, 1993, 1994 and 1995, the six months ended
June 30, 1996 and the nine months ended September 30,
1995 and 1996 (unaudited).............................. F-4
Consolidated Statements of Stockholders' Equity (deficit)
for the years ended December 31, 1993, 1994 and 1995,
the six months ended June 30, 1996, the three months
ended September 30, 1996 (unaudited) and the three
months ended September 30, 1996 (unaudited) (pro
forma)................................................. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1993, 1994 and 1995, the six months ended
June 30, 1996 and the nine months ended September 30,
1995 and 1996 (unaudited).............................. F-6
Notes to Consolidated Financial Statements................ F-7
Formations in Health Care, Inc.
Independent Auditors' Report.............................. F-19
Balance Sheet as of December 31, 1995..................... F-20
Statement of Operations for the year ended December 31,
1995................................................... F-21
Statement of Shareholder's Equity (Deficit) for the year
ended December 31, 1995................................ F-22
Statement of Cash Flows for the year ended December 31,
1995................................................... F-23
Notes to Financial Statements............................. F-24
PracticeMatch, Inc.
Independent Auditors' Report.............................. F-27
Balance Sheets as of December 31, 1995, 1994 and 1993..... F-28
Statements of Operations for the years ended December 31,
1995, 1994 and 1993.................................... F-29
Statements of Stockholders' Equity (Deficiency) for the
years ended December 31, 1995, 1994 and 1993........... F-30
Statements of Cash Flows for the years ended December 31,
1995, 1994 and 1993.................................... F-31
Notes to Financial Statements............................. F-32
</TABLE>
F-1
<PAGE> 53
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Medirisk, Inc.:
We have audited the accompanying consolidated balance sheets of Medirisk,
Inc. and subsidiaries as of December 31, 1994 and 1995 and June 30, 1996, and
the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for each of the years in the three-year period ended
December 31, 1995 and for the six months ended June 30, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Medirisk,
Inc. and subsidiaries as of December 31, 1994 and 1995 and June 30, 1996, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1995, and for the six months ended June
30, 1996, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Atlanta, Georgia
August 23, 1996
F-2
<PAGE> 54
MEDIRISK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30, SEPTEMBER 30, SEPTEMBER 30,
1994 1995 1996 1996 1996
----------- ----------- ----------- ------------- -------------
(UNAUDITED) (UNAUDITED)
(PRO FORMA)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 413,625 $ 288,838 $ 1,146,617 $ 532,484 $ 532,484
Accounts receivable, less allowances for doubtful
accounts of $0, $0, $47,698, and $47,439 at December
31, 1994 and 1995, June 30, 1996 and September 30,
1996, respectively................................... 265,149 538,769 880,987 1,194,046 1,194,046
Prepaid expenses....................................... 72,245 90,573 265,664 792,158 792,158
Note receivable from officer (note 10)................. -- -- 22,500 22,500 22,500
Other current assets................................... 12,678 4,603 142,913 142,575 142,575
----------- ----------- ----------- ----------- -----------
Total current assets............................. 763,697 922,783 2,458,681 2,683,763 2,683,763
----------- ----------- ----------- ----------- -----------
Property and equipment (note 3)......................... 650,748 842,311 1,487,905 1,560,210 1,560,210
Less accumulated depreciation and amortization......... 317,206 510,605 673,829 778,414 778,414
----------- ----------- ----------- ----------- -----------
Property and equipment, net.......................... 333,542 331,706 814,076 781,796 781,796
----------- ----------- ----------- ----------- -----------
Excess of cost over net assets of businesses acquired,
less accumulated amortization of $81,931 at June 30,
1996 and $125,345 at September 30, 1996 (note 2)....... -- -- 3,226,909 3,183,495 3,183,495
Intangible assets, less accumulated amortization of
$37,417 at June 30, 1996 and $63,417 at September 30,
1996 (note 2).......................................... -- -- 482,583 456,583 456,583
Software development costs, less accumulated
amortization of $5,779 at June 30, 1996 and $12,545 at
September 30, 1996..................................... -- -- 103,152 101,276 101,276
Note receivable from officer, excluding current portion
(note 10).............................................. -- -- 90,000 90,000 90,000
Other assets............................................ 13,715 8,801 853,656 796,438 796,438
----------- ----------- ----------- ----------- -----------
Total assets..................................... $ 1,110,954 $ 1,263,290 $ 8,029,057 $ 8,093,351 $ 8,093,351
=========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current installments of long-term debt and obligations
under capital leases (notes 4, 5 and 6).............. $ 127,711 $ 172,614 $ 910,142 $ 1,591,255 $ 1,591,255
Accounts payable....................................... 23,659 107,115 262,101 156,261 156,261
Accrued expenses....................................... 92,773 170,925 139,478 668,793 668,793
Deferred revenue....................................... 198,222 275,143 2,257,568 2,274,564 2,274,564
Other liabilities...................................... -- -- 167,283 156,776 156,776
----------- ----------- ----------- ----------- -----------
Total current liabilities........................ 442,365 725,797 3,736,572 4,847,649 4,847,649
Long-term debt and obligations under capital leases,
excluding current installments, principally related
party debt at June 30, 1996 and September 30, 1996
(notes 4, 5 and 6)..................................... 171,695 151,302 7,968,991 7,197,744 7,197,744
Dividends payable (notes 8(b) and 8(d))................. 214,794 416,402 517,206 567,608 567,608
----------- ----------- ----------- ----------- -----------
Total liabilities................................ 828,854 1,293,501 12,222,769 12,613,001 12,613,001
----------- ----------- ----------- ----------- -----------
Series A convertible preferred stock, $.001 par value;
at $1.95 redemption value, net of unaccreted discount;
3,000,000 shares authorized; 1,292,359 issued and
outstanding shares at December 31, 1994 and 1995 (notes
8(a) and 8(b))......................................... 2,209,891 2,302,471 -- -- --
Stockholders' equity (deficit) -- (note 8):
Series A convertible preferred stock, $.001 par value
(estimated unaccrued aggregate involuntary
liquidation preference $3,461,000); 3,000,000 shares
authorized; 1,292,359 issued and outstanding shares
at June 30, 1996 and September 30, 1996; and no
shares issued and outstanding, pro forma at September
30, 1996............................................. -- -- 1,292 1,292 --
Series B convertible preferred stock; $.001 par value
(estimated unaccrued aggregate involuntary
liquidation preference $1,967,000); 400,000 shares
authorized; 280,623 issued and outstanding shares at
June 30, 1996 and September 30, 1996; and no shares
issued and outstanding, pro forma at September 30,
1996 (note 5)........................................ -- -- 281 281 --
Common Stock -- $.001 par value; 20,000,000 shares
authorized; 649,730, 656,226, 763,210 and 700,199
shares issued at December 31, 1994 and 1995, June 30,
1996 and September 30, 1996, respectively; 584,770,
591,266, 698,250, and 700,199 shares outstanding at
December 31, 1994 and 1995, June 30, 1996 and
September 30, 1996, respectively, and 1,722,008
shares issued and outstanding, pro forma at September
30, 1996............................................. 650 656 763 700 1,722
Additional paid-in capital............................. 492,330 292,666 5,075,360 5,015,806 5,016,357
Accumulated deficit.................................... (2,335,971) (2,566,204) (9,261,608) (9,537,729) (9,537,729)
----------- ----------- ----------- ----------- -----------
(1,842,991) (2,272,882) (4,183,912) (4,519,650) (4,519,650)
Less:
Common stock in treasury (64,960 shares), at cost.... 9,800 9,800 9,800 -- --
Note receivable from stockholder..................... 75,000 50,000 -- -- --
----------- ----------- ----------- ----------- -----------
Total stockholders' equity (deficit)............. (1,927,791) (2,332,682) (4,193,712) (4,519,650) (4,519,650)
Commitments and contingencies (notes 5, 6 and 8)
----------- ----------- ----------- ----------- -----------
Total liabilities and stockholders' equity
(deficit)...................................... $ 1,110,954 $ 1,263,290 $ 8,029,057 $ 8,093,351 $ 8,093,351
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 55
MEDIRISK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30, SEPTEMBER 30,
--------------------------------------- ----------- -------------------------
1993 1994 1995 1996 1995 1996
----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenue (note 9)................... $ 2,446,509 $ 2,893,803 $ 3,654,692 $ 3,874,025 $ 2,450,049 $ 6,253,646
Salaries, wages, and benefits...... 1,674,723 1,892,834 2,577,416 2,757,666 1,885,599 4,388,094
Other operating expenses........... 507,090 730,542 956,097 1,006,243 699,869 1,585,248
Depreciation and amortization...... 75,059 143,215 193,399 321,948 143,405 549,559
Acquired in-process research and
development costs (note 2)....... -- -- -- 6,180,000 -- 6,180,000
----------- ----------- ----------- ----------- ----------- -----------
Operating income (loss).......... 189,637 127,212 (72,220) (6,391,832) (278,824) (6,449,255)
Interest expense, principally
related party for 1996........... (40,641) (54,598) (65,433) (265,951) (44,304) (482,270)
Other income (expense), net........ 17,668 -- -- (37,621) -- (40,000)
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income
taxes.......................... 166,664 72,614 (137,653) (6,695,404) (323,128) (6,971,525)
Income taxes (note 7).............. -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)......... 166,664 72,614 (137,653) (6,695,404) (323,128) (6,971,525)
Accretion of Series A convertible
preferred stock.................. (13,774) (54,054) (92,580) -- (69,435) --
Series A convertible preferred
stock dividend requirement....... (56,997) (157,797) (201,608) (100,804) (151,206) (151,206)
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)
attributable to common
stock................... $ 95,893 $ (139,237) $ (431,841) $(6,796,208) (543,769) (7,122,731)
=========== =========== =========== =========== =========== ===========
Pro forma net loss per share of
common stock (unaudited)......... $ (0.20) $ (3.06) $ (3.25)
=========== =========== ===========
Pro forma weighted average number
of common shares used in
calculating pro forma net loss
per share of common stock
(unaudited)...................... 2,211,727 2,217,465 2,190,503
