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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): February 27, 1998
ENVOY CORPORATION
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(Exact name of registrant as specified in its charter)
Tennessee 0-25062 62-1575729
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(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification No.)
15 Century Boulevard, Suite 600, Nashville, TN 37214
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (615) 885-3700
Not Applicable
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(Former name or former address, if changed since last report)
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Item 2. Acquisition or Disposition of Assets
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On February 27, 1998, ENVOY Corporation ("ENVOY") completed business
combinations with Professional Office Services, Inc. ("POS"), XpiData, Inc.
("XpiData") and Automated Revenue Management, Inc. ("ARM") (POS, XpiData and ARM
are collectively referred to as the "ExpressBill Companies"). Pursuant to the
terms of three separate Agreements and Plans of Merger dated February 23, 1998
(the "Merger Agreements"), POS and XpiData were merged into a wholly-owned ENVOY
subsidiary, ENVOY/ExpressBill, Inc., and a newly formed ENVOY subsidiary was
merged with and into ARM and ARM became a wholly-owned subsidiary of ENVOY. In
exchange for all of the outstanding shares of the target companies, ENVOY issued
2,131,000 shares of common stock to the shareholder of POS, 1,365,000 shares to
the shareholders of XpiData and 4,000 shares to the shareholders of ARM. The
ExpressBill Companies primarily provide electronic data transmission and
formatting, patient statement processing, printing and mailing services for
health care providers and practice management system vendors. The transactions
are being accounted for as poolings of interests.
The terms and conditions of the business combinations are more fully
described in the Merger Agreements and the Registration Rights Agreement, which
are incorporated herein by reference in their entirety.
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Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
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(a) Financial Statements of Business Acquired:
The following financial statements of Professional
Office Services, Inc., are contained on pages 5 to 16 of
this report:
Report of Independent Public Accountants
Balance Sheets as of December 31, 1997 and 1996.
Statements of Operations for the years ended
December 31, 1997, 1996 and 1995.
Statements of Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995.
Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.
Notes to Financial Statements
The following financial statements of XpiData, Inc., are
contained on pages 17 to 28 of this report:
Report of Independent Public Accountants
Balance Sheets as of December 31, 1997 and 1996.
Statements of Operations for the years ended
December 31, 1997, 1996 and 1995.
Statements of Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995.
Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.
Notes to Financial Statements
(b) The pro forma financial information required by Item 7(b) is
not being filed at this time. ENVOY anticipates filing this
information in an amendment to this Form 8-K as soon as
practicable, but in no event later than 60 days from the date
hereof.
(c) Exhibits:
2.1 Agreement and Plan of Merger, dated as of February 23, 1998,
by and among ENVOY Corporation, ENVOY Acquisition
Corporation, Professional Office Services, Inc. and Richard
B. McIntyre (incorporated by reference to Exhibit 2.1 to the
Company's Form 8-K dated February 23, 1998).
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2.2 Agreement and Plan of Merger, dated as of February 23, 1998,
by and among ENVOY Corporation, ENVOY Acquisition
Corporation, XpiData, Inc., Michael Marolf, Sr., Michael
Marolf, Jr., Jeffrey Marolf and Lisa Marolf (incorporated by
reference to Exhibit 2.2 to the Company's Form 8-K dated
February 23, 1998).
2.3 Agreement and Plan of Merger, dated as of February 23, 1998,
by and among ENVOY Corporation, ENVOY Acquisition Subsidiary,
Inc., Automated Revenue Management, Inc., Patrick J.
McIntyre, Terrence J. McIntyre and Michael S. McIntyre
(incorporated by reference to Exhibit 2.3 to the Company's
Form 8-K dated February 23, 1998).
