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Filed pursuant to Rule 424(b)(1)
Registration No. 333-04433
3,000,000 SHARES
ENVOY LOGO(R)
COMMON STOCK
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Of the 3,000,000 shares of Common Stock being offered hereby, 2,870,000
shares are being sold by ENVOY Corporation ("ENVOY" or the "Company") and
130,000 shares are being sold by certain shareholders of the Company (the
"Selling Shareholders"). See "Principal and Selling Shareholders." The Company
will not receive any proceeds from the sale of shares by the Selling
Shareholders. The Common Stock of the Company is traded on The Nasdaq Stock
Market's National Market ("The Nasdaq Stock Market") under the symbol "ENVY." On
August 7, 1996, the last reported sale price for the Common Stock on The Nasdaq
Stock Market was $27.125 per share.
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THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO DISCOUNTS AND TO SELLING
PUBLIC COMMISSIONS COMPANY (1) SHAREHOLDERS
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Per Share.......... $26.50 $1.33 $25.17 $25.17
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Total(2)........... $79,500,000 $3,990,000 $72,237,900 $3,272,100
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(1) Before deducting expenses of the offering payable by the Company estimated
at $500,000.
(2) The Company has granted the Underwriters a 30-day option to purchase up to
450,000 additional shares of Common Stock solely to cover over-allotments,
if any. To the extent that the option is exercised, the Underwriters will
offer the additional shares at the Price to Public. If the option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $91,425,000, $4,588,500 and
$83,564,400, respectively. See "Underwriting."
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The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order, in whole or in part. It is
expected that the delivery of the shares of Common Stock will be made at the
offices of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or about
August 13, 1996.
ALEX. BROWN & SONS
INCORPORATED
HAMBRECHT & QUIST
J.C. BRADFORD & CO.
SOUTHCOAST CAPITAL
CORPORATION
THE DATE OF THIS PROSPECTUS IS AUGUST 8, 1996.
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ENVOY provides the connectivity required to
move information between participants in the health care industry.
[CHART]
Selected Current & Potential Health Care EDI Information Exchanges
EMPLOYERS HOSPITALS LABORATORIES PAYORS PHARMACIES PHYSICIANS
- ----------------- ----------------- ----------------- ----------------- ----------------- -----------------
Enrollment Claims Claims* Claims Eligibility* Eligibility
Submission* Adjudication* (Medicaid/
Managed Care)*
Regulatory Remittance* Referrals* Patient Roster* Claims Referral
Compliance Adjudication* Management*
Just-in-time Results Enrollment Electronic Lab Order
Inventory Reporting Prescriptions
Patient Census Preadmission Formulary Medical/Patient
Records
* Indicates health care EDI exchanges currently offered by the Company.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ STOCK MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN
PASSIVE MARKET MAKING TRANSACTIONS IN THE COMPANY'S COMMON STOCK ON THE NASDAQ
STOCK MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED (THE "EXCHANGE ACT"). SEE "UNDERWRITING."
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PROSPECTUS SUMMARY
The following summary is not intended to be complete and is qualified in
its entirety by reference to, and should be read in conjunction with, the
detailed information appearing elsewhere or incorporated by reference in this
Prospectus. Except as otherwise specified herein, all information in this
Prospectus assumes no exercise of the Underwriters' over-allotment option. See
"Underwriting."
THE COMPANY
ENVOY is a leading provider of electronic data interchange ("EDI") services
to participants in the health care market, including pharmacies, physicians,
hospitals, dentists, billing services, commercial insurance companies, managed
care organizations, state and federal governmental agencies and others. The
Company provides health care EDI services on a real-time and batch-processing
basis by utilizing proprietary computer and telecommunications software and
microprocessor technology. ENVOY is one of the largest processors of electronic
real-time pharmacy and commercial third-party payor batch transactions in the
United States based upon annual transaction volume. ENVOY's transaction network
is directly or indirectly connected to approximately 160,000 physicians, 30,000
pharmacies, 23,000 dentists, 3,300 hospitals and 550 payors.
There are many types of transactions, information exchanges and other
communications that occur between the principal participants in the health care
industry. Presently, the majority of these transactions are paper-based and
processed manually. As more payors, providers and purchasers of health care
services are linked electronically, the Company believes that more health care
transactions will be processed electronically and more types of non-claim
information, such as prescriptions and laboratory orders and results, will be
available for electronic transfer from party to party. The Company believes that
private and governmental efforts to contain health care costs, the growth of
managed care and the creation of various health care alliances, as well as other
changes in the health care delivery mechanisms, will accelerate the transition
to health care EDI.
ENVOY's strategy is to maintain and enhance its leadership position in the
health care EDI industry by (i) delivering value-added transaction processing
services to its customers on a cost-effective basis, (ii) increasing the types
of transactions that can be transmitted electronically, such as prescriptions
and laboratory orders and results, and (iii) expanding its EDI network within
the health care industry. In addition, the Company plans to selectively pursue
acquisitions of other related health care information businesses. The Company
believes that its reputation for providing quality and cost-effective services
and products and its extensive EDI network enhance ENVOY's ability to attract
and retain customers.
In March 1996, ENVOY acquired National Electronic Information Corporation
("NEIC") as part of the ongoing effort to expand its health care EDI services.
NEIC is one of the nation's largest clearinghouses of batch claims for
commercial payors and processed approximately 85 million health care claims in
1995. The Company believes that the combination of NEIC's batch claim processing
capabilities and ENVOY's real-time electronic transaction processing
capabilities positions the Company to provide more comprehensive health care EDI
solutions.
The Company was incorporated in Tennessee in August 1994. The Company's
executive offices are located at 15 Century Boulevard, Suite 600, Nashville,
Tennessee 37214, and its telephone number is (615) 885-3700.
THE OFFERING
Common Stock offered by the Company.............. 2,870,000 shares
Common Stock offered by the Selling
Shareholders................................... 130,000 shares
Common Stock to be outstanding after the
offering....................................... 14,633,471 shares (1)
Use of proceeds.................................. To repay certain indebtedness and for
general corporate purposes, including
working capital, and to finance potential
future acquisitions. See "Use of
Proceeds."
Nasdaq symbol.................................... ENVY
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SUMMARY FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER OPERATING DATA)
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------------- ---------------------------------------
PRO FORMA PRO FORMA PRO FORMA
1993 1994 1995 1995(2) 1995 1996 1995(2) 1996(2)
------- ------- ------- --------- ------ ------- --------- ---------
STATEMENTS OF OPERATIONS DATA:
Revenues.......................... $13,979 $20,950 $25,205 $64,739 $6,923 $10,330 $15,695 $18,517
Cost of revenues................ 9,691 13,280 15,435 31,529 4,269 5,308 8,380 8,125
Selling, general and
administrative................ 4,416 5,901 8,243 23,667 2,123 2,992 5,682 5,991
Depreciation and amortization... 1,228 1,990 2,468 24,144 560 2,319 5,947 6,328
Merger and facility integration
costs......................... -- -- -- -- -- 32,584 -- --
EMC losses(3)................... -- -- -- -- -- 435 -- 435
Operating loss.................... (1,356) (221) (941) (14,601) (29) (33,308) (4,314) (2,362)
Loss from continuing
operations before income taxes
and loss in investee............ (1,349) (192) (224) (17,664) (19) (33,714) (5,345) (3,482)
Loss in investee(3)............... -- -- (1,776) (1,800) (218) -- (242) --
Loss from continuing operations... (835) (119) (2,000) (19,464) (267) (22,508) (5,617) (3,942)
Loss per common share from
continuing operations(4)........ $ (0.07) $ (0.01) $ (0.18) $ (1.67) $(0.02) $ (1.97) $ (0.47) $ (0.34)
Weighted average common shares
outstanding..................... 11,476 11,510 11,241 11,647 11,603 11,416 12,009 11,702
OTHER OPERATING DATA:
Transactions (in millions)........ 205.2 302.0 378.4 466.2 92.1 120.8 111.1 140.8
MARCH 31, 1996
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AS
ACTUAL ADJUSTED(5)
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(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital....................................................................... $ 183 $ 36,521
Assets................................................................................ 107,931 144,269
Long-term debt, including current portion and redeemable preferred stock.............. 37,955 2,555
Convertible subordinated debt......................................................... 10,000 10,000
Preferred shareholders' equity........................................................ 40,100 40,100
Total shareholders' equity............................................................ 39,451 111,189
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(1) Excludes (i) 3,180,165 shares of Common Stock issuable upon the exercise of
options, of which 1,384,498 shares were exercisable as of June 30, 1996,
(ii) conversion of 3,730,233 shares of Series B Convertible Preferred Stock,
no par value per share (the "Series B Preferred Stock"), into an equal
number of shares of Common Stock, and (iii) conversion of the $10,000,000
principal amount 9% Convertible Subordinated Notes due 2000 (the
"Convertible Notes") into approximately 950,570 shares of Common Stock at
the current conversion price of $10.52 per share.
(2) Pro forma financial information reflects the acquisitions of Teleclaims,
Inc. ("Teleclaims") and NEIC as if they had occurred on January 1, 1995. The
acquisitions occurred on March 1, 1996 and March 6, 1996, respectively, and
the actual operating results of the Company for the first quarter of 1996
reflect the impact of such acquisitions as of the respective acquisition
dates. The pro forma presentation in this Prospectus excludes the one-time
charge for acquired in-process technology of $30.7 million, the $4.2 million
merger and facility integration costs and the related deferred income tax
benefit of $11.7 million from the pro forma statements of operations;
however, the presentation in the notes to the Company's historical unaudited
financial statements for the three months ended March 31, 1996 (the
"Unaudited Financial Statements") includes the $30.7 million charge for
acquired in-process technology, $1.9 million of merger and facility
integration costs and the related deferred income tax benefit of $11.7
million. The Company has decided to make a change in accounting principle to
conform to a May 23, 1996 consensus of the FASB Emerging Issues Task Force
("EITF"), where the EITF concluded any deferred income tax benefit should
not be provided and in-process technology should be charged to expense on a
gross basis at the time of the acquisition. The application of this
accounting change will be reflected as a charge in the Statement of
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Operations as a cumulative effect type accounting change in the Company's
second quarter financial statements for the period ending June 30, 1996. In
accordance with FASB Statement No. 3 "Reporting Accounting Changes in
Interim Financial Statements" the effect of the change on the six months
ended June 30, 1996, will be to increase loss from continuing operations by
$11.7 million and increase net loss by $11.7 million, with a corresponding
decrease to goodwill. See Notes C and D to the Unaudited Financial
Statements and the Unaudited Pro Forma Financial Information included in
this Prospectus.
(3) Reflects an impairment of the carrying value of the Company's investment in
EMC* Express, Inc. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 4 of Notes to the Company's
audited financial statements (the "Audited Financial Statements").
(4) Supplementally, pro forma loss per share for the year ended December 31,
1995 and the three months ended March 31, 1996 are ($1.07) and ($0.22),
respectively, which assumes (i) that the completion of the acquisitions and
the sale of 2,870,000 shares of the Company's Common Stock sold by the
Company occurred as of the first day of the respective periods and (ii) a
portion of the proceeds have been used to retire debt as indicated in "Use
of Proceeds."
(5) Adjusted to reflect the sale by the Company of 2,870,000 shares of Common
Stock offered hereby after deducting underwriting discounts and commissions
and estimated offering expenses.
The Company was incorporated 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 Company was spun-off to shareholders through a
stock dividend distribution and the Predecessor was merged into First Data. The
Company's financial statements included herein include financial information for
the Predecessor through June 1995, with the financial services business shown as
a discontinued operation.
RECENT FINANCIAL RESULTS
On July 23, 1996, the Company announced its second quarter 1996 operating
results. Revenues for the second quarter of 1996 increased to $19.6 million from
$6.2 million in the second quarter of 1995. The loss from continuing operations
was $1.4 million or $0.12 per share compared to a loss from continuing
operations of $170,000 or $0.02 per share in the second quarter of 1995. The
1996 second quarter loss includes $.4 million of facility integration costs and
EMC losses and $4.1 million of amortization of intangibles related to the NEIC
and Teleclaims acquisitions. Transaction volume for the 1996 second quarter was
148.3 million. For comparison purposes, had the acquisitions of NEIC and
Teleclaims occurred as of the first day of the comparable quarter of 1995, pro
forma transaction volume in the 1995 period would have been 110.4 million.
Revenues for the six month period ended June 30, 1996 were $29.9 million
compared to $13.1 million in the comparable 1995 period. The loss from
continuing operations for the six month period ended June 30, 1996 was $35.3
million or $3.05 per share compared to a loss from continuing operations of
$437,000 or $0.04 per share for the six month period ended June 30, 1995. The
Company's operating results for the most recent six month period include merger
and facility integration costs and EMC losses of $33.4 million (including a
$30.7 million charge for the write-off of acquired in-process technology) and
give effect to an accounting principle change on the write-off of in-process
technology which reversed a tax benefit recorded in the first quarter of 1996
and increased the loss from continuing operations and net loss by $11.7 million.
Amortization of intangibles related to the NEIC and Teleclaims acquisitions was
$5.3 million for the six month period ended June 30, 1996.
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RISK FACTORS
In addition to the other information included or incorporated by reference
in this Prospectus, the following factors should be considered carefully in
evaluating an investment in the Common Stock offered hereby. This discussion
also identifies important cautionary factors that could cause the Company's
actual results to differ materially from those projected in forward looking
statements of the Company made by, or on behalf of, the Company.
Limited Operating History; Substantial Net Loss. The electronic health
care transaction processing industry is relatively new, and the Company's
operating history is relatively limited. The Company has experienced substantial
net losses, including a net loss of $22.5 million in its most recent fiscal
quarter, and has an accumulated deficit of approximately $25.6 million as of
March 31, 1996. As a result of the Company's decision to make a change in
accounting principle (see note 2 on page 5), the Company will increase its loss
from continuing operations for the six months ended June 30, 1996, by $11.7
million. Historically, operating losses incurred in the Company's health care
transaction processing business were funded by earnings from the financial
processing business which was sold in 1995. In order to achieve profitability,
the Company must successfully implement its business strategy and increase its
revenues, while controlling expenses. There can be no assurances as to when or
if the Company will achieve profitability. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Recent Acquisition. In March 1996, ENVOY completed the acquisition of
NEIC, a commercial clearinghouse for batch processing of health care claims.
ENVOY acquired NEIC for $94.3 million, including the fees, expenses and other
costs associated with the acquisition. In connection with the acquisition, the
Company recognized in the first quarter of 1996 a one-time write off of acquired
in-process technology of approximately $30.0 million and related deferred income
tax benefit of approximately $11.4 million. The Company has decided to make a
change in accounting principle to conform to a May 23, 1996 consensus of the
EITF, where the EITF concluded any deferred income tax benefit should not be
provided and in-process technology should be charged to expense on a gross basis
at the time of the acquisition. The application of this accounting change will
be reflected as a charge in the statement of operations as a cumulative effect
type accounting change ($11.4 million for the NEIC acquisition) in the Company's
second quarter financial statements for the period ending June 30, 1996.
Accordingly, the effect of the change in connection with the NEIC acquisition on
the six months ended June 30, 1996 will be to increase loss from continuing
operations and net loss by $11.4 million, respectively, with a corresponding
decrease to goodwill. As a result, the Company is amortizing $35.3 million of
goodwill associated with the NEIC acquisition over a three year period, and such
amortization will adversely affect the Company's results of operations for the
balance of 1996 and the following two years. The acquisition of NEIC, with 1995
revenues of $37.4 million, created a significant expansion of the Company's
overall business, and the Company has only recently begun the integration of
NEIC into its business. There can be no assurance that ENVOY will be able to
operate the acquired business on a profitable basis, integrate the acquisition
with its existing business or achieve operating synergies necessary to make the
acquisition successful. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Development of Electronic Processing in the Health Care Industry. The
Company's strategy anticipates that electronic processing of health care
transactions, including transactions involving clinical as well as financial
information, will win market acceptance and that providers and third-party
payors increasingly will use electronic processing networks for the processing
and transmission of data. Electronic transmission of health care transactions is
still developing, and complexities in the nature and types of transactions which
must be processed has hindered to some degree the development and acceptance of
electronic processing in this market. In addition, while the multiplicity of
claims, forms and formats used by the many different third-party payors has
fostered the development of electronic clearinghouses, the standardization of
these claim formats, whether due to consolidation in the industry or otherwise,
could reduce the use of clearinghouses, including
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electronic clearinghouses. There can be no assurance that continued conversion
from paper-based transaction processing to electronic transaction processing in
the health care market will occur or that, to the extent it does occur, health
care providers and payors will use independent networks such as that being
developed by the Company.
Acquisition Strategy; Impact on Operating Results; Need for
Capital. ENVOY's strategy includes acquisitions of related health care
information businesses and other companies complementary to its business. The
success of any such acquisition will depend on many factors, including the
Company's ability to identify suitable acquisition candidates, the purchase
price, the availability and terms of financing, and management's ability to
effectively integrate the acquired services, technologies or businesses into the
Company's operations. Significant competition for acquisition opportunities
exists in the health care industry, which may significantly increase the costs
of and decrease the opportunities for acquisitions. Although the Company is
actively pursuing potential acquisitions, there can be no assurance that any
acquisition will be consummated. No assurances can be given that the Company
will be able to operate any acquired businesses profitably or otherwise
successfully implement its expansion strategy. The Company may finance future
acquisitions through borrowings or the issuance of debt or equity securities.
Although the Company historically has obtained financing on reasonable terms,
there can be no assurances that future lenders will extend credit, or extend
credit on favorable terms. Further, any issuance of equity securities could have
a dilutive effect on the holders of Common Stock. Such acquisitions may result
in significant goodwill and increases in the amount of depreciation and
amortization expense and could also result in write downs of purchased assets,
all of which could adversely affect the Company's operating results in future
periods.
Competition. The Company faces significant competition in the health care
sector of the electronic transaction processing market from companies that are
similarly specialized and also from companies that are involved in other, more
highly developed sectors of the electronic transaction processing market. The
Company also faces competition from other companies, such as vendors of provider
information management systems, which have added or may add their own
proprietary transaction processing systems to existing or future products.
Competition may be experienced in the form of pressure to reduce per transaction
prices or eliminate per transaction pricing altogether. If electronic
transaction processing becomes the standard for claims and information
processing, a number of larger and better capitalized entities may elect to
enter the industry and further increase competitive pricing pressures. Many of
the Company's existing and potential competitors are larger and have
significantly greater financial, marketing, technological and other resources
than the Company. See "Business -- Competition."
Availability of Direct Links. Certain third-party payors provide
electronic data transmission systems to health care providers that establish a
direct link between the provider and the payor, bypassing third-party processors
such as the Company. Any significant increase in the utilization of direct links
between health care providers and payors would have a material adverse effect on
the Company's business, operating results and financial condition.
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 operations of health care industry
participants. Federal and state legislatures periodically consider programs to
modify or amend the United States health care system at both the federal and
state level. These programs may contain proposals to increase governmental
involvement in health care, lower reimbursement rates or otherwise change the
environment in which health care industry participants operate. Health care
industry participants may react to these proposals and the uncertainty
surrounding such proposals by curtailing or deferring investments, including
investments in the Company's services and products. In addition, many health
care providers are consolidating to create larger health care delivery
organizations. This consolidation reduces the number of potential customers for
the Company's services, and the increased bargaining power of these
organizations could lead to reductions in the amounts paid for the Company's
services.
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Industry developments are increasing the amount of capitation-based health care
and reducing the need for providers to make claims for reimbursement for
products or services. Other health care information companies, such as billing
services and practice management vendors, which currently utilize the Company's
services, have developed or acquired transaction processing and networking
capabilities and may cease utilizing the Company's services in the future. The
impact of these developments in the health care industry is difficult to predict
and could have a material adverse effect on the Company's business, operating
results or financial condition.
Customer Concentration. No customer accounted for more than 10% of the
Company's revenues during 1995 or the first quarter of 1996. However, on a pro
forma basis, giving effect to the acquisitions of NEIC and Teleclaims as of
January 1, 1995, the Company's top ten customers accounted for approximately 35%
of revenues in 1995. Further consolidation in the health care industry is likely
to increase customer concentration and may increase the Company's dependency on
a limited number of customers. In addition, a significant portion of NEIC's
revenues has been generated by five major insurance company payors who were
shareholders of NEIC before its acquisition by the Company. Although each of
these carriers has continued to use the Company's services after the
acquisition, they have no minimum transaction commitment to the Company in the
future and there can be no assurance that the volume of business generated by
these payors will not decline or terminate. The loss of one or more significant
customers could have a material adverse effect on the Company's business,
operating results or financial condition.
Evolving Industry Standards and Rapid Technological Changes. The market
for the Company's services is characterized by rapidly changing technology,
evolving industry standards and frequent introduction of new and enhanced
services. The Company's success will depend upon its continued ability to
enhance its existing services, to introduce new services on a timely and cost-
effective basis to meet evolving customer requirements, to achieve market
acceptance for new services and to respond to emerging industry standards and
other technological changes. There can be no assurance that the Company will be
able to respond effectively to technological changes or new industry standards.
Moreover, there can be no assurance that competitive services will not be
developed, or that any such competitive services will not have an adverse effect
upon the Company's operating results.
Dependence on Technology; Risk of Infringement. The Company's ability to
compete effectively depends to a significant extent on its ability to protect
its proprietary information. The Company relies primarily on copyright and trade
secret laws, confidentiality procedures and licensing arrangements to protect
its intellectual property rights. The Company has not filed any patent
applications with respect to its intellectual property. The Company generally
enters into confidentiality agreements with its consultants and employees and
generally limits access to and distribution of its technology, software and
other proprietary information. Although the Company intends to defend its
intellectual property, there can be no assurance that the steps taken by the
Company to protect its proprietary information will be adequate to prevent
misappropriation of its technology or that the Company's competitors will not
independently develop technologies that are substantially equivalent or superior
to the Company's technology. The Company is also subject to the risk of alleged
infringement by it of intellectual property rights of others. Although the
Company is not currently aware of any pending or threatened infringement claims
with respect to the Company's current or future products, there can be no
assurance that third parties will not assert such claims. Any such claims could
require the Company to enter into license arrangements or could result in
protracted and costly litigation, regardless of the merits of such claims. No
assurance can be given that any necessary licenses will be available or that, if
available, such licenses can be obtained on commercially reasonable terms.
Furthermore, litigation may be necessary to enforce the Company's intellectual
property rights, to protect the Company's trade secrets, to determine the
validity and scope of the proprietary rights of others or to defend against
claims of infringement. Such litigation could result in substantial costs and
diversion of resources and could have a material adverse effect on the Company's
business, operating results or financial condition.
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Reliance on Data Centers. The Company's real-time electronic transaction
processing services depend on its host computer system which is contained in a
single data center facility. In addition, the Company's primary batch claims
processing capacity is outsourced to one vendor that processes claims through a
single computer center. The Company also operates a batch claims processing
center which is contained in a single data center facility in Oklahoma City,
Oklahoma for the processing of Blue Shield, Medicare and Medicaid claims.
Although the Company is currently evaluating certain disaster recovery
alternatives, neither the real-time host computer system nor the Oklahoma City
batch claims center have a remote backup data center. There can be no assurance
that a fire or other disaster affecting such data centers would not disable the
Company's respective systems or otherwise have a material adverse effect on the
Company's business, financial condition or results of operations. In addition, a
disruption in service from the vendor providing batch claims processing services
to the Company could have a material adverse effect on the Company's business,
operating results or financial condition.
Proposed Health Care Data Confidentiality Legislation. Legislation which
imposes restrictions on third-party processors' ability to transmit certain
patient data without specific patient consent has been introduced in the U.S.
Congress. Such legislation, if adopted, could adversely affect the ability of
third-party processors to transmit certain data, including treatment and
clinical data, and could materially adversely affect the Company's future
results.
Litigation. In March 1996, in response to ENVOY's termination of its
management contract and option agreement regarding EMC* Express, Inc., ENVOY was
sued in the Superior Court of the State of California for the City and County of
San Francisco. The suit asserts claims for breach of contract and negligent
conduct. The plaintiff, StellarNet, Inc., seeks unspecified compensatory
damages, plus attorneys fees and court costs. Loss of the pending litigation
could have a material adverse effect on the Company's financial condition or
results of operations. See "Business -- Litigation" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Indemnification Obligations. The Company has certain indemnification
obligations to First Data with respect to the distribution and merger
transaction which was completed in June 1995. In the event First Data is
entitled to indemnification under its contractual rights, the payment thereunder
could have a material adverse effect on the Company's operating results and
financial condition.
Dependency Upon Key Executives. ENVOY's success depends upon the continued
contributions of its senior management. The Company believes that its continued
future success will also depend upon its ability to attract, motivate and retain
highly-skilled technical, managerial and marketing personnel. The loss of the
services of certain of the Company's executives or technical personnel,
particularly Fred C. Goad, Jr. and Jim D. Kever, or the inability to hire and
retain qualified personnel could have an adverse effect upon the Company's
business. There can be no assurance that ENVOY will continue to be successful in
attracting and retaining the personnel it requires to successfully develop new
and enhanced services and to continue to grow and operate profitably. The
Company has no key man life insurance on the lives of any of its executive
officers or technical personnel. See "Management."
Certain Anti-takeover Provisions. The Charter, Bylaws, and Shareholders'
Rights Plan of the Company, and Tennessee law contain certain provisions that
may have the effect of inhibiting a non-negotiated merger or other business
combination involving ENVOY. Such provisions are intended to encourage any
person interested in acquiring the Company to negotiate with and obtain the
approval of the Board of Directors in connection with any such transaction.
These provisions include a staggered Board of Directors, blank check preferred
stock, super majority voting provisions, the issuance of stock purchase rights,
and the application of Tennessee law provisions on business combinations.
Certain of these provisions may discourage a future acquisition of the Company
not approved by the Board of Directors in which shareholders might receive a
premium value for their
9
10
shares. As a result, shareholders who might desire to participate in such a
transaction may not have the opportunity to do so. In addition, the Board of
Directors has the power to designate the issuance of up to 3,469,767 shares of
preferred stock. The rights and preferences for any series or class may be set
by the Board of Directors, in its sole discretion and without approval of the
holders of the Company's Common Stock, and the rights and preferences of any
such preferred stock may be superior to those of the Common Stock, thus
adversely affecting the rights of the holders of Common Stock. Furthermore,
there are currently authorized and outstanding 3,730,233 shares of Series B
Preferred Stock. The Series B Preferred Stock has a liquidation preference to
the Common Stock and has a class vote with respect to actions adverse to any
rights of the Series B Preferred Stock and the creation of any other class or
series of preferred stock senior to or pari pasu with the Series B Preferred
Stock. See "Description of Capital Stock."
Volatility of Stock Price; Absence of Dividends. From time to time, there
may be significant volatility in the market price for the Common Stock.
Quarterly operating results of the Company, changes in earnings estimated by
analysts, changes in general conditions in the Company's industry or the economy
or the financial markets or other developments affecting the Company could cause
the market price of the Common Stock to fluctuate substantially. In addition, in
recent years the stock market has experienced significant price and volume
fluctuations. This volatility has had a significant effect on the market prices
of securities issued by many companies for reasons unrelated to their operating
performance. For the foreseeable future, it is expected that earnings, if any,
generated from ENVOY's operations will be used to finance the growth of its
business, and that no dividends will be paid to holders of the Common Stock.
Risks Associated with Forward-Looking Statements. This Prospectus contains
certain statements that are "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and
Section 21E of the Exchange Act. Those statements include, among other things,
the discussions of the Company's business strategy and expectations concerning
developments in the healthcare EDI industry, the Company's market position,
future operations, transaction growth, margins and profitability, and liquidity
and capital resources. Investors in the Common Stock offered hereby are
cautioned that reliance on any forward-looking statement involves risks and
uncertainties, and that although the Company believes that the assumptions on
which the forward-looking statements contained herein are reasonable, any of
those assumptions could prove to be inaccurate, and as a result, the
forward-looking statements based on those assumptions also could be incorrect.
The uncertainties in this regard include, but are not limited to, those
identified in the risk factors discussed above. In light of these and other
uncertainties, the inclusion of a forward-looking statement herein should not be
regarded as a representation by the Company that the Company's plans and
objectives will be achieved.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock is listed on The Nasdaq Stock Market under the
symbol "ENVY." The following table sets forth, for the periods indicated, the
high and low sale prices for the Common Stock as reported by The Nasdaq Stock
Market. Prior to June 7, 1995, the day on which the Company's Common Stock was
first publicly traded, there was no public market for the Common Stock.