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 56
MEDIRISK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995, SIX MONTHS ENDED JUNE 30, 1996,
THE THREE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND THE THREE MONTHS ENDED
SEPTEMBER 30, 1996 (UNAUDITED) (PRO FORMA)
<TABLE>
<CAPTION>
SERIES A SERIES B
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------- ----------------- ------------------ PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
---------- ------ -------- ------ --------- ------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992....... -- $ -- -- $ -- 649,600 $ 650 707,084 (2,507,421)
Accretion of discount on Series A
convertible preferred stock (note
8(b))............................. -- -- -- -- -- -- -- (13,774)
Accrued dividend payable (note
8(b))............................. -- -- -- -- -- -- (56,997) --
Net income......................... -- -- -- -- -- -- -- 166,664
---------- ------ -------- ---- --------- ------ --------- -----------
Balance at December 31, 1993....... -- -- -- -- 649,600 650 650,087 (2,354,531)
Repurchase of common stock (note
8(e))............................. -- -- -- -- -- -- -- --
Conversion of notes payable into
common stock (note 8(e)).......... -- -- -- -- -- -- -- --
Issuance of common stock........... -- -- -- -- 130 -- 40 --
Issuance of common stock in
exchange for note receivable from
stockholder (note 8(e))........... -- -- -- -- -- -- -- --
Accretion of discount on Series A
convertible preferred stock (note
8(b))............................. -- -- -- -- -- -- -- (54,054)
Accrued dividend payable (notes
8(b) and (d))..................... -- -- -- -- -- -- (157,797) --
Net income......................... -- -- -- -- -- -- -- 72,614
---------- ------ -------- ---- --------- ------ --------- -----------
Balance at December 31, 1994....... -- -- -- -- 649,730 650 492,330 (2,335,971)
Accretion of discount on Series A
convertible preferred stock (note
8(b))............................. -- -- -- -- -- -- -- (92,580)
Issuance of common stock........... -- -- -- -- 6,496 6 1,944 --
Repayment of note receivable from
stockholder (note 8(e))........... -- -- -- -- -- -- -- --
Accrued dividend payable (note
8(b))............................. -- -- -- -- -- -- (201,608) --
Net loss........................... -- -- -- -- -- -- -- (137,653)
---------- ------ -------- ---- --------- ------ --------- -----------
Balance at December 31, 1995....... -- -- -- -- 656,226 656 292,666 (2,566,204)
Issuance of Series B convertible
preferred stock, net of issuance
costs of $220,556 (note 5 and
8)................................ -- -- 280,623 281 -- -- 1,779,163 --
Conversion of Series A convertible
preferred stock from redeemable to
nonredeemable (note 8(b))......... 1,292,359 1,292 -- -- -- -- 2,301,179 --
Issuance of common stock (note
2)................................ -- -- -- -- 106,984 107 130,460 --
Repayment of note receivable from
stockholder (note 8(e))........... -- -- -- -- -- -- -- --
Forgiveness of note receivable from
stockholder (note 8(e))........... -- -- -- -- -- -- -- --
Discount on issuance of debt
arising from stock purchase
warrants (note 5)................. -- -- -- -- -- -- 573,111 --
Stock option compensation expense
(note 8(c))....................... -- -- -- -- -- -- 99,585 --
Accrued dividend payable (note
8(b))............................. -- -- -- -- -- -- (100,804) --
Net loss........................... -- -- -- -- -- -- -- (6,695,404)
---------- ------ -------- ---- --------- ------ --------- -----------
Balance at June 30, 1996........... 1,292,359 1,292 280,623 281 763,210 763 5,075,360 (9,261,608)
========== ====== ======== ==== ========= ====== ========= ===========
Cancellation of treasury stock..... -- -- -- -- (64,960) (65) (9,735) --
Issuance of common stock........... -- -- -- -- 1,949 2 583 --
Accrued dividend payable (note
8(b))............................. -- -- -- -- -- -- (50,402) --
Net loss........................... -- -- -- -- -- -- -- (276,121)
---------- ------ -------- ---- --------- ------ --------- -----------
Balance at September 30, 1996
(unaudited)....................... 1,292,359 1,292 280,623 281 700,199 700 5,015,806 (9,537,729)
Conversion of all Series A and
Series B convertible preferred
stock into common stock........... (1,292,359) (1,292) (280,623) (281) 1,021,809 1,022 551 --
---------- ------ -------- ---- --------- ------ --------- -----------
Balance at September 30, 1996
(unaudited) (pro forma)........... -- -- -- -- 1,722,008 $1,722 5,016,357 (9,537,729)
========== ====== ======== ==== ========= ====== ========= ===========
<CAPTION>
NOTE TOTAL
TREASURY STOCK RECEIVABLE STOCKHOLDERS'
-------------------- FROM EQUITY
SHARES AMOUNT STOCKHOLDER (DEFICIT)
-------- --------- ----------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1992....... 64,960 $ (9,800) -- (1,809,487)
Accretion of discount on Series A
convertible preferred stock (note
8(b))............................. -- -- -- (13,774)
Accrued dividend payable (note
8(b))............................. -- -- -- (56,997)
Net income......................... -- -- -- 166,664
-------- --------- ------- ----------
Balance at December 31, 1993....... 64,960 (9,800) -- (1,713,594)
Repurchase of common stock (note
8(e))............................. 233,856 (150,000) -- (150,000)
Conversion of notes payable into
common stock (note 8(e)).......... (61,062) 39,166 -- 39,166
Issuance of common stock........... (55,866) 35,834 -- 35,874
Issuance of common stock in
exchange for note receivable from
stockholder (note 8(e))........... (116,928) 75,000 (75,000) --
Accretion of discount on Series A
convertible preferred stock (note
8(b))............................. -- -- -- (54,054)
Accrued dividend payable (notes
8(b) and (d))..................... -- -- -- (157,797)
Net income......................... -- -- -- 72,614
-------- --------- ------- ----------
Balance at December 31, 1994....... 64,960 (9,800) (75,000) (1,927,791)
Accretion of discount on Series A
convertible preferred stock (note
8(b))............................. -- -- -- (92,580)
Issuance of common stock........... -- -- -- 1,950
Repayment of note receivable from
stockholder (note 8(e))........... -- -- 25,000 25,000
Accrued dividend payable (note
8(b))............................. -- -- -- (201,608)
Net loss........................... -- -- -- (137,653)
-------- --------- ------- ----------
Balance at December 31, 1995....... 64,960 (9,800) (50,000) (2,332,682)
Issuance of Series B convertible
preferred stock, net of issuance
costs of $220,556 (note 5 and
8)................................ -- -- -- 1,779,444
Conversion of Series A convertible
preferred stock from redeemable to
nonredeemable (note 8(b))......... -- -- -- 2,302,471
Issuance of common stock (note
2)................................ -- -- -- 130,567
Repayment of note receivable from
stockholder (note 8(e))........... -- -- 14,000 14,000
Forgiveness of note receivable from
stockholder (note 8(e))........... -- -- 36,000 36,000
Discount on issuance of debt
arising from stock purchase
warrants (note 5)................. -- -- -- 573,111
Stock option compensation expense
(note 8(c))....................... -- -- -- 99,585
Accrued dividend payable (note
8(b))............................. -- -- -- (100,804)
Net loss........................... -- -- -- (6,695,404)
-------- --------- ------- ----------
Balance at June 30, 1996........... 64,960 (9,800) -- (4,193,712)
======== ========= ======= ==========
Cancellation of treasury stock..... (64,960) 9,800 -- --
Issuance of common stock........... -- -- -- 585
Accrued dividend payable (note
8(b))............................. -- -- -- (50,402)
Net loss........................... -- -- -- (276,121)
-------- --------- ------- ----------
Balance at September 30, 1996
(unaudited)....................... -- -- -- (4,519,650)
Conversion of all Series A and
Series B convertible preferred
stock into common stock........... -- -- -- --
-------- --------- ------- ----------
Balance at September 30, 1996
(unaudited) (pro forma)........... -- -- -- (4,519,650)
======== ========= ======= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 57
MEDIRISK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30, SEPTEMBER 30,
--------------------------------- ----------- -----------------------
1993 1994 1995 1996 1995 1996
--------- --------- --------- ----------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................... $ 166,664 $ 72,614 $(137,653) $(6,695,404) $(323,128) $(6,971,525)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Acquired in-process research and development
costs........................................... -- -- -- 6,180,000 -- 6,180,000
Depreciation and amortization..................... 75,059 143,215 193,399 321,948 143,905 549,559
Other............................................. (15,268) -- -- 135,585 -- 135,585
Decrease (increase) in:
Accounts receivable............................. (62,748) (110,611) (273,620) 100,084 (67,703) (212,975)
Other assets.................................... (13,351) (35,960) (5,339) (132,594) 28,344 (578,378)
Increase (decrease) in:
Accounts payable................................ 17,802 (19,469) 83,456 (23,381) 20,243 (129,221)
Accrued expenses and other liabilities.......... 109,900 (51,270) 78,152 9,417 54,048 528,225
Deferred revenue................................ (121,234) 52,365 76,921 (54,557) 80,122 (107,561)
--------- --------- --------- ----------- --------- -----------
Net cash provided by (used in) operating
activities.................................. 156,824 50,884 15,316 (158,902) (64,169) (606,291)
--------- --------- --------- ----------- --------- -----------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired..... -- -- -- (6,925,393) -- (6,925,393)
Purchases of property and equipment................. (11,163) (3,191) -- (41,497) -- (113,802)
Additions to software development costs............. -- -- -- (108,931) -- (113,821)
Loan to officer..................................... -- -- -- (112,500) -- (112,500)
--------- --------- --------- ----------- --------- -----------
Net cash used in investing activities......... (11,163) (3,191) -- (7,188,321) -- (7,265,516)
--------- --------- --------- ----------- --------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock.............. -- -- 1,950 8,249 1,950 8,834
Proceeds from issuance of Series A convertible
preferred stock................................... -- 35,874 -- -- -- --
Proceeds from issuance of Series B convertible
preferred stock................................... -- -- -- 2,000,000 -- 2,000,000
Payments for Series B convertible preferred stock
issuance costs.................................... -- -- -- (220,556) -- (220,556)
Proceeds from issuance of notes payable............. 300,000 150,000 -- -- -- --
Proceeds from issuance of long-term debt, related
party............................................. -- -- -- 6,900,000 -- 6,900,000
Payments for debt issuance costs.................... -- -- -- (345,000) -- (345,000)
Payments on long-term debt and obligations under