4.1 Registration Rights Agreement dated February 27, 1998, by and
among ENVOY Corporation and Michael F. Marolf, Sr., Michael
F. Marolf, Jr., Jeffrey B. Marolf, Lisa A. Marolf, Richard B.
McIntyre, Michael S. McIntyre, Terrence J. McIntyre, and
Patrick J. McIntyre (incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997)
99.1 Press Release, dated February 23, 1998, issued by ENVOY
Corporation (incorporated by reference to Exhibit 99.1 to
the Company's Form 8-K dated February 23, 1998)
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Professional Office Services, Inc.:
We have audited the accompanying balance sheets of PROFESSIONAL OFFICE SERVICES,
INC. (see Note 1) as of December 31, 1997 and 1996, and the related statements
of operations, stockholders' equity and cash flows for each of the three years
in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Professional Office Services,
Inc. as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
February 11, 1998
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PROFESSIONAL OFFICE SERVICES, INC.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS 1997 1996
CURRENT ASSETS:
Cash and cash equivalents $ 47,026 $ 184,274
Accounts receivable, net of allowance of $266,867 in 1997
and $208,651 in 1996 4,902,622 2,754,683
Inventory, net 346,351 289,534
Deferred income taxes -- 156,400
Other 13,600 25,136
Total current assets 5,309,599 3,410,027
PROPERTY AND EQUIPMENT:
Leasehold improvements 31,842 31,842
Computer and office equipment 2,264,579 1,554,950
Furniture and fixtures 135,816 131,791
Vehicles 53,981 119,081
2,486,218 1,837,664
Less accumulated depreciation (1,266,189) (1,024,072)
Net property and equipment 1,220,029 813,592
OTHER ASSETS 24,779 49,779
Total assets $ 6,554,407 $ 4,273,398
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit $ 1,126,000 $ 1,740,000
Accounts payable 1,863,677 570,644
Accrued expenses 1,470,656 1,171,601
Postal deposits 772,624 245,106
Income taxes payable -- 30,510
Current portion of long-term debt 157,854 227,806
Total current liabilities 5,390,811 3,985,667
LONG-TERM DEBT, NET OF CURRENT PORTION 212,565 369,005
Total liabilities 5,603,376 4,354,672
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, no par value, 500 shares authorized, 175 shares issued and
outstanding in 1997 and 1996, respectively 3,459 3,459
Retained earnings 947,572 (84,733)
Total stockholders' equity 951,031 (81,274)
Total liabilities and stockholders' equity $ 6,554,407 $ 4,273,398
The accompanying notes to financial statements are an integral part
of these statements.
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PROFESSIONAL OFFICE SERVICES, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
REVENUES $ 16,119,796 $ 10,512,746 $ 7,229,400
OPERATING COSTS AND EXPENSES:
Cost of revenues 8,210,322 5,591,025 4,551,229
Selling, general and administrative 4,885,151 3,682,540 2,470,734
Depreciation and amortization 301,938 277,459 238,804
Total operating costs and expenses 13,397,411 9,551,024 7,260,767
INCOME (LOSS) FROM OPERATIONS 2,722,385 961,722 (31,367)
OTHER INCOME, NET -- 4,774 35,808
INTEREST EXPENSE (142,798) (186,082) (138,492)
INCOME (LOSS) BEFORE PROVISION (BENEFIT) INCOME TAXES 2,579,587 780,414 (134,051)
PROVISION (BENEFIT) FOR INCOME TAXES -- 147,457 (48,264)
NET INCOME (LOSS) $ 2,579,587 $ 632,957 $ (85,787)
The accompanying notes to financial statements are an integral part
of these statements.
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PROFESSIONAL OFFICE SERVICES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
COMMON RETAINED
STOCK EARNINGS TOTAL
BALANCE, AT DECEMBER 31, 1994 $ 3,459 $ 251,079 $ 254,538
Net income -- (85,787) (85,787)
Shareholder distributions -- (211,822) (211,822)
BALANCE, AT DECEMBER 31, 1995 3,459 (46,530) (43,071)
Net income -- 632,957 632,957
Shareholder distributions -- (671,160) (671,160)
BALANCE, AT DECEMBER 31, 1996 3,459 (84,733) (81,274)
Deferred tax benefit distribution to shareholder in the
form of a dividend
-- (156,400) (156,400)
Net income -- 2,579,587 2,579,587
Shareholder distributions -- (1,390,882) (1,390,882)
BALANCE, AT DECEMBER 31, 1997 $ 3,459 $ 947,572 $ 951,031
The accompanying notes to financial statements are an integral part
of these statements.