HIGH LOW
------ ------
1995
Second Quarter (beginning June 7, 1995)......................... $ 9.50 $ 7.25
Third Quarter................................................... 12.25 8.50
Fourth Quarter.................................................. 18.75 9.75
1996
First Quarter................................................... $24.25 $17.13
Second Quarter.................................................. 32.75 23.25
Third Quarter (through August 7, 1996).......................... 31.50 21.50
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On August 7, 1996, the last reported sale price for the Company's Common
Stock on The Nasdaq Stock Market was $27.125 per share. At June 30, 1996, there
were approximately 4,400 holders of the Company's Common Stock, including
approximately 300 holders of record.
The Company has never declared or paid a cash dividend on its Common Stock.
It is the present policy of the Board of Directors to retain all earnings to
support operations and to finance expansion; therefore, the Company does not
anticipate declaring or paying cash dividends on the Common Stock in the
foreseeable future. The declaration and payment of dividends in the future will
be determined based on a number of factors, including, but not limited to, the
Company's earnings, financial condition and requirements, restrictions in
financing agreements and other factors deemed relevant by the Board of
Directors. Pursuant to the Company's credit facilities, ENVOY is prohibited from
the payment of any cash dividends on its outstanding Common Stock.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock offered
by it hereby are estimated to be $71.7 million ($83.1 million if the
Underwriters' over-allotment option is exercised in full), after deducting the
estimated underwriting discounts and offering expenses payable by the Company.
The Company will not receive any proceeds from the sale of Common Stock by the
Selling Shareholders.
The Company intends to use the net proceeds to (i) repay its $25.0 million
term loan and all amounts outstanding under its $25.0 million revolving credit
facility (collectively, the "Credit Facilities"), and (ii) for general corporate
purposes, including funding the increased working capital requirements of the
Company generated by its growth and for possible strategic acquisitions.
The indebtedness under the Credit Facilities was incurred to finance a
portion of the cash purchase price in the acquisition of NEIC. Borrowings under
the revolving credit facility of $5.9 million and $5.0 million currently bear
interest at 9.25% (the lenders' "Base Rate" as defined in the Credit Facilities
plus 1.50%) and 7.98% (LIBOR as defined in the Credit Facilities plus 3%),
respectively, and borrowings under the term loan currently bear interest at
7.98% (LIBOR as defined in the Credit Facilities plus 3%). The Credit Facilities
mature March 31, 2000, and the current lenders are First Union National Bank, as
agent, and NationsBank, N.A. At August 7, 1996, the borrowings under the term
loan and revolving credit facility were $25.0 million and $12.9 million,
respectively. Upon application of net proceeds of the offering to repay the
Credit Facilities, the Company anticipates it will negotiate an amended credit
agreement to provide for up to $50.0 million of available credit.
The Company has executed a non-binding letter of intent dated June 13,
1996, to acquire substantially all of the assets of a small hospital-based
software company for an aggregate purchase price of approximately $2.1 million
in cash. The transaction is not expected to be material to ENVOY's financial
condition or results of operations and is subject to, among other things,
completion of due diligence, execution of a definitive acquisition agreement,
and receipt of all necessary consents and approvals. 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. However, other than this proposed acquisition, the Company has no
other agreement or understanding concerning the acquisition of any specific
company or business. See "Risk Factors -- Acquisition Strategy; Impact on
Operating Results; Need for Capital."
Any proceeds not utilized to repay indebtedness or for the other
above-described purposes will be invested in short-term, interest-bearing
securities.
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CAPITALIZATION
The following table sets forth the current indebtedness and capitalization
of the Company as of March 31, 1996 and as adjusted to reflect the sale by the
Company of the 2,870,000 shares of Common Stock offered hereby and the
application of the estimated net proceeds received by the Company therefrom as
described under "Use of Proceeds." The table should be reviewed in conjunction
with the financial statements and notes thereto included elsewhere in this
Prospectus.
MARCH 31, 1996
------------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
Current portion of long-term debt and redeemable preferred stock.... $ 4,374 $ 2,374
======== =======
Long-term debt, less current portion................................ $ 33,581 $ 181
-------- -------
9% Convertible Subordinated Notes................................... 10,000 10,000
-------- -------
Shareholders' equity:
Preferred Stock, no par value per share, 12,000,000 shares
authorized; 3,730,233 shares of Series B Convertible Preferred
Stock authorized, issued and outstanding (liquidation
preference $40,100,000) (1).................................... 40,100 40,100
Common Stock, no par value per share, 48,000,000 shares
authorized; 11,705,071 shares issued and outstanding;
14,575,071 shares issued and outstanding, as adjusted (2)...... 17,813 89,551
Additional Paid-in Capital........................................ 7,155 7,155
Accumulated deficit............................................... (25,617) (25,617)
-------- -------
Total shareholders' equity..................................... 39,451 111,189
-------- -------
Total capitalization...................................... $ 83,032 $ 121,370
======== =======
- ---------------
(1) Does not reflect 4,800,000 shares of Series A Preferred Stock which is
authorized for issuance pursuant to the Company's Shareholders' Rights Plan,
none of which is issued and outstanding. See "Description of Capital Stock"
and the Notes to Financial Statements.
(2) Excludes (i) 3,204,065 shares of Common Stock issuable upon the exercise of
options granted pursuant to the Company's existing stock option plan, of
which 1,205,565 shares are exercisable, (ii) conversion of the 3,730,233
shares of Series B Preferred Stock into an equal number of shares of Common
Stock, and (iii) conversion of the Convertible Notes into 950,570 shares of
Common Stock at the current conversion price of $10.52 per share.
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CERTAIN FINANCIAL DATA
The certain financial data set forth below are derived from the Company's
historical financial statements. The financial statements as of and for the
fiscal year ended December 31, 1995 have been audited by Ernst & Young LLP,
independent auditors. The balance sheet as of December 31, 1994 and the
statements of operations, shareholders' equity and cash flows for each of the
fiscal years in the two year period ended December 31, 1994 were audited by
Deloitte & Touche LLP, independent auditors. The certain financial information
for the three months ended March 31, 1995 and 1996 is derived from the unaudited
financial statements which, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial condition and the results of operations. See
Note 14 to the Audited Financial Statements and Notes C and D to the Unaudited
Financial Statements. Operating results for the three-month period ended March
31, 1996 are not indicative of results for the full year. The certain historical
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
financial statements and notes thereto included elsewhere in this Prospectus,
and the certain pro forma financial data should be read in conjunction with the
Unaudited Pro Forma Financial Information included elsewhere in this Prospectus.
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
--------------------------------------- -----------------------------------------
PRO FORMA PRO FORMA PRO FORMA
1993 1994 1995 1995(1) 1995 1996 1995(1) 1996(1)
------- ------- ------- --------- ------ -------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA(2):
Revenues................................. $13,979 $20,950 $25,205 $ 64,739 $6,923 $ 10,330 $15,695 $18,517
Cost of revenues....................... 9,691 13,280 15,435 31,529 4,269 5,308 8,380 8,125
Selling, general and administrative.... 4,416 5,901 8,243 23,667 2,123 2,992 5,682 5,991
Depreciation and amortization.......... 1,228 1,990 2,468 24,144 560 2,319 5,947 6,328
Merger and facility integration
costs................................ -- -- -- -- -- 32,584 -- --
EMC losses(3).......................... -- -- -- -- -- 435 -- 435
------- ------- ------- --------- ------ -------- --------- ---------
Operating loss........................... (1,356) (221) (941) (14,601 ) (29) (33,308) (4,314) (2,362)
------- ------- ------- --------- ------ -------- --------- ---------
Interest income........................ 7 29 380 736 10 98 87 164
Interest expense....................... -- -- (513) (4,649 ) -- (504) (1,118) (1,284)
FDC management services fee(4)......... -- -- 850 850 -- -- -- --
------- ------- ------- --------- ------ -------- --------- ---------
7 29 717 (3,063 ) 10 (406) (1,031) (1,120)
------- ------- ------- --------- ------ -------- --------- ---------
Loss from continuing operations before
income taxes and loss in investee(3)... (1,349) (192) (224) (17,664 ) (19) (33,714) (5,345) (3,482)
Income tax benefit (provision)........... 514 73 -- -- (30) 11,206 (30) (460)
Loss in investee(3)...................... -- -- (1,776) (1,800 ) (218) -- (242) --
------- ------- ------- --------- ------ -------- --------- ---------
Loss from continuing operations.......... (835) (119) (2,000) $(19,464 ) (267) (22,508) $(5,617) $(3,942)
=========== =========== ===========
Income (loss) from discontinued
operations............................. 5,523 4,818 (2,401) 169 --
------- ------- ------- ------ --------
Net income (loss)........................ $ 4,688 $ 4,699 $(4,401) $ (98) $(22,508)
======== ======== ======== ====== =========
Loss per common share from continuing
operations(5).......................... $(0.07) $(0.01) $(0.18) $(1.67 ) $(0.02) $(1.97) $(0.47) $(0.34)
Weighted average common shares
outstanding............................ 11,476 11,510 11,241 11,647 11,603 11,416 12,009 11,702
DECEMBER 31, MARCH 31,
------------------------------- ---------
1993 1994 1995 1996
------- ------- ------- ---------
(IN THOUSANDS)
BALANCE SHEET DATA(2):
Working capital of continuing operations................................. $ 2,274 $ 8,347 $11,277 $ 183
Assets of continuing operations(6)....................................... 11,763 21,242 30,150 107,931
Long-term debt, including current portion and redeemable preferred
stock.................................................................. -- 1,120 -- 37,955
Convertible subordinated debt............................................ -- -- 10,000 10,000
Preferred shareholders' equity........................................... -- -- -- 40,100
Total shareholders' equity of continuing operations...................... 8,299 17,156 15,335 39,451
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- ---------------
(1) Pro forma financial information reflects the acquisitions of Teleclaims and
NEIC as if they had occurred on January 1, 1995. The acquisitions occurred
on March 1, 1996 and March 6, 1996, respectively, and the actual operating
results for the first quarter of 1996 reflect the impact of such
acquisitions from their respective acquisition dates. The pro forma
presentation in this Prospectus excludes the one-time charge for acquired
in-process technology of $30.7 million, the $4.2 million merger and facility
integration costs and the related income tax benefit of $11.7 million from
the pro forma statements of operations; however, the presentation in the
notes to the Company's historical unaudited financial statements for the
three months period ended March 31, 1996 includes the $30.7 million charge
for acquired in-process technology, $1.9 million of merger and facility
integration costs and the related income tax benefit of $11.7 million in the
statement of operations. The Company has decided to make a change in
accounting principle to conform to a May 23, 1996 consensus of the EITF,
where the EITF concluded any deferred income tax benefit should not be
provided and in-process technology should be charged to expense on a gross
basis at the time of the acquisition. The application of this accounting
change will be reflected as a charge in the Statement of Operations as a
cumulative effect type accounting change in the Company's second quarter
financial statements for the period ending June 30, 1996. In accordance with
FASB Statement No. 3 "Reporting Accounting Changes in Interim Financial
Statements" the effect of the change on the six months ended June 30, 1996,
will be to increase loss from continuing operations by $11.7 million and
increase net loss by $11.7 million, with a corresponding decrease to
goodwill. See notes C and D to the Unaudited Financial Statements and the
Unaudited Pro Forma Financial Information included in this Prospectus.
(2) The financial services electronic processing business of the Predecessor was
merged into First Data and has been accounted for as discontinued operations
of the Company for accounting purposes. Certain reclassifications have been
made to the statements of operations to reflect such operations as
discontinued operations.
(3) Reflects an impairment of the carrying value of the Company's investment in
EMC* Express, Inc. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 4 of Notes to the Audited
Financial Statements.
(4) Represents management fees received from First Data for the period June 7,
1995 through December 31, 1995 pursuant to the management services
agreement. Management fees of $375,000 for the three months ended March 31,
1996 are classified in the revenues caption.
(5) Supplementally, pro forma loss per share for the year ended December 31,
1995 and the three months ended March 31, 1996 are ($1.07) and ($0.22),
respectively, which assumes (i) that the completion of the acquisitions and
the sale of 2,870,000 shares of the Company's Common Stock offered hereby
occurred as of the first day of the respective periods and (ii) a portion of
the proceeds have been used to retire debt as indicated in "Use of
Proceeds."
(6) As a result of the discontinued operations, total assets are not reflected
in this table; however, total assets as of the balance sheet dates set forth
above were: $49,701, $61,399, $30,150 and $107,931, respectively.
14
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Certain statements in this section are forward looking, declared as
management's current expectations and actual results may differ materially. See
"Risk Factors" -- "Risks Associated with Forward-Looking Statements".
OVERVIEW
The Company provides electronic processing services primarily for the
health care market. This includes submission for adjudication of insurance and
other third-party reimbursement claims for pharmacies, physicians, hospitals and
dentists and, since 1994, providing clearinghouse services for batch processing
of medical and dental reimbursement claims.
On June 6, 1995, the Company completed the sale through a merger of its
financial transaction processing business to First Data. For accounting
purposes, the health care transaction processing business is treated as
continuing operations, while the financial transaction processing business is
treated as discontinued operations.
In January 1995, ENVOY acquired 17.5% of the Common Stock of EMC* Express,
Inc. ("EMC") for $570,000, paid $250,000 for an option to acquire the remaining
82.5% equity interest in 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 it was probable an
impairment to its equity investment as of December 31, 1995 had occurred. As a
result of the Company's decision to terminate its management agreement (which
automatically terminated its option), the Company recorded losses of $1,776,000
in 1995 to recognize an impairment in the carrying value of its investment, to
write-off advances and commitments to EMC and to record the net realizable value
of its investment at zero. The termination was based on EMC's poor operating
performance, the belief that operating losses would likely continue, and the
Company's determination that the additional investment was no longer justified,
particularly since similar products and technology would be available to the
Company through the acquisition of NEIC. During the first quarter of 1996, the
Company recognized losses of $435,000 relating to the funding of EMC operating
losses through the termination date of the management agreement. See Note E to
the Unaudited Financial Statements and Note 4 of Notes to the Audited Financial
Statements.
In March 1996, the Company acquired Teleclaims and NEIC (the "Acquired
Businesses"). Both of these acquisitions were accounted for under the purchase
method of accounting and, as a result, the Company has recorded the assets and
liabilities of both companies at their estimated fair values with the excess of
the purchase price over these amounts being recorded as goodwill. The financial
statements for the first quarter of 1996 reflect the operations of the Acquired
Businesses for the period after their respective dates of acquisition.
Revenues are principally 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 are generally earned
on a per transaction basis and are generally based upon the number of
transactions processed rather than the transaction volume per customer. A small
portion of the Company's revenues are derived from the sale and lease of
point-of-service devices, customer support, on-site training and installation,
and annual participation fees.
The table below shows transactions processed by the Company for the periods
represented.
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- ------------------
1993 1994 1995 1995 1996
------- ------- ------- ------ -------
(IN THOUSANDS)
Pharmacy.............................. 203,596 296,043 363,084 89,681 107,600
Non-pharmacy.......................... 1,614 5,956 15,308 2,410 13,154
------- ------- ------- ------ -------
Total............................ 205,210 301,999 378,392 92,091 120,754
======== ======== ======== ====== ========
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16
The total transactions reflected above include the transactions of the
Acquired Businesses from the date of the acquisitions through the end of the
first quarter of 1996. Had the acquisitions of the Acquired Businesses occurred
as of the first day of the quarter ended March 31, 1996, total transactions in
the first quarter of 1996 would have been 140.8 million, of which 27.9 million
transactions would be attributable to the Acquired Businesses.
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, present sales efforts and current year growth trends,
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.
In recent years ENVOY has experienced competitive market pressures on
real-time pharmacy transaction pricing which have reduced gross margins. The
Company believes that these competitive pressures have lessened somewhat during
the last twelve months and that gross margin deterioration in pharmacy
transactions should be less than that experienced in the past. Real-time
non-pharmacy EDI transactions are relatively new in the marketplace and as such
have not yet experienced these pricing pressures. NEIC is one of the largest
processors of batch claims transactions for commercial insurance healthcare
payors. During the past two years pricing to these payors has also been subject
to market pressures. The Company believes that this market pressure will persist
over the next twelve months but at levels less than those experienced in the
past. The Company's consolidation and integration of NEIC's operation is
anticipated to lower overall costs in a number of areas which should offset some
of this margin erosion. There can be no assurance that the Company will be
successful in this regard or that the Company will not experience increased
competitive pricing pressures in the future.
The acquisition of NEIC has been a major focal point for the Company's
management during the first six months of 1996, and further integration and
consolidation of NEIC will continue throughout 1996, requiring significant
management time and focus. The Company has pursued and continues to actively
pursue the acquisition of health care information businesses and other companies
complementary to its business. ENVOY'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.
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RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the percentage
relationship certain statement of operations items bear to revenues.
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
------------------------- ----------------
1993 1994 1995 1995 1996
----- ----- ----- ----- ------
Revenues....................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues............................. 69.3 63.4 61.2 61.7 51.4
Selling, general and administrative
expenses.................................. 31.6 28.2 32.7 30.6 29.0
Depreciation and amortization................ 8.8 9.5 9.8 8.1 22.4
Merger and facilities integration costs...... -- -- -- -- 315.4
EMC losses................................... -- -- -- -- (4.2)
Operating loss................................. (9.7) (1.1) (3.7) (0.4) (322.4)
Interest income................................ 0.1 0.1 1.5 0.1 0.9
Interest expense............................... -- -- (2.0) -- (4.9)
Loss from continuing operations before income
taxes and loss in investee................... (9.7) (0.9) (0.9) (0.3) (326.4)
Income tax benefit (provision)................. 3.7 0.3 -- (0.4) 108.5
Loss in investee............................... -- -- (7.0) (3.1) --
Loss from continuing operations................ (6.0)% (0.6)% (7.9)% (3.9)% (217.9)%
THREE MONTHS ENDED MARCH 31, 1996 AS COMPARED WITH THREE MONTHS ENDED MARCH 31,
1995
Revenues. Revenues for the quarter ended March 31, 1996 were $10.3
million, an increase of 49.2% or $3.4 million over the first quarter of 1995.
The increase is primarily attributable to revenues from the Acquired Businesses,
which contributed $3.3 million to revenues following their respective
acquisitions. Additional factors contributing to the revenue growth in the first
quarter were a 10.3% increase in ENVOY's pre-acquisition processing service
revenue over the first quarter of 1995 and the First Data management fee of
$375,000. Hardware sales were $178,000 in the first quarter of 1996 compared
with $987,000 in the first quarter of 1995. The decrease is attributable to a
large one-time hardware sale in the earlier period. The net result of these
items was an increase in the Company's pre-acquisition total revenues of 2.6%.
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. In addition, the Acquired Businesses' cost of revenues
includes payments to third parties for transaction processing volume. Cost of
revenues in the first quarter of 1996 was $5.3 million compared to $4.3 million
in the first quarter of 1995, an increase of 24.3%. The dollar increase is
attributable to the inclusion of the Acquired Businesses' results coupled with
increased transaction volume in the Company's pre-acquisition business. As a
percent of revenues, cost of revenues was 51.4% in the first quarter of 1996
compared to 61.7% in the same period last year. This improvement is almost
exclusively attributable to the inclusion of the Acquired Businesses' results
which historically have experienced higher profit margins than those of ENVOY'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 first
quarter of 1996 were $3.0 million compared to $2.1 million in the first quarter
of 1995, an increase of 40.9%. Selling, general and administrative expenses
increased due to the inclusion of the Acquired Businesses and the additional
costs incurred by ENVOY during the quarter in anticipation of the acquisitions.
As a percentage of total revenues, selling, general and administrative expenses
were 29.0% in the first quarter of 1996 compared to 30.6% in the first quarter
of 1995.
17
18
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 1996 was $2.3 million compared to $560,000 for the same
period in 1995. The increase is primarily the result of the amortization of
goodwill and other intangibles of $1.4 million related to the inclusion of the
Acquired Businesses. Depreciation and amortization increased further as the
result of the addition of host computer systems in connection with the expansion
of the Company's transaction processing capabilities. The Company will amortize
goodwill of $47.3 million ($35.6 million following the adjustment for the effect
of the change in accounting principle -- see note 2 on page 5) associated with
the Acquired Businesses over the three year period following the acquisition. In
addition, ENVOY will amortize identified intangibles of $19.9 million over two
to nine year time periods, as applicable. As a result of these items, the
Company expects depreciation and amortization expense to increase in future
periods.
Merger and Facility Integration Costs. The Company recognized merger and
facility integration costs in the first quarter of 1996 of $32.6 million. This
represents a one-time charge of acquired in-process technology of $30.7 million
and facility integration costs of $1.9 million. The Company anticipates it will
incur additional facility integration costs of up to $2.4 million over the
remaining three quarters of 1996.
EMC Losses. During the first quarter of 1996, the Company recognized
losses of $435,000 relating to the funding of EMC operating losses through the
termination date of the management agreement. Such losses are recorded as an
operating expense because the Company now accounts for its investment in EMC on
the cost method of accounting and has discontinued accounting for such
investment on the equity method as it had done previously. Except for
approximately $105,000 in additional expenses in the second quarter and ongoing
litigation expenses associated with the defense of the lawsuit filed by
StellarNet, Inc., the majority stockholder of EMC, over the termination of the
management agreement, the Company does not anticipate additional losses from the
EMC management agreement or investment which would be material to its
operations. See Note E to the Unaudited Financial Statements and Note 4 of Notes
to the Audited Financial Statements.
Net Interest Expense. ENVOY recorded net interest expense for the quarter
ended March 31, 1996 of $406,000 compared to $10,000 of net interest income for
the first quarter of 1995. The increase in interest expense is the result of
increased borrowings under the Credit Facilities used to finance the purchase of
the Acquired Businesses as well as interest associated with the Convertible
Notes.
Income Tax Benefit. The Company's income tax benefit in the first quarter
of 1996 was $11.2 million compared with an income tax expense of $30,000 in the
same period last year. The tax benefit recorded in the first quarter principally
reflects a deferred income tax benefit associated with the $30.7 million charge
for the write off of acquired in-process technology related to the Acquired
Businesses.
FISCAL YEAR 1995 AS COMPARED WITH 1994
Revenues. Total revenues for the year ended December 31, 1995 were $25.2
million, an increase of 20.3% or $4.3 million over 1994. Transactions processed
for the year ended 1995 were 378.4 million compared to 302.0 million in 1994, an
increase of 76.4 million or 25.3%. Processing services revenue represented 92.9%
of total revenues in 1995 compared to 90.5% in 1994. The Company's primary
source of transaction volume and processing service revenue in 1995 was its
pharmacy business.
Cost of Revenues. Cost of revenues in 1995 was $15.4 million or 61.2% of
revenues compared to $13.3 million or 63.4% of revenues in 1994. The decrease as
a percentage of total revenues was principally attributable to the increase in
transaction volume and decreasing communication costs as a result of contract
negotiations with telecommunications carriers. A portion of the increase in the
cost of revenues was associated with an increase in the provision for doubtful
accounts of $577,000.
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This increase was implemented to maintain the reserve for doubtful accounts at
levels consistent with the Company's increasing revenues and associated
receivables.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended 1995 were $8.2 million compared to
$5.9 million in 1994, an increase of 39.7%. As a percentage of total revenues,
selling, general and administrative expenses were 32.7% in 1995 and 28.2% in
1994. The increase in selling, general and administrative expenses compared to
1994 is primarily the result of personnel increases in anticipation of growth of
the Company's business, including temporary and outside services used to assist
in the implementation of the transition to an independent company, and start-up
costs associated with the marketing and outside sales functions.
Depreciation and Amortization. Depreciation and amortization expense for
1995 was $2.5 million compared to $2.0 million in 1994. The increase is largely
due to the addition of host computer systems in connection with the expansion of
the Company's transaction processing capabilities.
Operating Loss. The Company incurred an operating loss for 1995 of
$941,000 compared to an operating loss for 1994 of $221,000. The loss was
primarily the result of increases in depreciation resulting from the addition of
the host computer systems, an increase in selling, general and administrative
expenses, the impact of lower revenue per transaction in the Company's pharmacy
business and, following the First Data merger, the absorption by the health care
business of all of the general and administrative overhead.
Interest and Other Income. The Company recorded interest income for the
year ended 1995 of $380,000, representing interest earned on investments.
Interest income for 1994 was $29,000. The Company also recorded income from
First Data management services fees of $850,000 for the year ended 1995.
Interest Expense. The Company recorded interest expense for the year ended
1995 of $513,000, as compared to no interest expense in 1994. Interest expense
represents interest on the $10.0 million Convertible Notes issued to First Data
in June 1995.
Loss in Investee. The Company determined that it was probable as of
December 31, 1995 that an impairment to its investment in EMC had occurred as a
result of the Company's decision to terminate its management agreement and other
factors. The termination was based on the Company's determination that the EMC
investment was no longer justified, particularly since similar products and
technology would be available to the Company through the acquisition of NEIC,
EMC's poor operating performance and the belief that operating losses would
likely continue. Accordingly, the Company recorded a fourth quarter adjustment
in the amount of $1.6 million to recognize an impairment in the carrying value
of its investment, to write-off advances and commitments to EMC and to record
the net realizable value of its investment at zero. The Company determined that
approximately $550,000 of the advances should have been recorded as losses in
the previous three quarters of 1995 as incurred and, accordingly, the Company
has restated such previously reported amounts in those quarters. See Note 12 of
Notes to Audited Financial Statements. During 1995, the Company recognized
losses for its initial investment and the option, advances and commitments and
equity losses, for a total loss in the EMC investment of approximately $1.8
million.
Loss from Discontinued Operations. The Company recorded a loss from
discontinued operations of $2.4 million in 1995, which was the result of $2.4
million in expenses related to the distribution of the Company's Common Stock
and the First Data merger. These expenses consisted primarily of legal,
accounting and financial advisor fees. The First Data transaction expenses for
the year ended 1994 totaled $708,000, net of taxes.
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FISCAL YEAR 1994 AS COMPARED WITH 1993
Revenues. Total revenues for the year ended December 31, 1994 increased
$7.0 million, or 49.9%, to $21.0 million as compared to 1993. The increase was a
direct result of the increase in the number of transactions processed by the
Company. Processing services revenue represented 90.5% of total revenues in 1994
compared to 95.1% in 1993.
Cost of Revenues. Cost of revenues for 1994 increased $3.6 million or
37.0% from 1993. As a percentage of total revenues, cost of revenues decreased
to 63.4% for 1994, down from 69.3% for 1993. The decrease was primarily the
result of the inclusion in 1993 of certain start-up costs and costs incurred for
building the basic infrastructure to compete in the health care transaction
processing industry, as well as a greater number of transactions in the 1994
period to absorb certain fixed operating costs.
Selling, General and Administrative. Selling, general and administrative
expenses increased 33.6% in 1994 to $5.9 million from $4.4 million for 1993. As
a percentage of total revenues, selling, general and administrative expenses
decreased to 28.2% in 1994, as compared to 31.6% for 1993. The continued decline
in selling, general and administrative expenses as a percentage of total
revenues was primarily the result of the approximate 50% increase in total
revenues.
Depreciation and Amortization. Depreciation and amortization increased
$762,000 in 1994, or 62.1%, over 1993. The increase was due primarily to the
acquisition of host computer systems in connection with the expansion of the
Company's transaction processing system.
Operating Loss. The operating loss was $221,000 in 1994, as compared to an
operating loss of $1.4 million for 1993. This reduction resulted from the more
rapid increase in revenue as compared to operating costs and expenses.
Income Taxes. The Company recognized an income tax benefit of $73,000 for
1994, as compared with a benefit of $514,000 for 1993. The tax benefits are a
result of the Company's operating losses for the respective periods.
LIQUIDITY AND CAPITAL RESOURCES
ENVOY has incurred operating losses since its health care transaction
processing business commenced operations in 1989. The operating losses have
resulted from ENVOY's substantial investment in its health care transaction
processing business coupled with a disproportionate amount of overhead and fixed
costs. Historically health care losses have been funded by earnings from the
Company's more mature financial transaction processing business which had a
substantially higher transaction volume and revenue base. The viability of ENVOY
requires continued expansion of the number of transactions processed to generate
greater revenue. While ENVOY believes that it is beginning to generate
sufficient revenues to cover operating expenses and the costs of planned
expansion, there can be no assurance that sufficient income will be generated
from operations to cover such costs and expenses. ENVOY believes that the
additional transaction volume from the Acquired Businesses, coupled with cost
savings and operating synergies that ENVOY believes it may realize from the
integration of the Acquired Businesses, will result in improved operating
results; however there are no assurances that such cost savings or synergies
will be realized or that profitability can be obtained or maintained.