capital leases.................................... (88,282) (227,976) (167,053) (151,691) (104,251) (241,825)
Repurchase of common stock.......................... -- (150,000) -- -- -- --
Repayment of note receivable from stockholder....... -- -- 25,000 14,000 -- 14,000
--------- --------- --------- ----------- --------- -----------
Net cash provided by (used in) financing
activities.................................. 211,718 (192,102) (140,103) 8,205,002 (102,301) 8,115,453
--------- --------- --------- ----------- --------- -----------
Net increase (decrease) in cash and cash
equivalents................................. 357,379 (144,409) (124,787) 857,779 (166,470) 243,646
Cash and cash equivalents at beginning of period...... 200,655 558,034 413,625 288,838 413,625 288,838
--------- --------- --------- ----------- --------- -----------
Cash and cash equivalents at end of period............ $ 558,034 $ 413,625 $ 288,838 $ 1,146,617 $ 247,155 $ 532,484
========= ========= ========= =========== ========= ===========
Supplemental disclosure of cash flow
information -- cash paid during the period for
interest............................................ $ 27,209 $ 47,098 $ 65,433 $ 277,744 $ 43,804 $ 731,672
========= ========= ========= =========== ========= ===========
Supplemental disclosures of noncash activities:
Purchase of computer and office equipment under
capital lease arrangements........................ $ 147,176 $ 213,360 $ 191,563 $ 180,827 $ 191,563 $ 180,827
========= ========= ========= =========== ========= ===========
Debt issued in acquisition of business.............. $ -- $ -- $ -- $ 1,076,000 $ -- $ 1,076,000
========= ========= ========= =========== ========= ===========
Common stock issued in acquisition of business...... $ -- $ -- $ -- $ 122,318 $ -- $ 122,318
========= ========= ========= =========== ========= ===========
Discount on issuance of debt arising from stock
purchase warrants................................. $ -- $ -- $ -- $ 573,111 $ -- $ 573,111
========= ========= ========= =========== ========= ===========
Prepayment of insurance premiums through issuance of
note payable...................................... $ -- $ -- $ 7,548 $ -- $ -- $ --
========= ========= ========= =========== ========= ===========
Accrual of dividend payable on Series A convertible
preferred stock .................................. $ 56,997 $ 157,797 $ 201,608 $ 100,804 $ 151,206 $ 151,206
========= ========= ========= =========== ========= ===========
Conversion of notes payable and accrued interest
into Series A convertible preferred stock......... $ -- $ 318,000 $ -- $ -- $ -- $ --
========= ========= ========= =========== ========= ===========
Conversion of notes payable into common stock....... $ -- $ 39,166 $ -- $ -- $ -- $ --
========= ========= ========= =========== ========= ===========
Acquisitions of businesses:
Fair value of assets acquired..................... $ -- $ -- $ -- $ 4,909,167 $ -- $ 4,909,167
Acquired in-process research and development
costs........................................... -- -- -- 6,180,000 -- 6,180,000
Fair value of liabilities assumed................. -- -- -- (2,961,849) -- (2,961,849)
Common stock issued............................... -- -- -- (122,318) -- (122,318)
Debt issued....................................... -- -- -- (1,076,000) -- (1,076,000)
--------- --------- --------- ----------- --------- -----------
Total cash paid for acquisitions.................. -- -- -- 6,929,000 -- 6,929,000
Cash acquired..................................... -- -- -- (3,607) -- (3,607)
--------- --------- --------- ----------- --------- -----------
Net cash paid for acquisitions................ $ -- $ -- $ -- $ 6,925,393 $ -- $ 6,925,393
========= ========= ========= =========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 58
MEDIRISK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1994, AND 1995, JUNE 30, 1996
AND SEPTEMBER 30, 1995 AND 1996 (UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) DESCRIPTION OF BUSINESS
Medirisk, Inc. (the "Company") is a provider of proprietary databases and
related decision support software and analytical services to the health care
industry. The Company's customers consist primarily of health care providers
(principally physicians and hospitals) and health care payors (principally
insurance companies and managed care organizations). The information provided by
the Company is used to make comparisons of the financial costs and clinical
outcomes of physician-mediated services to industry and company-specific
benchmarks and to access information concerning specific physicians. These
capabilities assist payers and providers in pricing managed care contracts,
evaluating fee schedules, comparing provider outcomes and performance, and
recruiting physicians.
(B) BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of the
balance sheet and income and expenses for the period. Actual results could
differ from those estimates.
The consolidated financial statements include the accounts of Medirisk,
Inc. and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Information as of September 30, 1996 and for the nine months ended
September 30, 1995 and 1996 is unaudited. In the opinion of management, all
adjustments considered necessary for the fair presentation of the unaudited
consolidated financial statements of the Company as of September 30, 1996 and
for the nine months ended September 30, 1995 and 1996 have been included.
Unaudited pro forma balances as of September 30, 1996 give effect to the
conversion of all convertible preferred stock to common stock.
(C) CASH EQUIVALENTS
Cash equivalents at December 31, 1994 and 1995, June 30, 1996 and September
30, 1996 included amounts of $313,866, $276,647, $1,000,104 and $393,475,
respectively, invested in money market accounts with a major brokerage firm. For
purposes of the statement of cash flows, the Company considers all highly liquid
debt instruments with original maturities of three months or less to be cash
equivalents.
(D) REVENUE RECOGNITION
The Company provides services/licenses its products primarily pursuant to
single- and multi-year contracts which provide for the payment of nonrefundable
annual fees generally in advance of use/shipment or of quarterly fees generally
billed in advance of service delivery. The products are segregated into three
types: financial, clinical performance, and physician database products. The
financial products provide customers with information from the Company's
financial product databases, which the Company periodically updates with new
and/or additional data. Revenue on these sales is recognized upon the delivery
of the data. The clinical performance products revenues relate to the delivery
of services and are recognized over the contract terms as the services are
provided. The physician database products revenue relates to data/services
provided to customers over time and are, therefore, recognized ratably over the
life of the contract. Customer service revenues are recognized ratably over the
service contract period. All other revenue, including fees for training,
consulting fees, and other miscellaneous services, is recognized upon the
performance of the applicable services.
F-7
<PAGE> 59
MEDIRISK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(E) DEFERRED REVENUE
Deferred revenue represents advance payments to the Company by customers
for products and services, including deposits, revenue deferred under license
fee and subscription arrangements, and revenue deferred under customer service
and support arrangements.
(F) ACCOUNTS RECEIVABLE
When the Company enters into multi-year, noncancelable subscription
contracts, receivables associated with these contracts are recorded as accounts
receivable and deferred revenue when they become due. The contract balances are
due at the beginning of their respective annual anniversary dates.
(G) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation is provided on the straight-line method over the
estimated useful lives of the assets ranging from three to seven years.
Amortization of assets acquired under capital lease arrangements is recorded
using the straight-line method over the estimated useful lives of the assets or
the lease term, whichever is shorter.
(H) EXCESS OF COST OVER NET ASSETS OF BUSINESSES ACQUIRED
The excess of cost over net assets of businesses acquired (goodwill) is
being amortized using the straight-line method over a period of 15 years. The
amortization period is based on, among other things, the nature of the products
and markets, the competitive position of the acquired companies and the
adaptability to changing market conditions of the acquired companies. At each
balance sheet date, the Company assesses the recoverability of this intangible
asset by determining whether the amortization of the goodwill balance over its
remaining life can be recovered through undiscounted future operating cash flows
of the acquired operation. The amount of goodwill impairment, if any, is
measured based on projected discounted future operating cash flows using a
discount rate equal to the rate of return that would be required by the Company
for a similar investment with like risks.
(I) INTANGIBLE ASSETS
Intangible assets represent purchased technological know-how (acquired
products). These costs were derived using a fair value method of allocation and
are being amortized using the straight-line method over five years. The Company
makes an ongoing assessment of the recoverability of its intangible assets by
comparing the amount capitalized for each asset to the estimated net realizable
value ("NRV") of the asset. If the NRV is less than the amount capitalized, a
write-down to NRV is recorded.
(J) RESEARCH AND DEVELOPMENT COSTS AND SOFTWARE DEVELOPMENT COSTS
Research and development costs are expensed as incurred. Amounts expensed
for research and development for the years ended December 31, 1993, 1994 and
1995, the six months ended June 30, 1996 and the nine months ended September 30,
1995 and 1996 (unaudited) were $165,488, $156,441, $221,943, $86,779, $158,724
and $91,894, respectively.
The Company capitalizes software development costs by project, commencing
when technological feasibility for the respective product is established and
concluding when the product is ready for general release to customers. The
Company makes an ongoing assessment of the recoverability of its capitalized
software projects by comparing the amount capitalized for each product to the
estimated NRV of the product. If the NRV is less than the amount capitalized, a
write-down to NRV is recorded. The Company capitalized computer software
development costs of $108,931 for the six-month period ended June 30, 1996 and
$113,821 for the nine-month period ended September 30, 1996. Capitalized
computer software development costs are
F-8
<PAGE> 60
MEDIRISK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
being amortized using the straight-line method over an estimated useful life of
five years. Amortization expense was $5,779 for the six-month period ended June
30, 1996 and $12,545 for the nine-month period ended September 30, 1996.
