UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
Commission File Number: 0-25062
ENVOY CORPORATION
(Exact Name of Registrant as Specified in its Charter)
TENNESSEE
(State or Other Jurisdiction of Incorporation or Organization)
62-1575729
(I.R.S. Employer Identification Number)
TWO LAKEVIEW PLACE, 15 CENTURY BLVD.
SUITE 600, NASHVILLE, TN 37214
(Address of Principal Executive Offices)
(615) 885-3700
(Registrant's Telephone Number, Including Area Code)
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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
SHARES OUTSTANDING AS OF MAY 9, 1997:
16,239,385
CLASS:
COMMON STOCK, NO PAR VALUE PER SHARE
1
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
ENVOY CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
March 31, 1997 December 31, 1996
-------------- -----------------
ASSETS:
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 29,287 $ 36,430
ACCOUNTS RECEIVABLE - NET 23,228 20,435
INVENTORIES 2,137 2,586
DEFERRED INCOME TAXES 1,478 1,018
OTHER CURRENT ASSETS 3,679 2,947
--------- ---------
TOTAL CURRENT ASSETS 59,809 63,416
PROPERTY AND EQUIPMENT, NET 15,578 15,353
OTHER ASSETS 58,015 55,045
--------- ---------
TOTAL ASSETS $ 133,402 $ 133,814
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE $ 940 $ 1,764
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES 16,346 13,135
CURRENT PORTION OF LONG TERM DEBT 74 93
--------- ---------
TOTAL CURRENT LIABILITIES 17,360 14,992
LONG TERM DEBT, LESS CURRENT PORTION 7,807 8,412
DEFERRED INCOME TAXES 736 1,965
SHAREHOLDERS' EQUITY:
PREFERRED STOCK -- No par value; authorized,
12,000,000 shares; issued 3,730,233 40,100 40,100
COMMON STOCK -- No par value; authorized, 48,000,000 shares;
issued, 15,683,756 and 11,289,421 in 1997 and 1996, respectively 104,487 103,199
ADDITIONAL PAID-IN CAPITAL 7,155 7,155
RETAINED DEFICIT (44,243) (42,009)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 107,499 108,445
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 133,402 $ 133,814
========= =========
See accompanying notes to unaudited consolidated financial statements.
2
ENVOY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended
March 31,
---------------------------------------
1997 1996
------------------- ---------------
REVENUES $ 26,092 $ 10,330
OPERATING COSTS AND EXPENSES:
COST OF REVENUES 12,866 5,308
SELLING, GENERAL AND ADMINISTRATIVE 5,924 2,992
DEPRECIATION AND AMORTIZATION 5,941 2,055
MERGER AND FACILITY INTEGRATION COSTS 0 1,884
WRITE OFF OF ACQUIRED IN PROCESS TECHNOLOGY 3,000 30,700
EMC LOSSES 0 435
------------------- ---------------
OPERATING LOSS (1,639) (33,044)
OTHER INCOME (EXPENSE)
INTEREST INCOME 452 98
INTEREST EXPENSE (324) (504)
------------------- ---------------
128 (406)
------------------- ---------------
LOSS BEFORE INCOME TAXES (1,511) (33,450)
INCOME TAX PROVISION 722 460
------------------- ---------------
NET LOSS $ (2,233) $ (33,910)
=================== ===============
NET LOSS PER COMMON SHARE $ (0.14) $ (2.97)
=================== ===============
WEIGHTED AVERAGE SHARES OUTSTANDING 15,476 11,416
=================== ===============
See accompanying notes to unaudited consolidated financial statements.
3
ENVOY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Three Months Ended
March 31,
--------------------------------------
1997 1996
------------------ -----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 249 $ 2,375
INVESTING ACTIVITIES:
NET DECREASE IN SHORT-TERM INVESTMENTS 0 6,271
PURCHASES OF PROPERTY AND EQUIPMENT (1,498) (1,467)
INCREASE IN OTHER ASSETS (2,650) (611)
PAYMENTS FOR BUSINESSES ACQUIRED, NET
OF $4,784 CASH ACQUIRED IN 1996 AND
INCLUDING OTHER CASH PAYMENTS
ASSOCIATED WITH THE ACQUISITIONS (4,000) (83,147)
------------------ -----------------
NET CASH USED IN INVESTING ACTIVITIES (8,148) (78,954)
FINANCING ACTIVITIES:
PROCEEDS FROM ISSUANCE OF PREFERRED STOCK 0 40,100
PROCEEDS FROM ISSUANCE OF COMMON STOCK 787 5,025
PROCEEDS FROM LONG-TERM DEBT 0 43,400
PAYMENTS ON LONG-TERM DEBT (31) (8,000)
PAYMENT OF DEFERRED FINANCING COSTS 0 (1,200)
------------------ -----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 756 79,325
------------------ -----------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (7,143) 2,746
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 36,430 222
------------------ -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 29,287 $ 2,968
================== =================
See accompanying notes to unaudited consolidated financial statements.
