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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
<TABLE>
<C> <S>
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
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COMMISSION FILE NUMBER: 000-22005
MEDIRISK, INC.
(Exact name of Registrant as specified in its charter)
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<S> <C>
DELAWARE 58-2256400
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
TWO PIEDMONT CENTER, SUITE 400 30305-1502
3565 PIEDMONT ROAD, N.E. (Zip Code)
ATLANTA, GEORGIA
(Address of principal executive offices)
</TABLE>
Registrant's telephone number, including area code: (404) 364-6700
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK,
par value $0.001 per share
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of the Common Stock of the Registrant held by
non-affiliates of the registrant (4,454,715 shares) on March 22, 1999: $15.9
million
The number of shares of Common Stock of the Registrant outstanding as of
March 22, 1999 was 7,403,643 shares.
DOCUMENTS INCORPORATED BY REFERENCE: THE INFORMATION CALLED FOR BY PART III IS
INCORPORATED BY REFERENCE TO THE DEFINITIVE PROXY STATEMENT FOR THE 1999 ANNUAL
MEETING OF STOCKHOLDERS OF THE REGISTRANT WHICH WILL BE FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION NOT LATER THAN 120 DAYS AFTER DECEMBER 31,
1998.
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PART I
ITEM 1. BUSINESS
Medirisk, Inc. (together with its subsidiaries, "Medirisk" or the
"Company") is a provider of proprietary database products, decision-support
software and analytical services to the healthcare industry. The Company's
products and services enable its customers to make objective comparisons of the
financial costs and clinical outcomes of physician services to customer-specific
and industry benchmarks, assess member satisfaction with specific managed care
plans, and obtain information concerning the background and credentials of
physicians. These capabilities assist healthcare industry participants in
strategic planning, effective contracting and improving the delivery of care.
Medirisk's databases have been built by collecting, standardizing and
normalizing various forms and types of healthcare information. The Company's
databases include information submitted by customers, data gathered from various
regulatory and governmental agencies, and data generated from the results of
proprietary surveys of healthcare providers, consumers, managed care
organizations and other payors. Medirisk believes the long-standing
relationships under which it collects data and the data interpretation
methodologies used by the Company represent significant competitive advantages.
Medirisk's databases are updated to reflect changes in the industry and, in the
case of its market performance and clinical performance databases, to take into
consideration secondary factors such as co-morbidity, case mix and demographics.
These attributes permit customers to compare objectively their financial and
clinical performance to industry or customer-specific benchmarks contained in
the Company's databases with specificity and precision.
INDUSTRY OVERVIEW
The U.S. healthcare industry has grown dramatically in recent years.
According to the Health Care Financing Administration ("HCFA"), healthcare
expenditures have increased from less than $250 billion, or approximately 9% of
the gross domestic product, in 1980 to in excess of $1.0 trillion, or
approximately 14% of the gross domestic product, in 1996 and is expected to
increase to $2.1 trillion, or approximately 17% of gross domestic product by
2007. Payors 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 payors and providers are under intense
pressure to deliver health care at the lowest total cost while ensuring high
quality results. To achieve this goal, payors and providers must understand
procedure cost and utilization rates as well as demonstrate improved outcomes.
The evolving impact of managed care has also increased physicians' receptivity
to a variety of practice affiliation and employment structures and,
consequently, the need for data that can be used to verify physician
qualifications.
Traditional healthcare information systems have focused on the
administrative aspects of health care (i.e., accounting, billing, patient
scheduling). The Company believes there is an increasing trend toward
reimbursement structures for healthcare services which require sophisticated
financial information management and a growing awareness that most healthcare
costs are related to clinical, rather than administrative, aspects of the
delivery of care. The result has been a growing demand for databases
incorporating financial, clinical and analytical tools that leverage this data
in order to assess managed care contracts, analyze outcomes, evaluate managed
care member satisfaction, verify the qualifications of providers and meet
ongoing accreditation requirements. While some payors and providers have
recently adopted new information systems that allow them to capture cost,
utilization and clinical outcomes data regarding their own businesses, the
Company believes these payors and providers generally have not been able to
effectively use such data to gain perspective on the marketplace. To accurately
analyze the potential impact of managed care contracts, payors and providers
need benchmark data against which they can compare internal data, information
relating to statistical differences in health care costs, projected utilization
and outcomes among urban, suburban and rural markets.
The healthcare information industry is highly fragmented and undergoing
consolidation, as vendors and service providers seek to build market share and
compete more effectively. Many existing healthcare
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information businesses have been created by entrepreneurs who are knowledgeable
in the areas of data products and technology, but these businesses typically
lack the sophisticated marketing organizations, sales effort, capital and
general management skills and processes that are required to generate
sustainable revenue expansion. Combined with the burdens associated with product
development, rapid technological change and the impact of the Internet, these
issues pose significant challenges to healthcare information companies that lack
breadth of management experience, economies of scale and access to capital. As a
result of these factors, many smaller healthcare information companies with
technologically sophisticated products and a reputation for quality service have
become attractive acquisition candidates for vendors and service providers
seeking to reach critical mass. Healthcare Internet companies have also
generated an increased interest by consumers in healthcare information. The
Internet serves as a new distribution channel for healthcare information,
thereby creating new demand for extended or versioned components of healthcare
information.
STRATEGY
Medirisk's objective is to become the leading provider of proprietary
database products, decision-support software and analytical services to all
participants of the healthcare industry, including: payors, providers,
employers, pharmaceutical companies and consumers. To attain this objective,
Medirisk is pursuing the following strategy:
Leverage the Company's Existing Customer Base. Medirisk believes the
increasing demand for healthcare information, coupled with its broad
customer base, provides a substantial opportunity for internal growth. The
Company has long-standing relationships with its customers and believes it
has developed a reputation for providing objective, value-added information
products. The Company intends to leverage these relationships by
cross-selling additional products and services to existing customers and
increasing product penetration through sales to other operating units,
departments or divisions of existing customers.
Emphasize Recurring Revenue. Medirisk seeks to maximize recurring
revenue by emphasizing multi-year contracts and contract renewals on its
subscription based products. A substantial portion of Medirisk's revenue is
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 achieved
by Medirisk's customers when they use the Company's products, as well as
from the customer's ongoing need for current information due to the rapid
pace of change within the healthcare industry. The Company's recurring
revenue percentage on its subscription based products has been in excess of
70% for each of the last five years.
Develop New Database Products and Decision-Support Tools. Medirisk
actively develops new products, product enhancements and decision-support
tools and, in 1998, introduced several new products and product
enhancements. The Company expects to introduce additional new products and
product enhancements during 1999. Ultimately, the Company intends to
cross-correlate existing and future databases in an effort to develop
integrated product offerings. For example, Medirisk believes that by
linking many of its products, cost and quality could be evaluated together.
Also, new Internet or web-enabled products may present additional
opportunities to distribute our current and future products to our current
and new customer sets.
Acquire and Integrate Complementary Products and Businesses. Medirisk
intends to acquire additional companies, products, databases and other
resources to expand into related areas and to increase market share within
the Company's existing product lines. Medirisk believes that the
acquisition of new products and customers creates compelling cross-selling
opportunities, enhances the development of new products by facilitating
cross-correlation of existing and acquired products and provides
significant operating leverage. See "Acquisitions."
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ACQUISITIONS
Medirisk believes the selective acquisition of complementary businesses
results in a more rapid expansion of its product line and customer base and
enables the Company to leverage its sales and marketing organizations. As a
result, Medirisk has invested significant resources to build the business
platform necessary to be a consolidator in the fragmented healthcare information
technology and services industry. Since its initial public offering in January
1997 and through December 31, 1998, Medirisk has acquired seven companies that
provide complementary products and services. The Company believes the
acquisition of these entities creates significant cross-selling opportunities
among its respective product offerings, increases its market share within
existing product lines and provides product and customer expansion
opportunities.
As part of a systematic approach to implementing its acquisition strategy,
Medirisk has corporate resources dedicated to identifying, analyzing and
pursuing targeted acquisition candidates. The Company currently is tracking a
database of several hundred companies, of which many meet its primary
acquisition criteria for product type, revenue and customer base. Of primary
interest to Medirisk are: (i) healthcare information products focused on
benchmark and outcomes data; (ii) software products that assist in data
collection and analysis; (iii) healthcare consulting firms; (iv) products that
assist in the delivery and use of Medirisk's databases; and (v) Internet related
products.
Medirisk believes that its existing infrastructure, in combination with
management's experience in acquiring and integrating new companies and products,
will facilitate the implementation of its acquisition strategy.
PRODUCTS AND SERVICES
Medirisk provides products and services designed to enable its customers to
measure and assess the performance of healthcare services in the United States
and to forecast the supply of and demand for healthcare services. At the core of
the Company's products and services are several proprietary databases. The
detailed nature of Medirisk's databases provides precise data that customers can
use to address specific decision-making needs and offers the Company's customers
competitive advantages. Medirisk also provides decision-support software tools
that enhance the utility of its database products, as well as customized
analytical services. The Company's flexible product design enables customers to
license the specific information they need based on variables such as geographic
region, medical specialty, clinical procedure and timeframe.
Medirisk has developed its databases and decision-support software for ease
of use and updates its databases to ensure that its products are accurate and
current. All of the Company's decision-support software is Microsoft
Windows(R)-based and is compatible with a variety of hardware and software
applications. The Company uses industry standard software and database tools.
All systems are designed to be open, scalable and compatible with multiple
platforms.
Market Performance Products
Medirisk's market performance products provide customers with comprehensive
proprietary data and decision support tools for use in analyzing physician fees,
health care utilization patterns and member satisfaction with managed care plans
in the United States. The following is a description of the Company's primary
market performance products:
CareData Reports(TM). CareData Reports are reports that are created
utilizing information accumulated and analyzed by the Company regarding
consumer satisfaction with managed health care. Based on this data,
CareData Reports rank specific health plans. Comparative market analysis is
available for 28 geographic markets. To collect data used in CareData
Reports, the Company conducts health care consumer surveys that are
sponsored by hundreds of major employers and measure member satisfaction
with approximately 150 aspects of managed health care. The Company's
CareData Reports product line is utilized by health plans to assess their
competitive position and quality of care, by employers to evaluate health
plans and by pharmaceutical companies to target potential markets for their
products.
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HealthPacs(R). HealthPacs are unique sets of data organized by
medical specialty or healthcare service lines. They are an accurate source
of current and future market demand and utilization data. HealthPacs
include demographic information about a community, population-based models
of the incidence or prevalence of diseases by category, estimates of the
demand for services by setting (inpatient, outpatient, physician services,
etc.), and the supply of local providers available to meet the demand.
These models provide current-year estimates and forecast the demand of
healthcare over the next 5 years.
Avenir II(R). Avenir II is a Windows(R)-based decision-support
application that integrates HealthPacs data sets with reporting, mapping
and graphics software. Avenir allows hospitals, health plans and other
healthcare industry participants to conduct detailed market analyses,
forecasting and strategic planning.
Patient Care Analyst. Patient Care Analyst ("PCA") is an Internet
application for the analysis of patient origin, market share and competitor
profiling. PCA allows the user secure, direct Internet access to patient
discharge data for state databases and the national MedPar (discharge
records for Medicare patients) and can be used for analysis in multiple
data sets.
Medirisk(SM) Physician Fee Database. The Physician Fee Database
reports reimbursement rates for medical procedures for various types of
payors and 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 payors, 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 were 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 or region or for the entire United States.
Medirisk(SM) Procedure Utilization Database. 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 profile. The database is offered on a
state-specific basis and can be adjusted for age and gender.
Medirisk(TM) Capitation Manager. Capitation Manager is a
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. With
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 capitated pricing for those services. Capitation
Manager then 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 market.
Clinical Performance Products
Medirisk offers clinical performance products that enable 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 healthcare
professional. Clinical outcomes are measured empirically using standard health
status scales to assess the patient prior to the delivery of therapy or care,
while such care is being delivered and after treatment is terminated. The data
included in these products are gathered by Company-certified clinicians,
automated patient information systems and Medirisk's patient interview staff
using the Company's standardized outcomes scales. Comparing
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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 payors and providers with (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) substantiating
quality for managed care contracting and accreditation needs.
Medirisk markets its clinical performance products primarily to health care
providers, and its products are currently available to track clinical outcomes
in rehabilitation, ambulatory surgery, orthopaedics, occupational health, pain
management, neurological care, wound care, respiratory care, nutrition and
infection therapy.
Medirisk's clinical performance products are listed on the Joint Commission
on Accreditation of HealthCare Organizations' ("JCAHO") roster of vendors who
have acceptable clinical performance measurement systems to support ORYX,
JCAHO's new accreditation initiative. The ORYX initiative requires health care
organizations to select an outcomes measurement standard from JCAHO's list of
acceptable performance measurement systems in order to receive JCAHO
accreditation. The ORYX initiative currently covers hospitals, long-term care
organizations, integrated delivery networks, health plans and provider-
sponsored organizations.
Medirisk Physician Profiling. Medirisk Physician Profiling ("MPP"),
formerly Successful Solutions, provides decision-support tools, consulting
services, and training materials to hospitals and physician group practices
to assist them in improving patient outcomes, achieving the efficient
delivery of care, and ensuring that billing and coding practices comply
with industry requirements. MPP collects clinical and billing record data
from customers and employs analytical tools and statistical algorithms to
profile the relative performance of individual physicians. Based on an
analysis of this information, we implement on-site education through
physician consultants and medical records specialists to influence
physician behavior and promote the effective and efficient delivery of
health care. Tools and services for bill coding and medical record
documentation help customers achieve optimal and appropriate reimbursement
for services delivered, while improving the quality of data for future
comparative analysis.
Physician Credentials Products
Medirisk provides database products, software and outsourced services
designed to enable its customers to access detailed information concerning the
background and credentials of physicians in the United States. The Company's
physician credentials products facilitate its customers' ability to establish or
improve physician recruiting efforts on a cost-effective basis, develop
healthcare networks and market the provider component of healthcare services.
Medirisk's physician credentials products also aid hospital and managed care
customers in verifying the credentials of physicians and other providers with
whom they work. Hospitals, managed care organizations and other healthcare
industry participants are required to verify and periodically re-verify such
credentials in order to maintain accreditation by organizations such as the
National Committee for Quality Assurance ("NCQA") and JCAHO. The Company's
credentials service has successfully completed all 10 of the audits of
credentialing processes conducted by NCQA. The Company's physician database is
comprised in part of physician data from the AMA's Physician MasterFile. All
physician information is further validated and enhanced by Medirisk's staff
conducting personal telephone interviews with the physicians. Current products
include:
Provider Credential Verification Report(TM). The Provider Credential
Verification Report is a report that provides customers with an efficient
and cost-effective means to verify electronically the key professional
credentials of participating healthcare practitioners using primary source
data. When joined with the Company's electronic processing of a National
Practitioner Database and/or Federation of State Medical Boards query and
written verification of a practitioner's hospital privileges, malpractice
insurance coverage and claims history, the Provider Credential Verification
Report becomes the central component of the Company's credential and
verification service.
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HCOL(TM). Healthcare Credentials Online ("HCOL") is an Internet-based
product that provides access to a national database of primary source
physician information, providing real-time credentials verification.
Internet access provides continually refreshed credentialing information
and reduces the paperwork traditionally associated with the credentialing
process, thereby enhancing the efficiency of credentialing staffs.
AppSTAT(TM). AppSTAT is an Internet-based service that allows
physicians to simplify the managed care application process by maintaining
a single, universal application for all current and future affiliations.
Physician subscribers can update their professional information via secure
Internet connections. This single data set can then be used to
automatically populate the unique applications of HMO's, PPO's, hospitals
and IPA's, as requested by the AppSTAT subscriber.
LUCI(TM). LUCI offers payors, hospitals and health plans a tool to
collect, manage and analyze vast amounts of provider-data. The system
simplifies the process of managing provider networks by enabling the
storing and processing of complex provider relationship data, including
contracts between providers, practices and networks, network affiliations,
flexible fee schedules, group contracting and credentialing. LUCI is a
32-bit, Microsoft-based, ODBG-compliant application that works with a
variety of databases, including SQL Server with the Microsoft NT server
operating system, and Sybase and Oracle with either Microsoft NT or Unix
operating systems. The client-server architecture makes it readily
deployable across wide area networks.
SweetQ(TM). SweetQ is a file server software program comprising eight
flexible modules designed to meet specific provider-data management needs
of payors, hospitals and health plans. SweetQ consists of three core
applications: credentialing and recredentialing, network management and
site survey. The system also contains five support applications: facility
review, perceptions of care, report card, data exchange, and complaints,
grievances and appeals.
PrimeSource(R). PrimeSource is the Company's database repository of
primary source physician information. The database contains personal and
professional data elements on more than 800,000 physicians across the
United States. The PrimeSource information is used for a wide range of the
Company's products and services, including specialized data packets for
custom-loaded software, electronic credentials verification, the provision
of outsource credentialing services, and information products suited to the
consumer market. Additional applications of the PrimeSource database
include market planning for healthcare organizations, the support of
physician locator services and the development of Web-based physician
directories.
PracticeMatch(TM). PracticeMatch is a decision-support software
system that provides in-house physician recruiters with on-line access to
the Company's physician database. By establishing a series of search and
selection criteria, customers obtain information about physicians who
satisfy specified criteria. The customer can then print or download the
information for use in building in-house databases, generating recruiting
status reports and tracking recruiting expenses associated with specific
candidates. The PracticeMatch product is constructed from proprietary
records of approximately 135,000 physicians developed in part from data in
the AMA's Physician MasterFile.
DATA ACQUISITION METHODOLOGY
In designing its products and services, Medirisk emphasizes quality and
ease of use. Medirisk uses proprietary data engineering methodologies to
standardize and interpret data in order to ensure that its products are as
comprehensive, accurate and current as practicable. The detailed nature of the
Company's databases provides precise data that customers can use to address
their specific decision-making needs. Furthermore, Medirisk's data engineering
methodologies are designed to ensure that its databases are free of bias. The
resulting objectivity of Medirisk's products and services allows the Company to
market its products to a broad range of healthcare industry participants and
improves the credibility of its databases as benchmarking tools.
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The Company collects data for inclusion in its databases and related
products in a variety of ways, including collecting data from customer sources,
purchasing data from public and private sources and conducting 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 data by standardizing, normalizing, formatting and
segmenting the submitted data.
Medirisk's databases are regularly updated to reflect changes in the
industry and, in the case of its market performance and clinical performance
databases, to take into consideration secondary factors such as co-morbidity,
case mix and demographics. These attributes permit customers to compare
objectively their financial and clinical performance to industry or
customer-specific benchmarks contained in the Company's databases with
specificity and precision.
Market Performance Products. The data used in Medirisk's market
performance products have been collected through (i) Medirisk's customer data
collection program, whereby customers provide their medical claims or other
health care transaction data to the Company on a regular basis, (ii) surveys of
managed care organizations, (iii) purchases of certain data sets, and (iv)
maintenance of a customer-support database. While Medirisk's market performance
databases include public-sector data, they focus primarily on private-sector
data derived from transaction data and clinical records. The Company believes
that private-sector data are more useful for comparative purposes than
public-sector data and that Medirisk's comprehensive compilation of
private-sector data represents a competitive advantage for the Company. For the
Company's CareData Reports products, Medirisk conducts annual patient surveys
regarding consumer satisfaction with managed care. These surveys are sponsored
by approximately 400 major employers and measure member satisfaction with
approximately 150 aspects of managed care including satisfaction with provider
panels, pharmacy benefit management and overall health plan design. For the
Company's HealthPac database, Medirisk collects demographic, market supply and
utilization data from publicly available sources or purchases or licenses data
from their source.
Clinical Performance Products. Medirisk obtains data for its clinical
performance databases by collecting data from its customers, purchasing data
from public and private sources, and collecting data from other
Company-certified sources. To facilitate collection of data from customers, the
Company provides its customers with data-collection tools that are tailored to
the customer's clinical record-keeping environment.
Physician Credentials Products. The data included in Medirisk's physician
credentials credentialing products are obtained from publicly available sources
or are licensed, leased or purchased from the source of the data. Sources of
data for credentialing products include state medical boards, the Drug
Enforcement Agency, HCFA, the American Board of Medical Specialties, the
American Association of Medical Colleges and the National Association of Social
Workers. The data used in Medirisk's physician credentials recruiting products
are collected from publicly available sources and the AMA Physician MasterFile
and verified by personal telephone interviews with or Internet data submission
by physicians. 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.
Since each physician profiled in the Company's recruiting database has
personally verified his or her information, the Company believes that its
recruiting database ensures the highest quality profile and offers a significant
competitive advantage over unverified databases. In addition, the Company has an
exclusive license to share and enhance portions of the AMA's Physician
MasterFile. This relationship greatly enhances the quality and availability of
information about practicing physicians.
CUSTOMERS
The unbiased nature of Medirisk's databases enables the Company to market
its products to a wide range of healthcare industry participants, including
managed care plans, indemnity insurers, integrated delivery systems, hospitals,
specialty healthcare providers, physician practice management companies,
physician practices, consulting firms, equipment suppliers, pharmaceutical
companies and consumers. None of the Company's customers accounted for a
material amount of the Company's revenues in 1998. Most of Medirisk's major
customers, which are defined as generating annualized revenue of more than
$5,000, license
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products in only one of the product areas offered by the Company. Medirisk has
approximately 1,000 major customers that in the aggregate account for more than
80% of the Company's revenue.
PRODUCT DELIVERY
The Company's products are delivered to customers via the Internet, on
CD-ROM, diskette, magnetic tape, on-line access or hard copy depending upon
customer preference. Medirisk believes that there are readily available
alternative sources of supply for all of the media on which its products are
delivered.