(K) STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation under Accounting
Principles Board (APB) Opinion No. 25 and related Interpretations. The Company
has not yet adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123) since the effects of SFAS
123 are not material to the Company's consolidated financial statements at this
time.
(L) PRO FORMA NET LOSS PER SHARE OF COMMON STOCK (UNAUDITED)
The computation of fully-diluted pro forma net loss per share of Common
Stock was antidilutive in each of the periods presented; therefore, the amounts
reported for primary and fully-diluted are the same.
Pro forma net loss per share was computed by dividing net loss by the
weighted average number of shares of common stock outstanding after giving
retroactive effect to the mandatory conversion of all of the Company's Series A
convertible preferred stock and Series B convertible preferred stock into common
stock, which will occur upon the consummation of the Company's initial public
offering, plus cheap stock as defined below. Retroactive restatement has been
made to share and per share amounts for the reverse stock split (see note 8(g)).
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83,
common stock and common stock equivalents, issued at prices below the assumed
initial public offering price per share ("cheap stock") during the 12-month
period immediately preceding the initial filing date of the Company's
Registration Statement for its public offering, have been included as
outstanding for all periods presented (using the treasury stock method at the
assumed initial public offering price) even though the effect is to reduce the
loss per share. Historical losses per share have not been presented because such
amounts are not deemed meaningful due to the significant changes in the
Company's capital structure resulting from the elimination of the redemption
feature of the Series A convertible preferred stock in 1996 and the mandatory
conversion of all of the Company's Series A and Series B convertible preferred
stock into common stock, which will occur in connection with the initial public
offering.
(M) INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred income tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
income tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(N) RECLASSIFICATIONS
Certain amounts in the 1993, 1994, and 1995 consolidated financial
statements have been reclassified to conform with the 1996 consolidated
financial statement presentation.
(2) BUSINESS ACQUISITIONS
In January 1996, the Company acquired Formations in Health Care, Inc.
("Formations") of Chicago, Illinois for approximately $1,475,000 in cash, 99,466
shares of the Company's common stock, and options to purchase 28,947 shares of
the Company's common stock at an exercise price of $.64 per share. Formations
provides clinical performance products that allow customers to measure outcomes
across a range of care
F-9
<PAGE> 61
MEDIRISK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
within a variety of medical specialties. These products also enable both payers
and providers to measure clinical outcomes and apply that information to attract
and retain managed care arrangements and to improve quality of clinical care.
The acquisition was accounted for using the purchase method of accounting with
the results of operations of the business acquired included from the effective
date of the acquisition. The acquisition resulted in purchased in-process
research and development costs of approximately $1,040,000, purchased
technological know-how of approximately $170,000, and excess of cost over net
assets acquired of approximately $422,000.
In March 1996, the Company acquired PracticeMatch, Inc. ("PracticeMatch")
of St. Louis, Missouri for approximately $5,454,000 in cash and $1,076,000 in
promissory notes. PracticeMatch offers a database containing detailed
information concerning physicians who are candidates for new practice
affiliations. The Company licenses its physician database products to assist
customers in cost-effective in-house recruiting of physicians. The acquisition
was accounted for using the purchase method of accounting with the results of
operations of the business acquired included from the effective date of the
acquisition. The acquisition resulted in purchased in-process research and
development costs of approximately $5,140,000, purchased technological know-how
of approximately $350,000, and excess of cost over net assets acquired of
approximately $2,887,000.
Unaudited pro forma results of operations as if Formations and
PracticeMatch had been acquired January 1, 1995 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996 SEPTEMBER 30, 1996
----------------- ---------------- ------------------
<S> <C> <C> <C>
Revenues............................... $9,184,000 $4,678,000 $7,058,000
Net loss............................... (534,000) (645,000) (921,000)
Net loss per share..................... (.24) (.29) (.42)
</TABLE>
The pro forma results include the historical accounts of the Company and
the acquired entities adjusted to reflect the effects of the depreciation and
amortization of the acquired identifiable tangible and intangible assets based
on the new cost basis of the assets acquired, additional interest expense
related to notes payable issued in connection with the acquisitions, and
reversal of the nonrecurring acquired in-process research and development costs
recorded in connection with the acquisitions. The pro forma results are not
necessarily indicative of actual results which might have occurred had the
operations and management of the Company and the acquired entities been combined
in 1995 and 1996.
(3) PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30, SEPTEMBER 30,
1994 1995 1996 1996
-------- -------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Furniture and fixtures.................... $233,281 $264,278 $ 341,820 $ 344,365
Computer and office equipment............. 417,467 578,033 1,086,419 1,156,179
Leasehold improvements.................... -- -- 59,666 59,666
-------- -------- ---------- ----------
$650,748 $842,311 $1,487,905 $1,560,210
======== ======== ========== ==========
</TABLE>
Included in property and equipment is equipment under capital lease
arrangements with a cost of $413,422, $604,985, $785,812, and $785,812 and
accumulated amortization of $140,016, $302,033, $394,946, and $437,820 at
December 31, 1994 and 1995, June 30, 1996, and September 30, 1996, respectively.
Amortization of equipment held under capital lease arrangements is included
in depreciation expense.
F-10
<PAGE> 62
MEDIRISK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES
Long-term debt and obligations under capital leases are summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30, SEPTEMBER 30,
1994 1995 1996 1996
-------- -------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
10% unsecured senior subordinated note
payable; interest payable quarterly;
principal due January 8, 2003 (see note
5)...................................... $ -- $ -- $6,900,000 $6,900,000
10% unsecured notes payable resulting from
PracticeMatch acquisition; interest
payable quarterly; 30% of the principal
due on April 1, 1997 with the remainder
due September 14, 1997.................. -- -- 1,076,000 1,076,000
Note payable to bank; secured by
substantially all assets of
PracticeMatch; interest at lender's base
rate plus 2% (10.25% at September 30,
1996); principal and interest due in
monthly installments of $9,200 with
final payment due October 18, 1996...... -- -- 156,743 133,110
Line of credit payable to bank; secured by
substantially all assets of
PracticeMatch; interest at lender's base
rate plus 2% (10.25% at September 30,
1996) payable monthly; unpaid principal
balance due October 18, 1996............ -- -- 198,000 198,000
9% unsecured note payable to related
party; principal and interest due in
equal monthly installments of $3,238
through April 2001...................... -- -- 150,173 143,765
Obligations under capital leases, due in
monthly installments expiring at various
dates through February 2001, at varying
interest rates secured by property and
equipment (note 6(a))................... 287,778 323,916 398,217 338,124
12.35% note payable, secured by computer
equipment; note paid off in 1995........ 11,628 -- -- --
-------- -------- ---------- ----------
299,406 323,916 8,879,133 8,788,999
Less current installments................. 127,711 172,614 910,142 1,591,255
-------- -------- ---------- ----------
Total long-term debt and
obligations under capital
leases, excluding current
installments.................. $171,695 $151,302 $7,968,991 $7,197,744
======== ======== ========== ==========
</TABLE>
F-11
<PAGE> 63
MEDIRISK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum debt payments are as follows:
<TABLE>
<CAPTION>
YEARS ENDING JUNE 30,
---------------------
<S> <C>
1997................................................... $ 910,142
1998................................................... 892,240
1999................................................... 92,198
2000................................................... 54,327
2001................................................... 30,226
Thereafter............................................. 6,900,000
----------
$8,879,133
==========
</TABLE>
Based on the borrowing rates currently available to the Company for debt
with similar terms and average maturities, the fair value of long-term debt
approximates its carrying value.
(5) HEALTHPLAN SERVICES SECURITIES PURCHASE AGREEMENT
On January 8, 1996, for the purpose of financing the Company's ongoing
acquisition program and working capital needs, the Company and HealthPlan
Services Corporation ("HPSC"), entered into a Securities Purchase Agreement (the
"Agreement"). Under the Agreement, HPSC purchased 280,623 shares of the
Company's Series B convertible preferred stock for $2,000,000 (see note 8) and
agreed to purchase up to $10,000,000 in original principal amount of senior
subordinated notes. In addition, HPSC will be issued warrants to purchase up to
432,101 shares of the Company's common stock for $.015 per share, based upon the
amount of senior subordinated debt purchased. HPSC's obligation to purchase
senior subordinated notes under the Agreement terminates upon the earliest to
occur of (i) an initial public offering of the Company; (ii) a change of control
of the Company; (iii) an event of default; (iv) January 8, 1999; or (v) the
death or termination of employment of the Company's Chairman and Chief Executive
Officer.
On March 13, 1996, the Company sold a $6,900,000 senior subordinated note
to HPSC. The note bears interest at 10% payable quarterly and is due upon the
earliest to occur of (i) an initial public offering by the Company; (ii) a
change of control of the Company; or (iii) at maturity on January 8, 2003.
Warrants to purchase 298,150 shares of the Company's common stock were issued to
HPSC in connection with issuance of this note. The proceeds received were
allocated to the notes and the warrants based on their relative fair values
resulting in a discount of $573,111 on the note, which is being amortized over
the life of the note.
In connection with the PracticeMatch acquisition (note 2), there are
restrictions on the use of $1,100,000 of the remaining funds available of the
HPSC senior subordinated debt facility.
Under the Agreement, the Company has agreed to certain financial covenants
including, but not limited to, net worth and financial ratio requirements. At
September 30, 1996, the Company was in compliance with these financial covenants
as amended or waived.