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PROFESSIONAL OFFICE SERVICES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,579,587 $ 632,957 $ (85,787)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Provision for doubtful accounts 58,216 44,457 70,938
Provision for depreciation and amortization 301,938 277,459 238,804
Provision for excess and obsolete inventory 12,500 12,500 --
Loss on disposal of assets 36,041 -- --
Deferred income taxes -- (82,800) (73,600)
Changes in operating assets and liabilities:
Increase in accounts receivable (2,206,155) (724,934) (859,997)
Increase in inventory (69,317) (61,419) (60,070)
Decrease (increase) in other current assets 11,536 (10,543) 2,564
Increase in other assets -- -- (74,167)
Increase in accounts payable 1,293,033 124,401 122,626
Increase in accrued expenses 299,055 187,528 379,419
Increase in postal deposits 527,518 142,138 102,967
Increase (decrease) in income taxes payable (30,510) 25,410 5,100
Net cash provided by (used in) operating activities 2,813,442 567,154 (231,203)
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Capital expenditures for property and equipment, net (719,415) (374,019) (493,938)
Net cash used in investing activities (719,415) (374,019) (493,938)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments on) revolving line of credit, net (614,000) 599,000 741,000
Proceeds from (payments on) long-term debt, net (226,393) (31,857) 154,265
Distributions to shareholder (1,390,882) (671,160) (211,822)
Net cash provided by (used in) financing activities (2,231,275) (104,017) 683,443
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (137,248) 89,118 (41,698)
CASH AND CASH EQUIVALENTS, beginning of year 184,274 95,156 136,854
CASH AND CASH EQUIVALENTS, end of year $ 47,026 $ 184,274 $ 95,156
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 142,798 $ 186,082 $ 138,492
Income taxes $ 30,510 $ 204,847 $ 20,237
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Deferred tax benefit distributed to shareholder in the
form of a dividend $ 156,400 $ -- $ --
The accompanying notes to financial statements are an integral part
of these statements.
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PROFESSIONAL OFFICE SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Professional Office Services, Inc. (the "Company") provides statement
mailing and related services primarily to health care service providers
and, to a lesser extent, members of the business community. The Company
also provides certain office supplies and standardized forms to its
customers. The Company's operations are primarily in the eastern United
States.
ORGANIZATION AND BASIS OF PRESENTATION
Prior to January 1, 1997, the Company consisted of Professional Office
Services, Inc. (an Ohio S-Corporation), WMS Systems, Inc. (an Ohio
C-Corporation) and Direct Factory Marketing (a sole proprietorship). All
three entities were owned by the Company's sole shareholder. The Company
provided statement mailing services, WMS Systems ("WMS") printed
customized forms to be utilized in the statement mailing services of the
Company and Direct Factory Marketing ("DFM") served as a wholesaler of
standardized insurance forms. On January 1, 1997, DFM and WMS were merged
into the Company and the merger has been accounted for at historical cost
similar to a pooling of interests due to the common ownership of the three
companies.
The statements of operations and stockholders' equity for each of the
three years in the period ended December 31, 1997 include the combined
results of operations of the Company, WMS, and DFM as if the entities had
been combined as of January 1, 1995. All significant intercompany accounts
and transactions have been eliminated.
CASH AND CASH EQUIVALENTS
For purposes of the balance sheets and the statements of cash flows, the
Company considers all highly liquid debt instruments with an original
maturity of three months or less to be cash equivalents.
INVENTORY
Inventory primarily represents forms utilized in the statement process for
customers under existing contracts and is valued at cost, net of reserves
for excess and obsolete inventory.
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PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Provision for depreciation is
made on a basis considered adequate to amortize the cost of depreciable
assets over their estimated useful lives of the respective assets of five
to seven years and is computed principally on the straight-line method.
Maintenance and repairs are expensed as incurred, and major betterments
and improvements are capitalized. The cost and accumulated depreciation of
assets sold or otherwise disposed of are removed from the accounts and the
resulting gain or loss is reflected in the statements of operations.
CONCENTRATION OF CREDIT RISKS
The Company's credit risks primarily relate to cash and accounts
receivable. Cash is primarily held in bank accounts. Accounts receivable
represent amounts due from the Company's customers, primarily in the
medical community. A loss of activity in this industry would have a
material adverse effect on the Company. The Company performs continual
credit evaluations of its customers and no individual customer's accounts
receivable balance represented a significant portion of the Company's
total accounts receivable balance.
REVENUE, NET
Revenues are derived primarily from statement mapping, printing and
mailing services for the Company's customers and from the sale of
standardized forms and office supplies. All revenues are recognized when
earned. Although a typical agreement for statement services binds a
customer for a period of months, each monthly charge is billed and
recorded as revenue on a monthly basis.
POSTAL DEPOSITS
The Company collects and maintains refundable deposits from certain
customers based on the monthly volume of postage each customer is expected
to generate. Deposits are adjusted as necessary based on the volume of
business performed for the customer and are returned when all contractual
obligations have been met and all amounts due from the customer have been
received. Deposits may also be utilized to offset overdue accounts
receivable balances if it becomes evident that the customer will not remit
payment.
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INCOME TAXES
Due to the Company's tax status as a S-corporation, the results of the
Company's operations are reported in the individual federal and state
income tax returns of the shareholder. The Company files informational
returns and, therefore, no provision for income taxes for 1997 is
recorded.
Prior to January 1, 1997, the Company and its affiliate DFM filed
informational returns. However, WMS, a C-Corporation, accounted for income
taxes in accordance with Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes". WMS established deferred
tax liabilities and assets based on the difference between the financial
statement and income tax carrying amounts of assets and liabilities using
existing rates.