COMPETITION
Medirisk faces intense competition in providing healthcare 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 resources than those of the Company. In addition, several large
horizontally integrated information services companies, including Dow Jones, IMS
Healthcare, First Data Corporation, National Data Corporation, United Healthcare
and Thomson Publishing, have developed and are marketing information products
and services to the healthcare industry. The Company believes it is likely that
one or more of such companies may become more 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
healthcare claims and, thus, have access to substantial claims and cost-related
data from which they could build competing databases or 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.
EMPLOYEES
On March 15, 1999, the Company had 276 full-time employees. Of these, 28
were corporate personnel, 44 were sales and marketing personnel and 204 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.
RISK FACTORS
In evaluating the Company and its business, prospective investors should
carefully consider the following risk factors in addition to the other
information contained herein. This annual report, as well as press releases and
other public statements made by the Company from time to time, contain
"forward-looking statements" within the meaning of the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. These statements address
activities, events or developments that will or may occur in the future and are
based on assumptions and analyses made by the Company in light of its experience
and perception of historical trends, current conditions, expected future
developments and other factors. Actual results and developments are subject to a
number of risks and uncertainties, including general economic, market or
business conditions; opportunities (or lack thereof) that may be presented to
and pursued by the Company; competitive actions by other companies; changes in
laws or regulations; and other factors (such as those set forth below) as may be
discussed from time to time in the Company's SEC reports and other filings. Many
of these risks and uncertainties are beyond the control of the Company.
Accordingly, readers are cautioned not to place undue reliance on such forward
looking statements, which speak only as of the date made and which the Company
undertakes no obligation to revise or update in order to reflect events after
the date made.
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, but not
limited to, the Company's sales cycle; demand for the Company's products; the
timing of significant new customer contracts;
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<PAGE> 10
the non-renewal of significant customer contracts; the timing of acquisitions;
competitive conditions in the industry; changes in customer budgets; and general
economic factors. The Company has historically recorded a disproportionate
amount of its revenue for each quarter in the final month of the quarter, while
expenses have been incurred more evenly throughout the period. Furthermore, the
Company has experienced a seasonal pattern in its operating results, with a
greater proportion of the Company's revenue and more favorable operating margins
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 operating
results and financial condition 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 Company's Common Stock.
History of Operating Losses; Uncertain Profitability. The Company incurred
net losses in the years ended December 31, 1996, 1997 and 1998. 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.
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. 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 business, 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 and 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 have a
material adverse effect on the Company's business, results of operations or
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, that it will be able to manage its expanded operations effectively
and profitably.
Risks of Integration of Acquired Operations. The process of integrating
management services, administrative organizations, facilities, management
information systems and other operational aspects of acquired businesses,
products 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. 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. Furthermore, there
can be no assurance that there will not be substantial unanticipated costs or
liabilities, or other material adverse effects associated with past or future
acquisitions and integration activities conducted by the Company.
9
<PAGE> 11
Dependence on Data Sources and AMA Licenses. The Company incorporates the
Physicians' Current Procedural Terminology ("CPT") codes of the AMA into certain
of its market performance products under a non-exclusive five-year license with
the AMA that expires in February 2000. The CPT code system is considered to be
the current industry standard for identifying physician procedures, and the loss
or non-renewal of the AMA CPT code license would have a material adverse effect
on the Company's business, results of operations or financial condition. In
addition, the Company relies in large part on data from outside payor, provider
and other sources to develop its proprietary products, including acquired data
and data received from customers under the Company's data collection program. In
general, the Company's data sources 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. There can be no
assurance that the Company's sources will continue to provide data in the
future. If any of the Company's sources of data becomes unavailable, 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.
Risks of Customer Concentration. The Company derives a substantial portion
of its revenue from clinical performance products provided to HEALTHSOUTH
Corporation under a three-year contract, the current term of which expires in
December 2000. HEALTHSOUTH accounted for approximately 7% of the Company's
revenues for fiscal 1998. 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.
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 or 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 non-competitive or obsolete. 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 sufficient 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. Any failure by the Company 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 could have a material
adverse effect on the Company's business, results of operations or financial
condition.
Need for Additional Financing. 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. In addition, many of the Company's acquisition agreements provide
for the payment of contingent consideration based on the performance of the
acquired business. If such acquired businesses exceed the relevant performance
goals, the Company will be required to make additional payments, which could be
material. If the Company does not have sufficient cash resources or if the
Company's 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 debt or equity financings. Any debt
financings could result in the imposition on the Company of operational or
financial restrictions. Any equity financings could result in dilution to
holders of the Company's Common Stock. There can be no assurance 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.
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 and employee non-disclosure agreements to maintain the
confidentiality and trade secrecy of its proprietary procedures and resources.
Policing unauthorized use and piracy of the Company's products is difficult. The
Company is aware that from time to time there have been limited breaches of the
confidentiality provisions of
10
<PAGE> 12
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. The
misappropriation of the Company's information or independent development of
similar products may have a material adverse effect on the Company's competitive
position. Furthermore, there can be no assurance that third parties will not
assert infringement claims against the Company or that a license or similar
agreement will be available on reasonable terms in the event of an unfavorable
ruling on any such claim.
Risk Related to Intangible Assets and Acquisition Related Charges. Largely
as a result of the Company's various acquisitions, Medirisk had recorded
approximately $24.5 million in intangible assets net of accumulated amortization
as of December 31, 1998. Such intangible assets are being amortized over periods
of five to 15 years. The Company expects the amount allocable to intangible
assets on its balance sheet to increase in connection with future acquisitions
and in connection with future contingent consideration payments for acquisitions
that have been consummated, resulting in increases in the Company's amortization
expense. In the event of any sale or liquidation of the Company or a portion of
its assets, there can be no assurance that the value of the Company's intangible
assets will be realized. In addition, the Company regularly evaluates whether
events and circumstances have occurred indicating that any portion of the
remaining balance of amounts allocable to the Company's intangible assets may
not be recoverable. If factors indicate that the carrying value of the Company's
intangible assets has been impaired, the Company would be required to reduce the
carrying value of such assets. Any future determination requiring the write-off
of a significant portion of the unamortized intangible assets could have a
material adverse effect on the Company's business, results of operations or
financial condition.
In connection with many of its acquisitions, the Company has recorded
non-recurring charges related to in-process research and development costs. The
amount of each of these non-recurring charges is equal to the estimated current
fair value of specifically identified technologies for which technological
feasibility has not yet been established pursuant to Statement of Financial
Accounting Standards No. 86, "Accounting for Costs of Computer Software to be
Sold, Leased or Otherwise Marketed" and for which future alternative uses did
not exist at the time of acquisition. The Company recorded approximately $4.4
million of these charges in 1997 and $11.7 million in 1998. Similar charges
could result in the future as a result of additional acquisitions accounted for
as purchases.
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, payors and other industry participants. The Company's products and
services are designed to function within the current structure of the U.S.
health care 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 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 are consolidating to create larger health
care delivery organizations. This consolidation reduces the number of potential
customers for the Company and may increase the bargaining power of these
organizations, which could lead to reduced prices for Medirisk's products and
services. The impact of these developments on the health care industry is
difficult to predict and could have a material adverse effect on the Company's
business, results of operations or financial condition.
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. In each of its target markets, the Company competes with
various competitors, which vary in size, scope and breadth of product and
service
11
<PAGE> 13
offerings. In addition, other information companies not presently offering
health care information services competitive with the Company's products and
services may enter the markets in which the Company competes. Many of the
Company's competitors have, and 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's business, results of operations or
financial condition.
Potential for System Defects. The information products offered by the
Company may contain undetected errors or failures. Any such errors or failures
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. Any of the foregoing results could have a material adverse effect on
the Company's business, results of operations or financial condition.
Year 2000 Compliance. Both the Company's internal operations and products
use a significant number of computer software programs and operating systems.
Given the information known at this time about the Company's systems and
products, coupled with the Company's ongoing efforts to upgrade or maintain
systems and products, as necessary, the Company does not anticipate that the
year 2000 issue or related costs will have a material adverse effect on the
Company's business, results of operations or financial condition. However, the
Company is still analyzing its databases and software applications and those
utilized by key suppliers of data and key customers, and to the extent they are
not fully year 2000 compliant, there can be no assurance that the costs
necessary to update databases or software or potential systems interruptions,
interruptions in the supply of data or interruptions in demand for the Company's
products would not have a material adverse effect on the Company's business,
results of operations or financial condition.
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. Specifically, the Company's Certificate of Incorporation, as
amended, provides for the issuance of up to 995,000 shares of preferred stock
with such rights and preferences as may be determined by the Board of Directors.
Such shares may be issued without further stockholder approval in circumstances
that could have the effect of preventing or delaying a change of control. The
Company's Board of Directors is classified into three classes, with each class
of directors having a staggered three year term. The Company's Bylaws prohibit
action by the stockholders through written consent and restrict the ability of
stockholders to call stockholder meetings and propose action at meetings.
Finally, Section 203 of the Delaware General Corporation Law restricts
transactions between the Company and any "interested stockholders" (as defined
therein). In addition, the Company adopted a Shareholder Protection Rights
Agreement, commonly known as a "poison pill", in August of 1998. These
provisions could reduce or eliminate any takeover premium in the market price
for the Company's Common Stock or otherwise limit the price certain investors
might be willing to pay for the Company's Common Stock.
ITEM 2. PROPERTIES
Medirisk's corporate headquarters occupy approximately 16,000 square feet
of an office building located in Atlanta, Georgia, under a lease expiring in
March 2004. Medirisk also leases office space in Chicago, Illinois; St. Louis,
Missouri; Rockville, Maryland; New York, New York; Nashville, Tennessee; San
Diego, California; Dallas, Texas; Albuquerque, New Mexico; and Vidalia, Georgia.
The Company believes that such offices are adequate for the Company's current
requirements.
ITEM 3. LEGAL PROCEEDINGS.
The Company and certain of its officers and directors are named as
defendants in three purported securities class action lawsuits filed in the
United States District Court for the Northern District of Georgia:
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Richard Sturm v. Medirisk, Inc., et al. (Civil Action No. 1:98-CV-1922), John T.
Gallagher v. Medirisk, Inc., et al. (Civil Action No. 1:98-CV-2099), and
Frederick T. Casiello v. Medirisk, Inc., et al. (Civil Action No. 1:98-CV-2100).
The Sturm action was filed on July 8, 1998. The Gallagher and Casiello actions
were each filed on July 24, 1998. These lawsuits have been consolidated under
the style In re Medirisk, Inc. Securities Litigation. Plaintiffs served their
consolidated and amended complaint on January 13, 1999. The Company moved to
dismiss this complaint on March 12, 1999. The consolidated and amended complaint
alleges that the Company violated federal securities laws by making certain
forward-looking statements and by failing to disclose in its public statements
and/or the Prospectus for its June 1998 common stock offering certain alleged
adverse trends respecting its Market Performance and Physician Credentialing
Products. The consolidated and amended complaint asserts claims based on
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and claims under
Sections 11 and 15 of the Securities Act of 1933. Plaintiffs seek compensatory
damages, rescission or rescissory damages, and reimbursement of their attorneys'
fees and costs. Because of the uncertainty of the litigation process, the
Company cannot predict the outcome of these consolidated cases and, therefore,
it is possible that their outcome could have a material adverse effect on the
Company. The Company believes that plaintiffs' claims have no merit and intends
to defend these cases vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's security holders during
the quarter ended December 31, 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Common Stock is quoted on the Nasdaq National Market under the symbol
"MDMD." The following table sets forth the high and low sales prices for the
Common Stock for the quarters indicated as reported on the Nasdaq National
Market.
<TABLE>
<CAPTION>
PRICE RANGE
-----------------
HIGH LOW
------- -------
<S> <C> <C>
Fourth Quarter ended December 31, 1998...................... $ 5.625 $ 2.438
Third Quarter ended September 30, 1998...................... 6.313 2.313
Second Quarter ended June 30, 1998.......................... 25.250 18.625
First Quarter ended March 31, 1998.......................... 25.625 11.000
Fourth Quarter ended December 31,1997....................... 12.250 10.250
Third Quarter ended September 30, 1997...................... 10.875 7.375
Second Quarter ended June 30, 1997.......................... 8.375 6.250
First Quarter ended March 31, 1997.......................... 10.500 7.625
</TABLE>
The last reported sale price of the Common Stock on the Nasdaq National
Market on March 22, 1999 was $3.563 per share. As of March 22, 1999 the Company
had 107 stockholders of record.
The Company has not declared or paid any cash dividends or distributions on
its Common Stock since 1991. 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. Payments of future
dividends, if any, will be at the discretion of the Company's Board of
Directors. The Credit Agreement between the Company and NationsBank N.A.
contains restrictions on the payment of dividends. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
In March 1998, in connection with, and as partial consideration for, the
acquisition of Healthdemographics, Inc., the Company issued 171,315 shares of
Common Stock to various shareholders of Healthdemographics, Inc. In May 1998, in
connection with, and as partial consideration for, the acquisition of
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<PAGE> 15
Successful Solutions, Inc., the Company issued 189,811 shares of Common Stock to
various shareholders of Successful Solutions, Inc. All of such transactions were
conducted without an underwriter or other placement agent, and the Company
claims that all of such transactions were exempt from registration under the
Securities Act pursuant to Section 4(2) of the Securities Act.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below as of and for the
years ended December 31, 1994, 1995, 1996, 1997 and 1998 have been derived from
the audited consolidated financial statements of the Company and its
subsidiaries. The consolidated financial statements and related notes as of
December 31, 1997 and 1998 and for each of the years in the three-year period
ended December 31, 1998, together with the related report of KPMG LLP,
independent certified public accountants, are included elsewhere in this Form
10-K. As a result of the 1997 Acquisitions and the acquisitions of
Healthdemographics, Successful Solutions and Sweetwater (collectively, the "1998
Acquisitions"), 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
"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 Form 10-K.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1994 1995 1996 1997 1998
------ ------ ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue........................................... $2,894 $3,655 $ 8,904 $16,749 $ 27,204
Salaries, wages and benefits...................... 1,893 2,578 6,093 7,910 12,972
Other operating expenses.......................... 731 956 2,314 4,374 8,040
Depreciation and amortization..................... 143 193 787 1,304 2,815
Acquired in-process research and development costs
and integration costs(1)........................ -- -- 6,180 4,575 13,547
------ ------ ------- ------- --------
Operating income (loss)........................... 127 (72) (6,470) (1,414) (10,170)
Interest income (expense), net.................... (54) (66) (703) 345 626
Other expense..................................... -- -- (57) -- --
Provision for income taxes........................ -- -- -- (707) (550)
------ ------ ------- ------- --------
Income (loss) before extraordinary item........... 73 (138) (7,230) (1,776) (10,094)
Extraordinary item -- loss on early extinguishment
of debt (1)(2).................................. -- -- -- (806) --
------ ------ ------- ------- --------
Net income (loss)................................. 73 (138) (7,230) (2,582) (10,094)
====== ====== ======= ======= ========
Accretion of discount on Series A Convertible
Preferred stock................................. (92) -- -- --
Convertible preferred stock dividend
requirement..................................... (202) (202) (25) --
------ ------- ------- --------
Net loss attributable to common stock........ (432) (7,432) (2,607) (10,094)
====== ======= ======= ========
Loss per common share -- basic and diluted(3):
Loss per share before extraordinary item.......... (0.30) (4.84) (0.46) (1.66)
Loss per share -- extraordinary item.............. -- -- (0.21) --
------ ------- ------- --------
Net loss per share of common stock........... (0.30) (4.84) (0.67) (1.66)
====== ======= ======= ========
Weighted average number of common shares used in
calculating net loss per share of common
Stock -- basic and diluted(3)................... 1,427 1,536 3,918 6,094
</TABLE>
14
<PAGE> 16
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)........................ $ 321 $ 197 $(2,495) $ 4,181 $25,945
Total assets..................................... 1,111 1,263 8,456 20,658 59,120
Long-term debt and capital lease obligations,
excluding current portion...................... 172 151 7,195 165 16
Redeemable preferred stock....................... 2,210 2,302 -- -- --
Stockholders' equity (deficit)................... (1,928) (2,333) (4,823) 16,184 53,648
</TABLE>
- ---------------
(1) In connection with the 1997 Acquisitions, the Company recorded non-recurring
charges related to acquired in-process research and development and
integration costs in 1997. Excluding these charges and the extraordinary
item, operating income, net income and net income per share of common
stock -- diluted for the year ended December 31, 1997 would have been $3.2
million, $2.1 million and $0.45 respectively. In 1998, the Company recorded
non-recurring charges related to acquired in-process research and
development costs in connection with the 1998 acquisitions as well as
integration costs associated with the 1997 Acquisitions and the 1998
Acquisitions. Excluding these charges, operating income, net income and net
income per share of common stock -- diluted for the year ended December 31,
1998 would have been $3.4 million, $2.4 million and $0.37, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," Note 2 of Notes to Consolidated Financial Statements of the
Company and the Consolidated Financial Statements of the Company.
(2) As a result of the application of a portion of the net proceeds of the
Company's initial public offering to repay indebtedness, the Company
incurred a one-time, non-recurring, non-cash charge of approximately
$806,000 with respect to accelerated amortization of original issue discount
on certain senior subordinated notes and related deferred financing costs.
Due to the Company's losses, no income tax benefit was applied to the
extraordinary loss presented. See Note 5 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 for 1994 per share are not
presented as they are not meaningful due to the mandatory conversion of all
outstanding shares of the Company's Series A and Series B Convertible
Preferred Stock into Common Stock which occurred upon completion of the
Company's initial public offering in January 1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and accompanying notes, as well as the other
financial information appearing elsewhere in this Form 10-K. Except for
historical information, the following discussion contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from those discussed herein or those implied by such
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in
"Business -- Risk Factors."
OVERVIEW
Medirisk is a provider of proprietary database products, decision-support
software and analytical services to the healthcare industry. The Company's
products and services enable its customers to make objective comparisons of the
financial costs and clinical outcomes of physician services to customer-specific
and industry benchmarks, assess member satisfaction with specific managed care
plans, and obtain information concerning the background and credentials of
physicians. These capabilities assist healthcare industry participants in
measuring the performance of healthcare payors and providers and forecasting the
supply of and demand for healthcare services.
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<PAGE> 17
Applications of Medirisk's products include pricing managed care contracts,
evaluating physician fee schedules and utilization of physician services,
comparing provider outcomes and health plan performance, credentialing and
recruiting physicians, developing healthcare delivery networks, and marketing
healthcare services. The Company actively sells its products to over 1,000 major
customers, including leading health plans, insurers, hospitals, large
multi-specialty physician groups, physician practice management companies,
employers, equipment suppliers and pharmaceutical companies, as well as several
hundred smaller customers, including single-specialty physician groups. Medirisk
believes that it is the leading provider of clinical and financial database
products comprised of physician-oriented content and managed care member
satisfaction information in the United States.
ACQUISITIONS
Following the completion of its initial public offering in January 1997,
Medirisk significantly expanded its operations by acquiring four companies in
1997 (the "1997 Acquisitions") and three companies in 1998 (the "1998
Acquisitions"). The acquisition of businesses with complementary products and
services has broadened the Company's customer base, created additional
cross-selling opportunities, increased market share within existing products and
resulted in new product extensions and enhancements. The following summarizes
these recent transactions.
- In May 1997, Medirisk acquired substantially all of the assets of
Staff-Link, Inc. ("Staff-Link") of St. Louis, Missouri, a provider of a
physician database and related software utilities designed to assist
healthcare organizations with their in-house recruiting efforts.
Staff-Link's customer base increased the market share of the Company's
physician credentials products.
- In June 1997, Medirisk acquired CIVS, Inc. ("CIVS") of Rockville,
Maryland, a leading national provider of physician credentialing services
and information products to healthcare organizations. The acquisition of
CIVS added new customers to the Company's physician credentials product
line and broadened the range of products and outsourced services offered
by the Company.
- In August 1997, Medirisk acquired CareData Reports, Inc. ("CareData") of
New York, New York, which creates reports analyzing consumer satisfaction
with more than 150 aspects of managed healthcare plans and ranks specific
health plans accordingly. CareData's products are used by managed care
plans to assess their competitive position and quality of care, by
employers to evaluate health plans and by pharmaceutical companies to
target potential markets for their products.
- In November 1997, Medirisk acquired Medsource, Inc. ("Medsource") of St.
Paul, Minnesota, which licenses databases of physician information for
use in recruiting physicians and developing healthcare networks. The
acquisition strengthened the Company's physician credentials product line
and extended the application of these products to the administrative and
the marketing functions of healthcare organizations.
- In March 1998, Medirisk acquired Healthdemographics of San Diego,
California, which provides databases and decision-support applications to
forecast the supply of and demand for healthcare services. Healthcare
delivery organizations, insurers, equipment suppliers, consultants and
other healthcare industry participants use the proprietary demographic
and market segmentation information and software provided by
Healthdemographics to make more informed business decisions regarding
strategic planning and market planning and analysis. The acquisition of
Healthdemographics resulted in an expansion of the Company's market
performance products and customer base.
- In May 1998, Medirisk acquired Successful Solutions, Inc. ("Successful
Solutions") of Vidalia, Georgia, which provides decision-support tools,
consulting services and training materials to hospitals and physician
group practices to assist in improving patient outcomes, achieving the
efficient delivery of care and establishing billing and coding practices
that comply with industry requirements. Successful Solutions collects
clinical and billing record data from its customers and profiles the
relative performance of individual physicians using its analytical tools
and statistical algorithms. Successful Solutions implements on-site
education through physician consultants and medical record specialists to
16
<PAGE> 18
influence physician behavior and promote the effective and efficient
delivery of health care. Successful Solutions' tools and services for
bill coding and medical record documentation help its customers achieve
optimal and appropriate reimbursement for services delivered, while
improving the quality of data for future comparative analysis.
- In June 1998, Medirisk acquired Sweetwater Health Enterprises, Inc.