F-12
<PAGE> 64
MEDIRISK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) COMMITMENTS
(A) LEASES
The Company has entered into noncancelable capital and operating lease
agreements for office space, furniture and fixtures, and computer and office
equipment. Future minimum payments under all such noncancelable capital and
operating leases as of June 30, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30, OPERATING CAPITAL (NOTE 4)
-------------------- ---------- ----------------
<S> <C> <C>
1997................................................ $ 484,216 $259,527
1998................................................ 484,679 154,782
1999................................................ 391,531 72,027
2000................................................ 53,158 12,569
2001 and thereafter................................. -- 8,379
---------- --------
$1,413,584 507,284
==========
Less amount representing interest and sales taxes... 109,067
--------
$398,217
========
</TABLE>
Rental expense for noncancelable operating leases was $90,073, $176,452,
$212,547, $191,635, $159,496, and $323,028 for the years ended December 31,
1993, 1994, and 1995, the six months ended June 30, 1996 and the nine months
ended September 30, 1995 and 1996 (unaudited), respectively.
(B) EMPLOYMENT AGREEMENT
The Company has entered into an Employment Agreement (the "Agreement") with
the Company's Chairman and Chief Executive Officer (the "CEO"). The Agreement
provides for a base salary subject to annual increases at the discretion of the
Compensation Committee, annual performance bonuses based upon attaining certain
goals established by the Compensation Committee, minimum annual stock option
grants and certain severance benefits in the event of termination. The Agreement
expires on May 31, 1999 and is automatically renewable for one-year terms
thereafter, subject to termination by the Company or the CEO upon 60 days'
notice.
(7) INCOME TAXES
Because of operating losses, net operating loss carryforwards and other
factors, the Company has not provided any income tax expense for the years ended
December 31, 1993, 1994, and 1995, the six months ended June 30, 1996, and the
nine months ended September 30, 1995 and 1996. A reconciliation of the expected
income tax expense (benefit) (based on a U.S. Federal statutory tax rate of 34%)
to the actual income taxes is as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30, SEPTEMBER 30,
------------------------------ ----------- -----------------------
1993 1994 1995 1996 1995 1996
-------- -------- -------- ----------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Computed "expected" tax expense
(benefit).................... $ 56,666 $ 24,689 $(46,802) $(2,276,437) $(109,864) $(2,370,318)
Losses in excess of allowable
carryback.................... -- -- 43,101 2,269,534 107,089 2,359,779
Utilization of net operating
loss carryforwards........... (57,423) (26,555) -- -- -- --
Other.......................... 757 1,866 3,701 6,903 2,775 10,539
-------- -------- -------- ----------- --------- -----------
Actual income taxes... $ -- $ -- $ -- $ -- $ -- $ --
======== ======== ======== =========== ========= ===========
</TABLE>
F-13
<PAGE> 65
MEDIRISK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences and carryforwards which give rise
to deferred income tax assets are presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30, SEPTEMBER 30,
1994 1995 1996 1996
-------- -------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Deferred income tax assets:
Acquired in-process research and
development costs.................... $ -- $ -- $2,357,701 $2,317,532
Net operating loss carryforwards........ 185,041 193,944 430,570 512,131
Deferred revenue........................ 77,307 107,306 89,929 127,669
Property and equipment depreciation
differences.......................... 5,210 32,873 50,876 62,042
Other................................... -- -- 8,337 21,516
-------- -------- ---------- ----------
Total gross deferred income tax
assets........................ 267,558 334,123 2,937,413 3,040,890
Less valuation allowance.................. 267,558 334,123 2,937,413 3,040,890
-------- -------- ---------- ----------
Net deferred income tax
assets........................ $ -- $ -- $ -- $ --
======== ======== ========== ==========
</TABLE>
Deferred income tax assets and liabilities are initially recognized for
differences between the financial statement carrying amount and the tax bases of
assets and liabilities which will result in future deductible or taxable amounts
and operating loss and tax credit carryforwards. A valuation allowance is then
established to reduce the deferred income tax asset to the level at which it is
"more likely than not" that the tax benefits will be realized. Realization of
tax benefits of deductible temporary differences and operating loss or credit
carryforwards depends on having sufficient taxable income of an appropriate
character within the carryback and carryforward periods. Sources of taxable
income that may allow for the realization of tax benefits include: (1) taxable
income in the current year or prior years that is available through carryback;
(2) future taxable income that will result from the reversal of existing taxable
temporary differences; and (3) taxable income generated by future operations.
The valuation allowance for deferred income tax assets at January 1, 1996
was $334,123. The net increase in the valuation allowance for the six months
ended June 30, 1996 was $2,603,290.
At June 30, 1996, the Company had net operating loss carryforwards of
approximately $1,104,000, which expire beginning in 2006 through 2011. The
amount of net operating loss carryforwards may be limited if the Company has an
ownership change. In the event of an ownership change, the amount of taxable
income of a loss corporation for any postchange year which may be offset by
prechange losses shall not exceed the Internal Revenue Code Section 382
limitation for such year. Generally, an ownership change occurs if a 5%
shareholder or any equity structure shift increases the percentage of the stock
of the loss corporation owned by more than 50 percentage points over the lowest
percentage of stock of the loss corporation owned by such shareholders at any
time during a three-year look back testing period. The Section 382 limitation is
equal to the value of the old loss corporation (before the ownership change)
multiplied by the Federal long-term tax-exempt rate.
(8) STOCKHOLDERS' EQUITY (DEFICIT)
(A) ARTICLES OF INCORPORATION
On January 8, 1996, the Company's articles of incorporation were amended to
increase the number of authorized shares of common stock from 5,000,000 shares
to 20,000,000 shares and to establish 400,000 authorized shares of Series B
convertible preferred stock. On that same date, the Company's articles of
incorporation were amended to remove the redeemable feature from the Company's
Series A convertible preferred stock.
F-14
<PAGE> 66
MEDIRISK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(B) SERIES A AND SERIES B CONVERTIBLE PREFERRED STOCK
Until January 1996, the Series A convertible preferred stock ("Series A
CPS") carried a mandatory redemption feature pursuant to a Stockholders'
Agreement which required the Company to redeem all outstanding shares of Series
A CPS on the seventh anniversary of the original issue date (April 5, 1998) at a
price equivalent to the liquidation price of $1.95. In January 1996, the
redemption feature was eliminated and the balance related to this security was
reclassified to stockholders' equity.
The holders of the Company's Series A CPS are entitled to dividends on a
cumulative basis at 8% which began on April 5, 1994. The holders of the
Company's Series B convertible preferred stock ("Series B CPS") are entitled to
dividends on a cumulative basis at 8% beginning on January 8, 1997. The Series A
CPS and Series B CPS are convertible at the option of the holder at any time
into common stock at a ratio of .6496 shares for one share, subject to
adjustment in certain circumstances, and the holders of the Series A CPS and
Series B CPS carry voting power equivalent to the number of common shares into
which their preferred shares could be converted. Furthermore, the Company is
restricted from paying dividends on the Company's common stock until all unpaid
dividends on the Series A CPS and Series B CPS are paid. In no event shall the
Series A CPS and Series B CPS dividends be paid until payment in full of the
senior subordinated note payable. Accordingly, these dividends payable have been
classified as noncurrent.
In the event of liquidation, holders of the Series A CPS and Series B CPS
are entitled to the sum of (a) $1.95 per preferred share for Series A CPS and
$7.13 per preferred share for Series B CPS, (b) all accrued and unpaid
dividends, and (c) the portion of the fair market value of the assets and
liabilities of the Company attributable to the Series A CPS and Series B CPS
holders determined by the number of common shares that would be held by the
Series A CPS and Series B CPS holders upon conversion to common stock.
Additionally, the Series A CPS and Series B CPS will automatically convert upon
the occurrence of certain future events such as an initial public offering, as
defined, and the Company is required to obtain prior approval of the holders of
the Series A CPS and Series B CPS to effect certain transactions. The holders of
the Series A CPS and Series B CPS also carry certain other rights and
privileges, as further defined in the agreements.
During 1994 notes payable of $300,000 and accrued interest of $18,000 were
converted into 318,000 shares of the Company's Series A CPS at a conversion
price of $1.00 per share. Until January 1996, the discount of $302,100 resulting
from the 1994 conversion, and the discount associated with the original issuance
of the Series A CPS of $96,450, representing the difference between the recorded
value of the Series A CPS and the redemption value, were being accreted using
the straight-line method from issuance date through April 5, 1998, the first
date that the holders could have required redemption.
(C) STOCK OPTIONS
The Company periodically grants stock options to encourage stock ownership
by and retain the services of certain key employees. Options granted are
determined at the discretion of the Board of Directors. All options granted are
earned over a five-year vesting period at 20% per year, and expire at the
earlier of three months after termination of employment or ten years from date
of grant.
F-15
<PAGE> 67
MEDIRISK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes option plan activity for the years ended
December 31, 1993, 1994, and 1995, the six months ended June 30, 1996 and the
three months ended September 30, 1996:
<TABLE>
<CAPTION>
EXERCISE PRICE
SHARES PER SHARE
------- --------------
<S> <C> <C>
Options outstanding at December 31, 1992.................... 170,179 $.300
Granted..................................................... 35,728 .300
Canceled.................................................... (24,035) .300
-------
Options outstanding at December 31, 1993.................... 181,872 .300
Granted..................................................... 24,685 .300 - .64143
Exercised................................................... (130) .300
Canceled.................................................... (9,045) .300
-------
Options outstanding at December 31, 1994.................... 197,382 .300 - .64143
Granted..................................................... 63,661 .64143
Exercised................................................... (6,496) .300
Canceled.................................................... (37,027) .300 - .64143
-------
Options outstanding at December 31, 1995.................... 217,520 .300 - .64143
Granted..................................................... 176,731 .64143
Canceled.................................................... (17,604) .300 - .64143
-------
Options outstanding at June 30, 1996........................ 376,647 .300 - .64143
Exercised................................................... (1,949) .300
Cancelled................................................... (45,474) .64143
-------
Options outstanding at September 30, 1996................... 329,224 .300 - .64143
=======
Options exercisable at June 30, 1996........................ 120,403
=======
Options exercisable at September 30, 1996................... 140,275
=======
</TABLE>
Certain options in 1996 were granted at exercise prices below the fair
market value of the common stock as determined by management. Total compensation
cost relating to these option grants was $189,583, of which $99,585 was expensed
in 1996.