In June 1995, the Company issued the $10.0 million Convertible Notes to
First Data. The entire $10.0 million principal amount of the Convertible Notes
remains outstanding and is due in June 2000. The Convertible Notes are
convertible at the election of the holders into shares of Common Stock. The
current conversion price is equal to $10.52 per share. Proceeds from the
issuance of the Convertible Notes were used by ENVOY to fund certain merger
costs associated with the First Data transaction, to pay First Data $2.3 million
in satisfaction of certain minimum working capital and tangible net worth
requirements set forth in the distribution agreement between First Data, the
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Predecessor and the Company and to provide liquidity and working capital for
ENVOY following completion of the merger of the financial transaction business
with and into First Data.
In March 1996, the Company completed the purchase of the Acquired
Businesses. Teleclaims was acquired by the Company on March 1, 1996 for 73,242
shares of Common Stock. On March 6, 1996, ENVOY acquired NEIC for $94.3 million
consisting of $86.2 million that was paid at closing to the stockholders of
NEIC, $2.2 million to be paid to certain stockholders of NEIC on or after August
1, 1996 and certain other transaction and acquisition expenses of $5.9 million.
The NEIC acquisition was financed through equity issuances of 333,333 shares of
Common Stock for $5.0 million, 3,730,233 shares of Series B Preferred Stock for
$40.1 million and a new credit facility of $50.0 million. The new credit
facility provides financing through a $25.0 million term loan and a $25.0
million revolving line of credit. In addition to funding the merger
consideration, the proceeds of the Credit Facilities were used to fund capital
expenditures, merger expenses and working capital requirements.
Loans made pursuant to the Credit Facilities bear interest at varying rates
based on an index to the lender's prime rate or the 30, 60 or 90 day LIBOR.
Borrowings under the revolving credit facility of $5.9 million and $5.0 million
currently bear interest at 9.25% (the lenders' "Base Rate" as defined in the
Credit Facilities plus 1.50%) and 7.98% (LIBOR as defined in the Credit
Facilities plus 3%), respectively, and borrowings under the term loan bear
interest at 7.98% (LIBOR as defined plus 3.0%). The Credit Facilities were
subject to a one-time facility fee of $1.0 million and an annual administrative
fee of $20,000. The revolving credit facility requires an annualized commitment
fee of 0.375% of its average daily unused portion. The term loan is payable in
quarterly installments varying in amount from $1.0 million to $2.25 million. The
term loan is required to be prepaid with 100% of the net proceeds from any sales
of assets in excess of $500,000 per year and 50% of the net proceeds of the
issuance of any equity securities. The total amount outstanding under the Credit
Facilities is due and payable in full on March 31, 2000. The Credit Facilities
contain financial covenants applicable to ENVOY and its subsidiaries, including
the debt/cash flow ratio, ratios of debt to capital and cash flow to interest
expense and certain restrictions on capital expenditures.
The Credit Facilities are secured by guarantees from all existing and
future ENVOY subsidiaries and by security interests in all of the stock,
promissory notes and other assets of ENVOY. The Company and its subsidiaries are
subject to certain restrictions relating to payment of dividends and other
distributions, asset acquisitions, incurrence of debt, investments,
consolidations and mergers and other restrictive provisions. On March 31, 1996,
the Company had a balance of $25.0 million outstanding under the term loan and
$10.4 million outstanding under the revolving line of credit, which the Company
anticipates repaying from the net proceeds of this offering. Upon application of
such proceeds, the Company expects to renegotiate an amended credit agreement to
provide for up to $50.0 million of available credit.
ENVOY purchases additional computer hardware and software products from
time to time as required by the growth of its customer base. ENVOY incurred
capital expenditures of approximately $1.5 million in the first quarter of 1996,
primarily for computer hardware and software products used for the expansion of
the health care transaction processing function. The Company anticipates that
its total capital expenditures for 1996, including amounts expended in the first
quarter, will be approximately $5.0 million to $6.0 million primarily for data
processing equipment considered necessary because of anticipated increased
transaction volumes and to upgrade network technology.
In connection with the Acquired Businesses, ENVOY identified five projects
aggregating $30,700,000 that were classified as in-process technology for which
technological feasibility had not been established and alternative future use
did not exist. The cost to complete these projects into commercially viable
products is estimated at $2,200,000 and is expected to be incurred during the
next two fiscal years. There can be no assurance that these projects can be
completed during this time frame or for such amounts.
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Additional capital resource and liquidity demands may arise as a result of
strategic acquisition opportunities. Currently, the Company has a letter of
intent to acquire substantially all of the assets of a small hospital
software-based business for approximately $2.1 million, which, if consummated,
is not expected to materially impact the Company's liquidity after this
offering. See "Use of Proceeds."
The Company is actively seeking acquisitions of related health care
information businesses and other companies complementary to its business. In the
event the Company engages in such an acquisition in the future, its currently
available capital resources, including the proceeds of this offering not
otherwise allocated, may not be sufficient and the Company could be required to
incur additional indebtedness or issue additional capital stock, including
shares of common stock, which would result in dilution to existing investors.
However, based on current operations, anticipated capital needs to fund known
expenditures and the pending acquisition, the Company believes its current
liquidity position coupled with the proceeds of this offering, cash flow from
operations and a revised credit facility of up to $50.0 million of available
credit 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.
ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" ("FAS 121"), which requires impairment
losses to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount. FAS 121 also
addresses the accounting for long-lived assets that are expected to be disposed
of. FAS 121 is effective for financial statements for fiscal years beginning
after December 15, 1995; therefore, the Company has adopted FAS 121 as of the
first quarter of 1996 and, based on current circumstances, does not believe the
effect of adoption will be material.
In October 1995, the FASB issued Statement No. 123, "Accounting for
Stock-Based Compensation" ("FAS 123"). FAS 123 establishes financial accounting
and reporting standards for stock-based employee compensation plans. FAS 123 is
effective for transactions entered into in fiscal years beginning after December
15, 1995. The Company currently accounts for stock-based compensation awards
under the provisions of Accounting Principles Board Opinion No. 25, as permitted
by FAS 123, and intends to continue to do so.
IMPACT OF INFLATION
Inflation has not had a significant impact on the Company's results of
operations to date.
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BUSINESS
ENVOY is a leading provider of EDI services to participants in the health
care market, including pharmacies, physicians, hospitals, dentists, billing
services, commercial insurance companies, managed care organizations, state and
federal governmental agencies and others. The Company provides health care EDI
services on a real-time and batch-processing basis by utilizing proprietary
computer and telecommunications software and microprocessor technology. ENVOY is
one of the largest processors of electronic real-time pharmacy and commercial
third-party payor batch transactions in the United States based upon annual
transaction volume. ENVOY's transaction network is directly or indirectly
connected to approximately 160,000 physicians, 30,000 pharmacies, 23,000
dentists, 3,300 hospitals and 550 payors.
INDUSTRY BACKGROUND
Throughout the 1980's, advances in computer software, telecommunications
and microprocessor technology enabled the development of on-line, real-time
systems that electronically capture and transmit information, replacing the
recording and processing of transaction information on paper. In addition to
offering greater convenience, these electronic systems reduce processing costs,
settlement delays and losses from fraudulent transactions. The earliest and most
significant advances in electronic transaction processing occurred in the
financial services market, particularly in the areas of credit card
authorization and settlement. The Company believes the evolution of electronic
transaction processing in the financial services market has created the
framework for automation of other markets such as health care still dominated by
paper-based processing.
There are many types of transactions, information exchanges and other
communications that occur between the various participants in the health care
industry, including patients, physicians, hospitals, pharmacies, dentists,
billing services and payors. While electronic transaction processing for certain
portions of the health care market has increased over the past few years, the
majority of health care transactions continue to be paper-based and
manually-processed. Existing EDI services in this market primarily consist of:
(i) on-line verification of eligibility for pharmacies, health care providers
and third-party payors (both commercial and governmental) through direct network
communications; (ii) referral management for providers and payors; and (iii)
batch processing of health care reimbursement claims through a central
clearinghouse.
Health care providers initiate electronic transaction processing through
dedicated point-of-service terminals, stand alone software or software
integrated with the provider's management information system. Providers can
verify patient eligibility or obtain authorization for services at the time of
appointment or registration by transmitting patient data to the processor across
a telecommunication line. The processor then interfaces with the payor to obtain
an eligibility or authorization confirmation which is transmitted back to the
provider. The submission of claims occurs by providers aggregating claims
throughout the day and submitting them electronically to a clearinghouse in
batch. Claims are sorted, formatted and edited by the clearinghouse, and are
then forwarded electronically to the payor. The claim is processed by the payor
and the adjudicated response is transmitted back to the provider. To the extent
required, the payor then sends a check to the provider or, in certain
circumstances, initiates an electronic funds transfer to the provider's account.
The Company believes EDI transaction processing offers a number of benefits
to payors and providers. The elimination or reduction of paper-based
transactions significantly lowers claims processing costs of payors, and on-line
encounter and referral information provides more efficient medical cost
management for managed care organizations. In addition, payors are able to more
easily detect fraud and screen for unusual utilization trends. From the health
care providers' standpoint, information pertaining to eligibility, authorization
and reimbursement can be more easily accessed and transmitted. By processing
claims electronically, providers also reduce overhead costs and staff time and
improve accounts receivable management.
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The first major departure from paper-based claims processing in the health
care market occurred in the late 1980's in the pharmacy industry. Medicare and
Medicaid payment reforms and cost saving initiatives by third-party commercial
payors and large retail pharmacy chains led to a significant increase in
electronic processing of pharmacy third-party claims. The development and use by
pharmacies of practice management software products that include the capability
of connecting with an electronic claims processing network also facilitated the
movement to electronic claims processing.
According to the Health Data Directory, approximately 80% of the 993
million and 1.1 billion third-party pharmacy claims processed in 1994 and 1995,
respectively, were processed electronically. The Company believes that only a
small percentage of nonclaim pharmacy transactions, such as the delivery of
prescriptions by the physician to the pharmacist or formulary inquiries to
pharmacy benefit managers, are delivered electronically through real-time
on-line systems. The Company believes that there are opportunities to expand
electronic processing to other areas in the pharmacy market. Also, as the
population continues to grow and more benefit plans include prescription
programs, the Company believes the demand for real-time processing of pharmacy
transactions will continue to increase.
In addition to pharmacies, other providers, including hospitals, physicians
and dentists, transmit third-party reimbursement claims electronically, largely
on a batch basis through claims clearinghouses. According to the Health Data
Directory, approximately 35% of the 2.5 billion non-pharmacy health care claims
processed in 1995 were processed electronically. The recent growth of managed
care and governmental health care cost containment efforts have increased the
use of real time transaction processing by hospitals and physicians. Certain
state Medicaid programs permit providers to electronically verify Medicaid
eligibility on a real-time basis, and certain managed care companies have
encouraged their provider networks to utilize real-time EDI for authorizations,
encounter reports and referrals. The Company believes that there are significant
opportunities for further expansion of EDI transactions to the non-pharmacy
sector of the health care market, both for claims processing as well as for
clinical and other purposes.
STRATEGY
ENVOY's strategy is to maintain and enhance its leadership position in the
health care transaction processing industry. The key elements of this strategy
include:
Leverage current strengths in the real-time and batch claim processing
segments. ENVOY intends to expand its real-time pharmacy and health care
transaction processing and batch claims business through aggressive marketing.
The Company will emphasize its extensive transaction network and range of health
care EDI delivery platforms between payors and providers and high quality
customer service. In addition, the Company will seek to leverage its transaction
volume by negotiating lower telecommunication rates from telecommunication
carriers and putting more transactions through its predominantly fixed cost
base, in order to be the low cost provider of health care EDI services.
Pursue strategic acquisitions. The Company expects to continue to pursue
acquisitions of other related health care information businesses in order to
achieve greater economies of scale and to remain a cost effective provider of
transaction processing services. In addition, the Company believes that as the
currently fragmented health care transaction processing industry grows and
consolidates, acquisition opportunities should arise for the Company as well as
other market competitors and, thus, lead to the emergence of a few industry
leaders. ENVOY believes that, among other opportunities, low volume processors
may eventually seek to sell their portfolios of physician and hospital customers
to higher volume electronic transaction processors such as ENVOY.
Increase the types of transactions and data that are electronically
transmitted by and among various health care industry participants. The Company
believes that much of the information that flows from and among each of the
various participants in the health care market can be transmitted
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electronically with greater efficiency and cost effectiveness. The Company
intends to expand its health care EDI business to include electronic
prescriptions, lab orders, lab results and other transactions. The Company has
recently introduced software which enables providers and payors to
electronically exchange transactions such as remittance advice, patient rosters,
electronic fund transfers, patient statements and E-mail.
Extend data network within the health care industry. The Company plans to
increase the connection to and interconnection among physicians, hospitals,
pharmacies, managed care organizations and other third-party payors,
laboratories, medical equipment suppliers and, eventually, employers and
patients. The Company believes that a higher degree of interconnectivity among
these health care participants will increase the overall level of electronic
transactions.
COMPANY SERVICES
ENVOY provides various EDI services for third-party payors, pharmacies,
physicians, hospitals, dentists, billing services and others through a real-time
network and batch clearinghouse. Through its transaction network, ENVOY provides
an electronic link, directly and indirectly through other clearinghouses or
vendors, to approximately 160,000 physicians, 30,000 pharmacies, 23,000
dentists, 3,300 hospitals and 550 payors.
Real-time Transaction Processing. The Company provides real-time
transaction processing for pharmacy claim adjudication and managed care
transactions for health care providers and payors.
Pharmacy transactions constituted 97% of ENVOY's 372 million real-time
transactions processed in 1995. A standard pharmacy transaction is the inquiry
by the pharmacy, through its point-of-service terminal or personal computer
terminal, to determine whether the patient is covered by a benefit program.
After eligibility is confirmed, the claim is settled and the payor transmits to
the pharmacy the amount and timing of the pending payment. ENVOY's EDI network
is linked to approximately 30,000 of the estimated 56,000 retail pharmacies in
the United States, including 33 of the top 50 retail pharmacy chains.
ENVOY's real-time managed care transactions accounted for 5.6 million of
ENVOY's total real-time transactions in 1995. These transactions between
providers and payors include (i) verification of the patient's enrollment in a
program; (ii) verification that the provider is eligible to treat the patient;
(iii) verification that the patient is eligible for a particular treatment; (iv)
filing of encounter data; (v) referral to a specialist; and (vi) other ancillary
transactions. These transactions are enabled by the Company's network
connections to various databases. The Company has access to managed care and
commercial insurer databases for Prudential, CIGNA, Aetna, Oxford Health Plans,
MetraHealth, U.S. Healthcare, Pacificare, and Blue Cross of California. For
Medicaid eligibility verification and related transactions, the Company has
access to state databases in California, Florida, Georgia, Missouri, New Jersey,
New York, Tennessee, Texas and Washington. The Company believes managed care
transactions will grow as the scope of real-time inquiries is enhanced,
providers assume more of the financial risks of providing services, and
providers seek to lower administrative costs. In addition, if the patient wishes
to pay the deductible or co-payment amounts by credit card, ENVOY provides
payment authorization and verification processing service through the point of
service terminals in provider offices.
Batch Transaction Processing. With the recent acquisition of NEIC, ENVOY
became one of the nation's leading processors of commercial third-party payor
claims and enhanced its electronic network with connection to a significant
number of health care providers and payors across the United States. Batch
transactions are predominantly used to process reimbursement claims in
traditional fee-for-service commercial or government payor systems and to
process encounter data in capitated environments. These transactions are neither
time-sensitive nor easily processed on a real-time basis and, as a result are
processed on a collective and delayed basis. To submit claims, providers collect
data throughout the day and then electronically forward these claims in bulk to
a clearinghouse. ENVOY's clearinghouse electronically collects and verifies
receipt of the claims,
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performs payor specific reformatting required to conform to a particular payor's
specifications and editing, aggregates daily transactions by payor and transmits
claims to payors based upon each payor's chosen communications protocols. NEIC
and ENVOY processed an aggregate of approximately 92 million commercial
third-party payor claims in 1995. ENVOY's transaction network is connected with
550 of the approximate 1,500 commercial third-party payors, including all of the
top 20 commercial payors (based upon the number of members covered by such
third-party payors).
EDI Interfaces. The Company has developed a range of hardware and software
interfaces to facilitate the adoption of EDI by its customers.
ENline(SM). ENline, a proprietary PC-based software product, performs
all of the transactions of a stand alone point-of-service terminal and has
enhanced functionality to facilitate both batch and real-time processing,
as well as message based E-mail transactions. ENline was developed by the
Company in 1995 and is designed with open Application Program Interfaces
("APIs"). The APIs are established at the operating system level and enable
the Company's software to run on a wide variety of operating systems
including DOS, UNIX and Windows. ENline can either function as a stand
alone data entry system or be integrated into physician practice management
software. For a nominal fee, the Company provides ENline to practice
management software vendors for integration into and distribution with
their software. The stand alone version of ENline is offered directly to
providers for a nominal price.
Payor Gateway. The Company has recently developed software to enable
payor organizations to participate in EDI without requiring the payor to
develop interface technology. The Company's "Payor Gateway" software is
designed to facilitate the movement of transactions to and from the payors'
software. The Payor Gateway manages telecommunications access, security and
the retrieval of data and allows the payor to participate in EDI with the
Company assuming the responsibility for interfacing the Payor Gateway
software to the payor's system.
Point-of-Service Terminals. Point-of-service terminals are designed
to handle real-time transactions and allow the Company to rapidly and cost
effectively connect a significant number of providers into the transaction
network. The point-of-service terminal is easy to use, simple to install
and thus can be readily deployed in large numbers. The point-of-service
terminals can be accessed remotely to modify application software and
communications parameters, allowing the Company the flexibility to
implement changes in services relatively easily. Point-of-service terminals
are purchased by payors, who are sponsoring a managed care network, and are
generally offered to providers free of charge. In addition, providers may
purchase terminals from the Company for a nominal fee.
Customer Service. As an adjunct to its transaction processing services,
the Company maintains customer service facilities with help desks for real-time
and batch transaction customer inquiries. Client support employs a modern call
tracking and response system which is directly connected to the real-time and
batch processing centers. The customer service staff is available via a
toll-free telephone number. Customer support services are frequently included in
the contract price for transaction processing services, but may also be billed
separately, depending upon the specific contract terms. The Company also offers
other services, such as on-site product training, installation and terminal
repair and replacement.
SALES AND MARKETING
The Company develops and maintains payor, provider and vendor relationships
through its 90 sales and marketing personnel located in 11 geographic regions.
The Company's primary sales and marketing strategy focuses on selling its
services to organizations that have relationships with or access to a large
number of providers. ENVOY's services are also sold directly to providers by its
27 person direct sales force.
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In the pharmacy segment, the Company has traditionally established
relationships with large retail pharmacy chains and pharmacy software vendors.
To market its batch claims processing services, the Company develops
relationships with third-party payors and large submitters of claims. In
addition, the Company works closely with practice management system vendors to
provide an integrated solution to providers. Real-time managed care EDI services
are offered to providers either directly by the Company's sales force or
indirectly through commercial managed care organizations.
CUSTOMERS
The Company's principal customers consist of health care providers, such as
pharmacies, physicians, hospitals, dentists and billing services, and
third-party payors, such as indemnity insurers, managed care organizations and
state and federal governmental agencies. No customer accounted for 10% or more
of the Company's revenues during 1995 or 1994.
The Company typically provides real-time services to customers under
contracts that are not exclusive and generally do not guarantee a specific
transaction volume or revenue stream. The pricing of ENVOY's services is set
under contracts typically having terms of one to three years, subject to a
variety of early cancellation arrangements.
ENVOY's batch transactions include contracts with both payors and claim
submitters, including providers, practice management system vendors,
clearinghouses, billing services and others. Submitter contracts with ENVOY
often contain exclusivity provisions whereby the submitter agrees to process the
claim through ENVOY's clearinghouse if ENVOY has network access to the payor.
Pursuant to such submitter contracts, ENVOY agrees to pay certain transaction
volume incentives to the submitter. In addition, certain submitters are assessed
annual participation fees.
OPERATIONS
The Company delivers its real-time services through an integrated
electronic transaction processing system, which includes ENVOY-designed
software, host computer hardware, network management, switching services and the
ability to interact with the customers' personal computers and a variety of
point-of-service devices, most of which were originally designed by the Company.
ENVOY's real-time host computer system consists of Stratus and Data General
mini computers designed and configured to operate 24 hours a day, seven days a
week. These mini computers are configured to expand to meet increased
transaction volume. The Stratus systems are designed and manufactured to
accommodate a fault-tolerant, nonstop environment. A fault-tolerant environment
is provided for the Data General systems by maintaining on-line standby
computers. The Company's host computers have been upgraded to take advantage of
certain technological advances. The real-time host computer system data center
is protected by automated fire suppression systems designed to extinguish fire
with minimal damage to the computer equipment. The data center is further
protected by uninterruptible power supply systems consisting of diesel
generators and battery backups. In case of loss of commercial power, these
systems can supply power to the data center to continue operations. The data
center can only be entered by accessing a password protected security lock. The
software and related data files are backed up nightly and stored off-site. See
"Risk Factors -- Reliance on Data Centers."
The Company's real-time communications network consists of dedicated
circuits, T-l facilities and dial modem ports, which facilitate electronic
real-time communication among payors, providers and other users of
time-sensitive health care information. This communications network is designed
to provide a low cost, multipath host access from a computer modem or point of
service device with minimal delays and a high degree of accuracy and integrity.
The Company manages multiple lease lines to pharmacies and third-party payors.
The Company uses a number of different nationwide public communications networks
to provide access to substantially all potential domestic customers. The
networks utilized are Sprint TranXact (800 and 950), Sprint Ultra 800, AT&T
Megacom 800 and Transaction Network Services (TNS 800 and 950).
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To minimize the possibility that a customer might experience delay by a
failed or overloaded circuit, at least two potential communications paths are
provided for each transaction. Utilizing ENVOY's call tracking system,
transactions are rerouted under centralized control to receive the lowest
communications cost available and to bypass failed or overloaded communications
nodes.
A substantial portion of the Company's batch claim processing is
outsourced. Utilizing the Company's proprietary software, a third-party
processes batch transactions on an IBM 3090 mainframe computer coupled with a
RISC-based communications network server. The contractual arrangement between
the Company and the third-party processor requires the processor to maintain 24
hour a day, seven days a week processing capability and a "hot site" disaster
recovery system. The Company's contract with this third-party processor expires
December 31, 1997; however, at the Company's option, the agreement may be
extended for two consecutive renewal periods of six months each.
PROPRIETARY RIGHTS
ENVOY owns certain of the software and systems designs that it uses and has
a limited, perpetual, nonexclusive, royalty-free license to use other software
and systems designs, such as the point-of-service device designs which were
developed by the Predecessor. The Company also licenses certain other software
from third parties.
The Company's success is dependent in part upon electronic transaction
processing technology developed by the Company. A combination of trade secrets,
service mark and contract protection is used to establish and protect that
technology. Pursuant to a license and transition services agreement by and
between ENVOY and First Data, the parties are obligated to take appropriate
measures to protect these proprietary rights. There can be no assurance these
legal protections and the precautions taken by the Company or First Data will be
adequate to prevent misappropriation of technology used by ENVOY. In addition,
the legal protections do not prevent independent third-party development of
competitive technology.
COMPETITION
The Company faces potential competition in the health care EDI market not
only from other companies that are similarly specialized, but also from
companies involved in other, more highly developed sectors of the electronic
transaction processing market. Such companies could enter into, or focus more
attention on, the health care transaction processing market as it develops. In
addition, the Company faces competition by selected providers bypassing the
Company's electronic network and going directly to the payor. Many of ENVOY's
existing and potential competitors have greater financial, marketing and
technological resources. There is no assurance that the Company can continue to
compete successfully with its existing and potential competitors in the health
care EDI market.
Factors influencing competition in the health care market include (i)
compatibility with the provider's software and inclusion in practice management
software products, (ii) in the case of the pharmacy market, relationships with
major retail pharmacy chains, and (iii) relationships with third-party payors
and managed care organizations. The Company believes that the breadth, price and
quality of its services are the most significant factors in developing and
maintaining relationships with pharmaceutical chains, third-party payors and
managed care organizations.
FACILITIES
The Company's corporate offices are located in Nashville, Tennessee. ENVOY
leases 30,000 square feet of office space and anticipates it will expand its
space to 50,000 square feet by the end of the third quarter 1996. The Company's
real-time data center is located in Nashville, Tennessee and handles the
telecommunication network and the computer systems for the real-time pharmacy
and health care transactions. In addition, the Company leases approximately
10,000 square feet of office
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space in Oklahoma City, Oklahoma, to house its batch claims processing center
pursuant to a lease agreement scheduled to expire in July 1997.
ENVOY has two additional small processing centers located in Palm Harbor,
Florida and Birmingham, Alabama. The Company intends to eliminate these
facilities and transfer their processing functions to its Oklahoma City,
Oklahoma facility or outsource such processing under its current third-party
processor agreement.
Programming and customer support operations are located in Secaucus, New
Jersey and Nashville, Tennessee. The Secaucus support operation is currently
being consolidated into the Nashville programming and customer support
operations. This consolidation is anticipated to be completed by the end of
1996. In addition, the Company has seven small sales offices located in
California, Florida, Georgia, Illinois, Pennsylvania and Texas.
EMPLOYEES
As of June 27, 1996, ENVOY had approximately 373 employees, including
approximately 306 salaried and 67 hourly employees (including temporary
employees). None of these employees is represented by a union. ENVOY believes
its relationship with the employees is good.
LITIGATION
On January 28, 1995, the Company purchased 17.5% of the common stock of
EMC, a corporation that transmits billing information from hospitals and doctors
to third party payors. The remaining stock in EMC is held by StellarNet, Inc.
("StellarNet") which previously owned all of the business of EMC directly. In
connection with the closing, the Company also acquired an option to purchase the
remainder of the capital stock of EMC from StellarNet for approximately $2.7
million, subject to increase upon the achievement of certain performance
objectives, and also entered into a management agreement to provide management
services to EMC. 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.
In March 1996, StellarNet filed a lawsuit in the Superior Court of the
State of California for the City and County of San Francisco against the
Company. This lawsuit asserts claims for breach of contract and negligent
conduct in connection with the management services provided EMC. StellarNet
seeks unspecified compensatory damages, plus attorneys fees and court costs. The
Company has denied each of StellarNet's claims and has filed counterclaims for
fraudulent inducement and misrepresentation against StellarNet. As of the date
of this Prospectus, no estimate of a possible loss or range of loss can be
determined by the Company.
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MANAGEMENT
The following table sets forth certain information concerning the directors
and executive officers of the Company as of the date of this Prospectus.
NAME AGE POSITION
- ----------------------------------- --- --------------------------------------------------
Fred C. Goad, Jr.(1)............... 55 Chairman of the Board, Co-Chief Executive Officer
and Director
Jim D. Kever(1).................... 43 President, Co-Chief Executive Officer and Director
Kevin M. McNamara.................. 40 Vice President, Chief Financial Officer and
Secretary
Sheila H. Schweitzer............... 48 Senior Vice President of Operations
Richard P. Caliri.................. 50 Senior Vice President of Sales and Marketing
W. Marvin Gresham(3)............... 66 Director
William E. Ford(2)................. 34 Director
Laurence E. Hirsch(1)(3)........... 50 Director
G. Walter Loewenbaum II(2)......... 51 Director
Richard A. McStay(2)............... 59 Director
- ---------------
(1) Member of Executive Committee of the Board of Directors.
(2) Member of Audit Committee of the Board of Directors.
(3) Member of Compensation Committee of the Board of Directors.
Under the terms of the Company's Amended and Restated Charter (the
"Charter"), the members of the Board of Directors are divided into three
classes, each of which serves a term of three years. Each class is to consist as
nearly as practicable of one-third of the total number of directors constituting
the Board of Directors. Messrs. Kever, Hirsh and Ford comprise the "Class I"
directors, and their current terms expire in 1999. Messrs. Gresham and McStay
are "Class II" directors with terms ending in 1997. The "Class III" directors
are Messrs. Goad and Loewenbaum, and their terms expire in 1998. Executive
officers of the Company are elected on an annual basis and serve at the
discretion of the Board of Directors.
Mr. Goad served as President and a Director of the Company from its
incorporation in August 1994 until August 1995. On August 3, 1995, Mr. Goad was
elected Chairman and Co-Chief Executive Officer and currently serves in such
capacity in addition to being a Director. From September 1985 to June 1995, Mr.
Goad served as Chief Executive Officer and a Director of the Predecessor. Prior
to joining the Predecessor, Mr. Goad was a Vice President of Sales of UCCEL
Corporation, a mainframe software company, and, prior to that, was employed by
IBM, Docutel Corporation (now, Olivetti USA) and Financial Institutions
Services, Inc. Mr. Goad is also a Director of Performance Food Group Company, a
foodservice distribution company.
