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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
May 5, 1998 (February 27, 1998)
ENVOY CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Tennessee 0-25062 62-1575729
- ---------------------------- ------------------------ -------------------
(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
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
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This Current Report on Form 8-K/A amends and supersedes, to the extent set forth
herein, subsection (b) and supplements subsection (c) of "Item 7. Financial
Statements, Pro Forma Financial Information and Exhibits" of the Registrant's
Current Report on Form 8-K, as filed on March 9, 1998.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(b) The Registrant has restated certain of its historical fiscal year end
audited financial statements and the related financial statement schedule
to reflect the business combinations with the ExpressBill Companies
consistent with the accounting treatment for a pooling of interests. Listed
below are the financial statements, the financial statement schedule and
related information which are responsive to Item 7(b) hereof.
Reports of Independent Auditors
Consolidated Balance Sheets
Consolidated Statement of Operations
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Schedule II - Valuation and Qualifying Accounts
(c) The following exhibits are being filed herewith as a result of the
restatement of the Company's audited financial statements to reflect the
business combinations with the ExpressBill Companies:
Exhibits:
23.1 Consent of Ernst & Young LLP
23.2 Consent of Arthur Andersen LLP
27 Financial Data Schedule (for SEC use only)
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Report of Independent Auditors
Board of Directors and Shareholders
ENVOY Corporation
We have audited the accompanying consolidated balance sheets of ENVOY
Corporation and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. Our audits also
included the accompanying financial statement schedule filed herewith. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits. We did not audit the financial
statements of Professional Office Services, Inc. and XpiData, Inc., which
statements reflect total assets constituting 8% in 1997 and 5% in 1996, and
total revenues constituting 18% in 1997, 16% in 1996, and 24% in 1995 of the
related consolidated totals. Those statements were audited by other auditors
whose reports have been furnished to us, and our opinion, insofar as it relates
to data included for Professional Office Services, Inc. and XpiData, Inc., is
based solely on the reports of the other auditors.
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 and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of ENVOY Corporation and subsidiaries at
December 31, 1997 and 1996, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Ernst & Young LLP
Nashville, Tennessee
March 5, 1998, except for Notes 1 and 4,
as to which the date is April 29, 1998
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ENVOY Corporation
Consolidated Balance Sheets
(In thousands, except share data)
DECEMBER 31,
1997 1996
--------------------------
Assets
Current assets:
Cash and cash equivalents $ 8,598 $ 36,737
Trade accounts receivable, less allowance for
doubtful accounts of $3,641 and $2,228 in
1997 and 1996, respectively 33,510 24,549
Inventories 2,585 2,975
Deferred income taxes 1,797 1,309
Other 1,811 3,000
--------------------------
Total current assets 48,301 68,570
Property and equipment:
equipment 35,890 26,791
Furniture and fixtures 2,433 3,197
Leasehold improvements 2,766 2,156
--------------------------
41,089 32,144
Less accumulated depreciation and amortization (21,581) (15,507)
--------------------------
19,508 16,637
Other assets:
Goodwill, net of amortization 32,719 26,981
Other intangibles, net of amortization 22,592 25,682
Deferred income taxes 9,972 0
Other 4,431 2,487
--------------------------
Total assets $ 137,523 $ 140,357
==========================
See accompanying notes.
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ENVOY Corporation
Consolidated Balance Sheets (Continued)
(In thousands, except share data)
DECEMBER 31,
1997 1996
--------------------------
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 3,334 $ 5,707
Accrued expenses and other current liabilities 25,362 13,154
Short-term debt 1,315 1,781
Current portion of long-term debt 263 387
--------------------------
Total current liabilities 30,274 21,029
Long-term debt, less current portion 527 8,926
Deferred income taxes 0 1,988
Other non-current liabilities 9,163 0
Shareholders' equity:
Preferred stock--No par value; authorized,
12,000,000 shares; issued, 3,730,233 40,100 40,100
Common stock--No par value;
authorized, 48,000,000 shares;
issued, 20,075,822 and 18,854,531 in
1997 and 1996, respectively 114,652 103,265
Additional paid-in capital 7,208 7,193
Retained deficit (64,401) (42,144)
--------------------------
Total shareholders' equity 97,559 108,414
--------------------------
Total liabilities and shareholders' equity $ 137,523 $ 140,357
==========================
See accompanying notes
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ENVOY Corporation
Consolidated Statements of Operations
(In thousands, except per share data)
YEAR ENDED DECEMBER 31,
1997 1996 1995
-----------------------------------------