("Sweetwater") of Dallas, Texas, which offers a comprehensive selection
of physician credentialing services to hospitals and managed care
organizations to evaluate professional relationships with physicians and
secure accreditation by industry associations. In addition, Sweetwater
provides a suite of quality management software used by healthcare
organizations to facilitate in-house credentialing and network
management, as well as to track perceptions of care and individual
physician performance. Sweetwater also provides managed care consulting
and interim management services for healthcare organizations throughout
the country.
In connection with these 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 their
adaptability to changing market conditions.
Also in connection with the recent acquisitions, the Company recorded
non-recurring charges related to acquired in-process research and development
costs of $3.1 million for CIVS, $975,000 for CareData, $300,000 for Medsource,
$4.8 million for Healthdemographics, $3.4 million for Successful Solutions and
$3.5 million for Sweetwater. The amount of each of these non-recurring 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 24% for CIVS
and CareData, 20% for Healthdemographics, 25% for Successful Solutions, 33% for
Sweetwater and 29% for Medsource), 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 additional acquisitions accounted for as purchases. The Company also
incurred $1.9 million and $200,000 of integration costs in 1998 and 1997,
respectively. Included in the 1998 integration costs were approximately $535,000
of internal expense allocations which may recur in other expense categories in
the future and may result in an increase in some expense categories as a
percentage of total revenue.
As a result of the 1997 Acquisitions and 1998 Acquisitions, the Company's
historical financial statements are not representative of financial results to
be expected for future periods. See Note 2 of Notes to Consolidated Financial
Statements of the Company.
RECENT ACQUISITIONS
In March 1999 the Company purchased certain assets of Healthcare
Credentials Management Services, Inc. ("HCMS") for $4.0 million in cash.
Contingent consideration is payable in cash if HCMS achieves certain financial
objectives. HCMS provides online verifications and outsourced credentialing
services to over 300 hospitals and managed care clients. During 1999, Medirisk
expects to record approximately $750,000 in costs related to integrating HCMS's
products and operations. With the acquisition Medirisk adds two new
Internet-based products, HCOL and AppSTAT.
STOCK OFFERING
In June 1998, the Company completed an offering of 2,250,000 shares of
Common Stock (the "Stock Offering"). As a result of the Stock Offering, the
Company received approximately $40.5 million, net of offering costs of
approximately $600,000.
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<PAGE> 19
SOURCES OF REVENUE
The Company provides services and licenses its products primarily pursuant
to single- and multi-year contracts that provide for the payment of
non-refundable annual fees or quarterly fees. The products and services consist
of market performance, clinical performance and physician credentials products.
The market performance products provide customers with information from the
Company's market performance product databases. Revenue from these sales is
recognized upon the delivery of the data. The Company also licenses the
exclusive right to market the results of its managed care consumer satisfaction
surveys. Revenue from the licenses of disease-specific customized surveys to the
pharmaceutical industry is recognized as the related costs of producing the
survey are incurred, and revenue from non-customized data licensing is
recognized upon delivery. 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 credentials products consist of (i) data
and services provided to customers over time, for which revenue is recognized
ratably over the life of the contract, and (ii) credentials reports that
validate physicians' education, training and other matters, for which revenue is
recognized upon delivery of the completed reports. Customer service revenues are
recognized ratably over the service contract period. Revenue from the licensing
of the Company's software products is recognized upon shipment of the software.
All other revenue, including fees for training, consulting fees and other
miscellaneous services, is recognized upon the completion of the applicable
services.
The Company's three groups of products contribute varying percentages of
the Company's total revenue from quarter to quarter based on a variety of
factors, including, without limitation, the timing and size of acquisitions and
the differences in seasonality among the groups of products. Of its total
revenue for the year ended December 31, 1998, the Company derived approximately
44% from market performance products, approximately 17% from clinical
performance products and approximately 39% from physician credentials products.
Of its total revenue for the year ended December 31, 1997, the Company derived
approximately 37% from market performance products, approximately 20% from
clinical performance products and approximately 43% from physician credentials
products.
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 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 has been in excess of 70% for each of the
last five years.
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<PAGE> 20
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>
YEAR ENDED
DECEMBER 31,
--------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS:
Revenue..................................................... 100% 100% 100%
Salaries, wages and benefits................................ 69 47 48
Other operating expenses.................................... 26 26 30
Depreciation and amortization............................... 9 8 10
Acquired in-process research and development costs,
integration costs and acquisition-related costs........... 69 27 50
--- --- ---
Operating loss.............................................. (73) (8) (38)
Interest income (expense), net.............................. (8) 2 2
Provision for income taxes.................................. -- (4) (2)
Extraordinary item: loss on early extinguishment of debt.... -- (5) --
--- --- ---
Net loss.................................................... (81)% (15)% (38)%
=== === ===
</TABLE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenue. Revenue in 1998 was $27.2 million, an increase of $10.5 million
or 62% over 1997. The increase was primarily attributable to the 1998
Acquisitions. Revenue associated with the 1998 Acquisitions represented $7.7
million or 73% of the total increase. The Company's revenue excluding these
acquisitions increased $2.7 million and represented a 16% increase in revenue
over 1997. This increase was due to internal growth.
Salaries, wages and benefits. Salaries, wages and benefits in 1998 were
$13.0 million, an increase of $5.1 million or 64% over 1997. The increase was
primarily the result of the 1998 Acquisitions and 1997 Acquisitions and
incremental expenses associated with internal growth. As a percentage of
revenue, salaries, wages and benefits for 1998 and 1997 were 48% and 47%,
respectively.
Other operating expenses. Other operating expenses in 1998 were $8.0
million, an increase of $3.7 million or 84% over 1997. This increase is
primarily related to costs associated with the 1998 Acquisitions and 1997
Acquisitions. Other operating expenses increased as a percentage of revenue to
30% as compared to 26% in the same period in the prior year primarily as a
result of differences in expense structures of the acquired companies.
Depreciation and amortization. Depreciation and amortization expenses in
1998 were $2.8 million, an increase of $1.5 million or 116% over 1997. The
increase was primarily the result of the amortization of intangible assets
acquired in the 1998 Acquisitions and 1997 Acquisitions. Depreciation and
amortization as a percentage of revenue increased to 10% in 1998 compared to 8%
in 1997.
Acquired in-process research and development costs, integration costs and
acquisition-related costs. Acquired in-process research and development costs,
integration costs and acquisition-related costs in 1998 were $13.5 million, an
increase of $9.0 million or 196% over 1997. In connection with the acquisition
of Sweetwater, Successful Solutions and Healthdemographics in 1998, the
Company's recorded non-recurring charges resulting from expensing acquired
in-process research and development of $3.5 million, $3.4 million and $4.8
million, respectively. Integration costs in 1998 were $1.9 million as compared
to $200,000 in 1997. These integration charges in 1998 were associated with both
the 1997 Acquisitions and the 1998 Acquisitions. Included in the 1998
integration costs were approximately $535,000 of internal expense allocations
which may recur in other expense categories in the future and may result in an
increase in some expense categories as a percentage of total revenues.
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<PAGE> 21
Interest income, net. Interest income, net in 1998 was $626,000, compared
to $345,000 for 1997. The increase was a result of the interest income earned on
the net proceeds of the Company's stock offering in 1998.
Extraordinary items. The Company recorded an extraordinary loss in 1997 of
$806,000 related to a one-time, non-recurring, non-cash charge for bond discount
and debt issue cost associated with the early extinguishment of debt.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenue. Revenue in 1997 was $16.7 million, an increase of $7.8 million or
88% over 1996. The increase was primarily attributable to the 1997 Acquisitions.
Revenue recognized by the 1997 Acquisitions represented approximately $4.7
million, or 60% of the total increase. The Company's revenue without the impact
of the revenue from the 1997 Acquisitions increased 35% for 1997 over 1996 as a
result of a combination of factors, including the revenue of a company acquired
in March 1996 whose revenues were not included in the Company's revenues for the
entire year in 1996, increases in the volume of 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 for existing products and product extensions.
Salaries, wages and benefits. Salaries, wages and benefits in 1997 were
$7.9 million, an increase of $1.8 million or 30% over 1996. This increase was
primarily the result of the 1997 Acquisitions and growth in the revenues of the
Company's other business units. Salaries, wages and benefits decreased as a
percentage of revenue during 1997 to 47% as compared to 69% for the same period
in 1996. This decrease resulted primarily from leveraging the Company's existing
administrative, sales and marketing personnel as revenue increased through both
acquisitions and internal growth.
Other operating expenses. Other operating expenses in 1997 were $4.4
million, an increase of $2.1 million or 89% over 1996, principally as a result
of the 1997 Acquisitions. Other operating expenses remained generally consistent
at approximately 26% of revenue in 1997 and 1996.
Depreciation and amortization. Depreciation and amortization in 1997 was
$1.3 million, an increase of $517,000 or 66% over 1996. This increase resulted
primarily from the 1997 Acquisitions. As a percentage of revenue, depreciation
and amortization for 1997 and 1996 was 8% and 9%, respectively.
Acquired in-process research and development costs and integration
costs. In connection with the 1997 Acquisitions, the Company acquired the
ongoing research and development activities of each entity and incurred certain
integration expenses. At the effective date of each acquisition, the Company
recorded non-recurring charges resulting from expensing acquired in-process
research and development costs. In 1997, the acquired in process research and
development costs and integration costs totaled $4.6 million, or 27% of revenue.
Interest income (expense), net. Interest income, net in 1997 was $345,000,
an increase of $1.0 million over 1996. The increase was a result of the
extinguishment of debt with the proceeds of the Company's initial public
offering in January 1997 and the interest income earned on the net proceeds of
that offering.
Extraordinary items. The Company recorded an extraordinary loss in 1997 of
$806,000 related to a one-time, non-recurring, non-cash charge for bond discount
and debt issue cost associated with the early extinguishment of debt
20
<PAGE> 22
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth, for the fiscal periods indicated, certain
items from the statements of operations of the Company. 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>
1997 QUARTER ENDED 1998 QUARTER ENDED
------------------------------------- -------------------------------------
MAR. 31 JUN. 30 SEP. 30 DEC. 31 MAR. 31 JUN. 30 SEP. 30 DEC. 31
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS:
Revenue...................... $2,650 $ 3,243 $4,677 $6,179 $ 5,176 $ 5,416 $7,762 $8,850
Salaries, wages and
benefits................... 1,762 1,718 2,036 2,394 2,574 2,964 3,614 3,820
Other operating expenses..... 646 894 1,309 1,525 1,522 1,572 2,360 2,586
Depreciation and
amortization............... 201 249 352 502 427 652 860 876
Acquired in-process research
and development costs,
integration costs and
acquisition-related
costs...................... -- 3,100 1,064 411 4,815 7,249 992 491
------ ------- ------ ------ ------- ------- ------ ------
Operating income (loss)...... 41 (2,718) (84) 1,347 (4,162) (7,021) (64) 1,077
Interest income (expense),
net........................ 41 157 103 44 36 (34) 298 326
Provision for income taxes... -- -- -- (707) -- -- -- (550)
------ ------- ------ ------ ------- ------- ------ ------
Income (loss) before
extraordinary item......... 82 (2,561) 19 684 (4,126) (7,055) 234 853
Extraordinary item........... (806) -- -- -- -- -- -- --
------ ------- ------ ------ ------- ------- ------ ------
Net income (loss)............ (724) (2,561) 19 684 (4,126) (7,055) 234 853
====== ======= ====== ====== ======= ======= ====== ======
</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 but not limited to the following: 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 non-renewal of significant
customer contracts; the timing of acquisitions; competitive conditions in the
industry; changes in customer budgets; and general economic factors. The Company
has historically recorded a disproportionate amount of its revenue for each
quarter in the final month of the quarter, while expenses have been incurred
more evenly throughout the period. 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 healthcare industry
generally, the compounding effect of historical renewal schedules (which
typically results in greater license renewals in the third and fourth quarters)
and internal staffing and growth issues. The Company believes the licensing and
subsequent renewal pattern of its market performance products are more seasonal
than its other products and expects the addition of new products, including
those from acquisitions, to moderate, but not end, this seasonal effect.
A significant portion of the Company's expenses is 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.
SOFTWARE CAPITALIZATION
In addition to acquisitions, the Company seeks to expand its product
offerings through internal product development. The Company capitalizes internal
product development costs incurred after technological
21
<PAGE> 23
feasibility has been established and prior to general product release.
Capitalized software development costs, net of accumulated amortization, totaled
approximately $2.4 million at December 31, 1998.
INCOME TAXES
The Company recorded income tax expense of $550,000 during 1998 due to
limitations on the utilization of net operating loss carryforwards and the
non-deductibility of certain acquired in-process research and development costs
to offset taxable income. At December 31, 1998, the Company had net operating
loss carryforwards of approximately $3.1 million for federal income tax
purposes. The net operating loss carryforwards expire beginning in 2006 through
2012. The total gross deferred tax asset was approximately $5.2 million as of
December 31, 1998 and has been reduced to zero by a valuation allowance and
offsetting deferred income tax liabilities of approximately $2.6 million.
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 significant 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 approximately $22.5 million at December 31, 1998.
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.
At December 31, 1998, the Company had net operating loss carryforwards of
approximately $3.1 million which expire beginning in 2006 through 2012.
Approximately $1.4 million of the net operating loss at December 31, 1998
relates to loss carryforwards acquired in connection with the 1998 Acquisitions.
Accordingly, such losses are limited to income generated by the acquired entity
as well as substantial annual limitations.
LIQUIDITY AND CAPITAL RESOURCES
In June 1998 the Company completed the Stock Offering of 2,250,000 shares
of Common Stock. As a result of the offering, the Company received approximately
$40.5 million, net of offering expenses of approximately $600,000.
In June 1998 the Company entered into an Amended and Restated Credit
Agreement with NationsBank under which a $25 million revolving credit facility
(the "NationsBank Revolver") was made available to the Company. The NationsBank
Revolver is secured by substantially all of the Company's assets. Under the
terms of the NationsBank Revolver the Company may, subject to customary terms,
conditions and covenants, borrow up to $25.0 million to fund working capital
needs, new product development and acquisitions. The Amended and Restated Credit
Agreement for the NationsBank Revolver provides for interest at varying rates
based on LIBOR and NationsBank's prime rate, and will mature on July 15, 2000.
Under the terms of the NationsBank Revolver, the Company is subject to various
restrictive covenants regarding, among other things, payment of any dividends,
capital expenditures limitations, incurrence of indebtedness from others in
excess of certain amounts, and consummation of certain mergers and acquisitions
without the consent of NationsBank. Financial covenants include, but are not
limited to, maintaining debt to capitalization ratios, minimum net worth ratios,
debt service coverage ratios and cash flow leverage ratios. At December 31,
1998, the Company had $25 million in borrowing availability remaining on its
revolving line of credit.
22
<PAGE> 24
The Company had working capital of $25.9 million as of December 31, 1998 as
compared to working capital of $4.2 million at December 31, 1997. The increase
was due primarily to the net proceeds remaining from the follow-on stock
offering completed by the Company in June 1998.
Net cash used by operating activities totaled $3.1 million for the year
ended December 31, 1998 as compared to $697,000 for the prior year. The increase
in cash used of $2.4 million was primarily due to increases in accounts
receivable and other current assets and the extinguishment of accrued
liabilities assumed in the 1998 Acquisitions.
Net cash used in investing activities was approximately $18.0 million for
the year ended December 31, 1998 as compared to $9.3 million for the prior year.
In 1998, the Company used $14.4 million in cash to fund partially the
acquisitions of Healthdemographics, Successful Solutions and Sweetwater and to
pay $3.0 million of contingent consideration in connection with the acquisition
of CareData. The remaining $3.6 million of net cash used in investing activities
for 1998 was used to fund $1.5 million in fixed asset purchases, $1.7 million of
software development and $425,000 in Notes to Officers of the Company. The
increase in Notes to Officers is due primarily to a $350,000 loan to the
Company's Chairman and Chief Executive Officer. This loan bears interest at 7.5%
and is payable on July 30, 1999.
Net cash provided by financing activities was $38.9 million for the year
ended December 31, 1998 as compared to $13.1 million for the prior year. In 1997
the Company received net proceeds of $22.6 million from its initial public
offering, and in June 1998 the Company received net proceeds of $40.5 million
from its follow-on offering.
Many of the Company's acquisition agreements provide for the payment of
contingent consideration based upon the performance of the acquired businesses
over a prescribed period of time. If such acquired businesses exceed the
relevant performance goals, the Company will be required to make additional
payments, which could be material. In connection with the CareData acquisition,
additional consideration of $3.0 million was paid in April 1998. In March 1999,
additional consideration of $3.0 million was paid in connection with the
Healthdemographics acquisition. Additional payments under these agreements will
be forthcoming in 1999.
The Company believes that the remaining proceeds of the Stock Offering,
available 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 near term. The Company's
future liquidity and cash requirements will depend on a wide range of factors,
including costs associated with development of 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 remaining
proceeds from its June 1998 Stock Offering, borrowings under the NationsBank
Revolver and cash flow from operations are not sufficient to fund such
acquisitions or contingent payments relating to prior 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 on terms acceptable to the
Company.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income", and Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosures About Segments of an Enterprise and Related Information." SFAS 130
established standards for reporting and display of comprehensive income and its
components. Comprehensive income generally includes all changes in equity during
a period except those resulting from investments by owners and distribution to
owners. There was no impact on the Company's consolidated financial statements
with the adoption of SFAS 130. SFAS 131 established standards for reporting
information about operating segments in annual financial statements and in
interim financial reports to shareholders. The Company adopted both statements
in the first quarter of 1998.
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<PAGE> 25
On September 15, 1998 the SEC issued a letter to the AICPA SEC Regulations
Committee outlining changes that the SEC believes should be made to the
methodology of calculating acquired in-process research and development costs.
The Company has applied this new guidance with respect to the acquisitions of
Healthdemographics in March 1998, Successful Solutions in May 1998 and
Sweetwater Health Enterprises in June 1998. As a result, certain adjustments
relating to acquired in-process research and development costs and purchase
price allocations associated with such acquisitions have been made to the
Company's 1998 interim period SEC filings.
YEAR 2000 COMPLIANCE
Many of the world's computer systems and non-information technology systems
have programs and imbedded chips using two digits rather than four to define the
applicable year. If not addressed, such computer systems could be unable to
properly interpret dates beyond the year 1999. Many of Medirisk's systems and
much of its software are Year 2000 compliant. To bring the remaining systems and
software into compliance by mid-1999, Medirisk has designed a Year 2000
compliance program.
The Company has implemented a project team and project plan to manage the
Year 2000 initiative. The project team has substantially completed the Year 2000
assessment for all business areas that may be impacted by the Year 2000 issue,
including assessment of the following business areas: IT systems, Non-IT
systems, third parties and Medirisk products. The assessment included an
inventory in all areas, state of readiness determination, assessment of risk and
cost associated with non-compliant items, development of contingency plan steps
in the event of non-compliance and the remediation steps for non-compliant
items. The Company's remediation efforts are being prioritized in order of risk,
with the most critical items to be corrected immediately. The Company assessed
risk based on level of impact to operations and the ability to deliver quality
products to its customers.
State of Readiness
Substantially all of the areas the Company has assessed are Year 2000
compliant. The Company has developed a plan to bring the remaining 8 percent of
such areas into compliance, and the Company has scheduled completion of such
plan by August 1999. The Company is in the process of assessing the Year 2000
compliance of third parties, including its customers and vendors. Detailed
project plans are being designed for bringing all non-compliant issues into
compliance; however, the process of analyzing Year 2000 issues, particularly as
they relate to customers and suppliers, is ongoing.
Cost
The Company's current estimate of the remaining cost of compliance is under
$100,000; however, the process of analyzing these issues is ongoing, and the
estimate may change. In addition, the majority of the expenditures expected to
be incurred to address Year 2000 issues were planned and would have been
incurred by the Company in the normal course of business in the ongoing process
of updating and maintaining its systems. The Company's cost estimate does not
include unforeseen costs in the event of additional programming hours or similar
matters. The Company does not anticipate that the overall costs will have a
material impact on the Company's financial results or financial condition.
Contingency Plans
The Company has developed written contingency plans for all currently
identified non-compliant items. Medirisk is in the process of developing these
plans into a project plan and assigning dates and responsibilities to each
action item.
Remediation Steps
The Year 2000 project team has assessed and documented the remediation
steps for the non-compliant items and is in the process of executing the project
plans to achieve full remediation of all non-Year 2000 compliant items by the
second quarter of 1999.
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<PAGE> 26
Risk
The Year 2000 issue creates risk for the Company from unforeseen problems
with both its internal systems and those of third parties upon which the Company
relies. Accordingly, the Company has produced a list of all vendors and has
assessed the level of impact of each vendor. Medirisk is in the process of
querying all vendors and third parties to determine their compliance. Tracking
and follow-up procedures are being determined and will be prioritized to focus
on those vendors determined to have the most impact on the Company's business
operations.
If the databases or systems of the Company, key suppliers of data or key
customers are not Year 2000 compliant, then the cost necessary to update
databases or software or potential interruption in the supply of data or
interruptions in demand for the Company's products could have a material adverse
effect on the Company's business, results of operations or financial conditions.
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 healthcare information
industry.