4
ENVOY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1997
A. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of ENVOY
Corporation (the "Company" or "ENVOY") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments consisting of normal recurring accruals
considered necessary for a fair presentation have been included. Operating
results for the three-month period ended March 31, 1997 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1997.
These financial statements, footnote disclosures and other information
should be read in conjunction with the audited financial statements and the
accompanying notes thereto in the Company's Annual Report on Form 10-K for the
year ended December 31, 1996.
Certain reclassifications have been made in the 1996 financial statements
to conform to the classifications in 1997.
B. NET LOSS PER COMMON SHARE
Net loss per common share has been computed by dividing net loss by the
weighted average common shares outstanding.
C. RECENT ACQUISITIONS
Each of the following acquisitions was accounted for under the purchase
method of accounting, applying the provisions of APB Opinion No. 16 ("APB 16")
and, as a result, the Company recorded the assets and liabilities of the
acquired companies at their estimated fair values with the excess of the
purchase price over these amounts being recorded as goodwill. Actual allocations
of goodwill and identifiable intangibles will be based upon further studies and
may change during the allocation period, generally one year following the date
of acquisition. The financial statements for the three months ended March 31,
1997 and 1996 reflect the operations of the acquired businesses for the periods
after their respective dates of acquisition.
NATIONAL ELECTRONIC INFORMATION CORPORATION ("NEIC")
On March 6, 1996, the Company's shareholders approved the acquisition of
NEIC for an aggregate purchase price of approximately $94,301,000, consisting of
(i) $86,154,000 paid to the NEIC stockholders, (ii) $2,200,000 paid to certain
NEIC stockholders on August 1, 1996 and (iii) certain other transaction and
acquisition costs of $5,947,000. The Company recorded $37,631,000 in goodwill
and $19,600,000 of identifiable intangible assets related to the NEIC
acquisition. In connection with the NEIC acquisition, the Company incurred a one
time write-off of acquired in-process technology of $30,000,000. Such amount was
charged to expense in the three months ended March 31, 1996, because this amount
relates to research and development that had not reached technological
feasibility and for which there was no alternative future use. The NEIC
acquisition was financed through equity and debt financing.
TELECLAIMS, INC. ("TELECLAIMS")
On March 1, 1996, the Company acquired all the issued and outstanding
capital stock of Teleclaims in exchange for 73,242 shares of the Company's
Common Stock yielding a purchase price of approximately $1,500,000. Goodwill and
identifiable intangibles in the amount of $648,000 were recorded in connection
with the acquisition of Teleclaims. Also recorded as part of the Teleclaims
acquisition was a one time write-off of acquired in-process technology of
$700,000. Such amount was charged to expense in the three
5
months ended March 31, 1996, because this amount related to research and
development that had not reached technological feasibility and for which there
was no alternative future use.
NATIONAL VERIFICATION SYSTEMS, L. P. ("NVS")
On September 13, 1996, the Company completed the acquisition of NVS for
$2,150,000 in cash and the assumption of certain liabilities. Based on
management's preliminary estimates, the Company recorded $1,864,000 of goodwill
and other identifiable intangible assets related to the NVS acquisition.
PROFESSIONAL OFFICE SYSTEMS, INC. ("POSI")
On October 31, 1996, the Company acquired all the issued and outstanding
capital stock of POSI, the electronic data interchange clearinghouse for Blue
Cross and Blue Shield of the National Capital Area, for approximately $7,600,000
in cash. Based upon management's preliminary estimates, goodwill and
identifiable intangibles in the amount of $6,742,000 were recorded in connection
with the acquisition of POSI.