Mr. Kever has served as the President and Co-Chief Executive Officer of the
Company since August 1995. He served as Executive Vice President, Secretary and
General Counsel from incorporation in August 1994 until August 1995. He has
served as a Director since ENVOY's incorporation in August 1994. Prior to June
6, 1995, Mr. Kever had served as a Director and Secretary, Treasurer and General
Counsel of the Predecessor since 1981 and as Executive Vice President since
1984. Prior to joining the Predecessor, Mr. Kever was employed by Datanet, a
pharmaceutical software company.
Mr. McNamara currently serves as the Chief Financial Officer and Secretary
of the Company. Before his election in February 1996, he served as President of
NaBANCO Merchant Services Corporation, a wholly owned subsidiary of National
Bancard Corporation ("NaBANCO"), from October 1994 to December 1995. Mr.
McNamara served as Senior Executive Vice President and Chief Financial Officer
of NaBANCO from January 1992 through September 1994. Before joining
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NaBANCO, Mr. McNamara held the position of Chief Financial Officer of Child
World, Inc., a national toy retailer.
Ms. Schweitzer currently serves as Senior Vice President of Operations.
Before joining the Company in August 1995, Ms. Schweitzer served from 1991 to
1995 as President and Chief Executive Officer of Medical Management Resources,
Inc., a health care EDI services company which is a wholly-owned subsidiary of
The Associated Group, Inc.
Mr. Caliri currently serves as the Senior Vice President of Sales and
Marketing. Before joining ENVOY in March 1996, Mr. Caliri served as President
and Chief Executive Officer of NEIC, from December 1993 until the completion of
NEIC's merger with ENVOY in March of 1996. Prior to joining NEIC, he was
employed by John Hancock Financial Services in Boston, Massachusetts for more
than 25 years, serving most recently as Vice President of Group Operations.
Mr. Gresham has served as a Director of the Company since February 1995 and
had served as a Director of the Predecessor from 1991 through June 6, 1995. Mr.
Gresham is the retired President of Gresham Drugs, Inc., a chain of pharmacies
in the state of Florida.
Mr. Ford was appointed a Director of the Company on March 6, 1996. He has
served as a managing member of General Atlantic Partners LLC since 1991. Mr.
Ford also serves as a Director of GT Interactive Software Corporation, a
provider of entertainment and educational consumer software, and Marcam
Corporation, a provider of application software to manufacturing companies.
Mr. Hirsch has served as a Director of the Company since February 1995 and
had served as a Director of the Predecessor from 1987 through June 6, 1995. Mr.
Hirsch served as the President of Centex Corporation, a corporation engaged in
homebuilding, mortgage banking and related businesses, from March 1985 to July
1981; as its Chief Executive Officer, since July 1988; and as its Chairman since
July 1991. Mr. Hirsch serves as a Director of Centex Corporation and of
Commercial Metals Company, a company engaged in the manufacturing and recycling
of steel and metal products. In addition, Mr. Hirsch is a Trustee of BlackRock
Investors, Inc., a registered investment company.
Mr. Loewenbaum has been a Director of the Company since February 1995 and
served as a Director of the Predecessor from 1983 through June 6, 1995. Mr.
Loewenbaum serves as Chairman of the Board of Directors of Southcoast Capital
Corporation, an investment firm, and has served in such capacity since May 1990.
Mr. McStay has served as a Director of the Company since February 1995 and
had served as a Director of the Predecessor from 1985 through June 6, 1995. Mr.
McStay also serves as President of Southern Capital Advisors, Inc., the
investment advisory subsidiary of Morgan Keegan & Company, Inc., and as a
Director of TBC Corporation, a wholesaler of automobile tires and accessories.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of (i) 48,000,000
shares of Common Stock, no par value per share, of which 11,733,471 shares were
issued and outstanding as of June 30, 1996, and (ii) 12,000,000 shares of
preferred stock, no par value per share, of which (a) 4,800,000 shares have been
designated as Series A Preferred Stock (the "Series A Preferred Stock") that are
issuable only upon the exercise of the stock purchase rights pursuant to the
Company's Shareholders' Rights Plan and (b) 3,730,233 shares have been
designated Series B Convertible Preferred Stock (the "Series B Preferred
Stock"), all of which have been authorized and are currently issued and
outstanding. See "Stock Purchase Rights Under Shareholders' Rights Plan." After
giving effect to the sale of the Common Stock offered hereby, there will be
14,633,471 shares of Common Stock issued and outstanding.
The following summary of certain terms of the Company's capital stock
describes material provisions of, but does not purport to be complete and is
subject to and qualified in its entirety by, the Company's Charter, the
Company's Amended and Restated Bylaws, the Tennessee Business Corporation Act
and other applicable provisions of Tennessee corporate law.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters to be submitted to a vote of the shareholders and are not entitled to
cumulative voting in the election of directors, which means that the holders of
the majority of the shares voting for the election of directors can elect all of
the directors then standing for election by the holders of Common Stock. Subject
to prior dividend rights and sinking fund or redemption or purchase rights which
may be applicable to any outstanding preferred stock, the holders of Common
Stock are entitled to share ratably in such dividends, if any, as may be
declared from time to time by the Board of Directors in its discretion out of
funds legally available therefor. See "Price Range of Common Stock and Dividend
Policy." The holders of Common Stock are entitled to share ratably in any assets
remaining after satisfaction of all prior claims upon liquidation of the
Company, including prior claims of any outstanding preferred stock. The Charter
gives holders of Common Stock no preemptive or other subscription rights, and
Common Stock is not redeemable at the option of the holders, does not have any
conversion rights, and is not subject to call. The rights, preferences and
privileges of holders of Common Stock are subject to, and may be adversely
affected by, the rights of holders of shares of any series of preferred stock
that the Company may designate and issue in the future or which is currently
outstanding. See "Preferred Stock."
PREFERRED STOCK
The authorized but undesignated preferred stock may be issued from time to
time in one or more designated series or classes. The Board of Directors,
without approval of the shareholders, is authorized to establish the voting,
dividend, redemption, conversion, liquidation and other relevant provisions that
may be provided with respect to a particular series or class. The issuance of
preferred stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could, among other things, adversely
affect the voting power of the holders of Common Stock and, under certain
circumstances, make it more difficult for a third-party to acquire, or
discourage a third-party from acquiring, a majority of the outstanding voting
stock of the Company.
Series A Preferred Stock. The shares of Series A Preferred Stock, if
issued pursuant to the Shareholders' Rights Plan, will have ten votes per share
and will vote together with the shares of Common Stock on all matters except as
otherwise required by law. Subject to prior dividend rights and sinking fund or
redemption or purchase rights which may be applicable to any other series of
preferred stock, the holders of the Series A Preferred Stock will be entitled to
share in such dividends, if any, as may be declared from time to time by the
Board of Directors in its discretion out of funds legally available therefor
with respect to the Series A Preferred Stock and on a ten-to-one
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basis with respect to the Common Stock. The holders of each tenth of a share of
Series A Preferred Stock are entitled to share ratably in any assets remaining
after satisfaction of all prior claims upon liquidation of the Company,
including prior claims of any other series of preferred stock, ratably with the
holders of each share of the Common Stock. Holders of the Series A Preferred
Stock will have no preemptive or other subscription rights and the Series A
Preferred Stock is not subject to call.
Series B Preferred Stock. Each share of Series B Preferred Stock is
convertible into one share of Common Stock at any time from the date of
issuance, and shall be automatically converted into Common Stock upon the
transfer by an original holder of the Series B Preferred Stock to any person
other than an affiliate (as defined in Rule 12b-2 under the Exchange Act)
thereof. The Series B Preferred Stock shall be entitled to dividends only to the
extent cash dividends are declared and paid on the Common Stock on an as if
converted basis. The Series B Preferred Stock shall have a liquidation
preference of $10.75 per share, subject to adjustment, which shall be paid to
all holders of Series B Preferred Stock before the holders of Common Stock will
be entitled to receive any liquidation distribution. Each share of Series B
Preferred Stock shall be entitled to vote on all matters that the holders of
Common Stock are entitled to vote upon, on an as if converted basis, and such
shares shall be entitled to vote as a class with respect to actions adverse to
any rights of the Series B Preferred Stock and the creation of any other class
of preferred stock senior to or pari passu with the Series B Preferred Stock.
From and after January 1, 1999, the Company shall have an optional right to
redeem all of the outstanding Series B Preferred Stock at a redemption price of
$10.75 per share, provided that the average sale price of Common Stock as
reported on The Nasdaq Stock Market (or on such other exchange or market on
which Common Stock is then traded) for the 60 trading days prior to the notice
of redemption is not less than $21.50 per share. As long as General Atlantic
Partners 25, L.P. ("GAP 25") and GAP Coinvestment Partners, L.P. (collectively
the original purchasers of 2,800,000 shares of Series B Preferred Stock and
referred to herein collectively as the "GAP Investors") and any affiliate
thereof own (a) at least a majority of the outstanding shares of the Series B
Preferred Stock and (b) on an as if converted basis, an aggregate of 5% or more
of total number of shares of Common Stock outstanding, the holders of Series B
Preferred Stock, voting as a separate series, shall be entitled to elect one
director to the Board of Directors of the Company. William E. Ford, a managing
member of General Atlantic Partners, LLC, a Delaware limited liability company
and a general partner of GAP 25, became a director of the Company on March 6,
1996 and is a nominee for election to a three year term as a Class I director at
the Annual Meeting of Shareholders scheduled for June 11, 1996. In addition,
each of the GAP Investors and First Union Capital Partners, Inc. (the purchasers
of the remaining 930,233 shares of Series B Preferred Stock ("FUCP")) shall have
the right to send one representative to attend all meetings of the Company's
Board of Directors or committees thereof, as long as, with respect to the GAP
Investors, they or any affiliate thereof own at least 5% of the total number of
shares representing Common Stock on an as converted basis and, with respect to
FUCP, as long as it owns at least 2% of the total number of shares representing
Common Stock on an as converted basis. A representative of FUCP is further
entitled to inspect the properties and records of the Company, to receive
material sent or distributed to the Board of Directors of the Company (unless
otherwise requested by FUCP or determined by the Company's Chief Executive
Officer to be in violation of the Board's fiduciary duties), and to discuss the
Company's business with the Company's directors, officers and accountants.
REGISTRATION RIGHTS
In connection with the financing of the acquisition of NEIC, the purchasers
of the Series B Preferred Stock and 333,333 shares of Common Stock each entered
into a registration rights agreement with ENVOY (the "Registration Rights
Agreements"). Pursuant to the Registration Rights Agreements, holders of the
Series B Preferred Stock have certain rights to request that ENVOY use its best
efforts to cause a registration statement to be filed and declared effective
under the Securities Act, with respect to the Registrable Shares (as defined in
the Registration Rights Agreement)
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following the first anniversary of the issuance date of the shares of Series B
Preferred Stock. The GAP Investors have the right to demand two such
registrations and FUCP has one. The holders of the Series B Preferred Stock also
have the opportunity to register their Registrable Shares at any time ENVOY
proposes to file a registration statement under the Securities Act with respect
to an offering by ENVOY for its own account. There is no limit to the number of
such incidental registration rights. The registration rights agreement entered
into by purchasers of 333,333 shares of Common Stock and ENVOY provides for one
demand registration following the first anniversary and prior to the second
anniversary of the issuance date of the shares of ENVOY Common Stock and
unlimited rights to register such shares any time ENVOY proposes to file a
registration statement under the Securities Act with respect to an offering by
ENVOY for its own account. ENVOY shall bear the costs of the registration
statements filed pursuant to the exercise of the demand registrations, excluding
any underwriting discounts and commissions and the fees and expenses of the
selling shareholders' legal counsel.
Registration rights were also issued in connection with the issuance of the
Convertible Notes. The holders of the Convertible Notes or the shares of Common
Stock issued on conversion of the Convertible Notes have the right to two demand
registrations and unlimited incidental registrations.
STOCK PURCHASE RIGHTS UNDER SHAREHOLDERS' RIGHTS PLAN
With each share of Common Stock issued, one Stock Purchase Right is issued
in accordance with and pursuant to the Shareholders' Rights Plan (a "Right").
Each Right, when it first becomes exercisable, entitles the holder to purchase
from the Company one-tenth of one share of Series A Preferred Stock at an
initial exercise price of $60.00 per tenth of a share (the "Exercise Price"),
subject to adjustment.
Exercisability of Rights. Initially, the Rights will not be exercisable or
transferable apart from the shares of Common Stock with respect to which they
are or have been distributed, and will be evidenced only by the certificates
representing such shares. The Rights will become exercisable and transferable
apart from the Common Stock on a date (the "Exercisability Date") that is the
earlier of (a) the tenth day following the Stock Acquisition Date, defined as
the close of business on the day a public announcement has been made that a
person or group of affiliated or associated persons has become an Acquiring
Person (as defined below), or (b) the close of business on such date as a
majority of the Board of Directors of the Company shall determine, which date
shall be any date following the commencement of a tender or exchange offer that,
if consummated, would result in a person or group becoming an Acquiring Person.
The Rights will be exercisable from the Exercisability Date until the Expiration
Date (which is the earlier of the close of business on February 2, 2005 (the
"Final Expiration Date") or the date the Rights are redeemed by the Company (the
"Redemption Date")) at which time they will expire.
With certain exceptions described in the Shareholders' Rights Plan, a
person or group becomes an "Acquiring Person" when such person or group acquires
or obtains the rights to acquire beneficial ownership of 20% or more of the then
outstanding shares of Common Stock (other than as a result of Permitted Offer,
as defined below), or 10% or more of such shares if (a) the Board, after
reasonable inquiry and investigation, determines to declare the acquiring person
an "Adverse Person" under guidelines set forth in the Shareholders' Rights Plan
or (b) such 10% ownership is acquired by a person or group (a "Market
Accumulator") during the pendency of, or prior to the expiration of 20 business
days after the termination or expiration of, a tender or exchange offer for
Common Stock. A "Permitted Offer" is a tender or exchange offer for all
outstanding shares of Common Stock upon terms that a majority of the members of
the Company's Board of Directors (who are not officers of the Company and who
qualify as "Continuing Directors" under the Shareholders' Rights Plan) determine
to be adequate and in the best interests of the Company and its shareholders.
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Transferability of Rights. Prior to the Exercisability Date, the Rights
will not be transferable apart from the shares of Common Stock to which they are
attached; hence, the surrender or transfer of any Common Stock certificate prior
to that date will also constitute the transfer of the Rights associated with the
shares represented by such certificate. As soon as practicable after the
Exercisability Date, separate certificates evidencing the Rights ("Rights
Certificates") will be mailed to each record holder of shares of Common Stock.
Flip-In Rights. Upon the occurrence of an Exercisability Date, each holder
of a Right will thereafter have the right (the "Flip-In Right") to receive, upon
exercise, the number of shares of Series A Preferred Stock (or in the Board of
Directors' discretion, Common Stock) having a market value immediately prior to
the Exercisability Date equal to two times the then current Exercise Price of
the Right, provided, however, that any Right that is (or, in certain
circumstances specified in the Shareholders' Rights Plan, was) beneficially
owned by an Acquiring Person (or any of its affiliates or associates) will
become null and void upon the occurrence of a Exercisability Date. Cash will be
paid in lieu of issuing fractional shares.
Flip-Over Rights. If, at any time following a Stock Acquisition Date,
either (i) the Company is acquired in a merger or other business combination
transaction or (ii) the Company sells or otherwise transfers more than 50% of
its aggregate assets or earning power, each holder of a Right (except Rights
previously voided as described above) will thereafter have the right (the
"Flip-Over Right") to receive, upon exercise, shares of common stock of the
acquiring person having a value equal to two times the then current Exercise
Price of the Right. The Flip-Over Right shall be exercisable apart from, and
regardless of the exercise or surrender of, the Flip-In Right.
Redemption of the Rights. At any time prior to the earlier to occur of (a)
the close of business on the tenth day (subject to extension by the Board of
Directors of the Company) following the Stock Acquisition Date, or (b) the Final
Expiration Date, and in certain other circumstances, the Board of Directors of
the Company may redeem the Rights in whole but not in part at a Redemption Price
of $.01 per Right.
Amendment of the Shareholders' Rights Plan. At any time prior to the
Exercisability Date, the Company's Board of Directors may amend any provision of
the Shareholders' Rights Plan in any manner. Thereafter, the Board may amend the
Shareholders' Rights Plan in certain respects, including generally (a) to
shorten or lengthen any time period under the Shareholders' Rights Plan or (b)
in any manner that the Board of Directors deems necessary or desirable, so long
as such amendment is consistent with and for the purpose of fulfilling the
objectives of the Board in originally adopting the Shareholders' Rights Plan.
Certain amendments (including changes to the Redemption Price, Exercise Price,
Expiration Date, or number of shares for which a Right is exercisable), whether
prior to the Exercisability Date or thereafter, are permitted only upon approval
by a majority of the members of the Board of Directors of the Company.
DESCRIPTION OF CERTAIN STATUTORY, CHARTER AND BYLAW PROVISIONS
Tennessee Business Combination Act. The Tennessee Business Combination Act
(the "Tennessee Combination Act") provides, among other things, that any
corporation to which the Tennessee Combination Act applies, including the
Company, shall not engage in any "business combination" with an "interested
shareholder" for a period of five years following the date that such shareholder
became an interested shareholder unless prior to such date the board of
directors of the corporation approved either the business combination or the
transactions which resulted in the shareholder becoming an interested
shareholder. The Tennessee Combination Act defines "business combination"
generally to mean any: (a) merger or consolidation, (b) share exchange, (c)
sale, lease, exchange, pledge, mortgage or other transfer (in one transaction or
a series of transactions) of assets representing 10% or more of (i) the market
value of consolidated assets, (ii) the market value of the corporation's
outstanding shares, or (iii) the corporation's consolidated net income, (d)
issuance or transfer of shares from the corporation to the interested
shareholder,
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(e) plan of liquidation, (f) transaction in which the interested shareholder's
proportionate share of the outstanding shares of any class of securities is
increased, or (g) financing arrangements pursuant to which the interested
shareholder, directly or indirectly, receives a benefit other than
proportionately as a shareholder.
The Tennessee Combination Act defines "interested shareholder" generally to
mean any person who is the beneficial owner, either directly or indirectly, of
10% or more of any class or series of the outstanding voting stock, or any
affiliate or associate of the corporation who has been the beneficial owner,
either directly or indirectly, of 10% or more of the voting power of any class
or series of the corporation's voting stock at any time within the five year
period preceding the date in question. Consummation of a business combination
that is subject to the five-year moratorium is permitted after such five-year
period if the transaction (a) complies with all applicable charter and bylaw
requirements and applicable Tennessee law and (b) is approved by at least
two-thirds of the outstanding voting stock not beneficially owned by the
interested shareholder, or when the transaction meets certain fair price
criteria. The fair price criteria include, among others, the requirement that
the per share consideration received in any such business combination by each of
the shareholders is equal to the highest of (a) the highest per share price paid
by the interested shareholder during the preceding five-year period for shares
of the same class or series plus interest thereon from such date at a treasury
bill rate less the aggregate amount of any cash dividends paid and the market
value of any dividends paid other than in cash since such earliest date, up to
the amount of such interest, (b) the highest preferential amount, if any, that
such class or series is entitled to receive on liquidation, or (c) the market
value of the shares on either the date the business combination is announced or
the date when the interested shareholder reaches the 10% threshold, whichever is
higher, plus interest thereon less dividends as noted above.
The effect of the Tennessee Combination Act may be to render more difficult
a change of control of the Company.
Classified Board of Directors. Classification of directors is permitted
under the Tennessee Business Corporation Act, as amended, and the Company's
Charter provides for the classification of its Board of Directors. Under the
terms of the Charter, the members of its Board of Directors are divided into
three classes, serving staggered three-year terms. As a result, approximately
one-third of the Company's Board of Directors will be elected each year. See
"Management." This provision could (a) prevent a party who acquires control of a
majority of the Company's outstanding voting stock from obtaining control of the
Board of Directors of the Company until the second annual shareholders' meeting
following the date the acquiror obtains the controlling stock interest, (b) have
the effect of discouraging a potential acquiror from making a tender offer or
otherwise attempting to obtain control of the Company, and (c) increase the
likelihood that incumbent members of the Company's Board of Directors retain
their positions.
TRANSFER AGENT AND REGISTRAR
First Union National Bank is the transfer agent and registrar for the
Common Stock.
36
37
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth information with respect to the beneficial
ownership of shares of the Common Stock and Series B Preferred Stock as of June
30, 1996, by (i) each shareholder of the Company known to be the beneficial
owner of more than 5% of the outstanding shares of Common Stock or Series B
Preferred Stock; (ii) each Selling Shareholder; (iii) each director and
executive officer of the Company; and (iv) the directors and executive officers
of the Company as a group.
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
THE OFFERING(1) SHARES TO THE OFFERING(1)
TITLE OF NAME OF ---------------------------- BE SOLD IN -----------------------------
CLASS BENEFICIAL OWNERS NUMBER PERCENT THE OFFERING NUMBER PERCENT
- ------------------- ------------------- --------- ------------- ------------ --------- -------------
Series B Preferred General Atlantic
Partners 25,
L.P................ 2,800,000(2) 75.06%/19.27%(3) 2,800,000(2) 75.06%/16.41%(3)
Series B Preferred GAP Coinvestment
Partners, L.P...... 2,800,000(2) 75.06%/19.27%(3) 2,800,000(2) 75.06%/16.41%(3)
Series B Preferred William E. Ford.... 2,800,000(4) 75.06%/19.27%(3) 2,800,000(4) 75.06%/16.41%(3)
Common Wells Fargo Bank
National
Association........ 1,033,050(5) 8.80% 1,033,050(5) 7.24%
Common Robert Fleming,
Inc................ 950,570(6) 7.49% 950,570(6) 6.25%
Series B Preferred First Union Capital
Partners, Inc...... 930,233(2) 24.94%/7.35%(3) 930,233(2) 24.94%/6.12%(3)
Common Train, Smith
Counsel............ 817,850(7) 6.97% 817,850(7) 5.73%
Common IDS Life Capital
Resource Fund...... 800,000(8) 6.82% 800,000(8) 5.61%
Common Fred C. Goad,
Jr................. 595,239(9) 4.89% 80,000 515,239(9) 3.51%
Common Jim D. Kever....... 593,948(9) 4.88% 50,000 543,948(9) 3.70%
Common G. Walter
Loewenbaum II...... 516,412(10) 4.35% 516,412(10) 3.58%
Common W. Marvin Gresham.. 272,517(11) 2.31% 272,517(11) 1.90%
Common Richard A. McStay.. 163,550(12) 1.39% 163,550(12) 1.14%
Common Laurence E.
Hirsch............. 93,500(13) * 93,500(13) *
Common Kevin M. McNamara.. -- -- -- --
Common Sheila H.
Schweitzer......... -- -- -- --
Common Richard P.
Caliri............. -- -- -- --
All Executive
Officers and
Directors as a
Group (ten persons)
Common........... 2,250,166(14) 17.43% 2,120,166(14) 13.76%
Series B
Preferred........ 2,800,000 75.06% 2,800,000 75.06%
Common and Series
B Preferred (as
converted)....... 5,050,166(15) 32.14% 4,920,166(15) 27.02%
- ---------------
* Less than one percent
(1) For the purpose of determining "beneficial ownership," the rules of the
Securities and Exchange Commission ("SEC") require that every person who
has or shares the power to vote or dispose of shares of stock be reported
as a "beneficial owner" of all shares as to which such power exists. As a
consequence, multiple persons may be deemed to be the "beneficial owners"
of the same securities. The SEC rules also require that certain shares of
stock that a beneficial owner has the right to acquire within sixty days of
such date pursuant to the exercise of stock options are deemed to be
outstanding for the purpose of calculating the percentage ownership of such
owner but are not deemed outstanding for the purpose of calculating the
percentage ownership of any other person. At the close of business on June
30, 1996, there were 11,733,471 and 3,730,233 shares of Common Stock and
Series B Preferred Stock, respectively, outstanding.
37
38
(2) Pursuant to an agreement dated November 30, 1995 and effective as of March
6, 1996, General Atlantic Partners 25, L.P., GAP Coinvestment Partners,
L.P., and First Union Capital Partners, Inc. acquired 2,417,171, 382,829,
and 930,233 shares, respectively, of Series B Preferred Stock, each of
which shares of Series B Preferred Stock is convertible into one (1) share
of Common Stock (subject to adjustment). General Atlantic Partners 25, L.P.
and GAP Coinvestment Partners, L.P. are affiliated parties; therefore,
their ownership is aggregated for purposes of the above table, and each is
deemed to beneficially own all 2,800,000 shares. The address for General
Atlantic Partners 25, L.P., GAP Coinvestment Partners, L.P. and William E.
Ford is C/O General Atlantic Service Corporation, 125 East 56th Street, New
York, New York 10022. The address for First Union Capital Partners, Inc. is
One First Union Center, 18th Floor, Charlotte, North Carolina 28288-0732.
(3) The second percentage assumes conversion of the Series B Preferred Stock
into Common Stock.
(4) Mr. Ford is a managing member of General Atlantic Partners LLC, the general
partner of General Atlantic Partners 25, L.P., and a general partner of GAP
Coinvestment Partners, L.P. and is deemed to beneficially own such shares.
Mr. Ford disclaims beneficial ownership of such shares except to the extent
of his pecuniary interests.
(5) Wells Fargo Bank reported on Schedule 13G, as filed with the SEC, that as
of February 6, 1996, it has sole voting power with respect to 967,100
shares, sole dispositive power with respect to 1,024,150 shares and shared
dispositive power with respect to 8,900 shares. The address for Wells Fargo
Bank National Association is 464 California Street, San Francisco,
California 94163.
(6) Robert Fleming, Inc. is the advisor to nine affiliated entities which are
the beneficial owners of the Convertible Notes. The ownership in the above
table reflects full conversion of the Notes held by the affiliates of
Robert Fleming, Inc. at a conversion price of $10.52 per share. The address
for Robert Fleming, Inc. is 320 Park Avenue, 11th Floor, New York, New York
10022.
(7) Train, Smith Counsel, a New York general partnership, and its general
partners reported on Schedule 13G, as filed with the SEC, that as of
December 31, 1995, they each have beneficial ownership of 817,850 shares.
The address for Train, Smith Counsel is 667 Madison Avenue, New York, New
York 10021.
(8) IDS Life Capital Resource Fund, ("IDS"), reported on Schedule 13G, as filed
with the SEC, that as of December 31, 1995, it has sole voting power with
respect to 800,000 shares. IDS is advised by American Express Financial
Corporation, a subsidiary of American Express Company, each of whom claim
shared dispositive power with respect to the 800,000 shares. The address
for IDS Life Capital Resource Fund is IDS Tower 10, Minneapolis, Minnesota
55440.
(9) Includes 428,333 shares issuable pursuant to exercisable options for the
purchase of the Company's Common Stock. Following the Offering Mr. Goad's
options exercisable for the purchase of Common Stock shall equal 398,333
shares.
(10) Stock ownership includes 700 shares of which Mr. Loewenbaum's mother has
the use for life, 34,660 shares owned by Mr. Loewenbaum's wife, 4,500
shares owned by the Estate of Edward Shaw, Jr., of which Mr. Loewenbaum's
wife owns a one-half interest, 50,000 shares owned by Mr. Loewenbaum's
daughters, 10,000 shares held in trust to which Mr. Loewenbaum acts as
trustee, and 50,000 shares owned by Southcoast Capital Corporation, of
which Mr. Loewenbaum is Chairman of the Board of Directors and a 45%
shareholder. Mr. Loewenbaum disclaims beneficial ownership of the shares
held by such other persons or entities, except to the extent of his
pecuniary interests in the shares held by Southcoast Capital Corporation.
Stock ownership also includes 142,500 shares issuable pursuant to
exercisable options for the purchase of the Company's Common Stock.
(11) Includes 25,120 shares owned by Mr. Gresham's children, 1,850 shares owned
by Mr. Gresham's wife, and 88,000 shares issuable pursuant to exercisable
options for the purchase of the Company's Common Stock. Mr. Gresham
disclaims beneficial ownership of the shares held by his wife and children.
(12) Includes 940 shares owned by Mr. McStay's wife, 1,300 shares owned by Mr.
McStay's children, and 68,000 shares issuable pursuant to exercisable
options for the purchase of the Company's Common Stock. Mr. McStay
disclaims beneficial ownership of the shares held by his wife and children.
(13) Includes 24,000 shares issuable pursuant to exercisable options for the
purchase of the Company's Common Stock.
(14) Includes 1,179,166 shares issuable pursuant to exercisable options for the
purchase of the Company's Common Stock before the Offering and 1,149,166
following the Offering.