(D) STOCKHOLDERS' AGREEMENT
The Company is party to a Stockholders' Agreement (the "Agreement") among
all preferred and common stockholders of the Company which includes restrictions
and requirements, certain of which are disclosed below. The Agreement
establishes the composition of the Company's Board of Directors and provides for
restrictions on the transfer of the Company's shares. Additionally, the
Agreement provided for a one-time dividend to Series A CPS holders equivalent to
4% of the original purchase price of the Series A CPS. The dividend was
cumulative and accrued from April 5, 1993 to April 5, 1994. In no event shall
this Series A CPS one-time dividend be paid until payment in full of the senior
subordinated note payable. Accordingly, this dividend payable has been
classified as noncurrent.
The Company is required to reserve at all times common shares sufficient to
satisfy the exercise of all outstanding stock options and warrants, and to
satisfy the conversion of all Series A CPS and Series B CPS.
(E) CERTAIN COMMON STOCK TRANSACTIONS
In June 1994, the Company repurchased 233,856 shares of common stock from
an investor for $150,000. The repurchase was financed by the issuance of notes
payable to two other investors for $75,000 each. The notes payable were
subsequently liquidated by the payment of cash of $110,834 and the conversion of
$39,166 into 61,062 shares of common stock held in treasury.
F-16
<PAGE> 68
MEDIRISK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In July 1994, 116,928 shares of common stock held in treasury were issued
to a stockholder in exchange for an unsecured promissory note of $75,000. The
note bore interest at 8.25% and was payable in three annual installments of
$25,000 each through 1997. A total of $39,000 was repaid on the note and the
remaining balance of $36,000 was forgiven as consideration for entering into a
new employment agreement.
(F) WARRANTS
In 1993, the Company obtained $300,000 in financing through the issuance of
6% convertible unsecured promissory notes with attached warrants to acquire the
Company's common stock. Because the exercise price of the attached warrants
exceeded the fair value of the common stock, the Company allocated the $300,000
of proceeds to notes payable. The notes were convertible into the Company's
Series A CPS at a conversion price of $1.00 per share. In 1994, the notes
payable of $300,000 and accrued interest of $18,000 were converted into 318,000
shares of the Company's Series A CPS. The common stock purchase warrants give
the holders the right to acquire 194,880 shares of the Company's common stock at
an exercise price of $1.54 per share. The common stock purchase warrants expire
on June 23, 1998.
Also, as discussed in note 5, in March 1996, the Company issued to HPSC
warrants to purchase 298,150 shares of the Company's common stock at an exercise
price of $.015 per share. The common stock purchase warrants expire on January
8, 2003.
(G) COMMON STOCK REVERSE SPLIT
The Company's Board of Directors has approved an amendment to its
certificate of incorporation which effected a 0.6496-for-one reverse stock
split. All references to common stock, stock options and warrants in these
consolidated financial statements have been adjusted to reflect this amendment
as if it had occurred prior to January 1, 1993.
(9) MAJOR CUSTOMER
For the six months ended June 30, 1996 and the nine months ended September
30, 1996, one customer accounted for approximately 15% of total revenues.
(10) NOTE RECEIVABLE FROM OFFICER
In June 1996, the Company loaned $112,500 to an officer of the Company in
the form of an unsecured promissory note. The note is to be repaid in five equal
annual installments of $22,500 each, due and payable on the first through fifth
anniversaries of the date of the note. Interest accrues at a rate of 8.25% per
annum and is due and payable by the officer on the date each principal payment
is due.
(11) EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE REPORT OF THE
INDEPENDENT AUDITOR
REINCORPORATION
In September 1996, the Company was reincorporated in Delaware, and in
connection with such reincorporation, the Company's treasury stock was canceled
and an additional 1,000,000 shares of preferred were authorized. In addition,
the Company's articles of incorporation were amended such that the Company's
Series A and Series B convertible preferred stock would be canceled and no
longer authorized upon completion of an initial public offering.
F-17
<PAGE> 69
MEDIRISK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INITIAL PUBLIC OFFERING
In September 1996, the Company filed a registration statement with the
Securities and Exchange Commission, and in December 1996 and January 1997 filed
amendments, covering up to 2,645,000 shares of the Company's common stock.
STOCK INCENTIVE PLANS
In October 1996, the Board of Directors of the Company adopted the
Medirisk, Inc. 1996 Stock Incentive Plan (the "Incentive Plan") and the
Medirisk, Inc. Non-Management Directors' Stock Option Plan (the "Directors'
Plan"). A total of 502,693 shares of Common Stock have been reserved for
issuance under the Incentive Plan (which includes 329,224 options outstanding as
of September 30, 1996 under previous grants) and 100,000 shares of Common Stock
have been reserved for issuance under the Directors' Plan.
FINANCING ACTIVITIES
In December 1996, the Company secured an $850,000 bridge line of credit.
The Company also secured a commitment letter to receive a $10,000,000 revolving
line of credit contingent upon completion of certain conditions, including but
not limited to, the Company's initial public offering.
F-18
<PAGE> 70
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder
Formations in Health Care, Inc.:
We have audited the accompanying balance sheet of Formations in Health
Care, Inc. as of December 31, 1995, and the related statements of operations,
shareholder's equity (deficit), and cash flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Formations in Health Care,
Inc. as of December 31, 1995, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Atlanta, Georgia
June 28, 1996
F-19
<PAGE> 71
FORMATIONS IN HEALTH CARE, INC.
BALANCE SHEET
DECEMBER 31, 1995
<TABLE>
<S> <C>
ASSETS
Current assets:
Accounts receivable, less allowance for doubtful accounts
of $49,633............................................. $ 440,367
Prepaid expenses.......................................... 9,154
---------
Total current assets.............................. 449,521
---------
Property and equipment (note 2)............................. 261,807
Less accumulated depreciation............................. (185,104)
---------
Property and equipment, net....................... 76,703
---------
Total assets...................................... $ 526,224
=========
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Cash overdraft............................................ $ 9,283
Current installments of note payable to related party
(note 3)............................................... 25,105
Accounts payable.......................................... 9,136
Accrued expenses.......................................... 63,058
Deferred revenue.......................................... 309,777
---------
Total current liabilities......................... 416,359
Note payable to related party, excluding current
installments (note 3)..................................... 138,997
Other....................................................... 7,313
---------
Total liabilities................................. 562,669
---------
Shareholder's equity (deficit) (note 6):
Common stock -- no par value; 1,000 shares authorized; 100
shares issued and outstanding at December 31, 1995..... 1,660
Additional paid-in capital................................ 9,000
Accumulated deficit....................................... (47,105)
---------
Total shareholder's equity (deficit).............. (36,445)
Commitments and contingencies (note 4)
---------
Total liabilities and shareholder's equity
(deficit)......................................... $ 526,224
=========
</TABLE>
See accompanying notes to financial statements.
F-20
<PAGE> 72
FORMATIONS IN HEALTH CARE, INC.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
Revenue (note 5)............................................ $1,566,078
Salaries, wages, and benefits............................... 706,983
Other operating expenses.................................... 660,451
Provision for doubtful accounts............................. 50,995
Depreciation................................................ 51,782
----------
Operating income.................................. 95,867
Interest expense on related party borrowings (note 3)....... 13,356
----------
Net income........................................ $ 82,511
==========
</TABLE>
See accompanying notes to financial statements.
F-21
<PAGE> 73
FORMATIONS IN HEALTH CARE, INC.
STATEMENT OF SHAREHOLDER'S EQUITY (DEFICIT)
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------- PAID-IN ACCUMULATED SHAREHOLDER'S
SHARES AMOUNT CAPITAL DEFICIT EQUITY (DEFICIT)
------ ------ ---------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994................. 100 $1,660 $9,000 $(129,616) $(118,956)
Net income................................... -- -- -- 82,511 82,511
--- ------ ------ --------- ---------
Balance at December 31, 1995................. 100 $1,660 $9,000 $ (47,105) $ (36,445)
=== ====== ====== ========= =========
</TABLE>
See accompanying notes to financial statements.
F-22
<PAGE> 74
FORMATIONS IN HEALTH CARE, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income................................................ $ 82,511
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................... 51,782
Provision for doubtful accounts........................ 50,995
Increase in:
Accounts receivable.................................. (440,479)
Prepaid expenses..................................... (9,154)
Increase in:
Accounts payable..................................... 5,536
Accrued expenses..................................... 4,449
Deferred revenue..................................... 204,232
Other liabilities.................................... 7,313
---------
Net cash used in operating activities............. (42,815)
---------
Cash flows used in investing activities -- purchases of
property and equipment.................................... (1,291)
---------
Cash flows from financing activities:
Proceeds from note payable to related party............... 67,484
Principal payments on note payable to related party....... (69,447)
Increase in cash overdraft................................ 9,283
---------
Net cash provided by financing activities......... 7,320
---------
Net decrease in cash.............................. (36,786)
Cash at beginning of year................................... 36,786
---------
Cash at end of year......................................... $ --
=========
Supplemental disclosure of cash flow information -- cash
paid during the year for interest......................... $ 34,824
=========
</TABLE>
See accompanying notes to financial statements.
F-23
<PAGE> 75
FORMATIONS IN HEALTH CARE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) DESCRIPTION OF BUSINESS
Formations in Health Care, Inc. (the "Company") offers clinical outcomes
products that allow customers to measure outcomes in a variety of medical
specialties and across a full range of care within a particular specialty.