DIVERSE SOFTWARE SOLUTIONS, INC. ("DSS")
On March 11, 1997, the Company completed the acquisition of certain assets
of DSS for $4,000,000 in cash, plus a contingent payout based upon the
attainment of certain revenue thresholds in future operating periods, and the
assumption of certain liabilities. The Company preliminarily has recorded
$3,000,000 for such contingent payment. Based on management's preliminary
estimates, the Company recorded $4,910,000 of goodwill and other identifiable
intangible assets related to the DSS acquisition. Also recorded as part of the
DSS acquisition was a one-time write-off of acquired in-process technology of
$3,000,000. Such amount was charged to expense in the three months ended March
31, 1997, because this amount related to research and development that had not
reached technological feasibility and for which there was no alternative future
use.
The following presents unaudited pro forma results of operations (excluding
all one-time write-offs of acquired in-process technology and merger and
facility integration costs) for the three-month period ended March 31, 1997 and
1996 assuming all acquisitions, including EMC*Express, Inc. ("EMC") (See Note
E), had been consummated at the beginning of the periods presented (in
thousands, except per share data):
Three Months Ended
March 31,
--------------------------------
1997 1996
--------------- ---------------
Revenues $ 26,693 $ 20,604
Net income (loss) $ 719 $ (3,291)
Net income (loss) per common share $ 0.03 $ (0.29)
D. MERGER AND FACILITY INTEGRATION COSTS
As a result of the acquisitions of NEIC and Teleclaims in March 1996, the
Company approved a plan that reorganized certain of its operations, personnel
and facilities to gain the effects of potential cost savings and operating
synergies. The cost of this plan to integrate the acquired companies are
recognized as incurred in accordance with the guidance set forth in Emerging
Issues Task Force Issue 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)" and was not part of the purchase price
allocation. The costs for the three- month period ended March 31, 1996
associated with this plan of $1,884,000 represented exit costs associated with
lease terminations, personnel costs, writedowns of impaired assets and other
related costs that were incurred as a direct result of the plan and were
classified as merger and facility integration
6
costs in the statement of operations. No costs associated with this plan
were incurred in the three months ended March 31, 1997. The employee groups
terminated included accounting, marketing and certain areas of the systems and
operations departments. The number of employees terminated was approximately
120. Adjustments made to the liability as of March 31, 1997 were approximately
$1,815,000. No adjustments had been made to the liability as of March 31, 1996.
E. EMC LOSSES
On January 28, 1995, the Company purchased 17.5% of the capital stock of
EMC for approximately $570,000. In connection therewith, the Company paid
$250,000 for an option to purchase the remainder of the capital stock of EMC
(the "Option"), and also entered into a management agreement to provide
management services to EMC (the "Management Agreement"). Under the terms of the
Management Agreement, the Company agreed to fund certain operating costs of EMC
in the form of advances. The Management Agreement could be terminated by the
Company at any time on 60 days written notice, at which time the Option would be
terminated. The Company gave notice to terminate the Management Agreement on
January 31, 1996. As a result of the termination notice and other facts and
circumstances, the Company determined that it was probable an impairment to its
investment had occurred.
Based on the Company's decision to terminate the Management Agreement, the
Company discontinued the equity method of accounting for EMC and began
accounting for the investment on a cost basis. Accordingly, the funding of EMC's
operating costs in 1996 were charged to operating expense. The Company was
committed through March 31, 1996 to continue to fund certain operating costs of
EMC. The amount disbursed for the funding of these costs during the first
quarter of 1996 was $435,000.
Following the termination of the Management Agreement and the Option,
certain shareholders of EMC filed a lawsuit in March 1996 against the Company
asserting claims for breach of contract and negligent conduct. On October 18,
1996, the Company settled this lawsuit for $300,000. Concurrent with the
settlement of the lawsuit, the Company completed the acquisition of the
remaining 82.5% interest in EMC for approximately $2,000,000 in cash. The EMC
acquisition was accounted for under the purchase method of accounting applying
the provisions of APB No. 16 and, as a result, the Company recorded the assets
and liabilities at their estimated fair values. Based on management's
preliminary estimates, the Company recorded $1,954,000 of other identifiable
intangible assets related to the EMC acquisition. The operations of EMC are
included in the consolidated statement of operations from the date of
acquisition.