(15) Includes (i) conversion of the 2,800,000 shares of the Series B Preferred
Stock and (ii) the 1,179,166 shares issueable pursuant to exercisable
options for the purchase of the Company's Common Stock before the Offering
and 1,149,166 following the Offering.
38
39
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their representatives,
Alex. Brown & Sons Incorporated, Hambrecht & Quist LLC, J.C. Bradford & Co. and
Southcoast Capital Corporation (the "Representatives"), have severally agreed to
purchase from the Company and the Selling Shareholders the following respective
numbers of shares of Common Stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus:
NUMBER
UNDERWRITER OF SHARES
- --------------------------------------------------------------------------------- ---------
Alex. Brown & Sons Incorporated.................................................. 750,000
Hambrecht & Quist LLC............................................................ 750,000
J.C. Bradford & Co. ............................................................. 750,000
Southcoast Capital Corporation................................................... 750,000
---------
Total....................................................................... 3,000,000
=========
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all shares of the Common Stock offered hereby if any
of such shares are purchased.
The Company and the Selling Shareholders have been advised by the
Representatives that the Underwriters propose to offer the shares of Common
Stock to the public at the public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $0.75 per share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $0.10 per share to certain other dealers.
After the public offering, the offering price and other selling terms may be
changed by the Representatives of the Underwriters.
The Company has granted to the Underwriters an option, exercisable not
later than 30 days after the date of this Prospectus, to purchase up to 450,000
additional shares of Common Stock at the same price per share as the Company and
Selling Shareholders will receive for the 3,000,000 shares of Common Stock that
the several Underwriters have agreed to purchase. To the extent that the
Underwriters exercise such option, each of the Underwriters will have a firm
commitment to purchase approximately the same percentage thereof that the number
of shares of Common Stock to be purchased by it shown in the above table bears
to 3,000,000 and the Company will be obligated, pursuant to the option, to sell
such shares to the Underwriters. The Underwriters may exercise such option only
to cover over-allotments made in connection with the sale of Common Stock
offered hereby. If purchased, the Underwriters will offer such additional shares
on the same terms as those on which the 3,000,000 shares are being offered.
In connection with this offering, certain Underwriters may engage in
passive market making transactions in the Common Stock on The Nasdaq Stock
Market immediately prior to the commencement of sales in the offering in
accordance with Rule 10b-6A under the Exchange Act. Passive market making
consists of displaying bids on The Nasdaq Stock Market limited by the bid prices
of independent market makers and making purchases limited by such prices and
effected in response to order flow. Net purchases by a passive market maker on
each day are limited to a specified percentage of the passive market maker's
average daily trading volume in the Common Stock during a specified period and
must be discontinued when such limit is reached. Passive market making may
stabilize the market price of the Common Stock at a level above that which might
otherwise prevail and, if commenced, may be discontinued at any time.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters, the Company and the Selling Shareholders against certain
liabilities, including liabilities under the Securities Act.
39
40
G. Walter Loewenbaum II, a Director of the Company, is Chairman of the
Board and a shareholder of Southcoast Capital Corporation.
The Company and holders of approximately 956,100 outstanding shares of
Common Stock and 2,800,000 shares of Series B Preferred Stock have agreed not to
offer, sell or otherwise dispose of any share of Common Stock or Series B
Preferred Stock for a period of 90 days after the date of this Prospectus
without the prior consent of the Representatives of the Underwriters.
LEGAL MATTERS
The validity of the issuance of Common Stock offered hereby will be passed
upon for the Company by Bass, Berry & Sims PLC, Nashville, Tennessee. Certain
legal matters with respect to the shares of Common Stock offered hereby will be
passed upon for the Underwriters by Piper & Marbury L.L.P., Baltimore, Maryland.
EXPERTS
The financial statements (including the schedule incorporated by reference)
of the Company at December 31, 1995, and for the year then ended, included
and/or incorporated by reference in this Prospectus and Registration Statement
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their reports thereon appearing and incorporated elsewhere herein, and are
included and incorporated herein by reference in reliance upon such reports
given upon the authority of such firm as experts in accounting and auditing.
The financial statements of ENVOY at December 31, 1994 and for the two
years in the period ended December 31, 1994 included and incorporated by
reference in this Prospectus and the related financial statement schedule
incorporated by reference in the Registration Statement have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their reports
appearing and incorporated herein and elsewhere in the Registration Statement,
and are included and incorporated in reliance upon the reports of such firm
given upon their authority as experts in accounting and auditing.
The financial statements of NEIC included and incorporated by reference in
this Prospectus from Form 8K/A of ENVOY Corporation have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report, which is
included and incorporated herein by reference, and has been so included and
incorporated in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
The financial statements of Teleclaims at December 31, 1995 and 1994, and
for each of the two years in the period ended December 31, 1995, appearing in
this Prospectus and Registration Statement have been audited by Hardman Guess
Frost & Cummings, P.C., independent auditors, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
40
41
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Exchange Act
and, in accordance therewith, files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information may be inspected and copied at
the office of the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549 or at its Regional Offices located in the Citicorp Center, Suite
1400, 500 West Madison Street, Chicago, Illinois 60661 and Seven World Trade
Center, Suite 1300, New York, New York 10007. Copies of such material also may
be obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
maintains a web site that contains reports, proxy statements and other
information regarding registrants, including the Company, that file such
information electronically with the Commission. The address of the Commission's
web site is http://www.sec.gov. The Company's Common Stock is listed on The
Nasdaq Stock Market, and such reports, proxy statements and other information
can also be inspected at the offices of Nasdaq Operations, 1735 K Street, N.W.,
Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on Form
S-3, including amendments thereto, relating to the Common Stock offered hereby
(the "Registration Statement"). This Prospectus, which is part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Common Stock offered hereby,
reference is hereby made to the Registration Statement and such exhibits and
schedules, which may be inspected and copied in the manner and at the locations
described above. Statements contained in this Prospectus as to the contents of
any contract or other document referred to are not necessarily complete and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement or as previously filed with
the Commission and incorporated herein by reference.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents or portions of documents filed by the Company with
the Commission are incorporated herein by reference:
(1) Annual Report on Form 10-K for the year ended December 31, 1995.
(2) Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, as
amended by the Form 10-Q/A filed on May 24, 1996.
(3) Current Reports on Form 8-K filed on March 18, 1996 and March 21, 1996
(each as amended by Form 8-K/A, filed on May 17, 1996 and May 20, 1996,
respectively) and July 23, 1996.
(4) The description of the Common Stock contained in the Company's
Registration Statement under the Exchange Act on Form 10 on November 1,
1994, as amended through Post-Effective Amendment No. 4, filed on May
4, 1995.
All reports and other documents filed by the Company pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus
and prior to the termination of the offering of Common Stock hereunder shall be
deemed to be incorporated by reference in this Prospectus and to be part hereof
from the filing date of such documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein,
or in any other subsequently filed document that also is incorporated or is
deemed to be incorporated by reference herein, modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
Subject to the foregoing, all information appearing in this Prospectus is
qualified in its entirety by the information appearing in the documents
incorporated herein by reference.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON WRITTEN OR ORAL
REQUEST, AT NO CHARGE, FROM THE COMPANY. REQUESTS SHOULD BE DIRECTED TO THE
COMPANY, 15 CENTURY BOULEVARD, SUITE 600, NASHVILLE, TENNESSEE 37214, ATTENTION:
STEPHEN C. DUGGAN, VICE PRESIDENT & CORPORATE CONTROLLER.
41
42
GLOSSARY OF TECHNICAL TERMS
APPLICATION PROGRAM INTERFACE (API)
The published library and data sets that are embedded within a software
application which give application developers the ability to access another
software application.
BATCH PROCESSING
The submission of information in a file transfer mode. The information is
identifiable by pre-defined header and trailer records (envelope), indicating
the type of information within envelope.
BATCH CLAIMS
Health care claims that are submitted in batch mode from one trading
partner to another.
COMMUNICATION NODES
A concentration of a telephony switch in a geographic area to allow both
voice and data services, to be concentrated and then routed to other geographic
locations.
COMMUNICATIONS PROTOCOLS
The mode of telephony communications such as Asynchronous and
Bisynchronous, (X-Modem, Y Modem, Z Modem, Kermit).
EDI NETWORK
A physical telecommunication and system processing architecture which is
designed to handle electronic data interchange between trading partners.
EDI SERVICES
EDI (Electronic Data Interchange) is the electronic exchange of business
applications in a pre-defined and agreed upon format, between two or more
business trading partners.
MULTIPATH HOST ACCESS
The ability for a host (Computer System) to be accessed via multiple
telecommunications mechanisms such as, an X25 packet switch, a direct dial via
an asynchronous mode.
POINT OF SERVICE TERMINALS
Telephone-like devices which are specially programmed to initiate
transactions, such as credit transaction and/or an eligibility, over a
pre-defined network.
PRACTICE MANAGEMENT SOFTWARE
Software that has been created for the management of a physician's office.
Most commonly used for administrative and financial transactions such as,
billing, appointment scheduling and creation of health care claims.
REAL-TIME PROCESSING
The ability for one trading partner to electronically request information
from another business partner and receive a response for the request in a single
session.
SOFTWARE INTERFACES
When two disparate software applications have developed the ability to work
together at some point, and/or share or transfer information.
T-1 FACILITIES
A type of physical telephony access. A T-1 Trunk is a physical connection
from Point A to Point B for telephony services.
G-1
43
ENVOY CORPORATION
INDEX TO PRO FORMA FINANCIAL INFORMATION AND FINANCIAL STATEMENTS
PAGE
----
I. UNAUDITED PRO FORMA FINANCIAL INFORMATION
Unaudited Pro Forma Financial Information........................................ F-2
Unaudited Condensed Combined Statements of Operations for the year ended December
31, 1995 and for the three months ended March 31, 1995 and 1996................. F-3
Notes to Unaudited Pro Forma Condensed Combined Financial Information............ F-6
II. FINANCIAL STATEMENTS OF ENVOY CORPORATION
Reports of Independent Auditors.................................................. F-10
Balance Sheets as of December 31, 1994 and December 31, 1995..................... F-12
Statements of Operations for the years ended December 31, 1993, December 31, 1994
and December 31, 1995........................................................... F-13
Statements of Shareholders' Equity for the years ended December 31, 1993,
December 31, 1994 and December 31, 1995......................................... F-14
Statements of Cash Flows for the years ended December 31, 1993, December 31, 1994
and December 31, 1995........................................................... F-15
Notes to Financial Statements.................................................... F-16
Unaudited Condensed Consolidated Balance Sheets as of December 31, 1995 and March
31, 1996........................................................................ F-28
Unaudited Condensed Consolidated Statements of Operations for the three months
ended March 31, 1995 and 1996................................................... F-29
Unaudited Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 1995 and 1996................................................... F-30
Notes to Unaudited Condensed Consolidated Financial Statements................... F-31
III. CONSOLIDATED FINANCIAL STATEMENTS OF
NATIONAL ELECTRONIC INFORMATION CORPORATION
Independent Auditors' Report..................................................... F-35
Consolidated Balance Sheets as of December 31, 1994 and December 31, 1995........ F-36
Consolidated Statements of Operations for the years ended December 31, 1993,
December 31, 1994 and December 31, 1995......................................... F-37
Consolidated Statements of Cash Flows for the years ended December 31, 1993,
December 31, 1994 and December 31, 1995......................................... F-38
Consolidated Statements of Changes in Shareholders' Equity (Deficiency) for the
years ended December 31, 1993, December 31, 1994 and December 31, 1995.......... F-39
Notes to Consolidated Financial Statements....................................... F-40
IV. FINANCIAL STATEMENTS OF TELECLAIMS, INC.
Independent Auditors' Report..................................................... F-46
Balance Sheets as of December 31, 1994 and December 31, 1995..................... F-47
Statements of Operations for the years ended December 31, 1994 and December 31,
1995............................................................................ F-48
Statements of Stockholders' Equity for the years ended December 31, 1994 and
December 31, 1995............................................................... F-49
Statements of Cash Flows for the years ended December 31, 1994 and December 31,
1995............................................................................ F-50
Notes to Financial Statements.................................................... F-51
F-1
44
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The unaudited pro forma condensed combined financial information for the
year ended December 31, 1995 and for the three months ended March 31, 1995 and
1996 are set forth on the following pages. The unaudited pro forma information
has been prepared utilizing the historical financial statements of ENVOY, NEIC
and Teleclaims. The pro forma financial information gives pro forma effect to
the NEIC and Teleclaims acquisitions. The NEIC and Teleclaims acquisitions are
already reflected in ENVOY's historical balance sheet at March 31, 1996;
accordingly, no pro forma balance sheet is presented. The acquisitions are
reflected as if they had occurred on January 1, 1995 for purposes of the Pro
Forma Condensed Combined Statements of Operations. In addition, the Pro Forma
Condensed Combined Statement of Operations for the Year Ended December 31, 1995
reflects the effects of (1) ENVOY's equity investment in EMC (made January 31,
1995) as if the investment was made January 1, 1995; and (2) NEIC's acquisition
of Medical Electronic Data Exchange, Inc. and Medical Electronic Data Index,
Inc. (referred to herein collectively as "Synaptek"), a medical claims
clearinghouse and electronic data transfer business completed in July 1995, as
if such acquisition was made by ENVOY as of January 1, 1995.
The NEIC and Teleclaims acquisitions are accounted for under the purchase
method of accounting and the pro forma financial information has been prepared
on such basis of accounting utilizing estimates and assumptions as set forth
below and in the notes thereto. The pro forma financial information is presented
for informational purposes and is not necessarily indicative of the future
results of operations of the combined companies, or of the results of operations
of the combined companies, that would have actually occurred had the
acquisitions been consummated as of the periods described above. The purchase
price allocations reflected in the pro forma financial information have been
based on preliminary estimates of the respective fair value of assets and
liabilities which may differ from the actual allocations, and are subject to
revision based on further studies and valuations. The Unaudited Pro forma
Condensed Combined Statements of Operations, which include results of operations
as if the acquisitions had been consummated as of January 1, 1995, do not
reflect the effects of potential cost savings and operating synergies that may
result from the acquisitions. Certain amounts in the historical financial
statements of NEIC, Teleclaims and Synaptek have been reclassified to conform to
the financial presentation of ENVOY.
F-2
45
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL
SYNAPTEK SUBTOTAL
JAN-JUL '95(C) PRO PRO
HISTORICAL HISTORICAL HISTORICAL AND EMC FORMA PRO FORMA FORMA
ENVOY NEIC(A) TELECLAIMS(B) JAN '95 COMBINED ADJUSTMENTS COMBINED
---------- ---------- ------------- -------------- --------- ----------- --------
Revenues........................ $ 25,205 $ 37,444 $ 903 $1,187 $64,739 $ 64,739
Operating costs and expenses:
Cost of revenues.............. 15,435 14,757 818 519 31,529 31,529
Selling, general and
administrative.............. 8,243 14,129 671 624 23,667 23,667
Depreciation and
amortization................ 2,468 1,221 172 70 3,931 $ 15,576(d) 24,144
4,594(e)
181(f)
33(g)
(144)(k)
(27)(l)
---------- ---------- ------ ------- --------- ----------- --------
Operating income (loss)......... (941) 7,337 (758) (26) 5,612 (20,213) (14,601)
Other income (expense):
Interest income............... 380 325 31 736 736
Interest expense.............. (513) (179) (22) (714) (240)(h) (4,649)
(3,695)(i)
FDC management services
fee(p)...................... 850 850 850
---------- ---------- ------ ------- --------- ----------- --------
717 146 31 (22) 872 (3,935) (3,063)
Income (loss) from continuing
operations before income taxes
and loss in investee.......... (224) 7,483 (727) (48) 6,484 (24,148) (17,664)
Income taxes.................... (2,881) (2,881) 2,881(j)
Loss in investee................ (1,776) (24)(m) (1,800) (1,800)
---------- ---------- ------ ------- --------- ----------- --------
Income (loss) from continuing
operations.................... $ (2,000) $ 4,602 $(727) $ (72) $ 1,803 $ (21,267) $(19,464)
========= ========= ============= ============= ========== =========== =========
Loss per common share from
continuing operations......... $ (0.18) $ (1.67)
========= ========
Weighted average common shares
outstanding................... 11,241 406(o) 11,647
========= =========== ========
See accompanying notes to unaudited pro forma condensed combined financial
information.
F-3
46
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1995
(UNAUDITED)(IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL
SYNAPTEK
JAN-MAR
'95(C) SUBTOTAL PRO
HISTORICAL HISTORICAL HISTORICAL AND EMC PRO FORMA PRO FORMA FORMA
ENVOY NEIC(A) TELECLAIMS(B) JAN '95 COMBINED ADJUSTMENTS COMBINED
---------- ---------- ------------- ----------- --------- ----------- --------
Revenues............................... $ 6,923 $8,067 $ 216 $ 489 $15,695 $15,695
Operating costs and expenses:
Cost of revenues..................... 4,269 3,695 215 201 8,380 8,380
Selling, general and
administrative..................... 2,123 3,166 177 216 5,682 5,682
Depreciation and amortization........ 560 267 45 19 891 $ 3,894(d) 5,947
1,149(e)
45(f)
8(g)
(36)(k)
(4)(l)
------- --- ------ ---- ---- ------- -------
Operating income (loss)................ (29) 939 (221) 53 742 (5,056) (4,314)
Other income (expense):
Interest income...................... 10 68 9 87 87
Interest expense..................... (87) (17) (104) (60)(h) (1,118)
(954)(i)
------- --- ------ ---- ---- ------- -------
10 (19) 9 (17) (17) (1,014) (1,031)
Income (loss) from continuing
operations before income taxes and
loss in investee..................... (19) 920 (212) 36 725 (6,070) (5,345)
Income tax benefit (provision)......... (30) (356) (386) 356(j) (30)
Loss in investee....................... (218) (24)(m) (242) (242)
------- --- ------ ---- ---- ------- -------
Income (loss) from continuing
operations........................... $ (267) $ 564 $(212) $ 12 $ 97 $(5,714) $(5,617)
======= === ====== ==== ==== ======= =======
Loss per common share from continuing
operations........................... $ (0.02) $ (0.47)
======= =======
Weighted average common shares
outstanding.......................... 11,603 406(o) 12,009
======= ======= =======
See accompanying notes to unaudited pro forma condensed combined financial
information.
F-4
47
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL HISTORICAL HISTORICAL SUBTOTAL PRO FORMA PRO FORMA
ENVOY NEIC(A) TELECLAIMS(B) PRO FORMA ADJUSTMENTS COMBINED
---------- --------- ------------- --------- ----------- ---------
Revenues............................... $ 10,330 $ 8,013 $ 174 $ 18,517 $18,517
Operating costs and expenses:
Cost of revenues..................... 5,308 2,628 189 8,125 8,125
Selling, general and
administrative..................... 2,992 2,999 5,991 5,991
Depreciation and amortization........ 2,319 285 43 2,647 $ 2,843(d) 6,328
838(e)
30(f)
6(g)
(36)(k)
Merger and facility integration
costs.............................. 32,584 2,307 34,891 (30,700)(d) --
(4,191)(n)
EMC losses........................... 435 435 435
-------- ------- ---- -------- -------- -------
Operating loss......................... (33,308) (206) (58) (33,572) (31,210) (2,362)
Other income (expense):
Interest income...................... 98 66 164 164
Interest expense..................... (504) (39) (543) (44)(h) (1,284)
(697)(i)
-------- ------- ---- -------- -------- -------
(406) 27 (379) (741) (1,120)
Loss from continuing operations before
income taxes......................... (33,714) (179) (58) (33,951) 30,469 (3,482)
Income tax benefit (provision)......... 11,206 (922) 10,284 (11,666)(d) (460)
922(j)
-------- ------- ---- -------- -------- -------
Net loss............................... $(22,508) $(1,101) $ (58) $(23,667) $ 19,725 $(3,942)
======== ======= ==== ======== ======== =======
Net loss per common share.............. $ (1.97) $ (.34)
======== =======
Weighted average common shares
outstanding.......................... 11,416 286(o) 11,702
======== ======== =======
See accompanying notes to unaudited pro forma condensed combined financial
information.
F-5
48
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION
On November 30, 1995, ENVOY entered into an Agreement and Plan of Merger
(the "Merger Agreement") with NEIC. The merger was approved by the shareholders
on March 6, 1996 and closed immediately thereafter. In the merger, each share of
outstanding NEIC common stock was converted into the right to receive $2,606.94
cash, for an aggregate consideration of $86,150,000. 840 shares of NEIC
redeemable preferred stock will remain outstanding and may be redeemed by or put
to NEIC on and after August 1, 1996 at a redemption price of $2,606.94 per
share, or an aggregate of approximately $2,200,000.
The cash purchase price was funded by cash proceeds from equity investments
in ENVOY and conventional debt financing. An aggregate of 3,730,233 shares of
Series B Convertible Preferred Stock were sold for a total consideration of
$40,100,000, or $10.75 per share of Series B Preferred Stock. Each share of the
Series B Preferred Stock is convertible into one share of ENVOY Common Stock.
ENVOY obtained bank financing of $50,000,000, which consisted of a $25,000,000
term loan and a $25,000,000 revolving credit facility. Additionally, ENVOY sold
333,333 shares of ENVOY Common Stock for an aggregate purchase price of
$5,000,000.
The financing for the NEIC acquisition was as follows (in thousands):
Proceeds of Series B Convertible Preferred Stock.................................. $40,100
Proceeds of Common Stock.......................................................... 5,000
Bank Financing.................................................................... 41,050
-------
Total................................................................... $86,150
=======
The merger is accounted for under the purchase method of accounting
applying the provisions of Accounting Principles Board Opinion No. 16 ("APB
16"). Pursuant to the requirements of APB 16, the aggregate purchase price,
based on appraised fair values, is being allocated to the tangible and
intangible assets and liabilities assumed based on their estimated fair value at
the date of the acquisition. The estimated aggregate purchase price to be
allocated to the assets acquired and liabilities assumed consists of (in
thousands):
Cash paid for NEIC stock.......................................................... $86,150
Preferred Stock Fair Value........................................................ 2,200
Estimated Transaction and Acquisition Costs....................................... 5,950
-------
Total............................................................................. $94,300
=======
The allocation of the purchase price for purposes of the pro forma
financial information has been estimated as follows (in thousands):
Current assets................................................................... $ 14,305
Property and equipment........................................................... 3,000
Deferred tax asset............................................................... 5,797
Deferred loan costs.............................................................. 1,200
Liabilities assumed.............................................................. (7,248)
Submitter/Payor relationships.................................................... 12,100
Covenant not to compete.......................................................... 4,000
Assembled work force............................................................. 1,400
Developed in process technology.................................................. 2,100
In process technology............................................................ 30,000
Unallocated excess purchase price over net assets acquired (goodwill)............ 46,728
Estimated tax effect of temporary differences related to all assets and
liabilities, excluding goodwill ($27,646)...................................... (19,082)
--------
$ 94,300
========
F-6
49
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION -- (CONTINUED)
Also, on March 1, 1996, ENVOY acquired Teleclaims, an Alabama corporation,
in exchange for 73,242 shares of Common Stock for a purchase price of
approximately $1,500,000. The acquisition is accounted for under the purchase
method of accounting applying the provisions of APB 16. The allocation of the
purchase price for purposes of the pro forma financial information is as follows
(in thousands):
Net assets acquired................................................................. $ 336
Identifiable intangibles............................................................ 300
In-process technology............................................................... 700
Unallocated excess purchase price over net assets acquired (goodwill)............... 544
Estimated tax effects of temporary differences related to all assets and
liabilities, excluding goodwill................................................... (380)
------
$1,500
======
The above allocations are based on management's preliminary estimates. The
actual allocations will be based on further studies and valuations and may
change during the allocation period.
The Company concluded that the electronic health claim transaction
processing industry is relatively new, subject to uncertainty, including
regulatory influences and characterized by high levels of ongoing technological
innovation and rapidly changing technology. The Company operates in an
environment with high levels of price competition in a fragmented market and
faces significant competition from companies that have greater financial,
technological and other resources. The Company's operating history is relatively
limited and its ability to integrate acquisitions into the Company's operations
and business strategies is unproven. Accordingly, the Company concluded that a
three-year amortization period on a straight-line basis of the excess cost over
fair value of net assets acquired in the NEIC and Teleclaims acquisitions is
appropriate based on current evidence.
PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS
(a) Records historical financial data of NEIC for the year ended December 31,
1995, the three month period ended March 31, 1995 and for the period
January 1, 1996 through March 6, 1996.
(b) Records historical financial data of Teleclaims for the year ended
December 31, 1995, the three month period ended March 31, 1995 and the
period January 1, 1996 through February 29, 1996.
(c) Records historical data for Synaptek prior to its acquisition by NEIC for
the period January 1, 1995 through July 1995, and January 1, 1995 through
March 31, 1995.
(d) Records the amortization for NEIC over a three year life on the straight
line basis for the unallocated excess purchase price over net assets
acquired (goodwill) for the year ended December 31, 1995, the three month
period ended March 31, 1995 and the period January 1, 1996 through March
6, 1996. In connection with the preliminary allocation of the purchase
price, $30,000,000 for NEIC and $700,000 for Teleclaims represents a
charge for in-process technology and $11,400,000 for NEIC and $266,000
for Teleclaims represents the related deferred income tax benefit that
was recorded in the initial period subsequent to the consummation of the
acquisitions. The $30,700,000 charge and related income tax benefit of
$11,666,000 is excluded from the accompanying Pro Forma Statements of
Operations as it is a nonrecurring item consistent with Rule 11-02 of
Regulation S-X.
On May 23, 1996, subsequent to the consummation dates of the NEIC and
Teleclaims purchase business combinations, the FASB Emerging Issues Task
Force ("EITF") reached a
F-7
50
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION -- (CONTINUED)
consensus that the write-off of amounts for financial reporting purposes
to acquired in-process technology occurs prior to the measurement of
deferred taxes in a purchase business combination. Accordingly, the EITF
concluded deferred taxes are not provided and the in-process technology
is charged to expense on a gross basis at acquisition.
The Company has decided to make a change in accounting principle to
conform with the consensus of the EITF. Since the consensus does not
specify the manner of reporting a change in accounting principle, the
Company plans to account for such change in accordance with Statement of
Financial Accounting Standards No. 111, "Rescission of FASB Statement No.
32 and Technical Corrections," and report the change as specified by APB
Opinion No. 20. The Company plans to apply the provisions of the EITF
consensus to the prior NEIC and Teleclaims acquisitions and to reflect
this application in the Statement of Operations as a cumulative effect
type accounting change in the Company's second quarter financial
statements for the period ended June 30, 1996. In accordance with FASB
Statement No. 3 "Reporting Accounting Changes in Interim Financial
Statements" the effect of the change on the six months ended June 30,
1996, will be to increase loss from continuing operations by $11.7
million and increase net loss by $11.7 million, with a corresponding
decrease to goodwill.
An independent valuation of NEIC's assets was performed, including the
portion of the purchase price attributed to in-process technology that
should be expensed in accordance with Interpretation 4 of Statement of
Financial Accounting Standards No. 2, "Accounting for Research and
Development Costs." The Company identified five projects that were
classified as in-process technology relating to NEIC. The $30,700,000
charge values the acquired research and development based on the
estimated risk-adjusted future cash flows to be derived using a discount
rate of 25% of specifically identified technologies for which (1)
technological feasibility had not 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" (consistent
with management's definition for internally-developed software) and (2)
alternative future use did not exist.
(e) Records the amortization for NEIC of acquired identifiable intangible
assets on a straight line basis over periods of two to nine years for the
year ended December 31, 1995, the three month period ended March 31, 1995
and the period January 1, 1996 through March 6, 1996. The amortization
period for the identifiable intangible assets are as follows:
submitter/payor relationships - nine years, covenant not to compete - two
years, assembled work force - seven years, and developed in process
technology - two years.
(f) Records the amortization for Teleclaims over a three year life on the
straight line basis for the unallocated excess purchase price over net
assets acquired (goodwill) for the year ended December 31, 1995, the
three month period ended March 31, 1995 and the period January 1, 1996
through February 29, 1996.
(g) Records the amortization for Teleclaims of acquired identifiable
intangible assets based on a nine year life on a straight line basis for
the year ended December 31, 1995, the three month period ended March 31,
1995 and the period January 1, 1996 through February 29, 1996.
(h) Records the amortization of deferred loan costs incurred in connection
with the NEIC acquisition over the life of the related debt (5 years) for
the year ended December 31, 1995, the three month period ended March 31,
1995 and the period January 1, 1996 through March 6, 1996.
(i) Records interest expense of debt incurred in connection with the NEIC
acquisition at an average annual interest rate of approximately 9% for
the year ended December 31, 1995, the
F-8
51
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION -- (CONTINUED)
three month period ended March 31, 1995 and the period January 1, 1996
through March 6, 1996.