FINANCIAL INSTRUMENTS
To meet the reporting requirements of ("SFAS") No. 107, "Disclosures About
Fair Value of Financial Instruments," the Company estimates the fair value
of financial instruments using quoted market prices, or the current
interest rates available for instruments with similar maturities. At
December 31, 1997 and 1996, there were no material differences in the book
values of the Company's financial instruments and their related, fair
values.
MANAGEMENT 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.
2. INCOME TAXES
The Company's income tax obligations and deferred income taxes reported on
the accompanying financial statements resulted only from the operations of
WMS prior to the merger of WMS into the Company on January 1, 1997 (see
Note 1). As of December 21, 1996, the deferred tax assets and liabilities
of WMS consisted of a net deferred tax asset. Upon consummation of the
merger of WMS into the Company, the net deferred tax asset resulted in a
deferred tax benefit to the Company's sole shareholder. Therefore, on
January 1, 1997, WMS distributed the net deferred tax asset to the
shareholder in the form of a dividend. Subsequent to December 31, 1996,
the Company's activity is reported on the sole shareholder's individual
income tax return.
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The net deferred tax assets and liabilities of the WMS are as follows:
DECEMBER 31, DECEMBER 31,
1997 1996
Current deferred tax assets:
Reserves not currently deductible $ -- $156,400
The components of the provision (benefit) for income taxes related to the
operations of WMS for 1997, 1996 and 1995 consisted of the following:
1997 1996 1995
Federal income taxes:
Current $ -- $ 189,963 $ 20,903
Deferred -- (68,310) (60,720)
State income taxes:
Current -- 40,294 4,433
Deferred -- (14,490) (12,880)
Provision (benefit) for income taxes $ -- $ 147,457 $(48,264)
The reconciliation of income tax computed by applying the U.S. federal
statutory rate to the actual income tax provision (benefit) related to the
operations of WMS follows:
1997 1996 1995
Income tax provision (benefit) at
U S. federal statutory rate $ -- $ 121,653 $(39,817)
State income taxes, net of
federal benefit -- 25,804 (8,447)
Provision (benefit) for income taxes $ -- $ 147,457 $(48,264)
3. LINES OF CREDIT
The Company has a revolving line of credit agreement collateralized by the
assets of the Company with a credit limit of $2,000,000. The line of
credit charges interest at the prime rate of interest (8.5% at December
31, 1997), which is payable monthly. The Company is subject to ongoing
compliance with financial and other covenants under the line of credit,
all of which the Company is in compliance or has obtained appropriate
waivers at December 31, 1997. The outstanding balance of the line of
credit was $1,126,000 at December 31, 1997.
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The Company also has an equipment line of credit under which up to
$500,000 may be borrowed at the prime rate of interest (8.5% at December
31, 1997). There were no borrowings outstanding under this line of credit
at December 31, 1997.
4. LONG-TERM DEBT
Long-term debt at December 31, 1997 and 1996 consists of the following:
1997 1996
Notes payable, principal and interest payable monthly, interest at rates ranging
from 9.25% to 9.5%, due through 2001, secured by assets of the Company $ 370,419 $ 555,508
Note payable, principal and interest payable monthly, interest at 9.25%, with
final payment made in 1997, secured by assets of the Company -- 11,578
Note payable, principal and interest payable monthly, interest at prime plus
1.25% (8.0% at December 31, 1996), with final payment made in 1997,
secured by assets of the Company -- 19,265
Note payable, principal and interest payable monthly, interest at 8.0% with
final payment made in 1997, secured by assets of the Company -- 5,000
Note payable, principal and interest payable monthly, interest at 7.95%, with
final payment made in 1997, secured by vehicle -- 5,460
370,419 596,811
Less current portion (157,854) (227,806)
$ 212,565 $ 369,005
Annual long-term debt principal requirements are as follows:
FISCAL YEAR AMOUNT
1998 $157,854
1999 112,008
2000 73,008
2001 27,549
$370,419
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5. COMMITMENTS AND CONTINGENCIES
The Company leases office space from a related party (see Note 6) for its
corporate offices and leases certain equipment under non-cancelable
operating leases which expire on various dates through 2002. The
non-cancelable operating leases include commitments for maintenance and
minimum usage charges on equipment. Rent and lease expense was $413,736,
$323,166 and $191,972 in 1997, 1996 and 1995, respectively.