F. TRANSACTION WITH FIRST DATA CORPORATION
On June 6, 1995, the Company completed a merger of its financial
transaction processing business with First Data Corporation (the "First Data
Merger"). Pursuant to a management services agreement entered into in connection
with the First Data Merger, the Company is receiving a fee from First Data
Corporation ("First Data") of $1,500,000 per annum, payable in quarterly
installments of $375,000, during the first two years following the First Data
Merger, after which period such fees are anticipated to end. Management fees of
$375,000 for the three months ended March 31, 1997 and 1996 are classified in
revenues in the consolidated statements of operations. First Data asserted
certain indemnification claims against the Company in connection with the First
Data Merger and, pending resolution of these claims, withheld certain payments
due the Company under the management services agreement. On March 28, 1997, the
Company and First Data entered into a definitive agreement whereby First Data
released such claims and paid in full to the Company all amounts past due under
the management services agreement.
G. 9% SUBORDINATED CONVERTIBLE NOTES
In June 1995, the Company issued $10 million in 9% Subordinated Convertible
Notes due in May 2000 (the "Convertible Notes"). The Convertible Notes are
convertible at the election of the holders in shares of Common Stock at a
current conversion price of $10.52 per share. On November 7, 1996, the Company
filed a registration statement with the Securities and Exchange Commission
covering the offering of 321,289 shares of Common Stock. The registration
statement was filed pursuant to the demand of the current holders of the
Convertible Notes under a Registration Rights Agreement dated June 6, 1995. The
Company was advised by the holders of the Convertible Notes that they intended
to convert $3,380,000
7
principal amount of the Convertible Notes into 321,289 shares of Common
Stock to permit their sale pursuant to the registration statement. As of March
31, 1997, $2,286,000 in principal amount of the Convertible Notes had been
converted into 217,317 shares of Common Stock and sold pursuant to the
registration statement. In an unrelated transaction and subsequent to March 31,
1997, $5,075,000 in principal amount of the Convertible Notes was converted into
482,429 shares of Common Stock, leaving $2,639,000 principal amount of the
Convertible Notes outstanding as of May 9, 1997. Had the conversion of the
Convertible Notes into Common Stock occurred as of January 1, 1997, weighted
average shares outstanding at March 31, 1997 would have been 15,981,221 compared
to reported weighted average shares outstanding of 15,476,084. This change in
weighted average shares outstanding has no effect on net loss per common share.
On April 29, 1997, the Company delivered notice to the holders of the
Convertible Notes of its election to prepay the remaining outstanding
Convertible Notes on June 6, 1997. Although the holders of the Convertible Notes
have the option to redeem the Convertible Notes at a redemption price of 104% of
the outstanding principal amount plus accrued interest, management currently
believes that, based on the current market price of the Common Stock, the note
holders will elect to convert the outstanding Convertible Notes into 250,824
shares of Common Stock.
H. CHANGE IN ACCOUNTING PRINCIPLE
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods. Statement
No. 128 is not expected to have any impact on the Company's computation of
primary earnings per share; however, the Company does expect to have to include
a computation of diluted earnings per share in future periods for the effect of
dilutive securities.
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurances that
the forward-looking statements included herein will prove to be accurate. There
are many factors that may cause actual results to differ materially from those
indicated by the forward-looking statements, including, among others,
competitive pressures, changes in pricing policies, delays in product
development, business conditions in the marketplace, general economic conditions
and the various risk factors set forth in the Company's periodic reports filed
with the Securities and Exchange Commission. In light of the significant
uncertainties inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a representation by the
Company that the objectives and plans of the Company will be achieved. The
following discussion and analysis should be read in conjunction with, and is
qualified in its entirety by, the Unaudited Consolidated Financial Statements,
including the notes thereto.
OVERVIEW
ENVOY Corporation (the "Company") provides electronic processing services
primarily for the health care market. These services include submission for
adjudication of insurance and other third-party reimbursement claims for
pharmacies, physicians, hospitals, dentists and other participants in the health
care market and, since 1994, providing clearinghouse services for batch
processing of medical and dental reimbursement claims.