(j) Records the elimination of the historical income tax provision for NEIC.
The pro forma adjustments (excluding the tax benefit related to the
charge for in-process technology) results in a $0 tax benefit as a result
of losses for which no tax benefit is recognized under Financial
Accounting Standards No. 109, "Accounting for Income Taxes".
(k) Records the elimination of goodwill amortization for NEIC for the year
ended December 31, 1995, the three month period ended March 31, 1995 and
the period from January 1, 1996 through March 6, 1996.
(l) Records the elimination of amortization of intangibles for Synaptek for
the year ended December 31, 1995 and the three month period ended March
31, 1995.
(m) Records historical data for EMC for the one month period January 1995.
(n) Eliminates nonrecurring charges resulting directly from the NEIC
acquisition of $2,307,000 for NEIC and $1,884,000 for ENVOY which are
included in the Historical Financial Statements for the three months
ended March 31, 1996. The charges are excluded from the accompanying Pro
Forma Statements of Operations as it is a nonrecurring item consistent
with Rule 11-02 of Regulation S-X.
(o) Adjustment to reflect the issuance of 73,242 common shares in the
Teleclaims acquisition and 333,333 common shares in the NEIC merger, of
ENVOY Common Stock had the NEIC merger and Teleclaims acquisition taken
place January 1, 1995.
(p) Represents management fees received from First Data for the period June
7, 1995 through December 31, 1995 pursuant to the management services
agreement. Management fees of $375,000 for the three months ended March
31, 1996 are classified in the revenues caption in the statement of
operations.
F-9
52
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
ENVOY Corporation
We have audited the accompanying balance sheet of ENVOY Corporation as of
December 31, 1995, and the related statements of operations, shareholders'
equity, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ENVOY Corporation at
December 31, 1995, and the results of operations and cash flows for the year
then ended, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Nashville, Tennessee
February 12, 1996,
except as to Note 14, as to which the date is
March 6, 1996
F-10
53
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
ENVOY Corporation
Nashville, Tennessee
We have audited the accompanying balance sheet of ENVOY Corporation as of
December 31, 1994, and the related statements of income, stockholders' equity,
and cash flows for each of the two years in the period ended December 31, 1994.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of ENVOY Corporation as of December 31, 1994,
and the results of its operations and its cash flows for each of the two years
in the period ended December 31, 1994 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Nashville, Tennessee
February 10, 1995
(June 6, 1995 as to Note 3)
F-11
54
ENVOY CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
YEAR ENDED
DECEMBER 31,
-------------------
1994 1995
------- -------
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 4,270 $ 222
Short-term investments............................................... 11,911 5,103
Accounts receivable, less allowance for doubtful accounts of $375 and
$534 in 1994 and 1995, respectively............................... 13,179 7,610
Note receivable -- related party..................................... 357 --
Inventories.......................................................... 4,759 2,092
Deferred income taxes................................................ 977 300
Other current assets................................................. 1,449 465
------- -------
Total current assets......................................... 36,902 15,792
Property and equipment:
Equipment............................................................ 38,239 16,474
Furniture and fixtures............................................... 1,225 704
Leasehold improvements............................................... 2,559 904
------- -------
42,023 18,082
Less accumulated depreciation and amortization......................... (21,213) (5,314)
------- -------
20,810 12,768
Note receivable -- related party....................................... 1,607 --
Other assets........................................................... 2,080 1,590
------- -------
Total assets................................................. $61,399 $30,150
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 1,534 $ 388
Accrued expenses and other current liabilities....................... 4,053 4,127
Current portion of long-term debt.................................... 420 --
------- -------
Total current liabilities.................................... 6,007 4,515
Long-term debt, less current portion................................... 700 10,000
Deferred income taxes.................................................. 1,467 300
Shareholders' equity:
Preferred stock -- $1 par value in 1994, no par value; authorized
2,000,000 shares in 1994, 12,000,000 shares in 1995; none
issued............................................................ -- --
Common stock -- $1 par value in 1994, no par value; authorized,
48,000,000 shares; issued, 11,017,668 and 11,289,421 in 1994 and
1995, respectively................................................ 11,018 11,289
Additional paid-in capital........................................... 35,190 7,155
Retained earnings (deficit).......................................... 8,281 (3,109)
Deferred compensation................................................ (1,264) --
------- -------
Total shareholders' equity................................... 53,225 15,335
------- -------
Total liabilities and shareholders' equity................... $61,399 $30,150
======== ========
See accompanying notes.
F-12
55
ENVOY CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
------- ------- -------
Revenues.................................................... $13,979 $20,950 $25,205
Operating costs and expenses:
Cost of revenues.......................................... 9,691 13,280 15,435
Selling, general and administrative....................... 4,416 5,901 8,243
Depreciation and amortization............................. 1,228 1,990 2,468
------- ------- -------
Operating loss.............................................. (1,356) (221) (941)
Other income (expense):
Interest income........................................... 7 29 380
Interest expense.......................................... -- -- (513)
FDC Management Services fee............................... -- -- 850
------- ------- -------
7 29 717
------- ------- -------
Loss from continuing operations before income taxes and loss
in investee............................................... (1,349) (192) (224)
Income taxes................................................ (514) (73) --
Loss in investee............................................ -- -- (1,776)
------- ------- -------
Loss from continuing operations............................. (835) (119) (2,000)
Discontinued operations:
Income from discontinued operations, net of income
taxes.................................................. 5,523 5,526 30
First Data transaction expenses including income taxes.... -- (708) (2,431)
------- ------- -------
Income (loss) from discontinued operations.................. 5,523 4,818 (2,401)
------- ------- -------
Net income (loss)........................................... $ 4,688 $ 4,699 $(4,401)
======== ======== ========
Earnings (loss) per common share:
Continuing operations..................................... $ (0.07) $ (0.01) $ (0.18)
Discontinued operations................................... 0.48 0.42 (0.21)
------- ------- -------
Net (loss) income........................................... $ 0.41 $ 0.41 $ (0.39)
======== ======== ========
Weighted average shares outstanding......................... 11,476 11,510 11,241
======== ======== ========
See accompanying notes.
F-13
56
ENVOY CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
COMMON STOCK ADDITIONAL RETAINED TOTAL
---------------- PAID-IN EARNINGS DEFERRED SHAREHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) COMPENSATION EQUITY
------ ------- ---------- -------- ------------ -------------
Balance at December 31,
1992...................... 10,787 $10,787 $ 30,880 $ (1,106) $ -- $ 40,561
Stock options exercised... 101 101 412 -- -- 513
Income tax benefit
realized on exercise of
stock options.......... -- -- 475 -- -- 475
Net income................ -- -- -- 4,688 -- 4,688
------ ------- ---------- -------- ------------ -------------
Balance at December 31,
1993...................... 10,888 10,888 31,767 3,582 -- 46,237
Stock options exercised... 130 130 855 -- -- 985
Income tax benefit
realized on exercise of
stock options.......... -- -- 594 -- -- 594
Stock option compensation
charge................. -- -- 1,974 -- (1,264) 710
Net income................ -- -- -- 4,699 -- 4,699
------ ------- ---------- -------- ------------ -------------
Balance at December 31,
1994...................... 11,018 11,018 35,190 8,281 (1,264) 53,225
Stock options exercised... 271 271 349 -- -- 620
Income tax benefit
realized on exercise of
stock options.......... -- -- 46 -- -- 46
FDC Merger:
Stock option
compensation
charge............... -- -- -- -- 1,264 1,264
Equity transfer........ -- -- (28,430) (6,989) -- (35,419)
Net loss.................. -- -- -- (4,401) -- (4,401)
------ ------- ---------- -------- ------------ -------------
Balance at December 31,
1995...................... 11,289 $11,289 $ 7,155 $ (3,109) $ -- $ 15,335
====== ======== ========= ======== ============ ===========
See accompanying notes.
F-14
57
ENVOY CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------
1993 1994 1995
------- ------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income............................................ $ 4,688 $ 4,699 $ (4,401)
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization............................. 4,278 4,941 3,550
Stock option compensation expense......................... -- 710 1,264
Provision for losses on accounts receivable............... 75 -- 359
Deferred income taxes..................................... 347 143 96
Write-off of investment in investee....................... -- -- 820
Changes in assets and liabilities, net of First Data
transaction:
Decrease (increase) in accounts receivable.............. (3,148) (1,765) 35
Increase in inventories................................. (1,274) (1,637) (1,568)
Decrease (increase) in other current assets............. 4 (49) 531
Increase in accounts payable, accrued expenses and other
current liabilities.................................. 498 1,396 1,273
------- ------- --------
Net cash provided by operating activities............ 5,468 8,438 1,959
INVESTING ACTIVITIES:
Net (increase) decrease in short-term investments............ 3,378 (394) (5,103)
Purchases of property and equipment.......................... (9,925) (7,684) (7,970)
Payments received on notes receivable........................ 212 400 1,639
Additions to notes receivable................................ (2,512) -- --
Increase in other assets..................................... (193) (603) (580)
Investment in investee....................................... -- -- (750)
------- ------- --------
Net cash used in investing activities................ (9,040) (8,281) (12,764)
FINANCING ACTIVITIES:
Proceeds from exercise of stock options...................... 989 1,579 620
Proceeds from long-term debt................................. -- 1,260 10,000
Payment on long-term debt.................................... -- (140) (1,120)
Cash transferred in First Data transaction................... -- -- (2,743)
------- ------- --------
Net cash provided by financing activities............ 989 2,699 6,757
------- ------- --------
Net (decrease) increase in cash and cash equivalents......... (2,583) 2,856 (4,048)
Cash and cash equivalents at beginning of year............... 3,997 1,414 4,270
------- ------- --------
Cash and cash equivalents at end of year..................... $ 1,414 $ 4,270 $ 222
======== ======== =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid................................................ $ 0 $ 29 $ (513)
Interest received............................................ 860 814 380
Income taxes paid............................................ (1,672) (2,056) (476)
NONCASH TRANSACTIONS:
First Data transaction:
Book value of assets transferred, excluding cash.......... $ -- $ -- $ 36,083
Liabilities transferred................................... -- -- (3,407)
Equity transferred........................................ -- -- (35,419)
------- ------- --------
Cash transferred............................................... $ -- $ -- $ (2,743)
======== ======== =========
See accompanying notes.
F-15
58
ENVOY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. ORGANIZATION
ENVOY Corporation, a Tennessee corporation (the "Company" or "New Envoy"),
was incorporated in August 1994 as a wholly owned subsidiary of Envoy
Corporation, a Delaware corporation ("Old Envoy"), and through a stock dividend
distribution by Old Envoy of all of the outstanding shares of the common stock
of New Envoy (the "distribution") the Company ceased to be a wholly owned
subsidiary of Old Envoy. Immediately after the distribution, Old Envoy was
merged with and into First Data Corporation ("First Data") (see Note 3). Old
Envoy was formed in 1981 to develop and market electronic transaction processing
services to capture and transmit time critical information for the financial
services and health care markets. In 1995, the assets and liabilities of Old
Envoy associated with the electronic transaction processing for the health care
markets and governmental benefits programs were transferred to New Envoy. For
accounting purposes, the Company's financial statements include financial
information for its predecessor, Old Envoy, with the financial services
electronic processing business (the "financial business") shown as a
discontinued operation. For purposes of the notes to financial statements, the
"Company" refers to Old Envoy and New Envoy for the period prior to June 6,
1995. The Company currently provides electronic transaction processing services
for the health care market, applying technology to the on-line verification and
adjudication of third party reimbursement claims for pharmacies and other health
care providers. The Company is also involved in the development of electronic
benefits transfer services for governmental benefits programs such as food
stamps, welfare and social security benefits.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. The carrying amount
approximates fair value because of the short maturity of those instruments.
SHORT-TERM INVESTMENTS
Short-term investments include investments in fixed rate securities
consisting primarily of bonds and corporate notes. These investments have
maturity dates of one to five years from the date of purchase and are accounted
for in accordance with Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities." It is
the Company's intent not to hold these investments to maturity.
INVENTORIES
Inventories, which consist of point-of-service terminals and parts, are
stated at the lower of cost (first-in, first-out method) or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided over
the estimated lives of the respective assets on the straight-line basis
principally over five to seven years.
REVENUE RECOGNITION
Processing services revenue is recognized as the transactions are
processed. Receivables generally are due within 30 days and do not require
collateral.
F-16
59
ENVOY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common share have been computed by dividing net income
(loss) by the weighted average common and dilutive common equivalent shares
outstanding using the treasury stock and modified treasury stock methods, as
appropriate. In June 1995, the Company issued a convertible subordinated note
which is not considered a common stock equivalent.
RESEARCH AND DEVELOPMENT
Research and development expenses of $755,000 in 1993, $1,047,000 in 1994,
and $1,419,000 in 1995, were charged to cost of revenues as incurred until
technological feasibility has been established for the product. Thereafter, all
software development costs are capitalized until the product is available for
general use to customers. The Company has not capitalized any significant
software costs to date.
INCOME TAXES
The Company adopted SFAS No. 109, "Accounting for Income Taxes," effective
January 1, 1993. There was no cumulative effect of adopting SFAS No. 109 on the
Company's financial statements for the year ended December 31, 1993.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("FAS 121"), which requires impairment
losses to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount. FAS 121 also
addresses the accounting for long-lived assets that are expected to be disposed
of. FAS 121 is effective for financial statements for fiscal years beginning
after December 15, 1995; therefore, the Company will adopt 121 in the first
quarter of 1996 and, based on current circumstances, does not believe the effect
of adoption will be material.
In October 1995, the FASB issued Statement No. 123, "Accounting for
Stock-Based Compensation" ("FAS 123"). FAS 123 establishes financial accounting
and reporting standards for stock-based employee compensation plans. FAS 123 is
effective for transactions entered into in fiscal years beginning after December
15, 1995. The Company will account for stock-based compensation awards under the
provisions of Accounting Principles Board Opinion No. 25, as permitted by FAS
123, and intends to continue to do so.
RECLASSIFICATIONS
Certain reclassifications have been made in the 1993 and 1994 financial
statements to conform to the classification used in 1995.
F-17
60
ENVOY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. DISCONTINUED OPERATIONS -- TRANSACTION WITH FIRST DATA CORPORATION
On August 16, 1994, the Company announced the execution of an agreement and
plan of reorganization and merger (the "merger agreement") by and between the
Company and First Data (the "merger"). This merger was completed June 6, 1995.
In the merger, all of the outstanding shares of the common stock ($1 par value)
of Old Envoy were converted into shares of First Data common stock according to
a formula set forth in the merger agreement. Immediately prior to (and as a
condition of) the merger, Old Envoy distributed, pro rata to its stockholders,
all of the common stock (no par value) of New Envoy. Prior to the distribution,
Old Envoy transferred the assets and liabilities of the health care and
governmental benefits electronic transaction processing business (the "medical
business") to New Envoy in exchange for the common stock of New Envoy, whose
shares were distributed in the distribution preceding the merger. Upon
consummation of the transactions, the financial services electronic transaction
processing business was merged with and into First Data and New Envoy became a
separate publicly held company. Promptly following the distribution and merger,
New Envoy amended its charter to change its name to "ENVOY Corporation."
Pursuant to a management services agreement entered into in connection with
the merger, the Company will receive a fee from First Data of $1,500,000 per
annum, payable in quarterly installments of $375,000, during the first two years
following the merger, after which period such fees are anticipated to end. Fees
payable under the management services agreement may be reduced or eliminated to
offset certain losses (as defined in the merger agreement) incurred by First
Data. The management fee paid for the year ended December 31, 1995 was $850,000.
Following the distribution, the Company entered into a license and
transition services agreement with First Data. Under this agreement, the Company
and First Data are sharing certain assets, facilities, and employees until the
business operations are fully separated. The net impact of this agreement will
depend upon the timing and extent of the transition period. The fees received
under the management services agreement are expected to assist the Company in
offsetting the transition expenses.
The net assets of the financial business were merged with and into First
Data under the terms of the merger agreement and have been accounted for as
discontinued operations. Certain reclassifications have been made to the
statements of operations for the years ended December 31, 1993 and 1994 to
reflect such operations as discontinued operations. The net assets of the
discontinued financial business were comprised of the following:
DECEMBER 31, JUNE 6,
1994 1995
------------ -----------
Current assets................................................. $ 25,206,000 $25,155,000
Noncurrent assets.............................................. 14,951,000 13,671,000
Current liabilities............................................ (2,658,000) (2,716,000)
Noncurrent liabilities......................................... (1,430,000) (691,000)
------------ -----------
$ 36,069,000 $35,419,000
============ ============
Revenues of the financial business were $28,911,000 and 33,436,000 for the
years ended December 31, 1993 and 1994, respectively, and $12,828,000 for the
period January 1, 1995 through June 6, 1995.
The Company incurred $1,997,000 in expense related to the distribution and
merger for the year ended December 31, 1995. These expenses consisted primarily
of legal, accounting and financial advisor fees. As set forth in the merger
agreement, First Data paid 50% of the costs of the
F-18
61
ENVOY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
transactions up to a maximum expense to First Data of $2,000,000. The $1,997,000
incurred by the Company is in addition to the $2,000,000 paid by First Data. The
costs associated with the First Data merger have been included in discontinued
operations including applicable income taxes of $434,000 for the year ended
December 31, 1995 to reflect the reversal of tax benefits previously recognized
for such charges. The First Data merger expenses for the year ended December 31,
1994 net of taxes totaled $708,000.
4. EMC LOSSES
On January 28, 1995, the Company purchased 17.5% of the common stock of
EMC* Express, Inc. ("EMC"), a newly formed corporation that transmits billing
information from hospitals and doctors to third party payors. The remaining
stock of EMC is held by StellarNet, Inc., a California corporation
("StellarNet"), an unrelated party, which previously owned all of the business
of EMC directly.
The total purchase price for the 17.5% interest in EMC was $570,000,
payable in cash and forgiveness of approximately $70,000 in indebtedness to the
Company.
In connection with the closing, the Company paid $250,000 for an option to
purchase the remainder of the common stock of EMC for $2,680,000, subject to
increase upon the achievement of certain performance objectives, and also
entered into a management agreement to provide certain 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.
The Company determined that it was probable an impairment to its equity
investment as of December 31, 1995 had occurred and that it would terminate the
management agreement and not exercise its option to purchase the remaining
interest in EMC. The Company's decision was made because similar products and
technology would be available to the Company through the acquisition of NEIC,
EMC's poor operating performance and the belief that operating losses would
likely continue. Accordingly, the Company recorded a fourth quarter adjustment
in the amount of $1,637,000, to recognize an impairment in the carrying value of
its investment, to write-off advances and commitments to EMC and to record the
net realizable value of its investment at zero. The Company determined that
approximately $550,000 of the advances should have been recorded as losses in
the previous three quarters of 1995 as incurred, and accordingly has restated
such previously reported amounts in those quarters (See Note 12). During 1995,
the Company recognized losses for its initial investment and option, advances
and commitments and equity losses, for a total loss in the EMC investment of
$1,776,000.
The Company had historically accounted for its investment in EMC on the
equity method. The Company discontinued applying the equity method when the
investment (including advances and commitments) was recorded at net realizable
value of zero. The Company is committed through March 31, 1996 to fund certain
operating costs of EMC which is estimated to approximate $300,000 to $400,000.
In March 1996, StellarNet filed a lawsuit in the Superior Court of the
State of California for the City and County of San Francisco against the
Company. This lawsuit asserts claims for breach of contract and negligent
conduct. StellarNet seeks unspecified compensatory damages, plus attorneys fees
and court costs. The Company will deny each of StellarNet's claims, believes
this lawsuit is without merit, intends to vigorously defend itself, and is
considering appropriate cross-claims. No estimate of a possible loss or range of
loss can be estimated.
F-19
62
ENVOY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Summary financial information for EMC as of and for the year ended December
31, 1995 is as follows:
Current assets.................................................................. $ 241,000
Property and equipment and other assets......................................... 359,000
Current liabilities............................................................. 516,000
Long-term debt.................................................................. 623,000
Revenues........................................................................ 1,208,000
Gross profit.................................................................... 952,000
Excess of expenses over revenues before income taxes............................ (1,162,000)
5. SHORT-TERM INVESTMENTS
Effective January 1, 1994, the Company adopted SFAS No. 115. The Company's
investment securities are classified as available-for-sale under SFAS No. 115
and, as a result, the carrying amount is a reasonable estimate of fair value.
The adoption of SFAS No. 115 had no effect on the Company's financial
statements.
The securities available for sale were as follows:
YEAR ENDED DECEMBER 31,
------------------------
1994 1995
----------- ----------
U.S. Treasury and U.S. Government agencies........................ $10,855,000 $4,050,000
Corporate debt securities......................................... 992,000 991,000
Other securities.................................................. 64,000 62,000
----------- ----------
$11,911,000 $5,103,000
============ ==========
The Company's proceeds, gross realized gains and gross realized losses from
the sale of available-for-sale securities were $26,357,000, $460,000 and
$62,000, respectively, in 1993; $35,900,000, $146,000 and $66,000, respectively,
in 1994; and $9,470,000, $288,000 and $9,000, respectively, in 1995.
The future contractual maturities of available-for-sale securities as of
December 31, 1995 are as follows:
Within one year................................................................. $2,857,000
One to five years............................................................... 2,246,000
Five to ten years............................................................... --
Over ten years.................................................................. --
----------
$5,103,000
==========
All investments are classified as current because the Company views its
portfolio as available for use in its current operations.
6. NOTE RECEIVABLE -- RELATED PARTY
At December 31, 1994, the Company had a note receivable from a customer
which was a related party through approximately 20% ownership by a member of the
Company's Board of Directors. Amounts receivable from that related party were
$1,964,000, of which $357,000 was classified as current. The related party note
receivable was paid in full in February 1995.
F-20
63
ENVOY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT
Long-term debt consists of the following:
YEAR ENDED DECEMBER 31,
--------------------------
1994 1995
---------- -----------
9% convertible subordinated note due 2000....................... $ -- $10,000,000
Note payable to bank, due in monthly installments with interest
at prime or LIBOR plus 2%..................................... 1,120,000 --
Less current portion............................................ (420,000) --
---------- -----------
$ 700,000 $10,000,000
========== ============
In connection with the distribution and merger of Old Envoy into First
Data, the Company entered into a $10,000,000 note agreement with First Data on
June 6, 1995. The note was convertible, at the option of the holder, into fully
paid and nonassessable shares of common stock of the Company at the rate of one
share for each $12 face amount (subject to adjustment). The conversion price and
conversion rights shall be subject to adjustment for stock dividends,
subdivision, and combinations, subsequent issuance of common stock, issuances of
certain rights, stock purchase rights or convertible securities and certain
issuer tender offers. The note is due on May 6, 2000 and requires semiannual
interest payments each April and October. The note may be prepaid at any time
after June 6, 1997 subject to prepayment penalties of 4% for prepayment before
June 6, 1998 and 2% for prepayment before June 6, 1999. The note requires the
Company to maintain certain financial covenants and places certain limitations
on the incurrence of additional indebtedness, payment of dividends and sale of
assets.
Subsequent to December 31, 1995, First Data sold the note to an unrelated
third party for $13,500,000. The terms and conditions of the note remain
substantially the same.
On July 29, 1994, the Company entered into a term loan agreement in the
amount of $1,260,000 to finance the acquisition of certain equipment. The loan
was transferred to First Data in connection with the merger.
8. LEASES AND COMMITMENTS
The Company leases certain equipment and office space under operating
leases. Rental expense incurred under the leases during the years ended December
31, 1993, 1994, and 1995 was approximately $1,257,000, $1,631,000, and
$1,095,000, respectively.
Future minimum rental payments at December 31, 1995 under operating lease
arrangements are as follows:
1996............................................................................ $ 513,000
1997............................................................................ 354,000
1998............................................................................ 103,000
1999............................................................................ 170,000
2000............................................................................ 173,000
Thereafter...................................................................... 805,000
----------
Total minimum lease payments.................................................... $2,118,000
==========
F-21
64
ENVOY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. CAPITAL STOCK, STOCK OPTIONS, AND SHAREHOLDER RIGHTS PLAN
The Company has granted stock options to certain officers, stockholders and
others at amounts not less than the estimated market value at the date of grant.
At December 31, 1995, the Company had reserved 2,214,640 shares of common stock
for issuance in connection with the stock option plans, with an additional
2,000,000 shares of common stock reserved as of March 6, 1996, upon approval by
the Company's shareholders. Summaries of stock options outstanding are as
follows:
NUMBER OF OPTION PRICE
SHARES PER SHARE
--------- --------------
Outstanding, December 31, 1992.................................. 1,292,000 $1.50 - $ 4.92
Granted....................................................... 408,000 3.79 - 5.00
Exercised..................................................... (102,000) 1.50 - 5.00
--------- --------------
Outstanding, December 31, 1993.................................. 1,598,000 1.50 - 4.92
Granted....................................................... 10,000 4.00 - 7.00
Exercised..................................................... (130,000) 1.83 - 4.92
Canceled...................................................... (1,000) 1.50 - 3.79
--------- --------------
Outstanding, December 31, 1994.................................. 1,477,000 1.83 - 7.00
Granted....................................................... 1,829,000 2.19 - 18.00
Exercised..................................................... (271,000) 1.83 - 3.79
--------- --------------
Outstanding, December 31, 1995.................................. 3,035,000 $1.83 - $18.00
========= ==============
All of the options in the above table are currently exercisable except for
options granted subsequent to June 1995. In June 1995, options for the purchase
of common stock aggregating 718,000 shares, which vests in one-third increments
beginning June 1996, were granted and in August 1995 options for the purchase of
1,001,000 shares were granted, all of which vest five years from the grant date.
In December 1995, options for the purchase of 100,000 shares of the Company's
common stock were granted with incremental vesting over four years beginning
September 1997.
Approximately 397,100 options granted in 1993 under the 1993 Employee
Incentive Plan provided for vesting in one-third increments upon the achievement
of certain performance criteria. None of the options vested in 1993. The
Compensation Committee of the Board of Directors amended the 1993 Employee
Incentive Plan in August 1994 to provide that all options thereunder would vest
immediately preceding the expiration of such option grant or earlier upon the
attainment of certain performance criteria. This amendment resulted in the
recording of deferred compensation and additional paid-in capital of
approximately $1,974,000. Based on the attainment of certain of the performance
criteria during the year ended December 31, 1994, one-third of the options
vested effective January 31, 1995 and as a result, $710,000 of the deferred
compensation expense was recognized during 1994. As a result of the merger (see
Note 3), the vesting of all outstanding options was accelerated and all options
became fully vested as of the effective time of the merger. Accordingly, during
the year ended December 31, 1995, the remaining deferred compensation expense of
$1,264,000 was recognized.
In connection with the distribution and merger, each holder of an
outstanding option to purchase shares of Old Envoy common stock (an "ENVOY
option") received an option to purchase an equal number of shares of New Envoy
common stock (a "New Envoy option"). The exercise price of the New Envoy option
is equal to a percentage (the "distribution percentage") of the exercise price
of the ENVOY option. The distribution percentage was established based upon the
market prices of New Envoy common stock and Old Envoy common stock as determined
by the ratio of (i) the average of the closing prices of New Envoy common stock
on the three trading days immediately following the merger to (ii) the closing
price of Old Envoy immediately prior to the
F-22
65
ENVOY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
merger. The distribution percentage was 33.33% and resulted in a retroactive
correspondingly downward adjustment of each New Envoy option. The distribution
percentage adjustment was designed to place the holder of an Old Envoy option in
the same economic position after the merger as before the merger.
In connection with the merger, the Board of Directors adopted a shareholder
rights plan for the Company. The purpose of the shareholder rights plan is to
protect the interests of the Company's shareholders if the Company is confronted
with coercive or potentially unfair takeover tactics by encouraging third
parties interested in acquiring the Company to negotiate with the Board of
Directors.
The shareholder rights plan is a plan by which the Company has distributed
rights ("rights") to purchase (at the rate of one right per share of common
stock) one-tenth of one share of Series A Preferred Stock at an exercise price
of $60 per tenth of a share. The rights are attached to the common stock and may
be exercised only if a person or group (excluding certain share acquisitions as
described in the plan) acquires 20% of the outstanding common stock or initiates
a tender or exchange offer that would result in such person or group acquiring
10% or more of the outstanding common stock. Upon such an event, the rights
"flip-in" and each holder of a right will thereafter have the right to receive,
upon exercise, preferred stock having a value equal to two times the exercise
price. All rights beneficially owned by the acquiring person or group triggering
the "flip-in" will be null and void. Additionally, if a third party were to take
certain action to acquire the Company, such as a merger or other business
combination, the rights would "flip-over" and entitle the holder to acquire
shares of the acquiring person with a value of two times the exercise price. The
rights are redeemable by the Company at any time before they become exercisable
for $0.01 per right and expire in 2005.