Future minimum lease commitments for operating leases are as follows:
FISCAL YEAR AMOUNT
1998 $1,197,124
1999 1,404,922
2000 1,354,882
2001 1,350,017
2002 1,145,722
$6,452,667
The Company is engaged in various legal matters in the normal course of
business. In management's opinion, the ultimate disposition of these
matters will not have a material adverse impact on the Company's financial
position or results of operations.
6. RELATED PARTY TRANSACTIONS
The Company leased office space from a partnership of the Company's sole
shareholder for approximately $91,680, $91,680 and $91,680 for the years
ended December 31, 1997, 1996 and 1995, respectively. During 1997, the
Company negotiated a lease for a new operating facility with the same
partnership. Rent expense for this facility will begin in 1998 and is
included in the future minimum lease commitments (see Note 5).
7. PROFIT SHARING PLAN
The Company has a contributory profit sharing plan for all employees over
21 years of age and with at least one year of service with the Company.
The plan is maintained on a fiscal year basis beginning January 1. The
Company matches 100% of the first 3% of the employees salary and 50% of
the remaining employee contribution. The Company's contributions were
$178,967, $139,966 and $91,870 for the years ended December 31, 1997, 1996
and 1995, respectively.
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8. EVENTS SUBSEQUENT TO DECEMBER 31, 1997
The shareholder of the Company has entered into a letter of intent to
merge with Envoy Corporation whereby Envoy Corporation will acquire all of
the outstanding shares of the Company. Management anticipates the merger
will be completed during the second quarter 1998.
Certain equipment purchased in December 1997 for approximately $300,000
was sold to a financial institution in a sale-leaseback transaction in
January 1998. The terms of the lease qualify as an operating lease for
accounting purposes and no material gain or loss resulted from the
transaction. Annual lease expense for the first year will be approximately
$62,400.
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To XpiData, Inc.:
We have audited the accompanying balance sheets of XPIDATA, INC. (see Note 1) as
of December 31, 1997 and 1996, and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of XpiData, Inc. as of December
31, 1997 and 1996, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
January 30, 1998
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XPIDATA, INC.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS 1997 1996
CURRENT ASSETS:
Cash and cash equivalents $ 157,930 $ 122,215
Accounts receivable, less allowance for doubtful accounts of
$62,950 and $49,950, respectively 2,304,947 1,241,821
Other receivables 109,578 116,647
Inventory 302,171 97,791
Deferred income taxes 296,554 135,331
Other 103,302 28,146
Total current assets 3,274,482 1,741,951
PROPERTY AND EQUIPMENT:
Computer and office equipment 732,924 467,133
Furniture and fixtures 131,386 60,677
Vehicles 142,683 23,421
1,006,993 551,231
Less accumulated depreciation (194,066) (80,879)
Net property and equipment 812,927 470,352
OTHER ASSETS:
Security deposits 62,185 50,803
Total assets $ 4,149,594 $ 2,263,106
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit $ 189,116 $ 40,636
Accounts payable 335,955 301,724
Accrued expenses 1,058,814 939,403
Postal deposits 1,120,337 588,063
Income taxes payable 471,485 78,958
Current portion of long-term debt 104,692 65,630
Shareholder payable 80,000 30,000
Total current liabilities 3,360,399 2,044,414
DEFERRED INCOME TAXES 46,226 22,739
LONG-TERM DEBT, NET OF CURRENT PORTION 201,309 144,995
Total liabilities 3,607,934 2,212,148
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, no par value, 1,000,000 shares authorized, 101,000
shares issued and outstanding 59,920 59,920
Additional paid-in capital 27,741 27,741
Retained earnings (deficit) 453,999 (36,703)
Total stockholders' equity 541,660 50,958
Total liabilities and stockholders' equity $ 4,149,594 $ 2,263,106
The accompanying notes to financial statements
are an integral part of these statements.
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XPIDATA, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
REVENUES $ 7,791,673 $ 3,475,455 $ 913,187
OPERATING COSTS AND EXPENSES:
Cost of revenues 3,261,246 1,435,644 447,265
Selling, general and administrative 3,547,512 2,021,554 477,247
Depreciation 129,186 52,834 18,080
Total operating costs and expenses 6,937,944 3,510,032 942,592
INCOME (LOSS) FROM OPERATIONS 853,729 (34,577) (29,405)
OTHER INCOME, NET 51,980 28,601 --
INTEREST EXPENSE (68,202) (30,019) (8,057)
INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR
INCOME TAXES 837,507 (35,995) (37,462)
PROVISION (BENEFIT) FOR INCOME TAXES 346,805 (6,896) (2,052)
NET INCOME (LOSS) $ 490,702 $ (29,099) $ (35,410)
The accompanying notes to financial statements
are an integral part of these statements.