The Company was incorporated in Tennessee in August 1994 as a wholly-owned
subsidiary of ENVOY Corporation, a Delaware corporation which was formed in 1981
(the "Predecessor"). The Predecessor was formed to develop and market electronic
transaction processing services for the financial services and health care
markets. In June 1995, in order to facilitate the transfer of the financial
services business to First Data Corporation ("First Data"), the assets and
liabilities of the Predecessor associated with the health care business were
transferred to the Company. The capital stock of the Company then was
distributed to shareholders through a stock dividend (the "Distribution") and
the Predecessor was merged into First Data.
Since the beginning of 1996, the Company has made several acquisitions, the
most significant being the acquisition of National Electronic Information
Corporation ("NEIC") (collectively, the "Acquired Businesses"). See Notes C and
E of Notes to the Unaudited Consolidated Financial Statements. All acquisitions
were accounted for under the purchase method of accounting and, as a result, the
Company has recorded the assets and liabilities of the Acquired Businesses at
their estimated fair values with the excess of the purchase price over these
amounts being recorded as goodwill. The financial statements for the three-month
periods ended March 31, 1997 and 1996 reflect the operations of the Acquired
Businesses for the period after their respective dates of acquisition.
Revenues principally are derived from (i) transaction processing services
to the health care market which are generally paid for by the health care
providers and (ii) commercial claim processing services provided to third-party
payors which are usually paid for by the payors. Revenues generally are earned
on a per transaction basis and generally are based upon the number of
transactions processed rather than the transaction volume per customer.
9
The table below shows transactions processed by the Company for the periods
presented:
Three Months
Ended March 31,
---------------------------
1997 1996
------------ -----------
(in thousands)
Pharmacy 146,662 107,601
Non-pharmacy 46,164 13,152
------------ -----------
Total 192,826 120,753
============ ===========
The transactions reflected above include the transactions of the Acquired
Businesses from the date of acquisition.
In addition to growth by acquisition, the Company has experienced and
continues to experience internal growth through increased transaction volume in
on-line real-time transaction processing and batch claims processing. Based on
historical growth rates and trends and the present sales efforts, the Company
believes its real-time and batch transaction volume will continue to increase.
However, it is expected that the rate of increase will decline as the base of
transactions increases.
The Company continues actively to pursue the acquisition of health care
information businesses and other companies complementary to its business. The
Company's ability to successfully negotiate and close acquisitions will
materially impact the financial condition and operating results of the Company.
There can be no assurance that the Company will find attractive acquisition
candidates, be able to successfully finance and complete the acquisitions,
consolidate and integrate such businesses following the acquisition or
successfully operate them on a going forward basis.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1997 As Compared With Three Months Ended
March 31, 1996
Revenues. Revenues for the quarter ended March 31, 1997 were $26.1 million
compared to $10.3 million for the same period last year. The increase is
primarily attributable to additional revenues generated from the Acquired
Businesses. Also contributing to the revenue growth in the first quarter of 1997
is a 36.3% increase in pharmacy transactions over the same quarter last year,
resulting in a 27.1% increase in pharmacy revenues.
Cost of Revenues. Cost of revenues includes the cost of communications,
computer operations, product development and customer support as well as the
cost of hardware sales and rebates to third parties for transaction processing
volume. Cost of revenues in the first quarter of 1997 were $12.9 million
compared to $5.3 million for the first quarter of 1996, an increase of $7.6
million or 143%. The dollar increase is attributable to the inclusion of the
Acquired Businesses and increased transaction volume in the Company's
pre-acquisition business. As a percentage of revenues, cost of revenues was
49.3% in the first quarter of 1997 compared to 51.4% in the first quarter of
1996. The improvement is attributable to the inclusion of the Acquired
Businesses' results which historically have experienced higher gross profit
margins than those of the Company's pre-acquisition business.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include marketing, finance, accounting and
administrative costs. Selling, general and administrative expenses for the three
months ended March 31, 1997 were $5.9 million compared to $3.0 million in the
same period in 1996, an increase of 96.7%. These expenses increased as a result
of the inclusion of the Acquired Businesses' results and the additional costs
associated with such acquisitions. As a percentage of revenues, selling, general
and administrative expenses were 22.7% for the first quarter of 1997 compared to
29.0% for the first quarter of 1996. The improvement is attributable to a larger
base of revenues, as well as the elimination of certain duplicative costs
realized in connection with the Acquired Businesses.