10. INCOME TAXES
The provision for income taxes was comprised of the following:
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
---------- ---------- --------
Current:
Federal................................................ $1,845,000 $2,198,000 $331,000
State.................................................. 346,000 419,000 49,000
---------- ---------- --------
Total current.................................. 2,191,000 2,617,000 380,000
Deferred:
Federal................................................ 574,000 178,000 86,000
State.................................................. 108,000 34,000 10,000
---------- ---------- --------
Total deferred................................. 682,000 212,000 96,000
---------- ---------- --------
Provision for income taxes............................... $2,873,000 $2,829,000 $476,000
========== ========== =========
F-23
66
ENVOY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The classification of the provision for income taxes in the statements of
operations is as follows:
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
---------- ---------- --------
Income tax expense attributable to continuing
operations............................................. $ (514,000) $ (73,000) $ --
Discontinued operations:
Income from operations................................. 3,387,000 3,336,000 42,000
First Data transaction expense (benefit)............... -- (434,000) 434,000
---------- ---------- --------
Total expense from discontinued operations..... 3,387,000 2,902,000 476,000
---------- ---------- --------
Total income tax expense....................... $2,873,000 $2,829,000 $476,000
========== ========== =========
The reconciliation of income tax computed by applying the U.S. federal
statutory rate to the actual income tax expense follows:
YEAR ENDED DECEMBER 31,
---------------------------------------
1993 1994 1995
---------- ---------- -----------
Income tax at U.S. federal statutory rate........... $2,571,000 $2,560,000 $(1,335,000)
Nondeductible First Data merger costs............... -- -- 679,000
State income taxes, net of federal benefit.......... 228,000 298,000 39,000
Change in valuation allowance, federal only......... -- -- 1,130,000
Other, net.......................................... 74,000 (29,000) (37,000)
---------- ---------- -----------
Income tax expense.................................. $2,873,000 $2,829,000 $ 476,000
========== ========== ============
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The tax effects of
significant items comprising the Company's temporary differences are as follows:
YEAR ENDED DECEMBER 31,
---------------------------
1994 1995
----------- -----------
Deferred tax liability:
Difference between book and tax depreciation and
amortization.............................................. $(4,495,000) $(1,800,000)
Deferred tax assets:
Difference between book and tax treatment of leased assets... 2,833,000 604,000
Reserves not currently deductible............................ 469,000 337,000
Net operating loss........................................... -- 836,000
Difference between book and tax treatment for investment in
EMC....................................................... -- 674,000
Difference between book and tax treatment of costs of First
Data merger............................................... 434,000 --
Difference between book and tax treatment of compensation
expense................................................... 269,000 612,000
----------- -----------
Total deferred tax assets...................................... 4,005,000 3,063,000
Valuation allowance for deferred tax assets.................... -- (1,263,000)
----------- -----------
Net deferred tax assets........................................ 4,005,000 1,800,000
----------- -----------
Net deferred tax liability..................................... $ (490,000) $ --
============ ============
F-24
67
ENVOY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1995, the Company had a net operating loss carryforward of
$2,200,000. The net operating loss carryforward will expire in the year 2010.
The valuation allowance relates to deferred tax assets established under SFAS
No. 109. The net operating loss will be carried forward to future years for
possible realization. Management has determined that it is more likely than not
that such asset will not be realized.
11. PROFIT-SHARING PLAN
The Company sponsors a 401(k) profit-sharing plan covering all employees
who have completed at least six months of service and are at least 20 and
one-half years of age. Eligible employees may elect to reduce their current
compensation and contribute to the 401(k) plan through salary deferral
contributions.
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
1994
-----------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues(a)............................. $ 4,689 $ 4,586 $ 4,713 $ 6,962
Gross profit(a)......................... 1,971 1,633 2,174 1,892
Income (loss) from continuing
operations............................ 68 (74) 153 (266)
Net income.............................. 1,056 1,579 1,016 1,048
Earnings (loss) per common share:
Continuing operations................. 0.01 0.00 0.01 (0.02)
Net income............................ 0.09 0.14 0.09 0.09
1995
-----------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues................................ $ 6,923(a) $ 6,051(a) $ 5,946 $ 6,285
Gross profit............................ 2,654(a) 2,503(a) 2,219 2,394
Loss from continuing operations......... (267)(b) (170)(b) (329)(b) (1,234)(c)
Net loss................................ (98)(b) (2,613)(b) (329)(b) (1,361)(c)
Loss per common share:
Continuing operations................. (.02) (.02) (.03) (.11)
Net loss.............................. (.01) (.24) (.03) (.12)
- ---------------
(a) Revenues and gross margin as previously reported in the Company's quarterly
reports differ from amounts set forth above because of the Merger
transaction with First Data in June 1995 (See Note 3). The quarterly
revenues and gross margin amounts have been restated to reflect only the
Company's continuing operations. There was no effect on previously reported
net income.
(b) Loss from continuing operations, net loss, and loss per common share have
been restated from the amounts previously reported. The restated amounts
reflect the investee advances in the quarter incurred (see Note 4). The
effect of the restatements follows on the next page.
(c) The Company recorded a fourth quarter adjustment in 1995 of $820,000
resulting from the loss recognized on the EMC investment and option (see
Note 4).
F-25
68
ENVOY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1995
---------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Loss from continuing operations previously reported...... $ (49) $ (115) $ (46)
Investee advances........................................ (218) (55) (283)
----------- ----------- -----------
Loss from continuing operations as restated.............. $(267) $ (170) $(329)
========= ========== ==========
Net income (loss) previously reported.................... $ 120 $(2,558) $ (46)
Investee advances........................................ (218) (55) (283)
----------- ----------- -----------
Net loss as restated..................................... $ (98) $(2,613) $(329)
========= ========== ==========
Loss per common share from continuing operations
previously reported.................................... $(.00) $ (.01) $(.00)
Loss per common share from continuing operations as
restated............................................... (.02) (.02) (.03)
Net income (loss) per share previously reported.......... .01 (.23) (.00)
Net loss per share as restated........................... (.01) (.24) (.03)
13. ACQUISITION
On January 27, 1994, the Company acquired the assets and operations of
National Computer Claims Services, Inc. ("NCCS"), a Florida corporation for
approximately $1,100,000. NCCS provides transaction processing services for the
health care industry. The acquisition was recorded using the purchase method of
accounting. Accordingly, the purchase price was allocated to the assets based on
their estimated fair values as of the date of acquisition. The excess cost over
fair value of net assets acquired was approximately $573,000 and is being
amortized on a straight-line basis over 15 years. The Company periodically
assesses the recoverability of the excess cost over fair value of net assets
acquired by reviewing the operations of the acquired entity. NCCS's results of
operations have been included in the Company's financial statements beginning
January 27, 1994. NCCS's operations are not material in relation to the
Company's financial statements and pro forma financial information has therefore
not been presented.
14. SUBSEQUENT EVENTS -- RECENT ACQUISITIONS
NEIC. On March 6, 1996, the Company's shareholders approved an agreement
and plan of merger dated November 30, 1995 (the "NEIC merger") by and among the
Company and NEIC and immediately thereafter, the Company acquired NEIC through a
merger. The NEIC merger will be accounted for under the purchase method of
accounting and, as a result, the Company will record the assets and liabilities
of NEIC at their estimated fair values with the excess of the purchase price
over these amounts being recorded as goodwill. The operations of NEIC will be
included in the statements of operations from the date of acquisition.
Transaction expenses are estimated to total $2,700,000.
The aggregate purchase price for the NEIC common stock was approximately
$86,200,000. The NEIC merger was financed through equity and debt financing. An
aggregate of 3,730,233 shares of the Company's Series B convertible preferred
stock were sold to three investors for an aggregate purchase price of
$40,100,000. Additionally, the Company sold 333,333 shares of the Company's
common stock to various investors for an aggregate purchase price of $5,000,000.
The Company also entered into a credit agreement with various lenders, whereby
the Company obtained $50,000,000 in bank financing in the form of a $25,000,000
revolving credit facility and a $25,000,000 term loan. An additional 840 shares
of NEIC cumulative redeemable preferred stock, $10.00 par value per
F-26
69
ENVOY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
share, remain outstanding following the NEIC merger. The NEIC preferred stock
may be redeemed by or put at any time on or after August 1, 1996 at a redemption
price of approximately $2,200,000, plus accrued dividends, if any. NEIC merger
expenses of $542,000, which are directly attributable to the NEIC merger, have
been capitalized at December 31, 1995 and are classified as other assets.
Teleclaims, Inc. During March 1996, the Company acquired all the issued
and outstanding common stock of Teleclaims, Inc. (the "Teleclaims acquisition")
for a purchase price of approximately $1,500,000. The Teleclaims acquisition
will be accounted for under the purchase method of accounting and, as a result,
the Company will record the assets and liabilities of Teleclaims, Inc. at their
estimated fair values with the excess of the purchase price over these amounts
being recorded as goodwill. The operations of Teleclaims, Inc. will be included
in the statements of operations from the date of acquisition.
The following presents unaudited pro forma results of operations for the
year ended December 31, 1995, assuming the NEIC merger and the Teleclaims
acquisition had been consummated at the beginning of the period presented (in
thousands, except per share data):
Revenues......................................................................... $ 64,739
Loss from continuing operations.................................................. (17,253)
Net loss......................................................................... (19,654)
Loss per common share:
Continuing operations.......................................................... $ (1.48)
Discontinued operations........................................................ (.21)
--------
Net loss......................................................................... $ (1.69)
=========
F-27
70
ENVOY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, MARCH 31,
1995 1996
------------- ---------
ASSETS:
Current assets:
Cash and cash equivalents....................................... $ 222 $ 2,968
Short term investments.......................................... 5,103 1,571
Accounts receivable - net....................................... 7,610 14,802
Inventories..................................................... 2,092 1,949
Deferred income taxes........................................... 300 300
Other current assets............................................ 465 660
-------- -------
Total current assets.................................... 15,792 22,250
Property and equipment, net....................................... 12,768 15,808
Other assets...................................................... 1,590 69,873
-------- -------
Total assets............................................ $30,150 $ 107,931
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable................................................ $ 388 $ 4,952
Accrued expenses and other current liabilities.................. 4,127 10,572
Other........................................................... -- 2,169
Redeemable preferred stock...................................... -- 2,200
Current portion of long term debt............................... -- 2,174
-------- -------
Total current liabilities............................... 4,515 22,067
Long term debt, less current portion.............................. 10,000 43,581
Other long term liabilities....................................... -- 86
Deferred income taxes............................................. 300 2,746
Shareholders' equity:
Preferred stock-no par value; authorized, 12,000,000 shares;
issued, 3,730,233 in 1996.................................... -- 40,100
Common stock-no par value; authorized, 48,000,000 shares;
issued, 11,289,421 and 11,705,071 in 1995 and 1996,
respectively................................................. 11,289 17,813
Additional paid-in capital...................................... 7,155 7,155
Accumulated deficit............................................. (3,109) (25,617)
-------- -------
Total shareholders' equity.............................. 15,335 39,451
-------- -------
Total liabilities and shareholders' equity.............. $30,150 $ 107,931
======== =======
See accompanying notes to unaudited condensed consolidated financial statements.
F-28
71
ENVOY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
--------------------
1995 1996
------- --------
Revenues.............................................................. $ 6,923 $ 10,330
Operating costs and expenses:
Cost of revenues.................................................... 4,269 5,308
Selling, general and administrative................................. 2,123 2,992
Depreciation and amortization....................................... 560 2,319
Merger and facility integration costs............................... -- 32,584
EMC losses.......................................................... -- 435
------- --------
Operating loss........................................................ (29) (33,308)
Other income (expense):
Interest income..................................................... 10 98
Interest expense.................................................... -- (504)
------- --------
10 (406)
------- --------
Loss from continuing operations before income taxes and loss
in investee......................................................... (19) (33,714)
Income tax benefit (provision)........................................ (30) 11,206
Loss in investee...................................................... (218) --
------- --------
Loss from continuing operations....................................... (267) (22,508)
------- --------
Discontinued operations:
Income from discontinued operations, net of income taxes............ 169 --
------- --------
Income from discontinued operations................................... 169 --
------- --------
Net loss.............................................................. $ (98) $(22,508)
======= ========
Net income (loss) per common share:
Continuing operations............................................... $ (0.02) $ (1.97)
Discontinued operations............................................. 0.01 --
------- --------
Net loss per common share............................................. $ (0.01) $ (1.97)
======= ========
Weighted average shares outstanding................................... 11,603 11,416
======= ========
See accompanying notes to unaudited condensed consolidated financial statements.
F-29
72
ENVOY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
--------------------
1995 1996
------- --------
Net cash provided by operating activities............................. $ 691 $ 2,375
Investing activities:
Net decrease in investments........................................... -- 6,271
Purchases of property and equipment................................... (1,846) (1,467)
Payments received on notes receivable................................. 1,992 308
(Decrease) in other assets............................................ (1,091) (919)
Payments for businesses acquired, net of $4,784 cash acquired and
including other cash payments associated with the acquisitions...... -- (83,147)
-------- -------
Net cash used in investing activities................................. (945) (78,954)
Financing Activities:
Proceeds from issuance of preferred stock............................. -- 40,100
Proceeds from issuance of common stock................................ 8 5,025
Proceeds from debt.................................................... -- 43,400
Payments of debt...................................................... (105) (8,000)
Payment of deferred financing costs................................... -- (1,200)
-------- -------
Net cash (used in) provided by financing activities................... (97) 79,325
-------- -------
Net (decrease) increase in cash and equivalents....................... (351) 2,746
Cash and cash equivalents at the beginning of the year................ 4,270 222
-------- -------
Cash and cash equivalents at the end of the period.................... $ 3,919 $ 2,968
======== =======
See accompanying notes to unaudited condensed consolidated financial statements.
F-30
73
ENVOY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1996
A. BASIS OF PRESENTATION
The accompanying unaudited condensed 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 (See Note C).
Operating results for the three-month period ended March 31, 1996 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1996.
These financial statements, footnote disclosures and other information
should be read in conjunction with the audited financial statements and the
accompanying notes thereto appearing elsewhere in this Prospectus.
The Company adopted Financial Accounting Standards Board ("FASB") Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" ("FAS 121") in the first quarter of 1996, and such
adoption had no material effect on the Company.
Certain reclassifications have been made in the 1995 financial statements
to conform to the classifications in 1996.
B. NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share has been computed by dividing net income
(loss) by the number of weighted average number of shares of common stock and
common stock equivalents, when dilutive, using the treasury stock and modified
treasury stock methods, as appropriate.
C. ACQUISITIONS
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 to be paid to
certain NEIC stockholders on or after August 1, 1996 and (iii) certain other
transaction and acquisition costs of $5,947,000. The NEIC business combination
was accounted for under the purchase method of accounting, applying the
provisions of Accounting Principles Board Opinion No. 16 ("APB 16") and, as a
result, the Company recorded the assets and liabilities of NEIC at their
estimated fair values with the excess of the purchase price over these amounts
being recorded as goodwill. Based upon management's preliminary estimates, the
Company recorded $46,728,000 in goodwill and $19,600,000 of identifiable
intangible assets related to the NEIC acquisition. The actual allocations will
be based on further studies and may change during the allocation period. The
operations of NEIC are included in the statement of operations from the date of
acquisition.
In connection with the NEIC acquisition, the Company also incurred a one
time write-off of acquired in-process technology of $30,000,000 and related
deferred income taxes of $11,400,000, and such amounts were charged to expense
in the three months ended March 31, 1996, because these amounts relate to
research and development that has not reached technological feasibility and
F-31
74
ENVOY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) -- (CONTINUED)
for which there is no alternative future use. The $30,000,000 is classified as
merger and facility integration costs in the statement of operations.
The NEIC acquisition was financed through equity and debt financing. An
aggregate of 3,730,233 shares of the Company's Series B Convertible Preferred
Stock were issued to three investors for an aggregate purchase price of
$40,100,000. Additionally, the Company issued 333,333 shares of the Company's
Common Stock to various investors for an aggregate purchase price of $5,000,000.
The Company also entered into a credit agreement with two lenders, whereby the
Company obtained $50,000,000 in bank financing in the form of a $25,000,000
revolving credit facility and a $25,000,000 term loan. An additional 840 shares
of NEIC cumulative redeemable preferred stock, $10.00 par value per share,
remain outstanding. The NEIC preferred stock may be redeemed by or put back to
the Company at any time on or after August 1, 1996 at a redemption price of
approximately $2,200,000.
TELECLAIMS, INC. ("TELECLAIMS")
On March 1, 1996, the Company acquired all the issued and outstanding
Capital stock of Teleclaims, Inc. in exchange for 73,242 shares of the Company's
Common Stock for a purchase price of approximately $1,500,000. The Teleclaims
business combination was accounted for under the purchase method of accounting
applying the provisions of APB 16 and, as a result, the Company recorded the
assets and liabilities at their estimated fair values with the excess of the
purchase price over these amounts being recorded as goodwill. Goodwill in the
amount of $544,000 was 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 and related deferred
income taxes of $266,000, and such amounts were charged to expense in the three
months ended March 31, 1996, because these amounts relate to research and
development that has not reached technological feasibility and for which there
is no alternative future use. The $700,000 is classified as merger and facility
integration costs in the statement of operations. The allocation is based on
management's preliminary estimates. The actual allocations will be based upon
further studies and may change during the allocation period. The operations of
Teleclaims are included in the statement of operations from the date of
acquisition.
The Company concluded that the electronic health claim transaction
processing industry is relatively new, subject to uncertainty, including
regulatory influences, and characterized by high levels of ongoing technological
innovation and rapidly changing technology. The Company operates in an
environment with high levels of price competition in a highly fragmented market
and faces significant competition from companies that have greater financial,
technological and other resources. The Company's operating history is relatively
limited and its ability to integrate acquisitions into the Company's operations
and business strategies is unproven. Accordingly, the Company concluded that a
three-year amortization period on a straight-line basis of the excess cost over
fair value of net assets acquired in the NEIC and Teleclaims acquisitions is
appropriate based on current evidence.
Identifiable intangible assets acquired in the NEIC and Teleclaims
acquisitions are amortized on a straight-line basis over a period of two to nine
years depending upon the estimated remaining useful life of such assets.
On May 23, 1996, subsequent to the consummation dates of the NEIC and
Teleclaims purchase business combinations, the FASB Emerging Issues Task Force
("EITF") reached a consensus that the write-off of amounts for financial
reporting purposes to acquired in-process technology occurs prior to the
measurement of deferred taxes in a purchase business combination. Accordingly,
the
F-32
75
ENVOY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) -- (CONTINUED)
EITF concluded deferred taxes are not provided and the in-process technology is
charged to expense on a gross basis at acquisition.
The Company has decided to make a change in accounting principle to conform
with the consensus of the EITF. Since the consensus does not specify the manner
of reporting a change in accounting principle, the Company plans to account for
such change in accordance with Statement of Financial Accounting Standards No.
111, "Rescission of FASB Statement No. 32 and Technical Corrections," and report
the change as specified by APB Opinion No. 20. The Company plans to apply the
provisions of the EITF consensus to the prior NEIC and Teleclaims acquisitions
and to reflect this application in the Statement of Operations as a cumulative
effect of a change in accounting principle with a corresponding decrease to
goodwill in the Company's second quarter financial statements for the period
ended June 30, 1996.
Accordingly, deferred income taxes previously provided, which increased
goodwill by $11,666,000 will be reflected as a cumulative effect adjustment in
the Company's second quarter financial statements ended June 30, 1996 with a
corresponding decrease to goodwill.
The following presents unaudited pro forma results of operations (including
the one-time write-off of acquired in-process technology and related deferred
income taxes) for the three months ended 1995 and 1996 assuming the NEIC and
Teleclaims acquisitions had been consummated at the beginning of the period
presented (in thousands, except per share data):
THREE MONTHS ENDED
MARCH 31,
---------------------
1995 1996
-------- --------
Revenues............................................................. $ 15,695 $ 18,517
Loss from continuing operations...................................... (26,675) (24,899)
Net loss............................................................. (26,406) (24,899)
Loss per common share:
Continuing operations.............................................. $ (2.21) $ (2.13)
Discontinued operations............................................ .01 .00
------- -------
Net loss................................................... $ (2.20) $ (2.13)
======= =======
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 is being
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 are not part of the purchase price
allocation. The costs incurred in the three months ended March 31, 1996
associated with this plan of $1,884,000 represents exit costs associated with
lease terminations, personnel costs, writedowns of impaired assets and other
related costs that will be incurred as a direct result of the plan and are
classified as merger and facility integration costs in the statement of
operations. The number of employees to be terminated is approximately 100, of
which two employees had been terminated at March 31, 1996. The employee groups
to be terminated are the accounting, marketing and certain areas of the systems
and operations departments. No adjustments have been made to the liability as of
March 31, 1996. The Company estimates that future costs to be charged to expense
as incurred during fiscal year 1996 to approximate $1,100,000 to $2,100,000.
F-33
76
ENVOY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) -- (CONTINUED)
Merger and facility integration costs consists of the following (in
thousands):
Acquired in process technology charge-off......................................... $30,700
Facility integration costs........................................................ 1,884
-------
Total merger and facility integration costs............................. $32,584
=======
E. EMC LOSSES
On January 28, 1995, the Company purchased 17.5% of the common stock of
EMC*Express, Inc. ("EMC"), a corporation that transmits billing information from
hospitals and doctors to third party payors. The remaining stock in EMC is held
by StellarNet, Inc., a California corporation ("StellarNet"), an unrelated
party, which previously owned all of the business of EMC directly. The total
purchase price for the 17.5% interest in EMC was $570,000.
In connection with the closing, the Company paid $250,000 for an option to
purchase the remainder of the capital stock of EMC for $2,680,000, subject to
increase upon the achievement of certain performance objectives, 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. The
Company was committed through March 31, 1996 to continue to fund certain
operating costs of EMC. The loss in EMC for the three months ended March 31,
1995 and 1996 was $218,000 and $435,000, respectively. The loss for the three
months ended March 31, 1996 is classified as an operating expense because the
Company now accounts for such investment in EMC on the cost method of accounting
and has discontinued accounting for such investment on the equity method as it
had done previously. No significant future commitments are expected to be
incurred by the Company. At March 31, 1996, the Company's investment in EMC is
recorded at net realizable value of zero.
In March 1996, StellarNet filed a lawsuit in the Superior Court of the
State of California for the City and County of San Francisco against the
Company. This lawsuit asserts claims for breach of contract and negligent
conduct. StellarNet seeks unspecified compensatory damages, plus attorneys fees
and court costs. The Company has denied each of StellarNet's claims and has
filed counterclaims for fraudulent inducement and misrepresentation against
StellarNet. The Company believes these claims of StellarNet are without merit
and intends to vigorously defend itself. No estimate of a possible loss or range
of loss can be estimated.
F. DISCONTINUED OPERATIONS
On June 6, 1995, the Company completed the merger between the Company and
First Data Corporation ("FDC"). Pursuant to a management services agreement
entered into in connection with the merger, the Company is receiving a fee from
FDC of $1,500,000 per annum, payable in quarterly installments of $375,000,
during the first two years following the merger, after which period such fees
are anticipated to end. Management fees of $375,000 for the three months ended
March 31, 1996 are classified in the revenue caption in the statement of
operations.
The net assets of the financial services electronic transaction processing
business was merged with and into FDC under the terms of the merger agreement
and were accounted for as discontinued operations. Certain reclassifications
were made to the statement of operations for the three months ended March 31,
1995 to reflect such operations as discontinued operations.
F-34
77
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
National Electronic Information Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of National
Electronic Information Corporation and Subsidiaries (the "Company") as of
December 31, 1994 and 1995, and the related consolidated statements of
operations, shareholders' equity (deficiency) and cash flows for each of the
three years in the period ended December 31, 1995. 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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, such consolidated financial statements present fairly, in
all material respects, the financial position of National Electronic Information
Corporation and Subsidiaries as of December 31, 1994 and 1995, and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
New York, New York
April 19, 1996
F-35
78
NATIONAL ELECTRONIC INFORMATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
(IN THOUSANDS EXCEPT SHARE DATA)
1994 1995
-------- --------
ASSETS
Current Assets:
Cash and cash equivalents.......................................... $ 4,401 $ 4,681
Accounts receivable, net of allowance for doubtful accounts of $283
and $421 in 1994 and 1995....................................... 2,383 4,125
Accounts receivable -- affiliates.................................. 1,518 2,063
Prepaid expenses and other assets.................................. 336 144
Deferred income taxes.............................................. 2,965 4,620
Investments........................................................ 549 4,409
-------- --------
Total current assets....................................... 12,152 20,042
Property and equipment -- At cost:
Office furniture and equipment..................................... 1,887 2,312
Computer equipment................................................. 3,523 4,822
Leasehold improvements............................................. 806 809
-------- --------
6,216 7,943
Less accumulated depreciation and amortization..................... 2,750 4,137
-------- --------
Property and equipment -- net........................................ 3,466 3,806
-------- --------
Investments.......................................................... 1,553 --
Goodwill............................................................. -- 3,892
Deferred income taxes................................................ 6,455 2,063
-------- --------
Total Assets............................................... $ 23,626 $ 29,803
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses.............................. $ 4,735 $ 5,635
Current portion of due to affiliates............................... 2,209 2,385
Deferred revenue................................................... 144 --
Current portion of capital lease obligations....................... 62 174
State and Federal income taxes payable............................. 100 31
-------- --------
Total current liabilities.................................. 7,250 8,225
-------- --------
Deferred rent........................................................ 242 81
Due to affiliates.................................................... 2,141 78
Long term capital lease obligations.................................. 82 224
-------- --------
Total liabilities.......................................... 9,715 8,608
Commitments
Shareholders' Equity:
Class A Common Stock, $10 par value; authorized, 50,000 shares;
issued and outstanding -- 32,379 and 33,819 shares in 1994 and
1995............................................................ 324 338
Class B Common Stock, $10 par value; authorized, 157 shares, issued
and outstanding, 69 shares...................................... 1 1
Additional paid-in capital......................................... 34,407 36,957
Unrealized (loss)/gain on investments.............................. (93) 25
Accumulated deficit................................................ (20,728) (16,126)
-------- --------
Total shareholders' equity................................. 13,911 21,195
-------- --------
Total Liabilities and Shareholders' Equity................. $ 23,626 $ 29,803
========= =========
See notes to consolidated financial statements.
F-36
79
NATIONAL ELECTRONIC INFORMATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN THOUSANDS)
1993 1994 1995
------- ------- -------
REVENUES
Processing service revenue.................................. $20,561 $25,053 $32,574
Participation fees.......................................... 3,429 3,610 4,177
Other income................................................ 473 437 693
------- ------- -------
24,463 29,100 37,444
------- ------- -------
OPERATING EXPENSES
Cost of processing services revenue......................... 12,222 12,331 14,757
------- ------- -------
GROSS MARGIN FROM OPERATIONS................................ 12,241 16,769 22,687
------- ------- -------
Selling, general and administrative......................... 9,178 11,204 13,862
Depreciation and amortization............................... 798 910 1,221
Acquisition expenses........................................ 330 599 267
------- ------- -------
10,306 12,713 15,350
INCOME FROM OPERATIONS...................................... 1,935 4,056 7,337
------- ------- -------
OTHER INCOME (EXPENSE)
Interest income............................................. 136 140 325
Interest expense............................................ (317) (233) (179)
------- ------- -------
(181) (93) 146
------- ------- -------
INCOME BEFORE INCOME TAXES.................................. 1,754 3,963 7,483
INCOME TAX PROVISION (BENEFIT).............................. 75 (9,320) 2,881
------- ------- -------
NET INCOME.................................................. $ 1,679 $13,283 $ 4,602
======== ======== ========
See notes to consolidated financial statements.