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XPIDATA, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
ADDITIONAL RETAINED
COMMON PAID-IN EARNINGS
STOCK CAPITAL (DEFICIT) TOTAL
BALANCE, AT DECEMBER 31, 1994 $59,920 $ -- $ 27,806 $ 87,726
Capital contribution -- 27,741 -- 27,741
Net loss -- -- (35,410) (35,410)
BALANCE, AT DECEMBER 31, 1995 59,920 27,741 (7,604) 80,057
Net loss -- -- (29,099) (29,099)
BALANCE, AT DECEMBER 31, 1996 59,920 27,741 (36,703) 50,958
Net income -- -- 490,702 490,702
BALANCE, AT DECEMBER 31, 1997 $59,920 $27,741 $ 453,999 $ 541,660
The accompanying notes to financial
statements are an integral part of these statements.
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XPIDATA, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 490,702 $ (29,099) $ (35,410)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Provision for doubtful accounts 13,000 50,903 --
Provision for depreciation 129,186 52,834 18,080
Loss on disposal of assets 13,910 -- --
Deferred income taxes (137,736) (101,877) (10,715)
Changes in operating assets and liabilities:
Increase in accounts receivable (1,076,126) (992,225) (202,916)
Decrease (increase) in other receivables 7,069 (60,878) (55,769)
Increase in inventory (204,380) (54,882) (15,302)
Increase in other current assets (75,156) (25,306) (2,840)
Increase in security deposits (11,382) (37,791) (12,416)
Increase in accounts payable 34,231 247,795 54,919
Increase in accrued expenses 119,411 777,736 158,543
Increase in postal deposits 532,274 428,481 159,582
Increase in income taxes payable 392,527 70,295 8,663
Increase (decrease) in shareholder payable 50,000 (10,000) (10,000)
Net cash provided by operating activities 277,530 315,986 54,419
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures for property and equipment, net (396,483) (193,242) (42,896)
Net cash used in investing activities (396,483) (193,242) (42,896)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving line of credit, net 148,480 40,636 --
Proceeds from (payments on) long-term debt, net 6,188 (41,165) (24,487)
Net cash provided by (used in) financing activities 154,668 (529) (24,487)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 35,715 122,215 (12,964)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 122,215 -- 12,964
CASH AND CASH EQUIVALENTS, END OF YEAR $ 157,930 $ 122,215 $ --
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 68,202 $ 30,019 $ 8,057
Income taxes $ 94,182 $ 24,686 $ --
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
TRANSACTIONS:
Cost of property and equipment obtained under capital
leases, net $ 89,188 $ 151,300 $ 108,703
Capital contribution from forgiveness of debt by shareholder $ -- $ -- $ 27,741
The accompanying notes to financial
statements are an integral part of these statements.
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XPIDATA, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
XpiData, Inc. (the "Company") provides statement mailing and related
services primarily to health care service providers and, to a lesser
extent, members of the business community. The Company's operations are
primarily in the western and mid-western United States.
ORGANIZATION AND BASIS OF PRESENTATION
The Company and a commonly controlled company, XBill, Inc., were
incorporated on February 23, 1995 as Arizona C-Corporations. The Company
provided the statement mailing and related services discussed above and
XBill, Inc. provided management services to the Company. On February 28,
1997, XBill, Inc. was merged into the Company and the merger has been
accounted for at historical cost similar to a pooling of interests due to
the common ownership of the two companies.
Prior to the incorporation of the Company and XBill, Inc., Direct
Marketing West, a sole proprietorship owned by the Company's majority
shareholder, provided statement mailing services and sold office supplies
and forms to healthcare providers. Upon incorporation of the Company, the
statement mailing services operations of Direct Marketing West were
transferred to the Company.
The statements of operations and stockholders' equity for each of the
three years in the period ended December 31, 1997 include the combined
results of operations of the Company and XBill, Inc. subsequent to their
incorporation in February 1995 as well as the results of operations of the
statement mailing services segment of the Company's predecessor company,
Direct Marketing West, for the period from January 1, 1995 through
February 23, 1995, as if the entities had been combined as of January 1,
1995. All significant intercompany accounts and transactions have been
eliminated.
CASH AND CASH EQUIVALENTS
For purposes of the balance sheets and the statements of cash flows, the
Company considers all highly liquid debt instruments with an original
maturity of three months or less to be cash equivalents.
INVENTORY
Inventory primarily represents forms utilized in the statement mailing
process for customers under existing contracts and is valued at cost.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Provision for depreciation is
made on a basis considered adequate to amortize the cost of depreciable
assets over the estimated useful lives of the respective assets of five to
seven years and is computed principally on the straight-line basis.