Products consist of reports prepared from the Company's clinical outcomes
database. The data included in the clinical outcomes products is gathered by
Company-certified clinicians, automated patient information systems and the
Company's patient interview staff using standardized outcomes scales. The
Company prepares reports detailing customer's clinical performance based on a
number of independent measures, including patient acuity, medical and functional
improvement, resource utilization, length of stay/duration of treatment, cost of
treatment and patient satisfaction.
(B) ACCOUNTING ESTIMATES
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and income and expenses for the
period. Actual results could differ significantly from those estimates.
(C) REVENUE RECOGNITION
The Company's revenues are derived primarily from customer contracts to
provide services and materials on a time-and-materials basis. Revenue
recognition occurs when services and/or materials are provided under the terms
of the customer contract. For the Company's largest customer, the Company bills
the customer quarterly in advance with the billed amount credited to deferred
revenue.
(D) DEFERRED REVENUE
Deferred revenue principally represents an amount prebilled to the
Company's largest customer in November 1995 for services and materials to be
performed in the first quarter of 1996. As stipulated in the related customer
contract, payment must be made by the customer in advance for charges that are
expected to arise in the succeeding quarter. The remaining portion of deferred
revenue is due to cash received in 1994 from nine companies participating in a
subacute measurement project. Due to the nature of the project, the deferred
revenue is being amortized on a straight-line basis over a period of 36 months
commencing July 1, 1995.
(E) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation for computer and office equipment is provided on the straight-line
method over a five-year estimated useful life. For furniture and fixtures,
depreciation is provided over a seven-year estimated useful life which
approximates the straight-line method.
(F) INCOME TAXES
No provision or balance sheet accounts pertaining to Federal or state
income taxes is present because the Company is an "S" Corporation. Any tax
liability is the responsibility of the individual shareholder.
(G) FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company uses financial instruments in the normal course of its
business. The carrying values of accounts receivable, cash overdraft, accounts
payable and accrued expenses approximate fair value due to the
F-24
<PAGE> 76
FORMATIONS IN HEALTH CARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
short-term maturities of these assets and liabilities. The Company believes the
fair value of its note payable to related party is not significantly different
from its carrying value.
(2) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1995 are summarized as follows:
<TABLE>
<S> <C>
Furniture and fixtures...................................... $ 73,430
Computer and office equipment............................... 188,377
--------
261,807
Less accumulated depreciation............................... 185,104
--------
$ 76,703
========
</TABLE>
(3) NOTE PAYABLE TO RELATED PARTY
The note is payable to the spouse of the sole shareholder of the Company
and is summarized as follows at December 31, 1995:
<TABLE>
<S> <C>
9.00% note payable, maturing on April 1, 2001............... $164,102
========
</TABLE>
Based on the borrowing rates currently available to the Company for debt
with similar terms and average maturities, the fair value of the note payable
approximates its carrying value.
Future minimum debt payments are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
------------
<S> <C>
1996........................................................ $ 25,105
1997........................................................ 27,460
1998........................................................ 30,036
1999........................................................ 32,853
2000........................................................ 35,935
2001 and thereafter......................................... 12,713
--------
$164,102
========
</TABLE>
(4) COMMITMENTS AND CONTINGENCIES
(A) LEASES
The Company has entered into a noncancelable operating lease agreement for
office space. Future minimum payments under such noncancelable operating leases
as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31, OPERATING
------------ ---------
<S> <C>
1996........................................................ $ 83,935
1997........................................................ 95,142
1998........................................................ 98,947
1999........................................................ 102,907
--------
$380,931
========
</TABLE>
Rental expense for noncancelable operating leases was $43,849 for the year
ended December 31, 1995.
F-25
<PAGE> 77
FORMATIONS IN HEALTH CARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(B) LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations, or liquidity.
(5) SIGNIFICANT CUSTOMERS
For the year ended December 31, 1995, one customer accounted for 58% of
total revenues and 69% of the accounts receivable at December 31, 1995.
(6) SUBSEQUENT EVENT (UNAUDITED)
In January 1996, the Company was acquired by Medirisk, Inc. of Atlanta,
Georgia for approximately $1,325,000 in cash, 99,466 shares of Series A common
stock, and an option to acquire an additional 28,947 shares of Medirisk Inc.
Series A common stock. The Company will continue operations in Chicago, Illinois
as a wholly-owned subsidiary of Medirisk, Inc.
F-26
<PAGE> 78
INDEPENDENT AUDITORS' REPORT
Board of Directors
PracticeMatch, Inc.
We have audited the accompanying balance sheets of PracticeMatch, Inc. (a
Missouri corporation) as of December 31, 1995, 1994 and 1993, and the related
statements of operations and stockholders' equity (deficiency) and cash flows
for each of the three years in the period ended December 31, 1995. 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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of PracticeMatch, Inc. as of
December 31, 1995, 1994 and 1993, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
Brown Smith Wallace, L.L.C.
St. Louis, Missouri
August 5, 1996
F-27
<PAGE> 79
PRACTICEMATCH, INC.
BALANCE SHEETS
DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents............................. $ 38,527 $ 148,113 $ 12,965
Contracts receivable (note B)......................... 73,133 61,268 60,218
Employee advances..................................... -- 1,898 2,580
Prepaid expenses...................................... 110,897 155,056 208,760
----------- ----------- -----------
Total Current Assets.......................... 222,557 366,335 284,523
Property and Equipment
Computer equipment.................................... 402,042 291,841 248,319
Furniture and fixtures................................ 151,323 144,041 141,069
Purchased software.................................... 60,822 53,697 37,708
Leasehold improvements................................ 38,269 28,090 28,090
----------- ----------- -----------
652,456 517,669 455,186
Less accumulated depreciation and amortization..... 360,510 365,823 285,718
----------- ----------- -----------
291,946 151,846 169,468
Other Assets
Software development costs, net of amortization (note
C)................................................. 251,887 95,772 --
Incorporation costs, net of amortization.............. -- 1,267 5,067
Deposits.............................................. 8,670 12,774 12,564
----------- ----------- -----------
260,557 109,813 17,631
----------- ----------- -----------
TOTAL ASSETS.................................. $ 775,060 $ 627,994 $ 471,622
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities
Notes payable (note D)................................ $ 140,427 $ 2,264 $ 114,176
Due to shareholder.................................... -- -- 66,000
Accounts payable -- trade............................. 61,053 62,863 113,894
Accrued liabilities................................... 114,755 77,506 97,483
Deferred revenue...................................... 1,767,083 1,996,527 1,781,705
----------- ----------- -----------
Total Current Liabilities..................... 2,083,318 2,139,160 2,173,258
Long-Term -- Deferred Revenue........................... 127,964 43,485 4,220
Long-Term Debt, less current maturities (note D)........ -- -- 2,690
Commitments (note E)
Stockholders' Equity (Deficiency) (notes G and I)
Common stock, par value $1 -- authorized 30,000
shares; issued and outstanding 1,250 shares........ 1,250 1,250 1,250
Retained earnings (deficit)........................... (1,437,472) (1,555,901) (1,709,796)
----------- ----------- -----------
(1,436,222) (1,554,651) (1,708,546)
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY)................................ $ 775,060 $ 627,994 $ 471,622
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-28
<PAGE> 80
PRACTICEMATCH, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Revenue.................................................... $3,963,065 $3,520,275 $3,006,976
Salaries, wages and benefits............................... 1,657,865 1,535,451 1,600,940
Other operating expenses................................... 1,498,109 1,565,785 1,542,102
Depreciation and amortization.............................. 143,059 88,343 82,399
---------- ---------- ----------
Operating income (loss)............................... 664,032 330,696 (218,465)
Other income (expense)
Interest income.......................................... 784 158 400
Interest expense......................................... (20,220) (20,190) (12,826)
Miscellaneous income..................................... 7,948 -- --
Loss on sale of equipment................................ (7,296) -- --
---------- ---------- ----------
(18,784) (20,032) (12,426)
---------- ---------- ----------
Net income (loss)..................................... $ 645,248 $ 310,664 $ (230,891)
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-29
<PAGE> 81
PRACTICEMATCH, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
RETAINED
COMMON EARNINGS
STOCK (DEFICIT) TOTAL
------ ----------- -----------
<S> <C> <C> <C>
Balance at December 31, 1992................................ $1,000 $(1,328,905) $(1,327,905)
Add:
Issuance of 250 shares of common stock................. 250 -- 250
Deduct:
Net loss for the year ended December 31, 1993.......... -- (230,891) (230,891)
Dividends paid during 1993............................. -- (150,000) (150,000)
------ ----------- -----------
Balance at December 31, 1993................................ 1,250 (1,709,796) (1,708,546)
Add:
Net income for the year ended December 31, 1994........ -- 310,664 310,664
Deduct:
Dividends paid during 1994............................. -- (156,769) (156,769)
------ ----------- -----------
Balance at December 31, 1994................................ 1,250 (1,555,901) (1,554,651)
Add:
Net income for the year ended December 31, 1995........ -- 645,248 645,248
Deduct:
Dividends paid during 1995............................. -- (526,819) (526,819)
------ ----------- -----------
Balance at December 31, 1995................................ $1,250 $(1,437,472) $(1,436,222)
====== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-30
<PAGE> 82
PRACTICEMATCH, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)..................................... $ 645,248 $ 310,664 $(230,891)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization...................... 143,059 88,343 78,599
(Gain) loss on sale of equipment................... 7,296 -- --
(Increase) decrease in contracts receivable........ (11,865) (1,050) (40,415)
(Increase) decrease in employee advances........... 1,898 682 (1,300)
(Increase) decrease in prepaid expenses............ 44,159 53,704 (77,357)
(Increase) decrease in other assets................ 4,104 (210) 3,646
Increase (decrease) in accounts payable............ (1,810) (51,031) 17,555
Increase (decrease) in accrued liabilities......... 37,249 (19,977) 9,480
Increase (decrease) in deferred revenue............ (144,965) 254,087 547,462
--------- --------- ---------
Net cash provided by operating activities..... 724,373 635,212 306,779
--------- --------- ---------
Cash flows from investing activities:
Purchases of equipment................................ (253,574) (54,474) (97,391)
Proceeds from sale of equipment....................... 2,137 -- --
Increase in capitalized software...................... (193,866) (108,219) --
--------- --------- ---------
Net cash used in investing activities......... (445,303) (162,693) (97,391)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from short-term debt......................... 210,786 100,000 --
Repayment of short-term debt.......................... (72,623) (280,602) (49,154)
Dividends paid........................................ (526,819) (156,769) (150,000)
--------- --------- ---------
Net cash used in financing activities......... (388,656) (337,371) (199,154)
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................. (109,586) 135,148 10,234
Cash and cash equivalents at beginning of year.......... 148,113 12,965 2,731
--------- --------- ---------
Cash and cash equivalents at end of year................ $ 38,527 $ 148,113 $ 12,965
========= ========= =========
</TABLE>
The accompanying notes are an integral part of this statements.