FORWARD-LOOKING STATEMENTS
The Company may from time to time make written or oral forward-looking
statements contained in press releases, the Company's filings with the SEC and
its reports to stockholders. Statements made in this Annual Report on Form 10-K,
other than those concerning historical information, should be considered
forward-looking and subject to various risks and uncertainties. Such
forward-looking statements are made based on management's belief, as well as on
assumptions made by, and information currently available to, management and are
made pursuant to, and in reliance upon, the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. The Company's actual results
may differ materially from the results anticipated in these forward-looking
statements due to numerous factors, including the following: 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; Risks Related to Intangible Assets
and Acquisition of In-process Research and Development; Uncertainty and
Consolidation in the Healthcare Industry; Risks of Rapid Technological Change;
Need for Additional Financing; Competition; Risks of Customer Concentration;
Potential for System Defects; Variable Quarterly Operating Results and
Seasonality; Year 2000 Compliance; and Adverse Impact of Anti-takeover
Provisions. For a more complete discussion of these factors, please see the
section of this document entitled "Business -- Risk Factors."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the consolidated financial statements of Medirisk and
its subsidiaries, consisting of the Consolidated Balance Sheets as of December
31, 1998 and 1997, and the related Consolidated Statements of Operations,
Consolidated Statements of Stockholders' Equity (Deficit) and Consolidated
Statements of Cash Flows for each of the three years in the three-year period
ended December 31, 1998, together with the Notes to Consolidated Financial
Statements. The Company's Consolidated Financial Statements and Notes thereto
are attached hereto following the signature page, and are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
25
<PAGE> 27
'PART III
ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS
Incorporated by reference from the Company's Definitive Proxy Statement to
be filed by April 30, 1999 for its 1999 Annual Meeting of Stockholders under the
captions "Information Relating to Nominees and Directors" and "Our Executive
Officers."
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the Company's Definitive Proxy Statement to
be filed by April 30, 1999 for its 1999 Annual Meeting of Stockholders under the
caption "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the Company's Definitive Proxy Statement to
be filed by April 30, 1999 for its 1999 Annual Meeting of Stockholders under the
caption "Security by Ownership of Certain Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the Company's Definitive Proxy Statement to
be filed by April 30, 1999 for its 1999 Annual Meeting of Stockholders under the
caption "Compensation Committee Interlocks and Insider Participation."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents incorporated by reference or filed with this report:
(1) Financial Statements.
The Financial Statements of the Company are listed in Item 8 of Part
II. (Attached hereto following signature page.)
(2) Financial Statement Schedules.
Independent Auditors' Report
Schedule II -- Valuation and Qualifying Accounts. (Attached hereto
following the Financial Statements.)
(3) Exhibits Incorporated by Reference or Filed with this Report.
The exhibits listed below are filed with or incorporated by reference into
this Annual Report on Form 10-K. ITEMS LISTED IN BOLDFACE CONSTITUTE MANAGEMENT
CONTRACTS OR COMPENSATORY PLANS OR ARRANGEMENTS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <S> <C>
2.1 -- Stock Purchase Agreement dated June 24, 1997, by and among
the company, CIVS, Inc. and the Shareholders of CIVS, Inc.
(incorporated by reference from Exhibit 2.4 to the Company's
Current Report on Form 8-K dated July 9, 1997).
2.2 -- Stock Purchase Agreement dated August 28, 1997, by and among
the Company and the Shareholders of CareData Reports, Inc.
(incorporated by reference from Exhibit 2.5 to the Company's
Current Report on Form 8-K dated August 28, 1997).
</TABLE>
26
<PAGE> 28
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <S> <C>
2.3 -- Acquisition Agreement and Plan of Merger, dated as of March
26, 1998, by and among the Company, Healthdemographics, Inc.
and the Shareholders of Healthdemographics, Inc.
(incorporated by reference from Exhibit 2.6 to the Company's
Current Report on Form 8-K dated March 31, 1998).
2.4 -- Acquisition Agreement and Plan of Merger, dated as of May
28, 1998 by and among the company, Successful Solutions,
Inc. and the Shareholders of Successful Solutions, Inc.
(incorporated by reference from Exhibit 2.7 to the Company's
Current Report on Form 8-K dated May 28, 1998).
2.5 -- Agreement and Plan of Merger dated June 25, 1998 by and
among the Company and the Shareholders of Sweetwater Health
Enterprises, Inc. (incorporated by reference from Exhibit
2.8 to the Company's Current Report on Form 8-K dated June
26, 1998).
3.1 -- Certificate of Incorporation of the Company (incorporated by
reference from Exhibit 3.1 to the Company's Registration
Statement on Form S-1 (No. 333-12311) filed with the
Commission on September 19, 1996).
3.1.1 -- Certificate of Designation of Series 1998-A Preferred Stock
(incorporated by reference from Exhibit 3.1.1 to the
Company's Current Report on Form 8-K dated March 31, 1998)
3.1.2 -- Certificate of Designation, Preferences and Rights of Series
A Junior Participating Preferred Stock.
3.2 -- Bylaws of the company (incorporated by reference from
Exhibit 3.2 to the Company's Registration Statement on Form
S-1 (No. 333-12311) filed with the Commission on September
19, 1996).
4.1 -- Shareholder Protection Rights Agreement dated as of July 29,
1998 between the Company and SunTrust Bank, Atlanta, as
Rights Agent (incorporated by reference from Exhibit 2.8 to
the Company's Current Report on Form 8-K dated July 29,
1998).
4.2 -- Specimen Stock Certificate of the Common Stock of the
Company (incorporated by reference from Exhibit 4.2 to the
Company's Registration Statement on Form S-1 (No. 333-12311)
filed with the Commission on September 19, 1996).
10.1 -- EMPLOYMENT AGREEMENT DATED AS OF AUGUST 18, 1998 BETWEEN THE
COMPANY AND MARK A. KAISER (INCORPORATED BY REFERENCE TO
EXHIBIT 10.2 TO THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30,1998).
10.2 -- AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT BETWEEN THE COMPANY
AND MARK A. KAISER.
10.3 -- EMPLOYMENT AGREEMENT DATED AS OF AUGUST 21, 1998 BETWEEN THE
COMPANY AND KENNETH M. GOINS, JR. (INCORPORATED BY REFERENCE
FROM EXHIBIT 10.2 TO THE COMPANY'S QUARTERLY REPORT ON FORM
10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30,1998).
10.4 -- AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT BETWEEN THE COMPANY
AND KENNETH M. GOINS, JR.
10.5 -- EMPLOYMENT AGREEMENT DATED AS OF NOVEMBER 4, 1998 BETWEEN
THE COMPANY AND THOMAS C. KUHN, III.
10.6 -- License and Services Agreement dated as of December 19, 1997
between Medirisk of Illinois, Inc. and HEALTHSOUTH
Corporation (incorporated by reference from Exhibit 10.5 to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997).++
10.7 -- Form of Indemnification Agreement between the Company and
each of its Officers and Directors (incorporated by
reference from Exhibit 10.11 to the Company's Registration
Statement on Form S-1 (No. 333-12311) filed with the
Commission on September 19, 1996).
10.8 -- Medirisk, Inc. 1996 Stock Incentive Plan (incorporated by
reference from Exhibit 10.12 to the Company's Registration
Statement on Form S-1 (No. 333-12311) filed with the
commission on September 19, 1996).
</TABLE>
27
<PAGE> 29
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <S> <C>
10.9 -- Medirisk, Inc. 1996 Non-Management Directors Stock Option
Plan (incorporated by reference from Exhibit 10.12 to the
Company's Registration Statement on Form S-1 (No. 333-12311)
filed with the Commission on September 19, 1996).
10.10 -- Registration Agreement dated as of October 28, 1996, between
the Company, Brantley Venture Partners II, L.P., Chase
Manhattan Bank N.A., as trustee, and Laurence H. Powell
(incorporated by reference from Exhibit 10.12 to the
Company's Registration Statement on Form S-1 (No. 333-12311)
filed with the Commission on September 19, 1996).
10.11 -- Amended and Restated Credit Agreement dated as of June 29,
1998 between the Company, as borrower, and NationsBank, N.A.
as lender (incorporated by reference from Exhibit 10.16 to
the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1998).
21.1 -- List of Subsidiaries of the Registrant.
23.1 -- Consent of KPMG LLP.
27.1 -- Financial data schedule (for SEC use only).
</TABLE>
- ---------------
++ Confidential Treatment pursuant to 17 CFR sec. 200.80 and 240.24b-2 has been
requested regarding certain portions of the indicated Exhibit, which
portions have been separately filed with the Commission.
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed by the Registrant during the
fourth quarter of the fiscal year ended December 31, 1998.
28
<PAGE> 30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, as of March 31, 1999.
MEDIRISK, INC.
By: /s/ THOMAS C. KUHN III
------------------------------------
Thomas C. Kuhn III
Senior Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated as of March 31, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ MARK A. KAISER Chairman of the Board and Chief Executive
- ----------------------------------------------------- Officer (Principal Executive Officer)
Mark A. Kaiser
/s/ KENNETH M. GOINS, JR. President and Chief Operating Officer
- -----------------------------------------------------
Kenneth M. Goins, Jr.
/s/ THOMAS C. KUHN III Senior Vice President and Chief Financial
- ----------------------------------------------------- Officer (Principal Financial and Accounting
Thomas c. Kuhn III Officer)
Director
- -----------------------------------------------------
Keith O. Cowan
/s/ MICHAEL J. FINN Director
- -----------------------------------------------------
Michael J. Finn
Director
- -----------------------------------------------------
William M. McClatchey, M.D.
/s/ ROBERT P. PINKAS Director
- -----------------------------------------------------
Robert P. Pinkas
</TABLE>
29
<PAGE> 31
FORM 10-K
MEDIRISK, INC. AND SUBSIDIARIES
YEAR ENDED DECEMBER 31, 1998
LIST OF CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Medirisk, Inc. and Subsidiaries Independent Auditors'
Report.................................................... F-2
Consolidated Balance Sheets as of December 31, 1998 and
1997................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996....................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1998, 1997 and 1996... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996....................... F-6
Notes to Consolidated Financial Statements................ F-7
</TABLE>
F-1
<PAGE> 32
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, 1998 and 1997, 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, 1998.
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, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Atlanta, Georgia
February 5, 1999
F-2
<PAGE> 33
MEDIRISK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $21,365,208 3,515,931
Accounts receivable, less allowances for doubtful accounts
of $466,250 and $147,557, at December 31, 1998 and 1997,
respectively............................................ 8,009,496 3,802,241
Prepaid expenses.......................................... 1,181,007 697,485
Notes receivable from officers............................ 447,500 22,500
Other current assets...................................... 398,289 451,513
----------- -----------
Total current assets............................... 31,401,500 8,489,670
----------- -----------
Property and equipment...................................... 4,951,152 3,083,466
Less accumulated depreciation and amortization............ 2,376,702 1,444,489
----------- -----------
Property and equipment, net............................. 2,574,450 1,638,977
----------- -----------
Excess of cost over net assets of businesses acquired, less
accumulated amortization of $1,689,233 and $537,218 at
December 31, 1998 and 1997, respectively.................. 17,760,644 7,555,902
Other intangible assets, less accumulated amortization of
$921,932 and $409,362 at December 31, 1998 and 1997,
respectively.............................................. 4,337,329 1,793,680
Software development costs, less accumulated amortization of
$363,237 and $96,508 at December 31, 1998 and 1997,
respectively.............................................. 2,436,673 1,008,398
Notes receivable from officers, excluding current portion... 45,000 67,500
Other assets................................................ 564,292 104,139
----------- -----------
$59,119,888 20,658,266
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt and obligations
under capital leases.................................... $ 62,057 168,493
Accounts payable.......................................... 276,967 257,723
Accrued expenses.......................................... 1,117,131 757,975
Income taxes payable...................................... 1,297,466 815,791
Deferred revenue.......................................... 2,702,469 2,308,610
----------- -----------
Total current liabilities.......................... 5,456,090 4,308,592
Long-term debt and obligations under capital leases,
excluding current installments............................ 16,114 165,251
----------- -----------
Total liabilities.................................. 5,472,204 4,473,843
----------- -----------
Series 1998-A preferred stock, $.001 par value, redeemable;
5,000 shares authorized and designated; none issued or
outstanding............................................... -- --
Stockholders' equity:
Preferred stock, $.001 par value; 795,000 shares
authorized; none issued or outstanding.................. -- --
Series A junior participating preferred stock, $.001 par
value; 200,000 shares authorized and designated; none
issued or outstanding................................... -- --
Common stock, $.001 par value; 20,000,000 shares
authorized; 7,344,795 and 4,193,346 shares issued and
outstanding at December 31, 1998 and 1997,
respectively............................................ 7,345 4,193
Additional paid-in capital................................ 76,113,254 28,559,279
Accumulated deficit....................................... (22,472,915) (12,379,049)
----------- -----------
53,647,684 16,184,423
----------- -----------
Commitments and contingencies............................... -- --
----------- -----------
$59,119,888 20,658,266
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 34
MEDIRISK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
------------ ---------- ----------
<S> <C> <C> <C>
Revenue.................................................. $ 27,204,030 16,748,839 8,904,133
Salaries, wages, and benefits............................ 12,971,839 7,909,600 6,092,792
Other operating expenses................................. 8,040,290 4,373,954 2,314,654
Depreciation and amortization............................ 2,814,811 1,304,155 786,849
Acquired in-process research and development and
integration costs...................................... 13,546,639 4,575,025 6,180,000
------------ ---------- ----------
Operating loss................................. (10,169,549) (1,413,895) (6,470,162)
Interest income (expense), net........................... 625,683 344,973 (703,542)
Other expense, net....................................... -- -- (57,073)
------------ ---------- ----------
Loss before income taxes and extraordinary
item......................................... (9,543,866) (1,068,922) (7,230,777)
Income taxes............................................. (550,000) (707,000) --
------------ ---------- ----------
Loss before extraordinary item................. (10,093,866) (1,775,922) (7,230,777)
Extraordinary item -- early extinguishment of debt....... -- (806,146) --
------------ ---------- ----------
Net loss....................................... (10,093,866) (2,582,068) (7,230,777)
Convertible preferred stock dividend requirement......... -- (24,673) (201,608)
------------ ---------- ----------
Net loss attributable to common stock.......... $(10,093,866) (2,606,741) (7,432,385)
============ ========== ==========
Net loss per share of common stock -- basic and diluted:
Net loss per share before extraordinary item........ $ (1.66) (0.46) (4.84)
Net loss per share -- extraordinary item............ -- (0.21) --
------------ ---------- ----------
Net loss per share of common stock............. $ (1.66) (0.67) (4.84)
============ ========== ==========
Weighted average number of common shares used in
calculating net loss per share of common stock -- basic
and diluted............................................ 6,094,343 3,918,347 1,536,159
============ ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 35
MEDIRISK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
SERIES B
SERIES A 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, 1995... -- $ -- -- $ -- 656,226 $ 656 $ 292,666 $ (2,566,204)
Issuance of Series B
convertible preferred stock,
net of issuance costs of
$220,556...................... -- -- 280,623 281 -- -- 1,779,163 --
Conversion of Series A
convertible preferred stock
from redeemable to
nonredeemable................. 1,292,359 1,292 -- -- -- -- 2,301,179 --
Issuance of common stock,
primarily in acquisitions..... -- -- -- -- 118,677 119 137,283 --
Repayment of note receivable
from stockholder.............. -- -- -- -- -- -- -- --
Forgiveness of note receivable
from stockholder.............. -- -- -- -- -- -- -- --
Discount on issuance of debt
arising from stock purchase
warrants...................... -- -- -- -- -- -- 573,111 --
Stock option compensation
expense....................... -- -- -- -- -- -- 99,585 --
Accrued dividend payable....... -- -- -- -- -- -- (201,608) --
Cancellation of treasury
stock......................... -- -- -- -- (64,960) (65) (9,735) --
Net loss....................... -- -- -- -- -- -- -- (7,230,777)
---------- ------ -------- -------- --------- --------- ----------- ------------
Balance at December 31, 1996... 1,292,359 1,292 280,623 281 709,943 710 4,971,644 (9,796,981)
Common stock issued in initial
public offering............... -- -- -- -- 2,300,000 2,300 22,623,371 --
Conversion of 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 --
Dividends paid on Series A and
Series B convertible preferred
stock......................... -- -- -- -- -- -- (24,673) --
Issuance of common stock in
acquisitions.................. -- -- -- -- 143,682 144 901,023 --
Stock option exercises......... -- -- -- -- 20,243 20 101,929 --
Common stock repurchased and
canceled...................... -- -- -- -- (2,331) (3) (14,566) --
Net loss....................... -- -- -- -- -- -- -- (2,582,068)
---------- ------ -------- -------- --------- --------- ----------- ------------
Balance at December 31, 1997... -- -- -- -- 4,193,346 4,193 28,559,279 (12,379,049)
Common stock issued in public
offering...................... -- -- -- -- 2,250,000 2,250 40,527,942 --
Issuance of common stock in
acquisitions.................. -- -- -- -- 361,126 361 6,602,214 --
Stock option exercises......... -- -- -- -- 51,941 53 32,600 --
Common stock repurchased and
canceled...................... -- -- -- -- (4,648) (5) (12,817) --
Exercise of warrants........... -- -- -- -- 493,030 493 304,036 --
Tax benefit from exercise of
stock options................. -- -- -- -- -- -- 100,000 --
Net loss....................... -- -- -- -- -- -- -- (10,093,866)
---------- ------ -------- -------- --------- --------- ----------- ------------
Balance at December 31, 1998... -- $ -- -- $ -- 7,344,795 $ 7,345 $76,113,254 $(22,472,915)
========== ====== ======== ======== ========= ========= =========== ============
<CAPTION>
NOTE TOTAL
TREASURY STOCK RECEIVABLE STOCKHOLDERS'
--------------------- FROM EQUITY
SHARES AMOUNT STOCKHOLDER (DEFICIT)
----------- ------- ----------- -------------
<S> <C> <C> <C> <C>
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...................... -- -- -- 1,779,444
Conversion of Series A
convertible preferred stock
from redeemable to
nonredeemable................. -- -- -- 2,302,471
Issuance of common stock,
primarily in acquisitions..... -- -- -- 137,402
Repayment of note receivable
from stockholder.............. -- -- 14,000 14,000
Forgiveness of note receivable
from stockholder.............. -- -- 36,000 36,000
Discount on issuance of debt
arising from stock purchase
warrants...................... -- -- -- 573,111
Stock option compensation
expense....................... -- -- -- 99,585
Accrued dividend payable....... -- -- -- (201,608)
Cancellation of treasury
stock......................... (64,960) 9,800 -- --
Net loss....................... -- -- -- (7,230,777)
----------- ------- -------- -----------
Balance at December 31, 1996... -- -- -- (4,823,054)
Common stock issued in initial
public offering............... -- -- -- 22,625,671
Conversion of Series A and
Series B convertible preferred
stock into common stock....... -- -- -- --
Dividends paid on Series A and
Series B convertible preferred
stock......................... -- -- -- (24,673)
Issuance of common stock in
acquisitions.................. -- -- -- 901,167
Stock option exercises......... -- -- -- 101,949
Common stock repurchased and
canceled...................... -- -- -- (14,569)
Net loss....................... -- -- -- (2,582,068)
----------- ------- -------- -----------
Balance at December 31, 1997... -- -- -- 16,184,423
Common stock issued in public
offering...................... -- -- -- 40,530,192
Issuance of common stock in
acquisitions.................. -- -- -- 6,602,575
Stock option exercises......... -- -- -- 32,653
Common stock repurchased and
canceled...................... -- -- -- (12,822)
Exercise of warrants........... -- -- -- 304,529
Tax benefit from exercise of
stock options................. -- -- -- 100,000
Net loss....................... -- -- -- (10,093,866)
----------- ------- -------- -----------
Balance at December 31, 1998... -- $ -- $ -- $53,647,684
=========== ======= ======== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 36
MEDIRISK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
------------ ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(10,093,866) (2,582,068) (7,230,777)
Adjustments to reconcile net loss to net cash used in
operating activities:
Acquired in-process research and development costs...... 11,650,000 4,375,000 6,180,000
Depreciation and amortization........................... 2,814,811 1,304,155 786,849
Loss due to early extinguishment of debt................ -- 806,146 --
Other................................................... -- -- 135,585
Decrease (increase) in:
Accounts receivable................................... (3,845,592) (1,925,277) (447,120)
Other assets.......................................... (762,951) 137,848 (846,014)
Increase (decrease) in:
Accounts payable...................................... (651,948) (870,028) 353,520
Accrued expenses and other liabilities................ (1,780,320) (175,425) 151,405
Deferred revenue...................................... (407,583) (1,766,992) 154,158
------------ ---------- ----------
Net cash used in operating activities............... (3,077,449) (696,641) (762,394)
------------ ---------- ----------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired........... (14,362,372) (7,386,208) (6,925,393)
Purchases of property and equipment....................... (1,504,961) (948,833) (138,792)
Additions to software development costs................... (1,695,004) (983,937) (120,969)
Repayment of (loans to) employees......................... (402,500) 22,500 (112,500)
------------ ---------- ----------
Net cash used in investing activities............... (17,964,837) (9,296,478) (7,297,654)
------------ ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock.................... 40,867,374 22,727,620 15,084
Common stock repurchased and canceled..................... (12,822) (14,569) --
Proceeds from issuance of Series B convertible preferred
stock................................................... -- -- 2,000,000
Payments for Series B convertible preferred stock issuance
costs................................................... -- -- (220,556)
Payment of dividends...................................... -- (642,683) --
Proceeds from issuance of long-term debt, principally
related party........................................... -- -- 7,407,086
Payments for debt issuance costs.......................... -- -- (345,000)
Payments on long-term debt and obligations under capital
leases.................................................. (1,962,989) (9,008,575) (652,147)
Repayment of note receivable from stockholder............. -- -- 14,000
------------ ---------- ----------
Net cash provided by financing activities........... 38,891,563 13,061,793 8,218,467
------------ ---------- ----------
Net increase in cash and cash equivalents........... $ 17,849,277 3,068,674 158,419
============ ========== ==========
Cash and cash equivalents at beginning of period............ 3,515,931 447,257 288,838
------------ ---------- ----------
Cash and cash equivalents at end of period.................. $ 21,365,208 3,515,931 447,257
============ ========== ==========
Supplemental disclosure of cash flow information: cash paid
during the period for interest............................ $ 137,720 129,771 736,432
============ ========== ==========
Supplemental disclosures of noncash activities:
Purchase of computer and office equipment under capital
lease arrangements...................................... $ -- -- 332,035
============ ========== ==========
Discount on issuance of debt arising from stock purchase
warrants................................................ $ -- -- 573,111
============ ========== ==========
Accrual of dividend payable on Series A convertible
preferred stock......................................... $ -- -- 201,608
============ ========== ==========
Acquisitions of businesses:
Fair value of assets acquired............................. $ 13,322,746 8,249,588 4,909,167
Acquired in-process research and development costs........ 11,650,000 4,375,000 6,180,000
Fair value of liabilities assumed......................... (6,492,417) (3,600,535) (2,961,849)
Common stock issued....................................... (6,602,575) (901,167) (122,318)
Contingent consideration paid............................. 2,999,941 -- --
Debt issued............................................... -- -- (1,076,000)
------------ ---------- ----------
Total cash paid for acquisitions.................... 14,877,695 8,122,886 6,929,000
Cash acquired............................................. (515,323) (736,678) (3,607)
------------ ---------- ----------
Net cash paid for acquisitions...................... $ 14,362,372 7,386,208 6,925,393
============ ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 37
MEDIRISK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
Medirisk, Inc. (the "Company") is a provider of proprietary database
products, decision-support software and analytical services to the healthcare
industry. The Company's products and services enable its customers to make
objective comparisons of the financial costs and clinical outcomes of physician
services to customer-specific and industry benchmarks, assess patient
satisfaction with specific managed care plans and obtain information concerning
the background and credentials of physicians. These capabilities assist
healthcare industry participants in measuring the performance of healthcare
payors and providers.