10
Depreciation and Amortization. Depreciation and amortization expense
relates primarily to host computers, communications equipment, goodwill and
other identifiable intangible assets. Depreciation and amortization expense for
the first quarter of 1997 was $5.9 million compared to $2.1 million for the
comparable period in 1996. The increase is primarily the result of the
amortization of goodwill and other intangibles related to the Acquired
Businesses of $4.6 million in the first quarter of 1997 compared with $1.4
million in the first quarter of 1996. Depreciation and amortization increased
further as the result of the additional investment in host computer systems to
expand the Company's transaction processing capabilities. The Company will
amortize goodwill of $43.1 million associated with the Acquired Businesses over
periods of three to fifteen years following the acquisitions. In addition, the
Company will amortize identified intangibles of $30.3 million over two to nine
year time periods, as applicable.
Merger and Facility Integration Costs. The Company recognized merger and
facility integration costs in the first quarter of 1996 of $1.9 million related
primarily to the NEIC acquisition. These charges represent costs incurred as a
direct result of the plan to integrate NEIC and Teleclaims, Inc. ("Teleclaims").
See Note D of Notes to the Unaudited Consolidated Financial Statements. No
charges were made to merger and facility integration costs in the first quarter
of 1997.
Write off of Acquired In Process Technology. The Company incurred a one
time write-off of acquired in process technology in connection with the
acquisition of certain of the Acquired Businesses. See Note C of Notes to the
Unaudited Consolidated Financial Statements. The Company recognized charges of
$3.0 million for the three months ended March 31, 1997, related to the write off
of certain acquired research and development in connection with the March 1997
acquisition of Diverse Software Solutions, Inc., and $30.7 million for the same
period in 1996, related to the NEIC and Teleclaims acquisitions.
EMC Losses. In January 1995, the Company acquired a 17.5% interest in
EMC*Express, Inc. ("EMC") and also entered into an agreement for the management
of EMC which required the Company to fund certain of EMC's operating costs in
the form of advances. The Company determined that it was probable an impairment
of its equity investment in EMC as of December 31, 1995 had occurred. As a
result, the Company recognized losses in the first quarter of 1996 of $435,000
relating to the funding of EMC operating losses through the termination date of
the management agreement in March 1996. Based upon the Company's decision to
terminate the management agreement, the Company discontinued the equity method
of accounting for EMC and began accounting for the investment on a cost basis.
Accordingly, the loss related to EMC has been charged to operating expense.
Following the termination of the management agreement, certain shareholders of
EMC filed a lawsuit against the Company asserting claims for breach of contract
and negligent conduct. In October 1996, the Company acquired the remaining 82.5%
interest in EMC and settled the related lawsuit. See Note E of Notes to the
Unaudited Consolidated Financial Statements.
Net Interest Income (Expense). The Company recorded net interest income of
$128,000 for the three months ended March 31, 1997 compared to $406,000 of net
interest expense for the first quarter of 1996. Net interest income in the first
quarter of 1997 resulted from the elimination of borrowings under the Company's
credit facilities which were outstanding in the corresponding prior year period,
and interest earned on the Company's cash and cash equivalents which more than
offset interest expense on the Company's 9% convertible subordinated notes
issued in June 1995. See "Liquidity and Capital Resources." The borrowings,
which consisted of a $25 million term loan and approximately $12.9 million
outstanding under the Company's revolving credit facility, were repaid in the
third quarter of 1996 with a portion of the proceeds from the Company's August
1996 public offering.
Income Tax Provision. The Company's income tax provision for the first
quarter of 1997 was $722,000 compared to $460,000 in the comparable period in
1996. The income tax expense recorded is based upon estimated taxable income.
Amortization of certain goodwill and identifiable intangibles are not deductible
for income tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred operating losses since its health care transaction
processing business commenced operations in 1989. The operating losses
historically resulted from the Company's substantial
11
investment in its health care transaction processing business coupled with
a disproportionate amount of overhead and fixed costs. Prior to the sale of the
financial processing business in 1995, health care losses had been funded by
earnings from the Company's more mature financial business, which had a
substantially higher transaction volume and revenue base.