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Maintenance and repairs are expensed as incurred and major betterments and
improvements are capitalized. The cost and accumulated depreciation of
assets sold or otherwise disposed of are removed from the accounts and the
resulting gain or loss is reflected in the statements of operations.
CONCENTRATION OF CREDIT RISKS
The Company's credit risks primarily relate to cash and accounts
receivable. Cash is primarily held in bank accounts. Accounts receivable
represent amounts due from the Company's customers, primarily in the
medical community. A loss of activity in this industry would have a
material adverse effect on the Company. The Company performs continual
credit evaluations of its customers and no individual customer's accounts
receivable balance represented a significant portion of the Company's
total accounts receivable balance.
REVENUES
Revenues are derived primarily from statement mailing services for the
Company's customers and are recognized when earned. Although a typical
agreement binds the customer for a period of months, each monthly charge
is billed and recorded as revenue on a monthly basis.
POSTAL DEPOSITS
The Company collects and maintains refundable deposits from a majority of
its customers based on the monthly volume of postage each customer is
expected to generate. Deposits are adjusted as necessary based on the
volume of business performed for the customer and are returned when all
contractual obligations have been met and all amounts due from the
customer have been received. Deposits may also be utilized to offset
overdue accounts receivable balances if it becomes evident that the
customer will not remit payment.
INCOME TAXES
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes", the Company establishes deferred
tax liabilities and assets based on the difference between the financial
statement and income tax carrying amounts of assets and liabilities using
existing rates.
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FINANCIAL INSTRUMENTS
To meet the reporting requirements of SFAS No. 107, "Disclosures About
Fair Value of Financial Instruments," the Company estimates the fair value
of financial instruments using quoted market prices, or the current
interest rates available for instruments with similar maturities. At
December 31, 1997 and 1996, there were no material differences in the book
values of the Company's financial instruments and their related fair
values.
MANAGEMENT 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.
2. INCOME TAXES
The net deferred tax assets and liabilities of the Company are as follows:
DECEMBER 31, DECEMBER 31,
1997 1996
Current deferred tax assets:
Reserves not currently deductible $ 239,950 $ 82,306
Difference between book and tax treatment of
compensation expense 62,000 51,715
Other 1,310 1,310
303,260 135,331
Current deferred tax liability:
Difference between book and tax treatment of
prepaid expenses (6,706) --
Net current deferred tax assets $ 296,554 $ 135,331
Non-current deferred tax liability:
Difference between book and tax treatment of
depreciation $ (46,226) $ (22,739)
Management believes deferred tax assets resulting from temporary
differences are fully realizable based on management's estimates of the
Company's ability to generate sufficient taxable income in the future. If
the Company does not generate taxable income in future years, management
will reevaluate the need for a valuation allowance which could have a
negative impact on future earnings.
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The components of the provision (benefit) for income taxes for 1997, 1996
and 1995 consisted of the following:
1997 1996 1995
Federal income taxes:
Current $ 411,860 $ 81,325 $ 7,364
Deferred (117,076) (86,596) (9,108)
State income taxes:
Current 72,681 13,656 1,299
Deferred (20,660) (15,281) (1,607)
Provision (benefit) for income taxes $346,805 $ (6,896) $(2,052)
The reconciliation of income tax computed by applying the U.S. federal
statutory rate to the actual income tax provision (benefit) follows:
1997 1996 1995
Income tax provision (benefit) at U.S. federal
statutory rate $284,752 $(12,238) $(12,737)
State income taxes, net of federal benefit 50,251 (2,160) (2,247)
Non-deductible expenses 10,722 4,581 760
Other 1,080 2,921 12,172
Provision (benefit) for income taxes $346,805 $ (6,896) $ (2,052)
3. LINE OF CREDIT
The Company has a revolving line of credit agreement collateralized by the
assets of the Company with a credit limit of $750,000. The line of credit
earns interest at prime rate plus 2% (10 1/2% at December 31, 1997) which
is payable monthly. The Company is subject to ongoing compliance with
financial and other covenants under the line of credit, all of which the
Company is in compliance or has obtained appropriate waivers at December
31, 1997. The outstanding balance of the line of credit was $189,116 at
December 31, 1997.