Applications of Medirisk's products include pricing managed care contracts,
evaluating physician fee schedules and utilization of physician services,
comparing provider outcomes and health plan performance, credentialing and
recruiting physicians, developing health care delivery networks and marketing
healthcare services. The Company actively sells its products to leading health
plans, insurers, hospitals, multi-specialty physician groups, physician practice
management companies, employers, and pharmaceutical companies, as well as
smaller customers, including single-specialty physician groups.
(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, income and expenses for the period, and disclosure of contingent
assets and liabilities. Actual results could differ from those estimates.
Business combinations which have been accounted for under the purchase
method of accounting include the results of operations of the acquired business
from the date of acquisition. Net assets of the companies acquired are recorded
at their fair value to the Company at the date of acquisition. Amounts allocated
to in-process research and development are expensed in the period of
acquisition.
The consolidated financial statements include the accounts of Medirisk,
Inc. and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
(c) Cash Equivalents
Cash equivalents at December 31, 1998 and 1997 include amounts of
$19,325,318 and $2,106,963, 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 adopted Statement of Position 97-2, Software Revenue
Recognition, on January 1, 1998. The implementation of this statement did not
have a material impact on the Company's results of operations.
The Company provides services and licenses its products primarily pursuant
to single- and multi-year contracts that provide for the payment of
nonrefundable annual or quarterly fees, often in advance of use or shipment. The
products are segregated into three types: market performance, clinical
performance and physician credentials products. The market performance products
provide customers with information from the Company's market performance
databases. Revenue on these sales is recognized upon the delivery of the data.
The Company also licenses the exclusive rights to market the results of its
managed care consumer satisfaction surveys. Revenue from the licenses of
disease-specific customized surveys to the pharmaceutical
F-7
<PAGE> 38
industry is recognized as the related costs of producing the survey are
incurred, and revenue from noncustomized data licensing is recognized upon
delivery. 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 credentials products consist of (i) data and services
provided to customers over time, for which revenue is recognized ratably over
the life of the contract, and (ii) credentials reports that validate physicians'
education, training, and other matters, for which revenue is recognized upon
delivery of the completed reports. Customer service revenues are recognized
ratably over the service contract period. Revenue from the licensing of the
Company's software products is recognized upon shipment of the software. All
other revenue, including fees for training, consulting fees and other
miscellaneous services, is recognized upon the performance of the applicable
services.
(e) Deferred Revenue
Deferred revenue represents accounts receivable and payments to the Company
by customers in advance of revenue recognition.
(f) Accounts Receivable
The Company enters into multi-year, noncancelable subscription contracts,
for which the associated receivables are recorded as accounts receivable and
deferred revenue when they become due. The contract balances are generally 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 as follows:
<TABLE>
<S> <C>
Furniture and fixtures...................................... 3 to 7 years
Computer and office equipment............................... 1 to 5 years
Leasehold improvements...................................... 3 to 5 years
</TABLE>
Amortization of assets acquired under capital lease arrangements not
transferring ownership or without a bargain purchase option 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 periods ranging from 12 to
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) Other Intangible Assets
Other intangible assets are comprised mainly of acquired products and
acquired customer contracts. The costs of acquired products and acquired
customer contracts from business acquisitions are derived using a fair value
method of allocation. Other intangible assets 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 future cash flows expected to result from the
use of the asset and its eventual disposition. If the sum of the future cash
flows is less than the amount capitalized, a write-down to fair value is
recorded.
F-8
<PAGE> 39
(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, 1998, 1997, and
1996, were $2,944,047, $2,149,155, and $951,645, 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 net realizable value ("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 $1,695,004
and $983,937 for the years ended December 31, 1998 and 1997, respectively.
Capitalized computer software development costs are being amortized ratably
based on the projected revenue associated with the software products or the
straight-line method over five years, whichever method results in a higher level
of amortization. Amortization expense was $266,729, $76,597, and $19,911 for the
years ended December 31, 1998, 1997, and 1996, respectively.
(k) Stock Option Plans
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations, in accounting for its
fixed plan stock options. As such, compensation expense would generally be
recorded on the date of grant only if the current market price of the underlying
stock exceeded the exercise price.
(l) Net Loss Per Share of Common Stock
Basic earnings (loss) per common share available to common shareholders is
based on the weighted-average number of common shares outstanding. Diluted
earnings (loss) per common share available to common shareholders is based on
the weighted-average number of common shares outstanding and dilutive potential
common shares, such as dilutive stock options.
Retroactive restatement has been made to share and per share amounts for
the reverse stock split (see note 8(g)) and conversion of all of the Company's
Series A convertible preferred stock and Series B convertible preferred stock
into common stock which occurred upon consummation of the Company's initial
public offering in January 1997 (see note 8(h)). Weighted average number of
shares of common stock outstanding through December 31, 1996 has been calculated
pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 98
("SAB 98") whereby common stock, options, warrants, or other potentially
dilutive instruments that are issued for nominal consideration ("nominal
issuances") during the periods covered by statements of operations included in
the Registration Statement for an initial public offering are reflected in
earnings per share calculations in a manner similar to a stock split or stock
dividend for which retroactive restatement is required. The Company had nominal
issuances in the periods covered by its Registration Statement for its initial
public offering. The computation of diluted net loss per share of common stock
was antidilutive in each of the periods presented; therefore, the amounts
reported for basic and diluted net loss per share are the same.
Securities that could potentially dilute basic earnings per share ("EPS")
in the future that were not included in diluted EPS because their effect on
periods presented was antidilutive total 447,827, 765,515, and 553,138 for the
years ended December 31, 1998, 1997, and 1996, respectively.
All prior period net loss per share data presented in these consolidated
financial statements have been restated to conform to the provisions of SFAS 128
and SAB 98.
F-9
<PAGE> 40
(m) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
The Company reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.
(n) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred income tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss carryforwards. 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.
(o) Industry Segments
On January 1, 1998, the Company adopted SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information.
(p) Comprehensive Income
On January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes standards for reporting and
presentation of comprehensive income and its components in a full set of
financial statements. The Company has no "other comprehensive income" to report
for the years ended December 31, 1998, 1997 and 1996.
(2) BUSINESS ACQUISITIONS
1998 ACQUISITIONS
Healthdemographics, Inc. ("Healthdemographics")
Effective March 23, 1998, the Company acquired all of the outstanding
shares of Healthdemographics of San Diego, California, which provides databases
and decision-support applications to forecast the supply of and demand for
healthcare services, for $2.7 million in cash and 171,315 shares of the
Company's common stock. The acquisition was accounted for using the purchase
method of accounting and resulted in purchased in-process research and
development costs of $4.8 million, acquired products of $120,000 and excess of
cost over net assets acquired of $2.0 million. If the acquired business exceeds
certain performance goals, contingent consideration will be paid by the Company
based upon a multiple of Healthdemographics' operating income over a
predetermined amount through March 31, 2001. Additional payments could be
significant. Contingent consideration paid will be added to excess of cost over
net assets acquired and amortized prospectively. Contingent consideration will
be paid by the Company in cash and common stock or in Series 1998 -- A Preferred
Stock, the determination of which is based on certain elections made by the
selling shareholders.
SUCCESSFUL SOLUTIONS, INC. ("SUCCESSFUL SOLUTIONS")
Effective May 28, 1998, the Company acquired all of the outstanding shares
of Successful Solutions of Vidalia, Georgia, which provides decision-support
tools, consulting services and training materials to hospitals and physician
group practices to assist in improving patient outcomes, achieving the efficient
delivery of care and establishing billing and coding practices that comply with
industry requirements. The Company purchased Successful Solutions for $2.9
million in cash, and 189,811 shares of the Company's common stock. The
acquisition was accounted for using the purchase method of accounting and
resulted in purchased in-process
F-10
<PAGE> 41
research and development costs of $3.4 million, acquired products of $500,000
and excess of cost over net assets acquired of $2.2 million. If the acquired
business exceeds certain performance goals, contingent consideration will be
paid by the Company based upon a multiple of Successful Solutions' operating
income over a predetermined amount through June 30, 1999. These potential
payments could be significant. Contingent consideration ultimately paid will be
added to excess of cost over net assets acquired and amortized prospectively.
Contingent consideration will be paid by the Company in cash and common stock.
SWEETWATER HEALTH ENTERPRISES, INC. ("SWEETWATER")
Effective June 25, 1998, the Company acquired all of the outstanding shares
of Sweetwater of Dallas, Texas, which provides (i) a comprehensive selection of
physician credentialing services to hospitals and managed care organizations,
(ii) a suite of quality management software used by healthcare organizations to
facilitate in-house credentialing and network management and to track
perceptions of care and individual physician performance, and (iii) managed care
and interim management services for healthcare organizations throughout the
United States. The Company purchased Sweetwater for $6.2 million in cash. The
acquisition was accounted for using the purchase method of accounting and
resulted in purchased in-process research and development costs of $3.5 million,
acquired products of $2.2 million and excess of cost over net assets acquired of
$3.9 million.
1997 ACQUISITIONS
Staff-Link, Inc. ("Staff-Link")
In May 1997, the Company acquired substantially all of the assets of
Staff-Link of St. Louis, Missouri, a provider of a physician database and
related software utilities designed to assist health care organizations with
their in-house recruiting efforts. The Company purchased Staff-Link for $300,000
in cash. The acquisition was accounted for using the purchase method of
accounting and resulted in acquired customer contracts of approximately $527,000
and excess of cost over net assets acquired of approximately $49,000.
CIVS, Inc. ("CIVS")
Effective June 1, 1997, the Company acquired all of the outstanding shares
of CIVS of Rockville, Maryland, a leading national provider of credentialing
services to hospitals and managed care organizations for approximately $3.5
million in cash and 129,166 shares of the Company's common stock. The
acquisition was accounted for using the purchase method of accounting and
resulted in purchased in-process research and development costs of approximately
$3.1 million, acquired products of approximately $415,000 and excess of cost
over net assets acquired of approximately $1.1 million. If the acquired business
exceeds certain performance goals, contingent consideration will be paid by the
Company based upon a multiple of CIVS's operating income over a predetermined
amount through 1999. These payments could be significant. Contingent
consideration ultimately paid will be paid in cash and added to excess of cost
over net assets acquired and amortized prospectively.
CareData Reports, Inc. ("CareData")
Effective August 1, 1997, the Company acquired all of the outstanding
shares of CareData of New York, New York, which performs surveys and creates
reports analyzing consumer satisfaction with more than 150 aspects of managed
health care plans and ranks specific health plans accordingly. CareData's
products are used by managed care plans to assess their competitive position and
quality of care, by employers to evaluate health plans and by pharmaceutical
companies to target potential markets for their products. The Company purchased
CareData for approximately $4.1 million in cash and 14,516 shares of Medirisk
common stock. The acquisition was accounted for using the purchase method of
accounting and resulted in purchased in-process research and development costs
of approximately $975,000, acquired products of approximately $200,000, and
excess of cost over net assets acquired of approximately $2.9 million. If the
acquired business exceeds certain performance goals, contingent consideration
will be paid by the Company based upon a multiple of CareData's
F-11
<PAGE> 42
operating income over a predetermined amount through 1999. In April 1998, the
Company paid $3.0 million as contingent consideration and increased the excess
of cost over net assets acquired by a like amount. Additional payments could be
significant. Contingent consideration ultimately paid will be paid in cash and
added to excess of cost over net assets acquired and amortized prospectively.
Medsource, Inc. ("Medsource")
In November 1997, the Company acquired all of the outstanding shares of
Medsource of St. Paul, Minnesota, which licenses databases of physician
information for use in recruiting physicians, developing health care networks,
and marketing hospitals. The Company purchased Medsource for $250,000 in cash
and the assumption of net liabilities of $805,000. The acquisition was accounted
for using the purchase method of accounting and resulted in purchased in-process
research and development costs of approximately $300,000, acquired products of
approximately $125,000 and excess of cost over net assets acquired of
approximately $755,000. If the acquired business exceeds certain performance
goals, contingent consideration will be paid by the Company based upon a
multiple of Medsource's operating income over a predetermined amount through
1999. These payments could be significant. Contingent consideration ultimately
paid will be paid in cash and added to excess of cost over net assets acquired
and amortized prospectively.
1996 ACQUISITIONS
Formations in HealthCare, Inc. ("Formations")
In January 1996, the Company acquired all of the outstanding shares of
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 $0.64 per share. Formations
provides clinical performance products that allow customers to measure outcomes
across a range of care within a variety of medical specialties. These products
also enable both payors 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 and resulted in purchased in-process research and
development costs of approximately $1.0 million, acquired products of
approximately $170,000, and excess of cost over net assets acquired of
approximately $422,000.
PracticeMatch, Inc. ("PracticeMatch")
In March 1996, the Company acquired all of the outstanding shares of
PracticeMatch of St. Louis, Missouri for approximately $5.5 million in cash and
$1.1 million in promissory notes and assumed net liabilities of $1.9 million.
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 and resulted in purchased in-process research and
development costs of approximately $5.1 million, acquired products of
approximately $350,000, and excess of cost over net assets acquired of
approximately $2.9 million.
INTEGRATION COSTS
The Company incurred approximately $1.9 million and $200,000 of integration
costs related to the 1998 and 1997 acquisitions for the years ended December 31,
1998 and 1997, respectively; integration costs include amounts incurred for such
activities as cross-training, product integration and marketing. Included in
integration costs for the year ended December 31, 1998 are approximately
$535,000 of internal expense allocations which may recur in other expense
categories in the future.
F-12
<PAGE> 43
PRO FORMA RESULTS
Unaudited pro forma results of operations as if the above acquisitions had
been acquired January 1, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1998 1997
----------- ----------
<S> <C> <C>
Revenues.................................................... $31,384,000 33,542,000
=========== ==========
Net loss.................................................... (3,537,000) (802,000)
=========== ==========
Net loss per share.......................................... $ (0.56) (0.18)
=========== ==========
</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, the
reversal of the nonrecurring acquired in-process research and development costs
recorded in connection with the acquisitions, and the reversal of an
extraordinary item reported in 1997. 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 1998 and
1997, nor are they necessarily indicative of future operations.
(3) PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- ---------
<S> <C> <C>
Furniture and fixtures...................................... $ 653,527 354,744
Computer and office equipment............................... 4,050,612 2,523,240
Leasehold improvements...................................... 247,013 205,482
---------- ---------
$4,951,152 3,083,466
========== =========
</TABLE>
Included in property and equipment is equipment under capital lease
arrangements with a cost of $967,929 and $967,929 and accumulated amortization
of $843,900 and $671,563 at December 31, 1998 and 1997, respectively.
Amortization of equipment held under capital lease arrangements is included
in depreciation expense.
(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,
-----------------
1998 1997
------- -------
<S> <C> <C>
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))..................................... $74,874 214,631
Other debt assumed in an acquisition with varying interest
rates and maturity dates.................................. 3,297 119,113
------- -------
78,171 333,744
Less current installments................................... 62,057 168,493
------- -------
Total long-term debt and obligations under capital
leases, excluding current installments.......... $16,114 165,251
======= =======
</TABLE>
F-13
<PAGE> 44
Future minimum debt payments and obligations under capital leases are as
follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------
<S> <C>
1999........................................................ $62,057
2000........................................................ 14,172
2001........................................................ 1,942
-------
$78,171
=======
</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.
On June 29, 1998, the Company entered into an Amended and Restated Credit
Agreement (the "Amended Credit Agreement") with a commercial bank that amended
the Company's existing revolving line of credit agreement. The Amended Credit
Agreement increases the maximum borrowing available under the revolving line of
credit from $10 million to $25 million, extends the maturity date from March 28,
1999 to July 15, 2000 and reduces the interest rate applicable to borrowings
made under the revolving line of credit from a range of LIBOR plus 1.65% to
2.25% to a range of LIBOR plus 1.50% to 2.10%. The interest rate varies
depending upon certain elections made by the Company and certain financial ratio
positions as defined in the Amended Credit Agreement. Interest on borrowings is
payable monthly and principal is due at expiration of the Amended Credit
Agreement, July 15, 2000. Borrowings under the Amended Credit Agreement are
subject to certain customary financial covenants and dividend restrictions and
are secured by substantially all of the Company's assets. An annual commitment
fee of 0.4% of the unused portion of the revolving line of credit is payable
monthly under the terms of the Amended Credit Agreement. Total line of credit
borrowings during 1998, all made prior to the Company's June 1998 Stock
Offering, were $9,794,929, all of which were repaid with the June 1998 Stock
Offering proceeds. As of December 31, 1998, the company had $25 million of
borrowing availability remaining under its Amended Credit Agreement.
(5) HEALTHPLAN SERVICES SECURITIES PURCHASE AGREEMENT (SEE NOTE 8(H))
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 would 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.
On March 13, 1996, the Company sold a $6,900,000 senior subordinated note
to HPSC. The note bore interest at 10% payable quarterly. Warrants to purchase
298,150 (note 8(f)) 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 was being amortized over the life of the
note.
On January 31, 1997, the Company consummated an initial public offering
(see note 8(h)). As a result, the Agreement was terminated and the $6,900,000
note payable to HPSC was repaid. The Company recorded an $806,146 charge for
early extinguishment of debt relating to the unamortized note discount and
related deferred financing costs.
F-14
<PAGE> 45
(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 December 31, 1998 are as follows:
<TABLE>
<CAPTION>
CAPITAL
YEAR ENDING DECEMBER 31, OPERATING (NOTE 4)
- ------------------------ ---------- --------
<S> <C> <C>
1999........................................................ $1,108,955 72,657
2000........................................................ 988,665 12,961
2001........................................................ 469,463 2,142
2002........................................................ 24,150 --
---------- -------
Total minimum lease payments...................... $2,591,233 87,760
==========
Less amount representing interest and sales taxes........... 12,886
-------
Present value of net minimum capital lease
payments........................................ $74,874
=======
</TABLE>
Rental expense for noncancelable operating leases was $1,190,639, $661,302,
and $412,407 for the years ended December 31, 1998, 1997, and 1996,
respectively.
(b) Employment Agreement
The Company has entered into Employment Agreements (the "Employment
Agreements") with three senior officers of the Company. The Employment
Agreements provide 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 Employment Agreements expire during 2001 and are automatically
renewable for one-year terms thereafter.
(c) Employee Benefit Plan
The Company maintains a 401(k) plan (the "Plan") for the benefit of all
eligible employees. The Plan provides for employer matching contributions at the
discretion of the Company's management. In July 1998, the Company began matching
25% of each employee's contributions, up to 4% of the employee's annual
compensation. The Company's matching contributions are subject to a five-year
vesting schedule. During 1998, the Company contributed $59,544 to the Plan.
(d) Legal Matters
The Company and certain of its officers and directors are named as
defendants in three purported securities class action lawsuits filed in the
United States District Court for the Northern District of Georgia: Richard Sturm
v. Medirisk, Inc., et al. (Civil Action No. 1:98-CV-1922), John T. Gallagher v.
Medirisk, Inc., et al. (Civil Action No. 1:98-CV-2099), and Frederick T.
Casiello v. Medirisk, Inc., et al. (Civil Action No. 1:98-CV-2100). The Sturm
action was filed on July 8, 1998. The Gallagher and Casiello actions were each
filed on July 24, 1998. These lawsuits have been consolidated under the style In
re Medirisk, Inc. Securities Litigation. Plaintiffs served their consolidated
and amended complaint on January 13, 1999. The Company moved to dismiss this
complaint on March 12, 1999. The consolidated and amended complaint alleges that
the Company violated federal securities laws by making certain forward-looking
statements and by failing to disclose in its public statements and/or the
Prospectus for its June 1998 common stock offering certain alleged adverse
trends respecting its Market Performance and Physician Credentialing Products.
The consolidated and amended complaint asserts claims based on Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934 and claims under Sections 11
and 15 of the Securities Act of 1933. Plaintiffs seek compensatory damages,
rescission or rescissory damages, and reimbursement of their attorneys' fees and
costs.
F-15
<PAGE> 46
Because of the uncertainty of the litigation process, the Company cannot
predict the outcome of these cases and, therefore, it is possible that their
outcome could have a material adverse effect on the Company. The Company
believes that plaintiffs' claims have no merit and intends to defend these cases
vigorously.