F-31
<PAGE> 83
PRACTICEMATCH, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
NOTE A -- SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
A summary of the operations and significant accounting policies
consistently applied in the preparation of the accompanying financial statements
follows:
NATURE OF OPERATIONS
The Company offers a database containing detailed information concerning
physicians who are candidates for new practice affiliations. The Company
licenses its physician database products to assist customers in cost effective,
in-house recruiting of physicians.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect 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.
DEFERRED REVENUE
Data license fees are generally received from customers at the inception of
the contract period. These fees are non-refundable except in the unlikely event
of disruption of services. These revenues are amortized ratably over the life of
the contract. Commissions paid in association with these data license fees are
amortized ratably over the life of the contracts.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
CONTRACTS RECEIVABLE
The Company has elected the direct write-off method of accounting for bad
debts. Under this method, all uncollectible accounts are charged to expense when
determined to be uncollectible by management. The utilization of this method,
although not in conformity with generally accepted accounting principles, does
not have a material effect on the accompanying financial statements.
PREPAID ADVERTISING
Advertising costs, except for costs associated with direct-response
advertising, are charged to operations when incurred. The costs of
direct-response advertising are capitalized and amortized over the period during
which future benefits are expected to be received, generally one year. Prepaid
advertising in 1995, 1994 and 1993 was $6,866, $20,536 and $15,184,
respectively. Advertising expense in 1995, 1994 and 1993 was $114,614, $143,269
and $11,352, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation is recorded on the straight-line method over the
estimated useful lives of the assets ranging from three to seven years.
Amortization of assets acquired under capital lease arrangements is recorded on
the straight-line method over the useful lives of the assets or the lease term,
whichever is shorter.
F-32
<PAGE> 84
PRACTICEMATCH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INCORPORATION COSTS
Incorporation costs were being amortized over a five year period.
Amortization expense charged to operations in 1995, 1994 and 1993 was $1,267,
$3,800 and $3,800, respectively.
INCOME TAXES
The stockholders have elected to be treated as an "S" Corporation under
provisions of the Internal Revenue Code which provides that, in lieu of
corporation income taxes, the stockholders are taxed on their proportionate
share of the Company's taxable income. Therefore, no provision or liability for
federal and state income taxes is reflected in these financial statements.
NOTE B -- CONTRACTS RECEIVABLE
The Company enters into multi-year, non-cancelable data license contracts.
The first year of the contract is paid at contract signing, with revenue being
recognized monthly over the next twelve months. The balances relating to future
years are recorded in contracts receivable. These balances are not due to be
paid until their respective annual anniversary dates. These receivables have
been reduced by the deferred revenue amount associated with the contracts. The
gross amounts for contracts receivable for the three years ending 1995, 1994 and
1993 were $942,693, $326,875 and $208,760, respectively.
NOTE C -- SOFTWARE DEVELOPMENT
In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed," the Company capitalizes the direct costs associated with the
development of software products.
Direct labor costs of producing product masters incurred subsequent to
establishing technological feasibility are capitalized. Those costs include
coding and testing performed subsequent to establishing technological
feasibility. Software production costs for computer software used as an integral
part of a product or process have been charged to expense until both (a)
technological feasibility has been established for the software and (b) all
research and development activities for the other components of the product or
process have been completed.
Capitalization of computer software costs is discontinued when the product
is available for general release to customers. Costs of maintenance and customer
support are charged to expense when the related revenue is recognized or when
those costs are incurred, whichever occurs first. The sales price of a product
includes customer support; therefore, the estimated related costs are accrued in
the same period that the sales price is recognized.
The realizability of these costs requires considerable judgment from
management related to the estimated useful lives and anticipated future sales.
The amount of software development costs capitalized for the periods ending
December 31, 1995, 1994 and 1993 was $302,085, $108,219 and $0, respectively.
Capitalized costs are amortized over the estimated product life on the straight
line basis. Unamortized costs are carried at the lower of book value or net
realized value. Amortization of software development costs for the periods
ending December 31, 1995, 1994 and 1993 was $37,752, $12,447 and $0,
respectively and is included in depreciation and amortization expense in the
statements of operations.
F-33
<PAGE> 85
PRACTICEMATCH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE D -- NOTES PAYABLE
The Company was indebted under notes payable as follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------- ------- ---------
<S> <C> <C> <C>
IBM Credit Corporation; $30,000; unsecured; payable in
monthly installments of $813, including interest at
.5% above prime (8.5% at December 31, 1994). Final
payment made in March 1995. ........................ $ -- $ 2,264 $ 11,266
Colonial Bank; secured by substantially all corporate
assets; payable in monthly installments of $9,200,
including interest at 2% above prime (8.5% at
December 31, 1995), with final payment due August
18, 1996. .......................................... 140,427 -- --
Colonial Bank; $300,000 line-of-credit; secured by
substantially all corporate assets; payable on
demand on August 18, 1996 with interest at 2% above
the prime rate (8.5% at December 31, 1995).......... -- -- 105,600
--------- ------- ---------
140,427 2,264 116,866
Less current maturities.......................... (140,427) (2,264) (114,176)
--------- ------- ---------
$ -- $ -- $ 2,690
========= ======= =========
</TABLE>
At December 31, 1995, 1994 and 1993, the fair value of the notes payable
approximates the amounts recorded on the financial statements.
NOTE E -- COMMITMENTS
The Company leases office space under an operating lease expiring in 1999.
Rental expense charged to operations under the terms of this lease in 1995, 1994
and 1993 was $130,608, $179,352 and $155,344, respectively.
The Company leases an automobile and equipment under operating leases
expiring in various years through 1999. Rental expense charged to operations
under the terms of these leases in 1995, 1994 and 1993 was $101,921, $226,790
and $210,283, respectively.
Minimum future rental payments under non-cancelable operating leases having
remaining terms in excess of one year as of December 31, 1995 for each of the
next four years are:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31 AMOUNT
- ----------- --------
<S> <C>
1996........................................................ $166,419
1997........................................................ 150,022
1998........................................................ 146,105
1999........................................................ 135,786
--------
Total minimum future rental payments.............. $598,332
========
</TABLE>
The Company has entered into an agreement with the American Medical
Association (AMA). Under the terms of the agreement, AMA agrees to license on an
exclusive basis within the United States of America a minimum of 5,000
practicing physician names in the AMA Willing to Relocate (WTR) Database. In
addition, the AMA agrees to provide PracticeMatch, Inc. with names of all
residents in the AMA WTR Database. In return, PracticeMatch, Inc. will pay AMA a
royalty of $22,000 per month. The agreement is
F-34
<PAGE> 86
PRACTICEMATCH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
effective until December 31, 1998, with PracticeMatch, Inc. having an option to
terminate the agreement after one year.
NOTE F -- RECLASSIFICATIONS
Certain reclassifications have been made to the prior year's financial
statements to conform to the 1995 presentation.
NOTE G -- STOCKHOLDERS' EQUITY (DEFICIENCY)
Pursuant to an agreement among the Company and its stockholders, the
Company and the remaining stockholders have the right of first refusal to
purchase a stockholder's shares. Additionally, if certain events occur to a
stockholder, the remaining stockholders or the Company must purchase the
existing shareholder's shares at the then current agreed value as defined in the
stockholder's agreement.
NOTE H -- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Interest.................................................. $19,903 $20,190 $12,193
======= ======= =======
</TABLE>
NOTE I -- SUBSEQUENT EVENTS
On March 8, 1996 the shareholders of the Company entered into a stock
purchase agreement whereby the shareholders agreed to sell their respective
shares of common stock to a purchaser known as Medirisk, Inc. (a Florida
corporation). The aggregate amount of shares sold was 1,250 shares. The closing
date of the sale was March 14, 1996. The Company will continue operations in St.
Louis, Missouri as a wholly-owned subsidiary of Medirisk, Inc.
F-35
<PAGE> 87
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NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES
IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................. 3
Risk Factors........................ 6
The Company......................... 11
Dividend Policy..................... 11
Use of Proceeds..................... 12
Capitalization...................... 14
Dilution............................ 15
Selected Consolidated Financial
Data.............................. 16
Unaudited Pro Forma Financial
Data.............................. 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 19
Business............................ 26
Management.......................... 36
Certain Transactions................ 42
Principal Stockholders.............. 43
Description of Capital Stock........ 44
Shares Eligible for Future Sale..... 48
Underwriting........................ 49
Legal Matters....................... 50
Experts............................. 50
Additional Information.............. 51
Index to Financial Statements....... F-1
</TABLE>
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UNTIL FEBRUARY 23, 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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2,300,000 SHARES
MEDIRISK LOGO
COMMON STOCK
---------------------------
PROSPECTUS
---------------------------
EQUITABLE SECURITIES CORPORATION
JEFFERIES & COMPANY, INC.
January 28, 1997
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