F-37
80
NATIONAL ELECTRONIC INFORMATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN THOUSANDS)
1993 1994 1995
------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income.................................................. $ 1,679 $13,283 $ 4,602
Adjustments to reconcile net income to net cash provided by
operating activities:
Deferred income taxes..................................... -- (9,420) 2,736
Depreciation and amortization............................. 798 910 1,221
Allowance for doubtful accounts........................... 41 232 117
Gain on sale of investments............................... -- -- (9)
Interest expense on affiliate loans....................... 312 227 162
Decrease (increase) in assets:
Accounts receivable....................................... (667) (7) (2,141)
Prepaid and other current assets.......................... (209) (3) 210
Increase (decrease) in liabilities:
Accounts payable and accrued expenses..................... 1,370 456 524
Deferred revenue.......................................... (104) (6) (144)
State and Federal income taxes payable.................... 48 25 (69)
Deferred rent............................................. (159) (161) (161)
------- ------- -------
Net cash provided by operating activities......... 3,109 5,536 7,048
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Synaptek -- Net of cash acquired............ -- -- (1,313)
Purchase of investments................................... (196) -- (4,184)
Proceeds from the sale of investments..................... -- -- 2,004
Purchase of property and equipment........................ (1,485) (1,748) (1,127)
------- ------- -------
Net cash used by investing activities............. (1,681) (1,748) (4,620)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of affiliate loans.............................. (1,170) (1,646) (2,048)
Issuance of capital stock................................. 17 -- --
Principal payments on capital lease obligations........... (32) 5 (100)
------- ------- -------
Net cash used by financing activities............. (1,185) (1,641) (2,148)
------- ------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 243 2,147 280
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 2,011 2,254 4,401
------- ------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 2,254 $ 4,401 $ 4,681
------- ------- -------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest.................... $ 5 $ 6 $ 18
------- ------- -------
Cash paid during the year for income taxes................ $ 4 $ 55 $ 97
------- ------- -------
Property and equipment financed through capital leases.... $ 171 $ 227 $ 83
------- ------- -------
See notes to consolidated financial statements.
F-38
81
NATIONAL ELECTRONIC INFORMATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN THOUSANDS EXCEPT SHARE DATA)
CAPITAL STOCK CAPITAL STOCK
---------------- ---------------- UNREALIZED
CLASS A CLASS B PAID-IN (LOSS)/GAIN ON ACCUMULATED
TOTAL SHARES AMOUNT SHARES AMOUNT CAPITAL INVESTMENTS DEFICIT
------- ------- ------ ------- ------ ------- -------------- -----------
BALANCE, JANUARY 1,
1993.................. $ (975) 30,712 $307 69 $ 1 $34,407 -- $ (35,690)
Net income............ 1,679 -- -- -- -- -- -- 1,679
Stock issued for
cash............... 17 1,667 17 -- -- -- -- --
------- ------- ------ ------ ------- -------------- -----------
BALANCE, JANUARY 1,
1994.................. 721 32,379 324 69 1 34,407 -- (34,011)
Net income............ 13,283 -- -- -- -- -- -- 13,283
Unrealized (loss) on
investments........ (93) -- -- -- -- -- (93) --
------- ------- ------ ------ ------- -------------- -----------
BALANCE, JANUARY 1,
1995.................. 13,911 32,379 324 69 1 34,407 (93) (20,728)
Net income............ 4,602 -- -- -- -- -- -- 4,602
Unrealized gain on
investments........ 118 -- -- -- -- -- 118 --
Stock issuance........ 2,564 1,440 14 -- -- 2,550 -- --
------- ------- ------ ------ ------ ------- -------------- -----------
BALANCE, DECEMBER 31,
1995.................. $21,195 33,819 $338 69 $ 1 $36,957 $ 25 $ (16,126)
======== ====== ======= ====== ======= ======== ============ ===========
See notes to consolidated financial statements.
F-39
82
NATIONAL ELECTRONIC INFORMATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ORGANIZATION -- National Electronic Information Corporation
("NEIC") and Subsidiaries (the "Company") was founded in 1981 by an insurance
consortium including five of the nation's largest health insurance companies to
implement a claims processing system to support the submission, editing and
distribution of electronic claims for hospital, medical and dental services to
commercial insurance and Medicare payers. The Company currently receives claims
from over 3,000 hospitals, 160,000 physicians and 20,000 dentists. Claims are
processed and routed to over 200 payers, including commercial insurers, Medicare
and Medicaid payers, health maintenance organizations and dental insurers.
Transaction fees for the Company's core claim processing business are paid by
payers, and are a function of claim volume and price per claim.
CONSOLIDATION -- The consolidated financial statements include the accounts
of NEIC, Medical Electronic Data Exchange, Inc. and Medical Electronic Index,
Inc. All intercompany accounts have been eliminated.
USE OF ESTIMATES AND CONCENTRATION -- The financial statements are prepared
in accordance with generally accepted accounting principles which require
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the balance sheet dates and the reported amounts of revenue and expenses during
the reporting periods. Actual results could differ from those estimates.
Approximately 62 percent, 55 percent, and 40 percent of the Company's revenues
were provided by the top five payers in 1993, 1994, and 1995. See note 5 to the
consolidated financial statements.
REVENUE RECOGNITION -- Processing service revenue and annual participation
fees are charged to insurance carriers. Health service providers are charged
annual participation fees and processing service revenue for Medicare claims.
Annual participation fees are generally recognized upon billing. Participation
fees not yet recognized upon billing are classified as deferred revenue.
Transaction fee revenue is recognized as claims are processed. Fees earned from
the licensing of software to health care providers are recognized when the
licenses are granted.
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost, less
accumulated depreciation and amortization. Depreciation of property and
equipment is provided by the straight-line method over five to seven years.
Leasehold improvements are amortized over the shorter of the duration of the
lease or estimated life of the improvement.
INVESTMENTS -- Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" (SFAS No.
115), requires that investments in debt and equity securities be classified in
three categories (held-to-maturity, trading and available-for-sale). SFAS No.
115 has previously been adopted by the Company, and the Company classified its
investment in accordance with the standard. Management has since adopted the
implementation guidance contained in the November 1995 Financial Accounting
Standards Board Special Report "Questions and Answers -- A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities" (the Special Report). The Special Report permitted
management to reassess the appropriateness of the classification of all
securities held when such guidance was implemented (no later than December 31,
1995) and account for the reclassification at fair value. On December 29, 1995,
management transferred 100 percent of its held-to-maturity securities to the
available-for-sale classification at fair value. The net unrealized gains on
such securities transferred is included in shareholders' equity at December 31,
1995.
COMPUTER SOFTWARE COSTS -- The cost of purchased, licensed or internally
developed computer software, incurred subsequent to establishing the
technological feasibility of the software, that is to
F-40
83
NATIONAL ELECTRONIC INFORMATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
be sold or marketed, is capitalized and amortized using the straight-line method
over five years. Costs incurred to establish the technological feasibility of
computer software to be sold, leased or otherwise marketed are expensed as
incurred. Amortization of capitalized computer software costs amounted to
$76,000, $52,000 and $89,000 for the years ended December 31, 1993, 1994 and
1995.
INCOME TAXES -- The Company follows SFAS No. 109, "Accounting for Income
Taxes," which requires the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred income taxes are
recognized for the tax consequences of temporary differences by applying enacted
statutory tax rates applicable to future years to differences between the
financial statement carrying amounts and the tax basis of existing assets and
liabilities. Under SFAS No. 109, the effect on deferred taxes of a change in tax
rates is recognized in income in the period of enactment. Additionally, SFAS No.
109 allows the recognition, in certain circumstances, of the tax benefit of net
operating loss carryforwards. See Note 2.
GOODWILL -- Goodwill represents the excess of the purchase price over the
fair value of the net assets of acquired companies and is amortized using the
straight-line method over 20 years in accordance with APB No. 17. The Company
carries its goodwill assets at purchase prices, less amortized amounts, and is
subject to annual review for impairment. When reviewing for impairment, the
Company's accounting policy for long-lived assets, including goodwill, requires
the cost of capital to be considered in calculating the present value of the
projected future cash flows expect to be generated over the estimated lives of
the related assets. The discounted amount is then compared to the carrying value
of the long-lived assets.
DEFERRED RENT -- The Company has recorded a deferred rent credit for rent
abatements granted under its office lease agreement. Rent expense is being
charged to operations ratably over the term of the lease.
CASH EQUIVALENTS -- The Company considers all highly liquid investments
with a maturity of three months or less to be cash equivalents.
RECLASSIFICATIONS -- Certain 1993 and 1994 amounts have been reclassified
to conform to the 1995 presentation.
2. INCOME TAXES
As discussed in Note 1, the Company follows SFAS No. 109 which permits the
recognition of certain deferred tax assets when it is more likely than not that
such income tax benefits will be realized in future years.
1993 1994 1995
------- ----------- ----------
Current:
Federal................................................ $32,000 $ 85,000 $ 85,000
State and local........................................ 43,000 15,000 115,000
------- ----------- ----------
Total.......................................... 75,000 100,000 200,000
Deferred:
Federal................................................ -- (8,319,000) 2,367,636
State and local........................................ -- (1,101,000) 313,364
------- ----------- ----------
Total.......................................... -- (9,420,000) 2,681,000
------- ----------- ----------
Income tax provision (benefit)........................... $75,000 $(9,320,000) $2,881,000
======== ============ ==========
F-41
84
NATIONAL ELECTRONIC INFORMATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1993, 1994, and 1995, the Company has a deferred tax
asset of $10,850,000, $9,420,000 and $6,683,000 with a related valuation
allowance of $10,850,000, $0 and $0, respectively. A valuation allowance is
provided when it is more likely than not that some portion or all of the
deferred tax asset will not be realized. The significant component of the
deferred tax asset relates to net operating loss carryforwards. There are no
significant deferred tax liabilities. The Company has approximately $19,500,000
of net operating loss carryforwards which expire in varying amounts from 1996
through 2007. At December 31, 1994, the valuation allowance was eliminated since
management believes that it is more likely than not that the Company will
generate sufficient profits to enable it to realize the asset.
The differences between income taxes computed by applying the federal
statutory rate to income before income taxes in 1993 is due to the utilization
of net operating loss carryforwards. In 1994, an income tax asset of $9,420,000
was established and in 1995, income tax expense reflects income taxes computed
at the statutory rates.
3. DUE TO AFFILIATES
As of January 1, 1990, the Company began charging shareholder carriers
amounts in excess of the claim fee charged to other commercial carriers for
processing service revenue (the "Surcharge"). The Company stopped charging these
amounts on December 31, 1991.
The repayment of the Surcharge to shareholder carriers in the form of a
discounted fee per claim began in 1993. The discount is $.05 below rates charged
to other commercial carriers. In 1995, two of the affiliates agreed to be repaid
in four equal installments in 1996.
The maximum amount discounted to shareholders in each calendar year cannot
exceed one-third of the aggregate Surcharge and the aggregate discount per
shareholder cannot exceed the aggregate Surcharge to that shareholder.
Due to affiliates as of December 31:
1993 1994 1995
----------- ----------- -----------
Balance, January 1.............................. $ 6,627,815 $ 5,768,994 $ 4,350,038
Interest accrued on surcharge................... 311,573 226,662 161,547
Repayment on surcharge.......................... (1,170,394) (1,645,618) (2,047,795)
----------- ----------- -----------
Balance, December 31............................ 5,768,994 4,350,038 2,463,790
Less current portion............................ 2,001,000 2,209,271 2,385,378
----------- ----------- -----------
$ 3,767,994 $ 2,140,767 $ 78,412
============ ============ ============
Interest expense relating to the Surcharge was computed based upon the
prime rate in effect on the final day of the preceding year. Based on this
formula, an interest rate of 6.0 percent was applied for the years 1993 and 1994
and 8.0 percent was applied for 1995, respectively.
The current portion is estimated based on a $.05 discount per claim
multiplied by the 1996 estimated claims volume applicable to the shareholder
carriers plus the full amount of the Surcharge for those shareholder carriers
who have agreed to be repaid in equal installments during 1996.
4. SHAREHOLDERS' EQUITY
The shares of Class A common stock and Class B common stock are identical
except that the entire voting power is vested in the holders of Class A common
stock. Each share of Class B common stock may be converted, at the election of
the holder, into one share of Class A common stock.
F-42
85
NATIONAL ELECTRONIC INFORMATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. RELATED PARTY TRANSACTIONS
a. The Company is owned by fourteen shareholders, ten of whom are major
insurance carriers. Participation fees and processing service revenue earned
from these shareholders amounted to approximately $15,127,000, $16,126,000 and
$14,985,000 in 1993, 1994 and 1995, respectively. Amounts receivable from
shareholders for the above fees approximated $1,518,000 and $2,063,000 at
December 31, 1994 and 1995, respectively.
b. The Company incurred personnel expenses in connection with health and
disability insurance supplied by shareholders of the Company approximating
$515,000, $27,000 and $25,800 for the years ended December 31, 1993, 1994 and
1995, respectively.
6. RETIREMENT PLAN
The Company sponsors a contributory 401(k) retirement plan that covers
substantially all employees. The Company will match, based upon years of
service, a percentage of employee contributions to a maximum of 5 percent. For
1993, 1994 and 1995, the Company's 401(k) retirement plan expense was
approximately $168,000, $241,000 and $278,000, respectively.
7. COMMITMENTS AND CONTINGENCIES
The Company leases equipment and office space under capital and operating
leases. The Company has entered into various capital lease agreements and the
principal payments due are as follows:
YEAR ENDING
DECEMBER 31, TOTAL
- ------------- --------
1996............................................................................ $173,636
1997............................................................................ 108,967
1998............................................................................ 65,490
1999............................................................................ 49,158
--------
$397,251
=========
At December 31, 1994 and 1995, assets purchased under the capital lease
were $227,000 and $449,000. The related accumulated depreciation was $49,000 and
$173,000, respectively.
Minimum future cash obligations under all noncancelable operating leases at
December 31, 1995 are as follows:
YEAR ENDING
DECEMBER 31, TOTAL
- ------------- ----------
1996.......................................................................... $1,129,579
1997.......................................................................... 603,579
1998.......................................................................... 47,553
1999.......................................................................... --
----------
$1,780,711
==========
The headquarters office space rental is subject to lessor cost escalation
and contains two five-year renewable options. The Company has agreed to renew
this lease for a term of one year ending on June 30, 1997. Rent expense for all
office space operating leases in 1993, 1994, and 1995 amounted to approximately
$554,000, $938,000 and $1,012,000, respectively.
F-43
86
NATIONAL ELECTRONIC INFORMATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
While various claims have been asserted against the Company, management
believes that the ultimate liability, if any, from the resolution of these
matters will not be material to the operating income or financial position of
the Company.
8. ACQUISITION
On July 25, 1995, NEIC executed an Agreement and Plan of Merger (the
"Merger Agreement") by and between the Company and Medical Electronic Data
Exchange, Inc. ("Synaptek") and Medical Electronic Data Index, Inc. ("Index")
and Kepa Zubeldia, Robert C. Brown and Zelda Brown (collectively the "Synaptek
Shareholders"). In the merger, all of the outstanding shares of Synaptek and
Index were retired in exchange for $1,000,000 cash, repayment of an obligation
for $106,000 and 1,440 shares of the Company's common stock valued at
approximately $2,550,000. Synaptek and Index act as a clearinghouse for
commercial, Medicare and Medicaid healthcare transactions.
In conjunction with the Merger Agreement, the Company also entered into a
Put Option Agreement with the Synaptek Shareholders whereby the Synaptek
Shareholders could cause the Company to repurchase the Company's common stock at
the greater of the fair market value of such shares or $2,600,000 during a six
month period beginning July 13, 1998. In conjunction with the sale of the
Company, the Put Option Agreement has terminated (see Note 9).
The acquisition has been accounted for using the purchase method and
accordingly, the purchase price has been allocated to the assets purchased and
the liabilities assumed based upon the fair values at the date of acquisition.
The excess of the purchase price over the fair values of the net assets acquired
was $3,975,000, has been recorded as goodwill and is being amortized on the
straight-line method over 20 years. The operating results of Synaptek and Index
have been included in the consolidated statement of operations from the date of
acquisition. The aggregate purchase price comprising goodwill consists of the
following:
Cash paid....................................................................... $1,000,000
Stock issued.................................................................... 2,550,000
Debt paid down.................................................................. 106,000
Negative fair value of net assets acquired...................................... 28,000
Acquisition costs............................................................... 291,000
----------
Total Goodwill........................................................ $3,975,000
==========
The allocation of the purchase price to the fair value of the assets
acquired and liabilities assumed is as follows:
Cash paid....................................................................... $ 65,000
Accounts receivable............................................................. 264,000
Prepaid expenses and other assets............................................... 18,000
Property and equipment.......................................................... 267,000
Goodwill........................................................................ 3,975,000
Accounts payable and expenses................................................... (369,000)
Capital lease obligations....................................................... (273,000)
----------
$3,947,000
==========
9. SUBSEQUENT EVENTS
On November 30, 1995, the Company entered into an agreement and plan of
merger (the "Purchase Agreement") with ENVOY Corporation ("ENVOY") and ENVOY
Acquisition Company
F-44
87
NATIONAL ELECTRONIC INFORMATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
("EAC") whereby the respective Boards of Directors of ENVOY, EAC and the Company
agreed to consummate a business combination, whereby, ENVOY and EAC would
acquire all the issued and outstanding common stock of the Company for $2,626.29
per share, less a transaction bonus of $27.97, in cash. The common stock shares
issued and outstanding for purposes of the transaction are 33,888.05 shares.
In connection with the above transaction, the Company has offered NEIC
Cumulative Redeemable Preferred Stock ("NEIC Preferred Stock") to certain
Synaptek Shareholders who own 840.21 shares of NEIC Common Stock in exchange for
the previously issued common shares at an exchange ratio of one share of NElC
Preferred Stock for each share of NEIC Common Stock. Each holder of NEIC
Preferred Stock has the option to sell their shares to the Company at a price of
$2,606.94 plus any unpaid cumulative and current accrued dividends payable after
August 1, 1996.
The Put Option Agreement referred to in Note 8 has terminated as of the
effective date of the merger (March 6, 1996).
F-45
88
INDEPENDENT AUDITORS' REPORT
Board of Directors
Teleclaims, Inc.
Birmingham, Alabama
We have audited the accompanying balance sheets of Teleclaims, Inc. (an
S-Corporation) as of December 31, 1994 and 1995, and the related statements of
operations, stockholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis. evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Teleclaims, Inc. as of
December 31, 1994 and 1995, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
HARDMAN GUESS FROST & CUMMINGS, P.C.
Birmingham, Alabama
February 28, 1996
F-46
89
TELECLAIMS, INC.
BALANCE SHEETS
DECEMBER 31,
--------------------------
1994 1995
---------- -----------
ASSETS
CURRENT ASSETS
Cash.......................................................... $ 11,945 $ 0
Accounts receivable, less allowance of $10,000 and $-0-,
respectively............................................... 101,095 129,374
Interest receivable -- shareholder............................ 37,992 22,389
Note receivable -- shareholder, current portion............... 79,992 39,996
Prepaid expenses.............................................. 12,702 18,113
---------- -----------
TOTAL CURRENT ASSETS.................................. 243,726 209,872
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment..................................................... 421,331 440,254
Software...................................................... 277,367 281,127
Furniture and fixtures........................................ 43,740 44,975
Leasehold improvements........................................ 5,458 5,458
---------- -----------
747,896 771,814
Less allowances for depreciation and amortization............. 343,889 515,689
---------- -----------
404,007 256,125
OTHER ASSETS
Note receivable -- shareholder, less current portion.......... 319,968 279,972
Intangible assets, net of accumulated amortization of $235,754
and $357,679, respectively................................. 450,251 328,326
Organizational costs, net of accumulated amortization of $555
and $755, respectively..................................... 445 245
---------- -----------
770,664 608,543
---------- -----------
TOTAL ASSETS.......................................... $1,418,397 $ 1,074,540
========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Cash overdraft................................................ $ 0 $ 1,226
Accounts payable.............................................. 2,502 16,884
Accrued employee benefits..................................... 15,658 23,077
Other......................................................... 1,349 6,108
---------- -----------
TOTAL CURRENT LIABILITIES............................. 19,509 47,295
STOCKHOLDERS' EQUITY
Class A common stock, par value $.01 per share -- 20,000
shares authorized, 11,500 and 13,250 shares issued and
outstanding, respectively.................................. 115 132
Class B non-voting common stock, par value $.01 per share --
20,000 shares authorized, 11,500 and 13,300 shares issued
and outstanding, respectively.............................. 115 133
Additional paid-in capital.................................... 2,299,770 2,654,735
Retained earnings (deficit)................................... (901,112) (1,627,755)
---------- -----------
TOTAL STOCKHOLDERS' EQUITY............................ 1,398,888 1,027,245
---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............ $1,418,397 $ 1,074,540
========== ============
See notes to financial statements.
F-47
90
TELECLAIMS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
-------------------------
1994 1995
---------- ----------
Net sales......................................................... $ 775,461 $ 903,103
General and administrative expenses............................... 1,475,922 1,660,750
---------- ----------
Operating (Loss)........................................ (700,461) (757,647)
Other income
Interest income......................................... 36,047 31,004
---------- ----------
Net (Loss).............................................. $ (664,414) $ (726,643)
========== ==========
See notes to financial statements.
F-48
91
TELECLAIMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994 AND 1995
ADDITIONAL
CAPITAL PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------- ---------- ----------- ----------
Balance at January 1, 1994..................... $ 210 $2,099,790 $ (236,698) $1,863,302
Issuance of 2,000 shares of common stock....... 20 199,980 0 200,000
Net loss for the year.......................... 0 0 (664,414) (664,414)
------- ---------- ----------- ----------
Balance at December 31, 1994................... 230 2,299,770 (901,112) 1,398,888
Issuance of 3,550 shares of common stock....... 35 354,965 0 355,000
Net loss for the year.......................... 0 0 (726,643) (726,643)
------- ---------- ----------- ----------
BALANCE AT DECEMBER 31, 1995......... $ 265 $2,654,735 $(1,627,755) $1,027,245
====== ========== ============ ==========
See notes to financial statements.
F-49
92
TELECLAIMS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-------------------------
1994 1995
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss)..................................................... $(664,414) $(726,643)
Adjustments to reconcile net income to net cash provided (used)
by operating activities:
Provision for depreciation and amortization................. 338,626 293,924
Changes in operating assets and liabilities:
Accounts receivable....................................... (26,236) (28,279)
Interest receivable....................................... (32,287) 15,603
Prepaid expenses.......................................... (2,533) (5,410)
Accounts payable.......................................... (55,159) 14,382
Accrued employee benefits................................. (5,444) 7,419
Other current liabilities................................. (3) 4,759
--------- ---------
NET CASH (USED) BY OPERATING ACTIVITIES.......................... (447,450) (424,245)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment and leasehold improvements.............. (51,206) (23,918)
Payments received on note receivable -- shareholder............ 0 79,992
--------- ---------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES................. (51,206) 56,074
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock......................... 200,000 355,000
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES...................... 200,000 355,000
--------- ---------
NET (DECREASE) IN CASH......................................... (298,656) (13,171)
Cash at beginning of year........................................ 310,601 11,945
--------- ---------
CASH (OVERDRAFT) AT END OF YEAR................................ $ 11,945 $ (1,226)
========== ==========
See notes to financial statements.
F-50
93
TELECLAIMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS: Teleclaims, Inc.'s primary business activity is
providing electronic document filing between physicians, medical practices,
hospitals and insurance companies.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS: Equipment and leasehold improvements
are recorded at cost. Expenditures for renewals and betterments which materially
extend the useful lives of the assets or increase their productivity are
capitalized. Expenditures for maintenance and repairs are charged to current
operations.
Depreciation of equipment and furniture and fixtures is computed on
accelerated methods over the estimated useful lives of the assets. Amortization
of computer software is computed on the straight-line method over lives ranging
from three to five years. Amortization of leasehold improvements is computed on
the straight-line method over 31.5 years.
INTANGIBLE ASSETS: The Company acquired certain intangible assets in
connection with the acquisition of the assets of the Company in 1992. These
capitalized costs are amortized on the straight-line method over the estimated
useful lives of the assets.
EMPLOYEE BENEFITS: The cost of compensated leave is accrued as it is
vested to the employees.
ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INCOME TAXES: The Company has elected to be taxed under the provisions of
Subchapter S of the Internal Revenue Code. Under those provisions, the Company
does not pay corporate income taxes on its taxable income, and the accompanying
financial statements do not include a provision for income taxes. Instead, the
stockholders are liable for individual income taxes on their respective share of
the Company's taxable income.
RECLASSIFICATIONS: Certain amounts in the 1994 financials have been
reclassified to conform to the 1995 presentation. Such reclassifications had no
effect on net income.
NOTE B -- NOTE RECEIVABLE FROM SHAREHOLDER
The note receivable from shareholder is payable in annual principal
installments of $39,996, along with interest at the prime rate of AmSouth Bank
of Birmingham, Alabama plus 1/2%. These annual payments are due on March 31 of
each year until March 31, 2003, at which time all remaining principal and
accrued interest shall be due and payable. The nonrecourse note is secured by
4,000 shares of Class B non-voting common stock of the Company which were issued
pursuant to the terms of a Subscription Agreement on the same date as the
issuance of the note. It is the intent of the Company to declare a bonus to the
shareholder each year to assist him in repaying the principal and interest on
the note, but the Company is under no legal obligation to declare such bonuses.
In the event the shareholder's employment is terminated for any reason the
Company shall have the right to repurchase the shareholder's stock at its
original purchase price.
Interest income includes $32,287 and $22,389 related to this note for the
years ended December 31, 1994 and 1995, respectively.
F-51
94
TELECLAIMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE C -- INTANGIBLE ASSETS
In connection with acquisition of the assets of the Company on March 23,
1992, the Company purchased certain intangible assets as follows:
A. Customer Contracts:
These costs represent the portion of the purchase price allocated to
the servicing rights for existing customer contracts. The capitalized costs
of $284,850 are being amortized on the straight-line method over thirteen
years.
B. Preferred Provider/Non-Compete Agreement:
These costs represent the amounts paid to Salcris Corporation, the
former owner of Teleclaims, Inc., and two of its shareholders in return for
a five-year non-compete and consulting agreement. The non-compete portion
of capitalized costs of $100,000 is being amortized on the straight-line
method over the term of the agreement. Under the agreement, the Company
made an additional payment in March 1993 of $301,155 which represented
payment in return for Salcris Corporation designating the Company as its
preferred provider of claims processing. These costs are also being
amortized on the straight-line method over five years.
NOTE D -- LEASES
The Company is committed under a noncancelable operating lease for office
space. Rent under the lease is comprised of a minimum rent and an allocation of
the landlord's operating expenses. The Company also leases certain office
equipment under various noncancelable operating leases. Future minimum rental
commitments under these leases are as follows:
FOR THE YEAR ENDING AMOUNT
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1996............................................................................. $ 63,107
1997............................................................................. 59,574
1998............................................................................. 9,254
1999............................................................................. 0
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TOTAL MINIMUM LEASE PAYMENTS........................................... $131,935
=========
Total expense for all operating leases for the years ended December 31,
1994 and 1995, was $87,982 and $95,210, respectively.
NOTE E -- EMPLOYEE BENEFIT PLAN
The Company has a qualified 401(k) profit sharing plan under which all
employees who meet minimum age (21) and length of service (six months)
requirements may defer a portion of their salary. The plan provides that the
Company make a contribution equal to twenty-five percent (25%) of the amount
contributed by an employee. The plan also provides that the Company may make an
annual contribution at the discretion of the Board of Directors to be allocated
among all the plan participants. Company contributions to the plan were $6,651
and $6,895 for the years ended December 31, 1994 and 1995, respectively.
F-52
95
TELECLAIMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE F -- CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to credit risk
consist of cash, accounts receivable and notes receivable. Accounts receivable
are due from customers located in the southeastern United States and notes
receivable are due from a stockholder of the Company.
The Company maintains bank balances with financial institutions in Alabama.
Accounts at each institution are guaranteed by federal deposit insurance up to
$100,000 per institution. The Company did not have any deposits in excess of the
amount insured at December 31, 1994 and 1995, respectively.
NOTE G -- FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial Accounting Standards Board Statement (SFAS) No. 107, Disclosure
About Fair Value of Financial Instruments requires disclosure of fair value
information about certain financial instruments, for which it is practicable to
estimate that value, whether or not such market values are recognized in the
balance sheet.
The carrying amount of the note receivable-shareholder approximates its
fair value because the note's interest rate fluctuates with the prime rate.
F-53
96
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NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
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TABLE OF CONTENTS
PAGE
----
Prospectus Summary.................... 3
Risk Factors.......................... 6
Price Range of Common Stock and
Dividend Policy..................... 10
Use of Proceeds....................... 11
Capitalization........................ 12
Certain Financial Data................ 13
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 15
Business.............................. 23
Management............................ 30
Description of Capital Stock.......... 32
Principal and Selling Shareholders.... 37
Underwriting.......................... 39
Legal Matters......................... 40
Experts............................... 40
Available Information................. 41
Incorporation of Certain Information
by Reference........................ 41
Glossary of Technical Terms........... G-1
Index to Financial Statements......... F-1
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3,000,000 SHARES
ENVOY LOGO(R)
COMMON STOCK
-------------------
PROSPECTUS
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ALEX. BROWN & SONS
INCORPORATED
HAMBRECHT & QUIST
J.C. BRADFORD & CO.
SOUTHCOAST CAPITAL
CORPORATION
August 8, 1996
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