The Company is also involved in other legal proceedings and litigation
arising in the ordinary course of business. In the opinion of management, the
outcome of such proceedings and litigation currently pending will not have a
material adverse effect on the consolidated financial condition or results of
operations of the Company.
(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 year ended
December 31, 1996. A reconciliation of the expected income tax (benefit) expense
(based on a U.S. Federal statutory tax rate of 34%) to the actual income taxes
is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
----------- ---------- -----------
<S> <C> <C> <C>
Computed "expected" tax benefit.................. $(3,244,915) $ (363,433) $(2,458,464)
In-process research and development costs
expensed for financial accounting purposes, not
deductible for tax purposes.................... 3,945,020 1,706,250 --
Utilization of net operating loss
carryforwards.................................. (328,419) (429,000) --
State income taxes, net of Federal income tax
benefit........................................ 294,117 (93,753) (361,539)
Increase (decrease) in the valuation allowance
for deferred income taxes, excluding benefit of
operating loss carryforward.................... -- (139,217) 2,774,215
Other............................................ (115,803) 26,153 45,788
----------- ---------- -----------
Actual income taxes.............................. $ 550,000 $ 707,000 $ --
=========== ========== ===========
</TABLE>
The tax effects of temporary differences and carryforwards which give rise
to deferred income tax assets are presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
Deferred income tax assets:
Acquired in-process research and development costs....... $2,045,569 $2,116,682
Net operating loss carryforwards......................... 1,374,735 737,990
Deferred revenue......................................... 85,386 99,510
Property and equipment depreciation differences.......... 209,998 182,845
Cash to accrual adjustment............................... 546,033 --
Financial statement amortization in excess of tax........ 691,825
Other.................................................... 260,846 392,685
---------- ----------
Total gross deferred income tax assets........... 5,214,392 3,529,712
Less valuation allowance................................. 2,631,382 2,540,121
---------- ----------
Deferred income tax assets, net of valuation
allowance...................................... 2,583,010 989,591
---------- ----------
</TABLE>
F-16
<PAGE> 47
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
Deferred income tax liabilities:
Intangible assets........................................ 1,000,000 462,186
Capitalized software costs............................... 1,583,010 527,405
---------- ----------
Deferred income tax liabilities....................... 2,583,010 989,591
---------- ----------
Net deferred income tax asset and liability........... $ -- $ --
========== ==========
</TABLE>
The net change in the valuation allowance for the years ended December 31,
1998 and 1997 was an increase (decrease) of $91,261 and $(568,217),
respectively.
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.
At December 31, 1998, the Company had net operating loss carryforwards of
approximately $3,100,000, which expire beginning in 2006 through 2012. Under
Internal Revenue Code Section 382, approximately $1,370,000 of the Company's net
operating loss carryforwards are limited to approximately $630,000 per year as a
result of the Company's 1998 acquisitions.
(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.
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 stock 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 (see note
8(h)).
(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.
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
F-17
<PAGE> 48
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.
The holders of the Company's Series A CPS were 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") were entitled to
dividends on a cumulative basis at 8% beginning on January 8, 1997. As a result
of the Company's initial public offering in January 1997, the Series A CPS and
Series B CPS were converted into 1,021,809 shares of common stock. The Series A
CPS and Series B CPS were convertible at the option of the holder at any time
into common stock of the Company at a ratio of 0.6496 share for one share,
subject to adjustment in certain circumstances, and the holders of the Series A
CPS and Series B CPS carried voting power equivalent to the number of common
shares into which their preferred shares could be converted. Furthermore, the
Company was restricted from paying dividends on the Company's common stock until
all unpaid dividends on the Series A CPS and Series B CPS were paid. In no event
could the Series A CPS and Series B CPS dividends be paid until payment in full
of the senior subordinated note payable.
In the event of liquidation, holders of the Series A CPS and Series B CPS
were 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 would automatically convert upon
the occurrence of certain future events such as an initial public offering, as
defined, and the Company was 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 carried certain other rights and
privileges, as further defined in the agreements.
(c) Stock Options
Effective October 1996, the Board of Directors adopted the 1996 Stock
Incentive Plan (the "1996 Plan"), under which 580,645 shares of common stock
have been reserved for issuance. Effective February 1998, the Board of Directors
adopted the 1998 Long-Term Incentive Plan (the "1998 Plan"), under which 500,000
shares of common stock have been reserved for issuance.
Options granted under the 1996 and 1998 Plans may be incentive stock
options or nonqualified stock options, as determined by the Board of Directors
at the time of grant. Incentive stock options are granted at a price not less
than the fair market value of the stock on the grant date, and nonqualified
options are granted at a price to be determined by the Board of Directors on the
grant date. Option vesting terms are established by the Board of Directors at
the time of grant, presently five years. The expiration date of options granted
under the 1996 and 1998 Plans is determined at the time of grant and may not
exceed ten years from the date of the grant. The 1996 and 1998 Plans also permit
the granting of certain stock incentives including restricted stock awards,
stock appreciation rights, and performance awards.
Effective October 1996, the Board of Directors adopted the Medirisk, Inc.
Non-Management Directors' Stock Option Plan (the "Director Plan"), under which
100,000 common shares have been reserved for issuance. Under the terms of the
Director Plan, Directors receive a specified number of options for each year
that they serve as a member of the Board of Directors. Options must be granted
with exercise prices equal to the fair market value of the stock on the grant
date. Options granted vest over three years and expire ten years from the date
of grant.
F-18
<PAGE> 49
The following table summarizes option activity under all option plans for
the years ended December 31, 1998, 1997, and 1996:
<TABLE>
<CAPTION>
EXERCISE PRICE
SHARES PER SHARE
------- ---------------
<S> <C> <C>
Options outstanding at December 31, 1995.................... 217,520 $0.30 - 0.64143
Granted..................................................... 176,731 0.64143
Exercised................................................... (11,693) 0.30 - 0.64143
Canceled.................................................... (63,630) 0.30 - 0.64143
-------
Options outstanding at December 31, 1996.................... 318,928 0.30 - 0.64143
Granted..................................................... 335,877 7.625 - 11.00
Exercised................................................... (20,243) 0.30 - 7.625
Canceled.................................................... (60,240) 0.30 - 7.625
-------
Options outstanding at December 31, 1997.................... 574,322 0.30 - 11.00
Granted..................................................... 569,905 2.3125 - 24.50
Exercised................................................... (51,941) 0.30 - 0.64143
Canceled.................................................... (94,269) 0.30 - 22.4375
-------
Options outstanding at December 31, 1998.................... 998,017 $ 0.30 - 24.50
======= ===============
Options exercisable at December 31, 1998.................... 225,816 $ 0.30 - 11.00
======= ===============
</TABLE>
The following table summarizes information about options outstanding and
exercisable at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- -------------------------------
NUMBER WEIGHTED- WEIGHTED- NUMBER
OUTSTANDING AT AVERAGE AVERAGE EXERCISABLE AT WEIGHTED-
RANGE OF DECEMBER 31, REMAINING EXERCISE DECEMBER 31, AVERAGE
EXERCISE PRICES 1998 CONTRACTUAL LIFE PRICE 1998 EXERCISE PRICE
- ---------------- -------------- ---------------- --------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$0.30 - 5.00... 673,487 96 months $ 1.77344 163,307 $ 0.40240
5.00 - 10.00... 58,464 108 months 7.55556 11,692 7.55555
10.00 - 15.00... 198,586 108 months 10.66198 50,817 10.72954
20.00 - 25.00... 67,480 120 months 22.03245 -- --
------- ---------- --------- ------- ---------
998,017 108 months $ 5.25060 225,816 $ 3.09676
======= ========== ========= ======= =========
</TABLE>
The Company has elected to follow APB Opinion No. 25 and related
interpretations in accounting for its stock options. Under APB Opinion No. 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized. However, SFAS 123 requires presentation of pro forma net
earnings (loss) and pro forma earnings (loss) per share as if the Company had
accounted for its employee stock options granted subsequent to December 31, 1994
under the fair value method of that statement. For purposes of pro forma
disclosure, the estimated fair value of the options is amortized to expense over
the vesting period. Under the fair value method, the Company's net loss and loss
per share would have been increased as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
Net loss....................................... $(11,111,388) $(3,062,437) $(7,440,910)
Loss per share................................. (1.82) (0.78) (4.84)
</TABLE>
Because SFAS 123 is applicable only to options granted subsequent to
December 31, 1994, and the options generally have a five-year vesting period,
the pro forma effect will not be fully reflected until 1999.
F-19
<PAGE> 50
The per share weighted-average fair values of stock options granted during
1998 and 1997 were $4.49 and $7.02, respectively, on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Expected volatility......................................... 112% 66% 0%
Expected dividend yield..................................... None None None
Risk-free interest rate..................................... 5% 6% 6%
Expected life of options.................................... 6 years 7 years 7 years
</TABLE>
(d) Stockholders' Agreement (see note 8(h))
The Company was party to a Stockholders' Agreement (the "Stockholders'
Agreement") among all preferred and common stockholders of the Company which
included restrictions and requirements, certain of which are disclosed below.
The Stockholders' Agreement established the composition of the Company's Board
of Directors and provided for restrictions on the transfer of the Company's
shares. Additionally, the Stockholders' 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 could the Series A CPS one-time dividend be paid
until payment in full of the senior subordinated note payable.
The Company was 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.
As a result of the Company's initial public offering in January 1997, the
Agreement was terminated and the dividend payable was paid (see note 8(h)).
(e) Certain Common Stock Transactions
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 in 1996 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 gave
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 were
exercised during 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 $0.015 per share. The common stock purchase warrants were exercised on
February 14, 1998.
(g) Common Stock Reverse Split
In December 1996, the Company's Board of Directors 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 December 31, 1995.
F-20
<PAGE> 51
(h) Public Offerings
On January 31, 1997, the Company sold 2.3 million shares of Common Stock in
an initial public offering in which it received approximately $22.6 million, net
of offering expenses of approximately $750,000. As a result of the consummation
of the offering, the Series A CPS and Series B CPS were converted into 1,021,809
shares of common stock of the Company, the HPSC Agreement was terminated, and
the Stockholders' Agreement was terminated. In addition, all of the Company's
dividends payable and debt, excluding obligations under capital leases, were
repaid.
In June 1998, the Company completed a stock offering of 2,250,000 shares of
Common Stock in which it received approximately $40.5 million, net of offering
expenses of approximately $600,000.
(i) Shareholder Protection Rights Agreement
On July 29, 1998, the Board of Directors adopted a Shareholder Protection
Rights Agreement, pursuant to which they granted one purchase right (a "Right")
for each outstanding share of common stock.
Each Right entitles the registered holder to purchase from the Company one
one-hundredth of a share of Series A Junior Participating Preferred Stock, par
value $0.001, at a price of $40.00 (the "Exercise Price"). The Rights are not
exercisable unless a person or group has acquired beneficial ownership or has
commenced a tender or exchange offer which would result in the beneficial
ownership of 15% or more of the Company's outstanding common shares. In such an
event, Rights held by the acquiring person or group will automatically become
void and each other Right will automatically become a right to buy, for the
Exercise Price, that number of common shares having a market value of twice the
Exercise Price. The Rights may have certain anti-takeover effects and will cause
substantial dilution to a person or group that attempts to acquire the Company
on terms not approved by the Board of Directors of the Company. The Rights are
intended to encourage persons who may seek to acquire control of the Company to
initiate such an acquisition through negotiations with the Board of Directors.
At any time prior to a person or group obtaining 15% or more of the Company's
common shares, the Board of Directors may amend the Rights in any respect,
including termination of the Rights.
(j) Series 1998-A Preferred Stock
In March 1998, in connection with the acquisition of Healthdemographics,
the Company's Board of Directors designated 5,000 shares of the Company's
preferred stock, par value $0.001, as Series 1998-A Preferred Stock. Holders of
Series 1998-A Preferred Stock are entitled to receive cash dividends before any
dividends are paid to holders of the Company's common stock or any other
securities ranking junior to the Series 1998-A Preferred Stock at the rate of 5%
per annum of the initial liquidation preference per share of the Series 1998-A
Preferred Stock ($10,000). Dividends on the Series 1998-A Preferred Stock accrue
from the date shares are issued and are payable annually on December 31 of each
year.
Upon any liquidation, dissolution and winding up of the Company, holders of
Series 1998-A Preferred Stock will be entitled to receive, from the assets of
the Company available for distribution to stockholders of the Company, an amount
equal to $10,000 per share plus any accrued and unpaid dividends on the Series
1998-A Preferred Stock (the "Liquidation Preference") before any distribution is
made to holders of common stock or any other class of stock ranking junior.
Each share of Series 1998-A Preferred Stock is entitled to a number of
votes equal to the number of shares of common stock into which such share of
Series 1998-A Preferred Stock is then convertible.
Beginning on the fifth anniversary of any issue date of shares of Series
1998-A Preferred Stock, the Company may, at its election, redeem all of the
shares of Series 1998-A Preferred Stock that were issued on such issue date and
that remain outstanding. Effective as of the twentieth anniversary of each issue
date of shares of Series 1998-A Preferred Stock, the Company is required to
redeem all of the shares of Series 1998-A Preferred Stock that were issued on
such issue date that remain outstanding. Upon any redemption of the Series
1998-A Preferred Stock, the Company will pay in cash the Liquidation Preference
in effect on the date
F-21
<PAGE> 52
established for redemption, and dividends shall cease to accrue on that date.
The Company will not establish any retirement or sinking fund for the redemption
of the Series 1998-A Preferred Stock.
Each share of Series 1998-A Preferred Stock is subject to automatic
conversion into common stock if, at any time after issuance, a share of common
stock equals or exceeds $22.61 (the "Conversion Price"). In such event, each
share of Series 1998-A Preferred Stock will automatically be converted into a
number of shares of common stock that results from dividing the Liquidation
Preference in effect at the time by the Conversion Price.
As of December 31, 1998, no shares of Series 1998-A Preferred Stock had
been issued or were outstanding.
(k) Employee Stock Purchase Plan
In September 1998, the Company adopted the 1998 Employee Stock Purchase
Plan (the "ESPP") and has reserved 200,000 shares of the Company's common stock
for future issuance under the ESPP. Under the ESPP, shares of the Company's
common stock may be purchased at three-month intervals at 85% of the lower of
the fair market value on the first or the last day of each three-month period.
All Company employees are eligible and may purchase shares having a value not
exceeding 10% of their gross compensation during an offering period. During
1998, employees contributed $72,426 to the ESPP, the amount of which was used to
purchase 32,478 shares of the Company's Common Stock on January 15, 1999. At
December 31, 1998, 167,522 shares were reserved for future issuance.
(l) Stock Repurchase Plan
On September 14, 1998, the Board of Directors approved a Stock Repurchase
Plan (the "Repurchase Plan") pursuant to which the Company is authorized to
repurchase up to 720,000 shares of the Company's common stock at market prices.
The Repurchase Plan was effective October 7, 1998. No shares had been
repurchased under the Repurchase Plan as of December 31, 1998.
(9) MAJOR CUSTOMERS
For the years ended December 31, 1998, 1997, and 1996, one customer
accounted for approximately 7%, 16%, and 15%, respectively, of total revenues.
(10) NOTES 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. The annual installments of $22,500 were paid in 1997 and 1998.
In July 1998, the Company loaned $75,000 to an officer of the Company in
the form of an unsecured promissory note. Interest accrues at 8.5% per annum and
is due, together with the principal balance, on August 2, 1999.
In August 1998, the Company loaned $350,000 to an officer of the Company in
the form of an unsecured promissory note. Interest accrues at 7.5% per annum and
is due, together with the principal balance, on July 30, 1999.
(11) SEGMENT REPORTING
The Company's reportable segments are strategic business units that offer
different products and services. Medirisk provides its services and products
through its Market Performance, Clinical Performance, and Physician Credentials
segments. Medirisk's Market Performance segment provides customers with
comprehensive proprietary data and decision support tools for use in analyzing
physician fees, health care utilization
F-22
<PAGE> 53
patterns and member satisfaction with managed care plans in the United States.
Medirisk's Clinical Performance segment enables customers to measure clinical
outcomes across a full range of care within a variety of medical specialties.
Medirisk's Physician Credentials segment provides database products, software
and outsourced services designed to enable its customers to access detailed
information concerning the background and credentials of physicians in the
United States.
Medirisk evaluates each segment's performance based on a modified operating
profit measurement (earnings before interest, taxes, depreciation, amortization,
or acquired in-process research and development costs and integration costs).
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Revenue:
Market Performance.................................. $ 12,214,263 6,237,721 3,978,832
Clinical Performance................................ 4,514,825 3,297,707 1,738,855
Physician Credentials............................... 10,474,942 7,213,411 3,186,446
------------ ------------ -----------
$ 27,204,030 $ 16,748,839 $ 8,904,133
------------ ------------ -----------
Operating profit (loss)(1):
Market Performance.................................. $ 7,012,347 $ 3,407,711 $ (484,419)
Clinical Performance................................ 413,311 1,278,501 (38,910)
Physician Credentials............................... 2,618,848 2,805,269 1,020,016
Corporate(2)........................................ (3,852,605 (3,026,196) --
------------ ------------ -----------
$ 6,191,901 $ 4,465,285 $ 496,687
------------ ------------ -----------
Depreciation and Amortization:
Market Performance.................................. $ 394,422 $ 251,214 $ 203,848
Clinical Performance................................ 372,101 206,191 78,339
Physician Credentials............................... 464,555 265,174 122,787
Corporate........................................... 1,583,733 581,576 381,875
------------ ------------ -----------
$ 2,814,811 $ 1,304,155 $ 786,849
------------ ------------ -----------
Reconciling items..................................... $(12,920,956) $ (4,230,052) $(6,940,615)
Loss before income taxes and extraordinary item....... $ (9,543,866) $ (1,068,922) $(7,230,777)
============ ============ ===========
Assets:
Market Performance.................................. $ 8,792,899 $ 3,112,411 $ 2,635,463
Clinical Performance................................ 3,035,574 2,488,172 709,334
Physician Credentials............................... 3,464,550 2,653,117 433,189
Corporate........................................... 43,826,866 12,404,566 4,677,975
------------ ------------ -----------
$ 59,119,889 $ 20,658,266 $ 8,455,961
============ ============ ===========
</TABLE>
- ---------------
(1) Excludes depreciation costs, amortization costs, acquired in-process
research and development costs, integration costs and acquisition-related
costs.
(2) In 1996 Corporate costs were included under the Market Performance segment.
F-23
<PAGE> 54
SCHEDULE II
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders
Medirisk, Inc.
Under date of February 5, 1999, we reported on the consolidated balance sheets
of Medirisk, Inc. and subsidiaries as of December 31, 1998 and 1997, 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,
1998, as contained in the annual report on Form 10-K for the year 1998. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule included in the annual report on Form 10-K for the year 1998. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Atlanta, Georgia
February 5, 1999
S-1
<PAGE> 55
MEDIRISK, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
-----------------------------
BALANCE AT CHARGES TO
BEGINNING CHARGES TO COSTS AND NET BALANCE AT
DESCRIPTION OF PERIOD OTHER ACCOUNTS EXPENSES DEDUCTIONS END OF PERIOD
----------- ---------- -------------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
December 31, 1996
Allowance for doubtful accounts... -- $ 47,439(1) $ 50,000 -- $ 97,439
December 31, 1997
Allowance for doubtful accounts... $97,439 150,000(1) 92,000 $191,882 147,557
December 31, 1998
Allowance for doubtful accounts... 147,557 324,665(1) 213,760 219,732 466,250
</TABLE>
- ---------------
(1) Represents beginning balance in allowance for doubtful accounts of acquired
companies.
S-2
<PAGE> 1
EXHIBIT 3.1.2
CERTIFICATE OF DESIGNATION, PREFERENCES AND
RIGHTS OF
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
OF
MEDIRISK, INC.
Pursuant to Section 151 of the
Delaware General Corporation Law
Medirisk, Inc., a corporation organized under the laws of the State of
Delaware (the "Corporation"), hereby certifies that, pursuant to the authority
conferred upon the Board of Directors by the Certificate of Incorporation, as
amended, of the Corporation, the Board of Directors on July 29, 1998, adopted
the following resolution creating a series of 200,000 shares of Preferred Stock
designated as Series A Junior Participating Preferred Stock:
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of this Corporation (the "Board") in accordance with the
provisions of its Certificate of Incorporation, as amended, a series of
Preferred Stock of the Corporation be and hereby is created, and that the
designation and amount thereof and the voting rights or powers, preferences and
relative, participating, optional and other special rights of the shares of such
series, and the qualifications, limitations or restrictions thereof are as
follows:
1. Series A Junior Participating Preferred Stock. There is hereby
established a series of Preferred Stock, par value $0.001 per share, of the
Corporation, and the designation and certain terms, powers, preferences and
other rights of the shares of such series, and certain qualifications,
limitations and restrictions thereon, are hereby fixed as follows:
(i) The distinctive serial designation of this series
shall be "Series A Junior Participating Preferred Stock" (hereinafter called
"this Series"). Each share of this Series shall be identical in all with the
other shares of this Series except as to the dates from and after which
dividends thereon shall be cumulative.
(ii) The number of shares in this Series shall initially
be 200,000, which number may from time to time be increased or decreased (but
not below the number then outstanding) by the Board of Directors. Shares of this
Series purchased by the Corporation shall be canceled and shall revert to
authorized but unissued shares of Preferred Stock undesignated as to series.
Shares of this Series may be issued in fractional shares, which fractional
shares shall entitle the holder, in proportion to such holder's fractional
share, to all rights of a holder of a whole share of this Series.