As of March 31, 1997, the Company had available cash and cash equivalents
of approximately $29.3 million. The Company also has a $50 million revolving
credit facility. The Company currently has no amounts outstanding under the
credit facility. Any outstanding borrowings made against the credit facility
would bear interest at a rate equal to the Base Rate (as defined in the credit
facility) or LIBOR. The total amount outstanding under the credit facility is
due and payable in full on June 30, 2000. The credit facility contains financial
covenants applicable to the Company and its subsidiaries including ratios of
debt to capital, annualized EDITDA to annualized interest expense and certain
other financial covenants customarily included in a credit facility of this
type. The Company and its subsidiaries also are subject to certain restrictions
relating to payment of dividends, acquisitions, incurrence of debt and other
restrictive provisions. The credit facility is secured by substantially all of
the assets of the Company and its subsidiaries.
In June 1995, the Company issued $10 million in 9% subordinated convertible
notes due in May 2000 (the "Convertible Notes"). The Convertible Notes are
convertible at the election of the holders into shares of Common Stock at a
current conversion price of $10.52 per share. On November 7, 1996, the Company
filed a registration statement with the Securities and Exchange Commission
covering the offering of 321,289 shares of Common Stock. The registration
statement was filed pursuant to the demand of the current holders of the
Convertible Notes under a Registration Rights Agreement dated June 6, 1995. As
of March 31, 1997, $2,286,000 in principal amount of the Convertible Notes had
been converted into 217,317 shares of Common Stock and sold pursuant to the
registration statement. The Company did not receive any proceeds from the sale
of the Common Stock offered thereunder. In an unrelated transaction and
subsequent to March 31, 1997, $5,075,000 in principal amount of the Convertible
Notes was converted into 482,429 Shares of Common Stock, leaving $2,639,000
principal amount of the Convertible Notes outstanding as of May 9, 1997. On
April 29, 1997, the Company delivered notice to the holders of the Convertible
Notes of its election to prepay the remaining outstanding Convertible Notes on
June 6, 1997. Although the holders of the Convertible Notes have the option to
redeem the Convertible Notes at a redemption price of 104% of the outstanding
principal amount plus accrued interest, management currently believes that,
based on the current market price of the Common Stock, the note holders will
elect to convert the outstanding Convertible Notes into 250,824 shares of Common
Stock.
The Company purchases additional computer hardware and software products
from time to time as required by the growth of its customer base. The Company
incurred capital expenditures of $1.5 million for the quarter ended March 31,
1997, primarily for computer hardware and software products used for the
expansion of the Company's business. The Company currently estimates that total
capital expenditures for 1997 will be approximately $5 to $6 million.
From time to time, the Company has engaged and will continue to engage in
acquisition discussions with other health care information businesses and other
companies complementary to its business. In the event the Company engages in
such acquisitions in the future, its currently available capital resources may
not be sufficient for such purposes and the Company may be required to incur
additional indebtedness or issue additional capital stock, which could result in
dilution to existing investors.
Based on current operations, anticipated capital needs to fund known
expenditures and current acquisitions, the Company believes its available cash,
cash flow from operations and the $50 million revolving credit facility will
provide the capital resources necessary to meet its liquidity and cash flow
requirements over the next twelve months, including the Company's current
short-term obligations. The Company believes that present funding sources will
provide the ability to meet long-term obligations as they mature. The Company's
available cash is invested in interest bearing securities with maturities of up
to 30 days.
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CHANGE IN ACCOUNTING PRINCIPLE
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods. Statement
No. 128 is not expected to have any impact on the Company's computation of
primary earnings per share; however, the Company does expect to have to include
a computation of diluted earnings per share in future periods for the effect of
dilutive securities.
SEASONALITY
The Company's business is to some extent seasonal, with more revenues being
generated from September through March as a result of a greater number of
pharmaceutical claims arising in those months, while operating expenses tend to
remain relatively constant over the course of the year.
IMPACT OF INFLATION
Inflation has not had a significant impact on the Company's results of
operations to date.
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PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, the Company may be a party to legal proceedings
incidental to its business but believes that none of these proceedings is
material to its business at the present time.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27 Financial Data Schedule
(b) Reports on Form 8-K.
During the first quarter of 1997, the Company did not file a Current
Report on Form 8-K with the Securities and Exchange Commission.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENVOY CORPORATION
Date: May 12, 1997 By: /s/ Fred C. Goad, Jr.
---------------------------
Fred C. Goad, Jr.
Chairman and Co-Chief
Executive Officer
Date: May 12, 1997 By: /s/ Kevin M. McNamara
---------------------------
Kevin M. McNamara
Senior Vice President and
Chief Financial Officer
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