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4. LONG-TERM DEBT AND CAPITAL LEASES
Long-term debt at December 31, 1997 and 1996 consists of the following:
1997 1996
Capitalized lease obligations, principal and interest payable monthly, interest
at rates ranging from 10% to 22%, due through 2001, secured by equipment
with a net book value at December 31, 1997 of $281,870 $ 232,078 $ 196,828
Note payable, principal and interest payable monthly, interest at 11% with final
payment due in 1999, secured by equipment 5,086 8,217
Note payable, principal and interest payable monthly, interest at 9% with final
payment due in 1998, secured by a vehicle 1,529 5,580
Notes payable, principal and interest payable monthly, interest at 9%, due
through 2002, secured by vehicles 67,308 --
306,001 210,625
Less current portion (104,692) (65,630)
$ 201,309 $ 144,995
Annual long-term debt and capital lease principal requirements are as
follows:
FISCAL YEAR AMOUNT
1998 $104,692
1999 85,628
2000 85,431
2001 23,586
2002 6,664
$306,001
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5. COMMITMENTS AND CONTINGENCIES
The Company leases office space for its corporate office and leases
certain equipment under non-cancelable operating leases which expire on
various dates through 2006. Rent expense was $294,452, $36,079 and $17,479
in 1997, 1996 and 1995, respectively.
Future minimum lease commitments for operating leases are as follows:
FISCAL YEAR AMOUNT
1998 $ 327,806
1999 325,722
2000 322,224
2001 322,224
2002 253,824
Thereafter 602,628
$2,154,428
The Company is engaged in various legal matters in the normal course of
business. In management's opinion, the ultimate disposition of these
matters will not have a material adverse impact on the Company's financial
position or results of operations.
6. RELATED PARTY TRANSACTIONS
The Company has recorded a receivable of $55,603 as of December 31, 1997
and 1996 representing amounts owed by the Company's majority shareholder
through Direct Marketing West, a sole proprietorship owned by the majority
shareholder. The Company has also recorded a payable of $80,000 and
$30,000 in 1997 and 1996, respectively, representing amounts loaned to the
Company by the majority shareholder.
7. PROFIT SHARING PLAN
The Company has a noncontributory profit sharing plan for all employees
subject to length of employment restrictions in determining eligibility
and vesting rights. The plan is maintained on a fiscal year basis
beginning March 1 and the amount of the contribution is based upon
individual employee wages and profitability of the Company. The amount of
the contribution is determined annually by the Board of Directors of the
Company. Benefits begin vesting after two years of employment and vest
fully after six years of employment. At December 31, 1997, the Company has
accrued the estimated Plan contribution for the current fiscal year in the
amount of $155,000. The Plan contribution for fiscal 1996 was $129,289. No
Plan contribution was made for fiscal 1995.
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8. EVENT SUBSEQUENT TO DECEMBER 31, 1997
The shareholders of the Company have entered into a letter of intent to
merge with Envoy Corporation whereby Envoy Corporation will acquire all of
the outstanding shares of the Company. Management anticipates the merger
will be completed during the second quarter 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ENVOY CORPORATION
Date: March 9, 1998 /s/ Kevin M. McNamara
--------------------------------------
Kevin M. McNamara
Senior Vice President and Chief
Financial Officer
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EXHIBIT INDEX
No. Exhibit
- ---- ----------------------------------------------------------------------------
2.1 Agreement and Plan of Merger, dated as of February 23, 1998, by and among
ENVOY Corporation, ENVOY Acquisition Corporation, Professional Office
Services, Inc. and Richard B. McIntyre (incorporated by reference to Exhibit
2.1 to the Company's Form 8-K dated February 23, 1998)
2.2 Agreement and Plan of Merger, dated as of February 23, 1998,
by and among ENVOY Corporation, ENVOY Acquisition
Corporation, XpiData, Inc., Michael Marolf, Sr., Michael
Marolf, Jr., Jeffrey Marolf and Lisa Marolf (incorporated by
reference to Exhibit 2.2 to the Company's Form 8-K dated
February 23, 1998)
2.3 Agreement and Plan of Merger, dated as of February 23, 1998,
by and among ENVOY Corporation, ENVOY Acquisition Subsidiary,
Inc., Automated Revenue Management, Inc., Patrick J.
McIntyre, Terrence J. McIntyre and Michael S. McIntyre
(incorporated by reference to Exhibit 2.3 to the Company's
Form 8-K dated February 23, 1998)
4.1 Registration Rights Agreement dated February 27, 1998, by and among ENVOY
Corporation and Michael F. Marolf, Sr., Michael F. Marolf, Jr., Jeffrey B.
Marolf, Lisa A. Marolf, Richard B. McIntyre, Michael S. McIntyre, Terrence
J. McIntyre, and Patrick J. McIntyre (incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1997)
99.1 Press Release, dated February 23, 1998, issued by ENVOY Corporation
(incorporated by reference to Exhibit 99.1 to the Company's Form 8-K dated
February 23, 1998)