(iii) The holders of full or fractional shares of this
Series shall be entitled to receive, when and as declared by the Board of
Directors, but only out of funds legally available therefor, dividends, (A) on
each date that dividends or other distributions (other than dividends or
distributions payable in Common Stock of the Corporation) are payable on or in
respect of Common Stock comprising part of the Reference Package (as defined
below), in an amount per whole share of this Series equal to the aggregate
amount of dividends or other distributions (other than dividends or
distributions payable in Common Stock of the Corporation) that would be payable
on such date to a holder of the Reference Package and (B) on the last day of
March, June, September and December in each year, in an amount per whole share
of this Series equal to the excess (if any) of $1.00 over the aggregate
dividends paid per whole share of this Series during the three-month period
ending on such last day. Each such dividend shall be paid to the holders of
record of shares of this Series on the date, not exceeding sixty days preceding
such dividend or distribution payment date, fixed for that purpose by the Board
of Directors in advance of payment of each particular
<PAGE> 2
dividend or distribution. Dividends on each full and each fractional share of
this Series shall be cumulative from the date such full or fractional share is
originally issued; provided that any such full or fractional share originally
issued after a dividend record date and on or prior to the dividend payment date
to which such record date relates shall not be entitled to receive the dividend
payable on such dividend payment date or any amount in respect of the period
from such original issuance to such dividend payment date.
The term "Reference Package" shall initially mean 100 shares of Common
Stock, par value $0.001 per share ("Common Stock"), of the Corporation. In the
event the Corporation shall at any time (A) declare or pay a dividend on any
Common Stock payable in Common Stock, (B) subdivide any Common Stock or (C)
combine any Common Stock into a smaller number of shares, then and in each such
case the Reference Package after such event shall be the Common Stock that a
holder of the Reference Package immediately prior to such event would hold
thereafter as a result thereof.
Holders of shares of this Series shall not be entitled to any
dividends, whether payable in cash, property or stock, in excess of full
cumulative dividends, as herein provided on this Series.
So long as any shares of this Series are outstanding, no dividend
(other than a dividend in Common Stock or in any other stock ranking junior to
this Series as to dividends and upon liquidation) shall be declared or paid or
set aside for payment or other distribution declared or made upon the Common
Stock or upon any other stock ranking junior to this Series as to dividends or
upon liquidation, nor shall any Common Stock nor any other stock of the
Corporation ranking junior to or on a parity with this Series as to dividends or
upon liquidation be redeemed, purchased or otherwise acquired for any
consideration (or any moneys be paid to or made available for a sinking fund for
the redemption of any shares of any such stock) by the Corporation (except by
conversion into or exchange for stock of the Corporation ranking junior to this
Series as to dividends and upon liquidation), unless, in each case, the full
cumulative dividends (including the dividend to be due upon payment of such
dividend, distribution, redemption, purchase or other acquisition) on all
outstanding shares of this Series shall have been, or shall contemporaneously
be, paid.
(iv) In the event of any merger, consolidation,
reclassification or other transaction in which the shares of Common Stock are
exchanged for or changed into other stock or securities, cash and/or any other
property, then in any such case the shares of this Series shall at the same time
be similarly exchanged or changed in an amount per whole share equal to the
aggregate amount of stock, securities, cash and/or any other property (payable
in kind), as the case may be, that a holder of the Reference Package would be
entitled to receive as a result of such transaction.
(v) In the event of any liquidation, dissolution or
winding up of the affairs of the Corporation, whether voluntary or involuntary,
the holders of full and fractional shares of this Series shall be entitled,
before any distribution or payment is made on any date to the holders of the
Common Stock or any other stock of the Corporation ranking junior to this Series
upon liquidation, to be paid in full an amount per whole share of this Series
equal to the greater of (A) $1.00 or (B) the aggregate amount distributed or to
be distributed prior to such date in connection with such liquidation,
dissolution or winding up to a holder of the Reference Package (such greater
amount being hereinafter referred to as the "Liquidation Preference"), together
with accrued dividends to such distribution or payment date, whether or not
earned or declared. If such payment shall have been made in full to all holders
of shares of this Series, the holders of shares of this Series as such shall
have no right or claim to any of the remaining assets of the Corporation.
In the event the assets of the Corporation available for distribution
to the holders of shares of this Series upon any liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, shall be
insufficient to pay in full all amounts to which such holders are entitled
pursuant to the first paragraph of this Section (v), no such distribution shall
be made on account of any shares of any other class or series of Preferred Stock
ranking on a parity with the shares of this Series upon such liquidation,
dissolution or winding up unless proportionate distributive amounts shall be
paid on account of the shares of
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<PAGE> 3
this Series, ratably in proportion to the full distributable, amounts for which
holders of all such parity shares are respectively entitled upon such
liquidation, dissolution or winding up.
Upon the liquidation, dissolution or winding up of the Corporation, the
holders of shares of this Series then outstanding shall be entitled to be paid
out of assets of the Corporation available for distribution to its stockholders
all amounts to which such holders are entitled pursuant to the first paragraph
of this Section (v) before any payment shall be made to the holders of Common
Stock or any other stock of the Corporation ranking junior upon liquidation to
this Series.
For the purposes of this Section (v), the consolidation or merger of,
or binding share exchange by, the Corporation with any other corporation shall
not be deemed to constitute a liquidation, dissolution or winding up of the
corporation.
(vi) The shares of this Series shall not be redeemable.
(vii) In addition to any other vote or consent of
stockholders required by law or by the Certificate of Incorporation, as amended,
of the Corporation, each whole share of this Series shall, on any matter, vote
as a class with any other capital stock comprising part of the Reference Package
and voting on such matter and shall have the number of votes thereon that a
holder of the Reference Package would have.
IN WITNESS WHEREOF, Medirisk, Inc. has caused this Certificate of
Designation to be executed as of August 21, 1998.
MEDIRISK, INC.
By: /s/ Barry W. Burt
-----------------------------------------
Name: Barry W. Burt
---------------------------------------
Title: Vice President & Secretary
--------------------------------------
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<PAGE> 1
EXHIBIT 10.2
AMENDMENT NUMBER 1 TO
EMPLOYMENT AGREEMENT
THIS AMENDMENT NUMBER 1 TO EMPLOYMENT AGREEMENT (this "Amendment") is
made and entered into as of the 4th day of November 1998, by and between
MEDIRISK, INC., a Delaware corporation (the "Company") and MARK A. KAISER
("Employee").
W I T N E S S E T H:
WHEREAS, the Company and Employee are parties to an Employment
Agreement dated as of 18 August 1998 (the "Agreement") pursuant to which the
Company employs Employee; and
WHEREAS, the Company and Employee desire to amend the Agreement in
light of organizational changes made at the Company;
NOW, THEREFORE, in consideration of the compensation payable to
Employee by the Company pursuant to the Agreement, and the mutual promises,
covenants, representations and warranties contained herein, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto do agree as
follows:
1. DUTIES, EXTENT OF SERVICES. Section 4 of the Agreement is
amended by deleting the first sentence of such Section 4 and inserting in lieu
thereof the following:
Employee is engaged as Chairman of the Board and Chief
Executive Officer of the Company and shall perform such duties
and responsibilities as are typically incident to such
positions, and shall perform in a faithful and competent
manner such additional duties as may be reasonably assigned
from time to time by the Company.
2. TERMINATION. Section 5(c) of the Agreement is amended by
deleting clause (i) therefrom and inserting in lieu thereof the following:
(i) without the express written consent of Employee, a
material diminution of his position, duties, responsibilities
and status with the Company as in effect as of the date of
Amendment Number 1 to this Agreement, a material reduction of
Employee's reporting responsibilities, titles or offices as in
effect as of the date of Amendment Number 1 to this Agreement,
or the removal of Employee from, or failure to re-elect
Employee to, any position referred to in Section 4 of this
Agreement, except in connection with promotions to higher
officer or except in connection with the termination of his
employment for Cause;
[the remainder of this page intentionally left blank]
<PAGE> 2
3. EFFECT. Except as specifically modified and amended by this
Amendment, the parties ratify and affirm all of the covenants and agreements set
forth in the Agreement, which shall continue in full force and effect as
modified hereby.
IN WITNESS WHEREOF, the Company and Employee have executed this
Agreement on the day and year first above written.
COMPANY:
MEDIRISK, INC.
By: /s/ Kenneth M. Goins, Jr.
-----------------------------------------
KENNETH M. GOINS, JR.
President & Chief Operating Officer
EMPLOYEE:
/s/ Mark A. Kaiser
--------------------------------------------
MARK A. KAISER
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<PAGE> 1
EXHIBIT 10.4
AMENDMENT NUMBER 1 TO
EMPLOYMENT AGREEMENT
THIS AMENDMENT NUMBER 1 TO EMPLOYMENT AGREEMENT (this "Amendment") is
made and entered into as of the 4th day of November 1998, by and between
MEDIRISK, INC., a Delaware corporation (the "Company") and KENNETH M.
GOINS, JR. ("Employee").
W I T N E S S E T H:
WHEREAS, the Company and Employee are parties to an Employment
Agreement dated as of 21 August 1998 (the "Agreement") pursuant to which the
Company employs Employee; and
WHEREAS, the Company and Employee desire to amend the Agreement in
light of organizational changes made at the Company;
NOW, THEREFORE, in consideration of the compensation payable to
Employee by the Company pursuant to the Agreement, and the mutual promises,
covenants, representations and warranties contained herein, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto do agree as
follows:
1. DUTIES, EXTENT OF SERVICES. Section 4 of the Agreement is
amended by deleting the first sentence of such Section 4 and inserting in lieu
thereof the following:
Employee is engaged as President and Chief Operating Officer
of the Company and shall perform such duties and
responsibilities as are typically incident to such positions,
and shall perform in a faithful and competent manner such
additional duties as may be reasonably assigned from time to
time by the Company.
2. TERMINATION. Section 5(c) of the Agreement is amended by
deleting clause (i) therefrom and inserting in lieu thereof the following:
(i) without the express written consent of Employee, a
material diminution of his position, duties, responsibilities
and status with the Company as in effect as of the date of
Amendment Number 1 to this Agreement, a material reduction of
Employee's reporting responsibilities, titles or offices as in
effect as of the date of Amendment Number 1 to this Agreement,
or the removal of Employee from, or failure to re-elect
Employee to, any position referred to in Section 4 of this
Agreement, except in connection with promotions to higher
officer or except in connection with the termination of his
employment for Cause;
[the remainder of this page intentionally left blank]
<PAGE> 2
3. EFFECT. Except as specifically modified and amended by this
Amendment, the parties ratify and affirm all of the covenants and agreements set
forth in the Agreement, which shall continue in full force and effect as
modified hereby.
IN WITNESS WHEREOF, the Company and Employee have executed this
Agreement on the day and year first above written.
COMPANY:
MEDIRISK, INC.
By: /s/ Mark A. Kaiser, Jr.
-------------------------------------
MARK A. KAISER, JR.
Chairman of the Board &
Chief Executive Officer
EMPLOYEE:
/s/ Kenneth M. Goins, Jr.
--------------------------------------------
KENNETH M. GOINS, JR.
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<PAGE> 1
EXHIBIT 10.5
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into
as of the 4th day of November 1998, by and between MEDIRISK, INC., a Delaware
corporation (the "Company"), and THOMAS C. KUHN III ("Employee").
W I T N E S S E T H:
WHEREAS, the Company desires to employ Employee, and Employee desires
to be employed by the Company, on the terms and conditions contained herein;
NOW, THEREFORE, in consideration of the compensation payable to
Employee by the Company pursuant to this Agreement, and the mutual promises,
covenants, representations and warranties contained herein, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto do agree as
follows:
1. EMPLOYMENT. Effective as of the date hereof (the "Effective
Date"), the Company employs Employee and Employee accepts employment with the
Company under the terms of this Agreement.
2. TERM. This Agreement shall begin on the Effective Date and
shall continue for an initial period of thirty-six (36) months from the
Effective Date (the "Initial Period"), subject to earlier termination by
Employee or the Company as hereinafter provided. This Agreement shall renew for
additional terms of twelve (12) months each, subject to earlier termination as
hereinafter provided, on the same terms and conditions (subject to mutually
agreeable modifications, if any).
3. COMPENSATION AND BENEFITS.
(A) Base Compensation. The Company shall pay Employee an
annual salary of One Hundred Forty Thousand and No/100 ($140,000.00) Dollars, as
may be adjusted as provided herein (the "Base Compensation"), payable according
to the pay periods of the Company as may be in effect from time to time. Such
payments shall be prorated for periods less than a full pay period. The Base
Compensation shall be subject to withholding for federal, state and local
payroll and all other taxes or withholdings applicable to Employee. Any
increases of the Base Compensation shall be at the discretion of the Company,
provided that any decreases to the then current Base Compensation shall require
the consent of Employee.
(B) Benefits. During the term of this Agreement, Employee
shall also be entitled to participate in the insurance and other fringe benefits
made available generally to similar employees of the Company, as such benefits
may be determined from time to time by the Company, provided that Employee shall
have at least three (3) weeks of paid vacation time. In
<PAGE> 2
addition, during the term of this Agreement, the Company will provide term life
insurance coverage of One Million Dollars ($1,000,000) on Employee's life with
the death benefit to be payable to Employee's estate or as otherwise directed in
writing by Employee. In addition, during the term of this Agreement and subject
to the Employee meeting the insurability requirements of the applicable carrier,
the Company will provide disability insurance coverage that, in the event of
Employee's disability, will pay benefits to Employee in an amount equal to
seventy percent (70%) of the total of (i) Employee's Base Compensation, as in
force from time to time, plus (ii) the average of Employee's total annual
incentive compensation for the then-preceding three years, or such lesser
percentage thereof as the Company may obtain without unreasonable expense.
(C) Bonuses. In addition to the Base Compensation payable
to Employee pursuant to Section 3(a) above, the Employee is entitled to an
annual bonus, with a target amount equal to twenty-five percent (25%) of
Employee's Base Compensation for such year based upon the Company's achievement
of one hundred percent (100%) of performance goals reasonably established by the
Compensation Committee of the Company's Board of Directors (the "Compensation
Committee"). The Company and Employee agree that Employee's performance bonus
for the year 1998 will be based upon the achievement of performance goals that
have already been established. The actual bonus to be paid will be increased or
decreased from the target based upon the Company's exceeding or failing to
achieve one hundred percent (100%) of the relevant goals pursuant to formulae
reasonably established by the Compensation Committee when establishing the
performance goals for the year.
(D) Expenses. The Company shall reimburse Employee for
any and all expenses reasonably incurred by Employee incident to the performance
of the Employee's duties hereunder upon submission to the Company of appropriate
documentation in accordance with the Company's policies and procedures.
(E) Stock Options. In addition to the benefits described
above, the Company granted Employee options to purchase 24,626 shares of Common
Stock of the Company ("Common Stock") on 10 September 1998. In addition to such
options, the Company will grant Employee options to purchase a minimum of
Fifteen Thousand (15,000) shares of Common Stock on each of the first and second
anniversaries of the date of this Agreement, such number of shares being
adjusted for any stock splits or stock dividends occurring after the date of
this Agreement; provided, however, that if in any year of the term of this
Agreement the Company grants Employee options to purchase more shares of Common
Stock than such minimum, then the amount in excess of such minimum may, in the
discretion of the Compensation Committee, be credited by the Company against the
minimum grant required hereunder for subsequent periods. Such options will have
an exercise price per share equal to the fair market value of a share of Common
Stock as reasonably determined by the Compensation Committee. Such options shall
vest at a rate of twenty percent (20%) per year, over five years, or immediately
upon the sale or other change of control of the Company.
4. DUTIES, EXTENT OF SERVICES. Employee is engaged as Senior Vice
President and Chief Financial Officer of the Company and shall perform such
duties and responsibilities as are typically incident to such positions, and
shall perform in a faithful and competent manner such
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<PAGE> 3
additional duties as may be reasonably assigned from time to time by the
Company. Such duties shall be performed on a full-time basis for the Company at
the Company's offices in Atlanta, Georgia. Employee may be required, from time
to time, to perform his duties temporarily hereunder at such other place or
places as the Company shall reasonably designate or as the interests of the
Company may reasonably require, provided that such period does not exceed thirty
(30) consecutive days without Employee's consent and that during any such period
Employee is able to return to Atlanta, Georgia at the Company's expense for
weekends. Employee shall devote all of Employee's business time, attention,
knowledge, and skill solely to the business and interest of the Company, and the
Company shall be entitled to all the benefits, profits, and other issues arising
from, or incident to, all work, services, and advice of Employee.
5. TERMINATION. This Agreement may be terminated by the parties
in the manners specified below:
(A) Termination without Cause. Either the Company or the
Employee may terminate Employee's employment under this Agreement at any time
for any reason upon thirty (30) day's prior written notice to the other party.
(B) Termination for Cause. The Company may terminate this
Agreement on written notice at any time for "Cause." For purposes of this
Agreement, "Cause" shall mean: (i) Employee is convicted of, pleads guilty to,
or confesses to a felony or any crime involving any act of dishonesty, fraud,
misappropriation, embezzlement or moral turpitude, in which event the Company
may terminate this Agreement immediately; (ii) the intentional misconduct or
gross negligence by Employee in connection with the performance of Employee's
duties hereunder; (iii) the engaging by Employee in any fraudulent, disloyal or
unprofessional conduct which results in an injury to the Company or its
affiliates, monetarily or otherwise; (iv) Employee breaches any provisions of
Section 6 of this Agreement; (v) the failure by Employee to otherwise
substantially perform his duties with the Company (other than any such failure
resulting from the disability of Employee under Section 5(d)(i)) or the material
breach of any provision of this Agreement other than Section 6; or (vi) Employee
materially underperforms the objective performance goals reasonably established
by the Compensation Committee and agreed to by Employee, which agreement shall
not be unreasonably withheld, which underperformance is not the result of
general economic conditions that widely affect the industry in which the Company
conducts its business. In the event of any termination for Cause pursuant to the
provisions of (ii), (iii), (iv), (v) or (vi) of this subsection, the Company
shall give Employee written notice prior to such termination detailing the
specific acts, actions, failures, or events upon which the forecast termination
is based, and Employee shall have thirty (30) days after such written notice to
cease such actions or otherwise correct any such failure or breach. If Employee
does not cease such action or otherwise correct such failure or breach within
such thirty (30) day time period, or having once received such written notice
and ceased such actions or corrected such failure or breach, Employee at any
time thereafter again so acts, fails or breaches, the Company may terminate this
Agreement immediately.
(C) Termination for Good Reason. Employee may terminate
this Agreement on written notice at any time for "Good Reason." For purposes of
this Agreement, "Good
-3-
<PAGE> 4
Reason" shall mean: (i) without the express written consent of Employee, a
material diminution of his position, duties, responsibilities and status with
the Company as in effect as of the date of this Agreement, a material reduction
of Employee's reporting responsibilities, titles or offices as in effect on the
date of this Agreement, or the removal of Employee from, or failure to re-elect
Employee to, any position referred to in Section 4 of this Agreement, except in
connection with promotions to higher office or except in connection with the
termination of his employment for Cause; (ii) the reduction of Employee's Base
Compensation or a substantial change in the performance bonus structure
currently in effect (other than changes in goals from year to year); (iii) the
requirement that Employee relocate outside of the Atlanta, Georgia metropolitan
area; (iv) the reduction in the number of Employee's yearly vacation days; (v)
the material breach by the Company of any provision of this Agreement, which
breach continues uncorrected and uncured for fifteen (15) days after Employee
gives notice of such breach to the Company; (vi) the intentional interference by
the Company or any person directly or indirectly controlling or controlled by
the Company with the performance by Employee of his duties under this Agreement,
such that Employee is prevented or materially impaired from performing such
duties; or (vii) the termination of this Agreement by written notice from
Employee to the Company during the thirty (30) day period immediately following
the first anniversary of a Change of Control (as defined below).
(D) Involuntary Termination. The employment of Employee
under this Agreement shall be automatically terminated by the death or
disability of Employee as outlined below.
(I) Disability. The Company may terminate this
Agreement at the time Employee shall have been Disabled for a continuous period
of six (6) months during any continuous twelve (12) month period. For purposes
of this Paragraph 5(d)(i), the term "Disabled" shall mean Employee's inability
to perform the essential functions of his duties, with or without reasonable
accommodation. During Employee's six (6) month period of Disability, the Company
agrees to continue to pay Employee's Base Compensation (less regular
withholdings for payroll or other taxes and other required or proper items, and
less proceeds from all disability insurance policies or plans provided or made
available by the Company). In the event of a termination of Employee on account
of Disability, Employee shall receive the proceeds of the policy of disability
insurance provided by the Company in accordance with Section 3(b) above. In
addition, any provisions in the relevant stock option agreements to the contrary
notwithstanding, all outstanding stock options granted to Employee pursuant to a
Company stock option plan shall vest immediately upon termination pursuant to
this Section 5(d)(i).
(II) Death. In the event Employee shall die
during the term of this Agreement, this Agreement shall terminate and Employee's
estate shall receive the remainder of the Base Compensation set forth in Section
3(a) hereof accrued to the last day of the month in which death occurs. In
addition, any provisions in the relevant stock option agreements to the contrary
notwithstanding, all outstanding stock options granted to Employee pursuant to a
Company stock option plan shall vest immediately upon termination pursuant to
this Section 5(d)(ii).
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<PAGE> 5
(E) Post-Termination Compensation. Except as provided in
Section 5(d) above, upon termination of this Agreement, Employer shall be
relieved of all of its obligations hereunder notwithstanding any period of time
remaining under the initial or any renewal term, subject to the following:
(I) Termination without Cause or for Good
Reason. Subject to Section 5(e)(iii), if the Company terminates Employee's
employment hereunder without Cause under Section 5(a) above or if Employee
terminates his employment hereunder for Good Reason under Section 5(c) above,
then Employee shall, after the effective date of such termination, as Employee's
sole and exclusive remedy, receive an amount equal to the annual Base
Compensation (as then in effect), payable without interest in equal amounts
according to the pay periods of the Company for a period of twelve (12) months
after the termination date. If the Company terminates Employee's employment
without Cause or if Employee terminates his employment for Good Reason, Employee
shall be under no duty to seek or accept other employment; but if he shall do
so, any compensation he shall receive therefrom shall not diminish the Company's
obligation to make payments required to Employee hereunder.
(II) Termination by the Company for Cause or by
Employee without Good Reason. If the Company terminates Employee's employment
hereunder with Cause under Section 5(b) above, then Employee shall, after the
effective date of such termination, receive the Base Compensation (as then in
effect) for a period of one (1) month after the termination date. If Employee
terminates his employment without Good Reason under Section 5(a) above, the
Company's obligation to pay Employee's Base Compensation shall terminate as of
the date of termination, and the Company shall pay Base Compensation accrued
through the date of termination.
(III) Termination following Change in Control. If
within twelve (12) months following a Change in Control (as defined below),
either (A) the Company terminates the employment of Employee hereunder without
Cause under Section 5(a) above or (B) Employee resigns from a declined
reassignment of a job that is not reasonably equivalent in responsibility or
compensation or that is not in the same geographic area, then, in lieu of any
other compensation that may be specified herein, Employee shall receive an
amount equal to two (2) multiplied by the sum of the annual Base Compensation
(as then in effect) plus an amount of annual bonus for the current year (the
annual bonus for the current year shall be equal in amount to the annual bonus
calculated in accordance with Section 3(c) as if the date of termination was the
last day of the current annual period, adjusted pro-rata for the portion of the
current annual period completed on the date of termination), payable by the
Company in a single lump-sum payment, to be paid not later than thirty (30) days
after termination. In the event such payment obligation arises, no compensation
received from other employment (or otherwise) shall reduce the obligation to
make the payment described in this paragraph.
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<PAGE> 6
(F) Change in Control. "Change of Control" means a change
in control of the Company of a nature that would be required to be reported
(assuming such event has not been "previously reported") in response to Item
1(a) of a Current Report on Form 8-K pursuant to Section 13 or 15(d) of the
Exchange Act of 1934 (the "Exchange Act"); provided that, without limitation, a
Change in Control shall also be deemed to have occurred at such time as:
(I) Any "person" within the meaning of Section
14(d) of the Exchange Act, other than the Company, a subsidiary, or any employee
benefit plan(s) sponsored by the Company or any Subsidiary, is or has become the
"beneficial owner," as defined in Rule 13d-3 under the Exchange Act, directly or
indirectly, of fifty percent (50%) or more of the combined voting power of the
outstanding securities of the Company ordinarily having the right to vote at the
election of directors; or
(II) Individuals who constitute the Board
immediately prior to any meeting of stockholders (the "Incumbent Board") have
ceased for any reason to constitute at least a majority thereof, provided that
any person becoming a director whose election, or nomination for election by the
Company's stockholders, was approved by a vote of at least three-quarters (3/4)
of the directors comprising the Incumbent Board (either by a specific vote or by
approval of the proxy statement of the Company in which such person is named as
a nominee for director without objection to such nomination) shall be, for
purposes of this Agreement, considered as though such person were a member of
the Incumbent Board; or
(III) Upon approval by the Company's stockholders
of a reorganization, merger, share exchange or consolidation, other than one
with respect to which those persons who were the beneficial owners, immediately
prior to such reorganization, merger, share exchange or consolidation, of
outstanding securities of the Company ordinarily having the right to vote in the
election of directors own, immediately after such transaction, more than fifty
percent (50%) of the outstanding securities of the resulting corporation
ordinarily having the right to vote in the election of directors; or
(IV) Upon approval by the Company's stockholders
of a complete liquidation and dissolution of the Company or the sale or other
disposition of all or substantially all of the assets of the Company other than
to a Subsidiary.
6. NONDISCLOSURE, CONFIDENTIALITY.
(A) Definitions. For purposes of this Section 6:
(I) "Trade Secrets" means all secret,
proprietary or Confidential Information regarding the Company or any of its
subsidiaries or the Company's or any of its subsidiaries' business or
activities, including any and all information not generally known to, or
ascertainable by, persons not employed by the Company or any of its
subsidiaries, the disclosure or knowledge of which would permit those persons to
derive actual or potential economic value therefrom or to cause economic or
financial harm to the Company or any of its subsidiaries. Trade Secrets shall
include, but not be limited to, information relating to the Company's or any of
-6-
<PAGE> 7
its subsidiaries' business plan, marketing techniques, financial statements and
projections, customer lists, Prospective Customer lists (including names,
addresses and telephone numbers), marketing research, marketing methods,
database products and systems, employee and independent contractor lists and
information about or records of clients or customers (including employees
thereof) compensation schedules, price list, training manuals, contracts,
agreements, specialized computer software, billing information, personnel
information and other information concerning the financial affairs, future plans
and management of the Company, its subsidiaries and their respective clients.
(II) "Confidential Information" means all
information regarding the Company and its subsidiaries, the Company's and its
subsidiaries' businesses, the Company's and its subsidiaries' activities or the
Company's and its subsidiaries' clients, customers or employees that is not
generally known to persons not employed by the Company or any of its
subsidiaries but that does not rise to the level of a Trade Secret and that is
not generally disclosed by Company practice or authority to persons not employed
by the Company or any of its subsidiaries.
(III) "Material Contact" means contact between
Employee and each customer or Prospective Customer (A) with whom Employee dealt;
(B) whose dealings with the Company or any of its subsidiaries were coordinated
or supervised by Employee; (c) about whom Employee obtained Trade Secrets or
Confidential Information in the ordinary course of business as a result of
Employee's association with the Company or any of its subsidiaries; or (D) who
receives products or services authorized by the Company or any of its
subsidiaries, the sale or provision of which results or resulted in
compensation, commissions or earnings for Employee within one year prior to the
date of Employee's termination.
(IV) "Person" means any individual, partnership,
corporation, trust, unincorporated organization, or any other business entity or
enterprise; provided, however, that the term "person" shall not include the
Company or any of its subsidiaries.
(V) "Prospective Customer" means any person to
whom the Company or any of its subsidiaries has sent or delivered a written
sales or servicing proposal or contract in connection with the business of the
Company or any of its subsidiaries.
(B) Acknowledgments. Employee agrees and acknowledges
that: (i) he is and will be in a position of confidence and trust with the
Company and he will have access to Trade Secrets and Confidential Information;
(ii) the nature and period of restrictions imposed by the covenants set forth in
this Section 6 are fair, reasonable and necessary to protect and preserve for
the Company the benefits of this Agreement and that such restrictions will not
prevent Employee from earning a livelihood; (iii) the Company would sustain
irreparable loss and damage if Employee were to breach any of such covenants;
and (iv) the covenants herein set forth are made as an inducement to and have
been relied upon by the Company in continuing to employ Employee, and Employee
represents and warrants for himself that he has not, prior to the date hereof,
disclosed to any Person or used or otherwise exploited for his own benefit or
for the benefit of any other Person any Trade Secrets or Confidential
Information.
-7-
<PAGE> 8
(C) Covenants. Having acknowledged the foregoing,
Employee hereby covenants to and agrees to the following:
(I) Covenant Against Disclosure of Trade Secrets
and Confidential Information. Employee hereby agrees to hold Trade Secrets and
Confidential Information in a fiduciary capacity for the benefit of the Company
and agrees that he shall not, directly or indirectly, during the term of
Employee's employment by the Company and for two years after the termination of
his employment for any reason whatsoever disclose to any Person or use or
otherwise exploit for Employee's own benefit or for the benefit of any other
Person any Trade Secrets or Confidential Information that were disclosed to
Employee or acquired by Employee while an Employee of the Company. Additionally,
Employee agrees that he will not, directly or indirectly, use or disclose to any
Person any Trade Secret at any time, as long as that information continues to be
a Trade Secret, even after the expiration of the above-referenced two-year
period, and Employee further agrees that this Section 6(c)(i) shall not limit in
any manner the protection of the Company's Trade Secrets otherwise afforded by
law.
(II) Covenant Against Diversion of Business.
Employee shall not, directly or indirectly, while he is in the Company's employ
and through the period ending one year after the termination of his employment
for any reason, accept, solicit, divert, appropriate, or attempt to accept,
solicit, divert, or appropriate, directly or by assisting others, any business
from any Person that was a customer or Prospective Customer with whom Employee
had Material Contact during his employment hereunder for purposes of providing
products or services that are competitive with those provided by the Company.
(III) Covenant Against Diversion of Employees.
Employee shall not, directly or indirectly while he is in the Company's employ
and through the period ending one year after the termination of his employment
for any reason initiate contact with the intention to recruit or hire, directly
or by assisting others, any employee of the Company or any of its affiliates;
provided, however, that Employee may hire or assist others in hiring any
employee of the Company whose employment with the Company at the time of such
hiring has been terminated by the Company.
(D) Consent to Injunction. Employee acknowledges that his
breach of any covenant set forth in this Section 6 will result in irreparable
injury to the Company and that the Company's remedies at law for such a breach
will be inadequate and extremely difficult to calculate or determine.
Accordingly, Employee agrees and consents that upon such breach or threatened
breach by Employee of any covenant set forth in this Section 6, the Company
shall, in addition to all other remedies available at law and in equity, be
entitled to a temporary restraining order, preliminary and interlocutory
injunction, and permanent injunctions to prevent or halt such a breach or
threatened breach by Employee of any covenant contained herein. Any violation of
the covenants contained in this Section 6 shall automatically toll and suspend
the period of such covenant for the amount of time the violation continues.
(E) Reformation. If any of the provisions of this
Agreement should ever be held to exceed the time or geographic limitations
permitted by applicable law in a final judgment
-8-
<PAGE> 9
by a court of competent jurisdiction, then such provisions shall be
automatically reformed to the maximum time or geographic limitations permitted
by applicable law.
(F) Severability. If any of the provisions of this
Agreement should in whole or in part be held invalid in a final judgment by a
court of competent jurisdiction, such invalidity shall not affect the validity
of the rest of this Agreement, the parties hereto intending that each provision
of this Agreement, including each subparagraph contained in Section 6(c), be
severable.
(G) Remedies Cumulative and Concurrent. The rights and
remedies of the Company as provided in this Agreement shall be cumulative and
may be pursued separately, successively or together against Employee at the sole
discretion of the Company, and may be exercised as often as occasion therefor
shall arise. The failure to exercise any right or remedy shall in no event be
construed as a waiver or release thereof.
7. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY.
(A) Anything in this Agreement to the contrary
notwithstanding and except as set forth below, in the event it shall be
determined that any payment or distribution by the Company to or for the benefit
of Employee (whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise, but determined without regard to any
additional payments required under this Section 7) (a "Payment") would be
subject to the excise tax imposed by Section 4999 of the Code or any interest or
penalties are incurred by Employee with respect to such excise tax (such excise
tax, together with any such interest and penalties, are hereinafter collectively
referred to as the "Excise Tax"), then Employee shall be entitled to receive an
additional payment (a "Gross-Up Payment") in an amount such that after payment
by Employee of all taxes (including any interest or penalties imposed with
respect to such taxes), including, without limitation, any income taxes (and any
interest and penalties imposed with respect thereto) and Excise Tax imposed upon
the Gross-Up Payment, Employee retains an amount of the Gross-Up Payment equal
to the Excise Tax imposed upon the Payments.
(B) Subject to the provisions of Section 7(c), all
determinations required to be made under this Section 7, including whether and
when a Gross-Up Payment is required and the amount of such Gross-Up Payment and
the assumptions to be utilized in arriving at such determination, shall be made
by KPMG Peat Marwick LLP or such other certified public accounting firm as may
be designated by Employee (the "Accounting Firm") which shall provide detailed
supporting calculations both to the Company and Employee within fifteen (15)
business days of the receipt of notice from Employee that there has been a
Payment, or such earlier time as is requested by the Company. In the event that
the Accounting Firm is serving as accountant or auditor for the individual,
entity or group effecting the Change in Control, Employee shall appoint another
nationally recognized accounting firm to make the determinations required
hereunder (which accounting firm shall then be referred to as the Accounting
Firm hereunder). All fees and expenses of the Accounting Firm shall be borne
solely by the Company. Any Gross-Up Payment, as determined pursuant to this
Section 7, shall be paid by the Company to Employee within five days of the
receipt of the Accounting Firm's determination. Any determination by the
Accounting Firm shall be binding upon the Company and Employee. It is possible
(due to the uncertainty in
-9-
<PAGE> 10
the application of Section 4999 of the Code at the time of the initial
determination by the Accounting Firm hereunder) that Gross-Up Payments will not
have been made by the Company which it is ultimately determined should have been
made ("Underpayment"), consistent with the calculations required to be made
hereunder. Consequently, in the event that the Company exhausts its remedies
pursuant to Section 7(c) and Employee thereafter is required to make a payment
of any Excise Tax, the Accounting Firm shall determine the amount of the
Underpayment that has occurred and any such Underpayment shall be promptly paid
by the Company to or for the benefit of Employee.
(C) Employee shall notify the Company in writing of any
claim by the Internal Revenue Service that, if successful, would require the
payment by the Company of the Gross-Up Payment. Such notification shall be given
as soon as practicable but no later than ten business days after Employee is
informed in writing of such claim and shall apprise the Company of the nature of
such claim and the date on which such claim is requested to be paid. Employee
shall not pay such claim prior to the expiration of the 30-day period following
the date on which it gives such notice to the Company (or such shorter period
ending on the date that any payment of taxes with respect to such claim is due).
If the Company notifies Employee in writing prior to the expiration of such
period that it desires to contest such claim, Employee shall:
(I) give the Company any information reasonably
requested by the Company relating to such claim,
(II) take such action in connection with
contesting such claim as the Company shall reasonably request in writing from
time to time, including, without limitation, accepting legal representation with
respect to such claim by an attorney reasonably selected by the Company,
(III) cooperate with the Company in good faith in
order effectively to contest such claim, and
(IV) permit the Company to participate in any
proceedings relating to such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold Employee harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limitation of the foregoing provisions of
this Section 7(c), the Company shall control all proceedings taken in connection
with such contest and, at its sole option, may pursue or forgo any and all
administrative appeals, proceedings, hearings and conferences with the taxing
authority in respect of such claim and may, at its sole option, either direct
Employee to pay the tax claimed and sue for a refund or contest the claim in any
permissible manner, and Employee agrees to prosecute such contest to a
determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that if the Company directs Employee to pay such
-10-
<PAGE> 11
claim and sue for a refund, the Company shall advance the amount of such payment
to Employee, on an interest-free basis and shall indemnify and hold Employee
harmless, on an after-tax basis, from any Excise Tax or income tax (including
interest or penalties with respect thereto) imposed with respect to such advance
or with respect to any imputed income with respect to such advance; and further
provided that any extension of the statute of limitations relating to payment of
taxes for the taxable year of Employee with respect to which such contested
amount is claimed to be due is limited solely to such contested amount.
Furthermore, the Company's control of the contest shall be limited to issues
with respect to which a Gross-Up Payment would be payable hereunder and Employee
shall be entitled to settle or contest, as the case may be, any other issue
raised by the Internal Revenue Service or any other taxing authority.
(D) If, after the receipt by Employee of an amount
advanced by the Company pursuant to Section 7(c), Employee becomes entitled to
receive any refund with respect to such claim, Employee shall (subject to the
Company's complying with the requirements of Section 7(c)) promptly pay to the
Company the amount of such refund (together with any interest paid or credited
thereon after taxes applicable thereto). If, after the receipt by Employee of an
amount advanced by the Company pursuant to Section 7(c), a determination is made
that Employee shall not be entitled to any refund with respect to such claim and
the Company does not notify Employee in writing of its intent to contest such
denial of refund prior to the expiration of 30 days after such determination,
then such advance shall be forgiven and shall not be required to be repaid and
the amount of such advance shall offset, to the extent thereof, the amount of
Gross-Up Payment required to be paid.
8. SEVERABILITY. The parties hereto hereby expressly agree and
contract that it is not the intention of either party to violate any public
policy, or any statutory or common law, and that if any paragraph, sentence,
clause or combination of the same of this Agreement shall be in violation of the
laws of any state where applicable, such paragraph, sentence, clause or the
combination of the same shall be void in the jurisdictions where it is unlawful,
and the remainder thereof shall remain binding on the parties hereto. It is the
intention of the parties to make the covenants of this Agreement binding only to
the extent that they may be lawfully done under existing applicable laws. In the
event that any part of any term or covenant of this Agreement is determined by a
court of law or equity to be overly broad or otherwise unenforceable, the
parties hereto agree that such court shall be empowered to substitute, and it is
the intent of the parties hereto that such court substitute, a reasonably
judicially enforceable term or limitation in the place of such unenforceable
term or covenant, and that as so modified this Agreement shall be fully
enforceable.
9. ENTIRE AGREEMENT; MODIFICATION. This Agreement constitutes the
entire agreement between the parties and supersedes any and all prior
understandings or agreements, and any changes or additions hereto must be in
writing and signed by both parties.
-11-
<PAGE> 12
10. ASSIGNMENT.
(A) The rights and benefits of Employee under this
Agreement, other than accrued and unpaid amounts due under Section 3(a) hereof,
are personal to Employee and shall not be assignable.
(B) This Agreement may not be assigned by the Company
except to an affiliate of the Company; provided, however, that if the Company
shall merge or effect a consolidation or share exchange with or into, or sell or
otherwise transfer substantially all its assets to, another business entity, the
Company may assign its rights hereunder to that business entity without the
consent of the Employee provided that it causes such business entity to assume
the Company's obligations under this Agreement.
11. NOTICE. The references to the notice periods of certain "days"
contained in this Agreement shall mean calendar days. Any notice provided for in
this Agreement shall be delivered to Employee at the most recent address of
Employee listed in the Company's then current employment records. Notice to the
Company shall be delivered to the following address: Medirisk, Inc., Two
Piedmont Center, Suite 400, Atlanta, Georgia 30305, Attention: Chief Executive
Officer.
12. WAIVER. The waiver by any party to this Agreement of a breach
of any of the provisions contained herein shall not operate or be construed as a
waiver of any subsequent breach.
13. GOVERNING LAW. The parties agree that the laws of the State of
Georgia and any applicable federal law shall apply to this Agreement and the
interpretation thereof. The place of any mediation or litigation under this
Agreement shall be Atlanta, Georgia.
14. ATTORNEY'S FEES; INDEMNIFICATION. In the event of a dispute
arising under this Agreement, the prevailing party shall be entitled to all
reasonable attorneys' fees incurred in connection with such dispute. The Company
agrees, to the maximum extent permitted by law and the Bylaws and Certificate of
Incorporation of the Company, to defend and indemnify the Employee against and
to hold the Employee harmless from any and all claims, suits, losses,
liabilities, and expenses (including disputes arising under this Agreement and
including reasonable attorneys' fees and payment of reasonable expenses incurred
in defending against such claim or suit as such expenses are incurred) asserted
against the Employee for actions taken or omitted to be taken by the Employee in
good faith and within the scope of his responsibilities as an officer or
employee of the Company. If requested by the Employee, the Company shall advance
to the Employee, promptly following the Company's receipt of any such request,
any and all expenses for which indemnification is available hereunder, subject
to the requirements of applicable law and the Company's Bylaws and Certificate
of Incorporation.
-12-
<PAGE> 13
IN WITNESS WHEREOF, the Company and Employee have executed this
Agreement on the day and year first above written.
COMPANY:
MEDIRISK, INC.
By: /s/ Mark A. Kaiser
--------------------------------------
MARK A. KAISER
Chairman & Chief Executive Officer
EMPLOYEE:
/s/ Thomas C. Kuhn, III
--------------------------------------------
THOMAS C. KUHN III
-13-
<PAGE> 1
EXHIBIT 21.1
MEDIRISK, INC.
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
STATE OF
NAME OF SUBSIDIARY INCORPORATION
- ------------------ -------------
<S> <C>
Medirisk of Illinois, Inc. (formerly known as Indiana Indiana
Formations in Health Care, Inc.)
Medirisk of Missouri, Inc. (formerly known as Missouri
PracticeMatch, Inc.)
CIVS, Inc. Maryland
CareData Reports, Inc. New York
Medsource, Inc. Minnesota
Healthdemographics, Inc. Delaware
Sweetwater Health Enterprises, Inc. Texas
Successful Solutions, Inc. Delaware
</TABLE>
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Medirisk, Inc.
We consent to incorporation by reference in the registration statements (No.
333-28541 and No. 333-63313) on Form S-8 of Medirisk, Inc. of our reports dated
February 5, 1999, relating to the consolidated balance sheets of Medirisk, Inc.
and subsidiaries as of December 31, 1998 and 1997, 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, 1998, and the
related consolidated financial statement schedule, which reports appear in the
1998 annual report on Form 10-K of Medirisk, Inc.
/s/ KPMG LLP
Atlanta, Georgia
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE MEDIRISK, INC.
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31,
1998 AND THE MEDIRISK, INC. CONSOLIDATED CONDENSED BALANCE SHEET AS OF DECEMBER
31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 21,365
<SECURITIES> 0
<RECEIVABLES> 8,475
<ALLOWANCES> 466
<INVENTORY> 0
<CURRENT-ASSETS> 31,402
<PP&E> 4,951
<DEPRECIATION> 2,377
<TOTAL-ASSETS> 59,120
<CURRENT-LIABILITIES> 5,456
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> 53,641
<TOTAL-LIABILITY-AND-EQUITY> 59,120
<SALES> 27,204
<TOTAL-REVENUES> 27,204
<CGS> 0
<TOTAL-COSTS> 37,374
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 626
<INCOME-PRETAX> (9,544)
<INCOME-TAX> 550
<INCOME-CONTINUING> (10,094)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,094)
<EPS-PRIMARY> (1.66)
<EPS-DILUTED> (1.66)
</TABLE>