Revenues $ 137,605 $ 90,572 $ 34,197
Operating costs and expenses:
Cost of revenues 66,439 45,279 20,433
Selling, general and administrative 32,734 24,631 11,156
Depreciation and amortization 26,095 19,508 2,725
Merger and facility integration costs 0 4,664 0
Write-off of acquired in-process technology 38,000 30,700 0
EMC losses 0 540 0
-----------------------------------------
Operating loss (25,663) (34,750) (117)
Other income (expense):
Interest income 1,312 1,032 380
Interest expense (1,577) (2,872) (659)
-----------------------------------------
(265) (1,840) (279)
-----------------------------------------
Loss from continuing operations
before income taxes and loss in investee (25,928) (36,590) (396)
Provision (benefit) for income taxes (5,218) 1,717 (50)
Loss in investee 0 0 (1,776)
-----------------------------------------
Loss from continuing operations (20,710) (38,307) (2,122)
Income from discontinued operations, net of
income taxes 0 0 30
First Data transaction expenses, including income taxes 0 0 (2,431)
-----------------------------------------
Loss from discontinued operations 0 0 (2,401)
-----------------------------------------
Net loss $ (20,710) $(38,307) $ (4,523)
=========================================
(Continued)
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ENVOY Corporation
Consolidated Statements of Operations (Continued)
(In thousands, except per share data)
YEAR ENDED DECEMBER 31,
1997 1996 1995
-----------------------------------------
Loss per common share:
Continuing operations $ (1.05) $ (2.32) $ (0.14)
Discontinued operations 0 0 (0.17)
-----------------------------------------
Net loss per common share $ (1.05) $ (2.32) $ (0.31)
=========================================
Weighted average shares outstanding 19,686 16,519 14,739
=========================================
Pro forma net loss data (unaudited), reflecting pro forma
tax provision on income of ExpressBill Companies
(see Notes 4 and 15):
Historical loss from continuing operations
before income taxes and loss in investee $ (25,928) $(36,590) $ (396)
Pro forma provision (benefit) for income taxes (4,186) 1,882 (50)
Loss in investee 0 0 (1,776)
-----------------------------------------
Pro forma loss from continuing operations (21,742) (38,472) (2,122)
Income from discontinued operations, net
of income taxes 0 0 30
First data transaction expenses,
Including income taxes 0 0 (2,431)
-----------------------------------------
Pro forma loss from discontinued operations 0 0 (2,401)
-----------------------------------------
Pro forma net loss $ (21,742) $(38,472) $ (4,523)
=========================================
Pro forma loss per common share
Continuing operations $ (1.10) $ (2.33) $ (0.14)
Discontinued operations 0 0 (0.17)
-----------------------------------------
Pro forma net loss per common share $ (1.10) $ (2.33) $ (0.31)
=========================================
See accompanying notes.
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ENVOY Corporation
Consolidated Statements of Shareholders' Equity
(In thousands)
COMMON STOCK PREFERRED STOCK ADDITIONAL RETAINED TOTAL
----------------- ---------------- PAID-IN EARNINGS DEFERRED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) COMPENSATION EQUITY
---------------------------------------------------------------------------------------
Balance at December 31, 1994 14,514 $ 11,081 $ 35,190 $ 8,558 $(1,264) $ 53,565
Stock options exercised 271 271 349 0 0 620
Income tax benefit realized on exercise
of stock options 0 0 46 0 0 46
First Data merger:
Stock option compensation charge 0 0 0 0 1,264 1,264
Equity transfer 0 0 (28,430) (6,989) 0 (35,419)
Capital distributions of ExpressBill 0 0 0 (212) 0 (212)
Capital contributions of ExpressBill 4 3 28 0 0 31
Net loss 0 0 0 (4,523) 0 (4,523)
---------------------------------------------------------------------------------------
Balance at December 31, 1995 14,789 11,355 7,183 (3,166) 0 15,372
Stock options exercised 163 510 0 0 0 510
Stock issued in connection with
acquisitions 413 6,650 3,730 $ 40,100 0 0 0 46,750
Conversion of debt to common stock 170 1,786 0 0 0 0 0 1,786
Proceeds from issuance of stock 3,320 82,964 0 0 0 0 0 82,964
Capital distributions of ExpressBill 0 0 0 0 0 (671) 0 (671)
Capital contributions of ExpressBill 0 0 0 0 10 0 0 10
Net loss 0 0 0 0 0 (38,307) 0 (38,307)
---------------------------------------------------------------------------------------
Balance at December 31, 1996 18,855 103,265 3,730 40,100 7,193 (42,144) 0 108,414
Stock options exercised 437 1,844 0 0 0 0 0 1,844
Income tax benefit realized on exercise
of stock options 0 1,249 0 0 0 0 0 1,249
Conversion of debt to common stock 781 8,214 0 0 0 0 0 8,214
Proceeds from issuance of stock 3 80 0 0 0 0 0 80
Capital distributions of ExpressBill 0 0 0 0 0 (1,547) 0 (1,547)
Capital contributions of ExpressBill 0 0 0 0 15 0 0 15
Net loss 0 0 0 0 0 (20,710) 0 (20,710)
---------------------------------------------------------------------------------------
Balance at December 31, 1997 20,076 $114,652 3,730 $ 40,100 $ 7,208 $(64,401) $ 0 $ 97,559
=======================================================================================
See accompanying notes
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ENVOY Corporation
Consolidated Statements of Cash Flows
(In thousands)
YEAR ENDED DECEMBER 31,
1997 1996 1995
-----------------------------------------
OPERATING ACTIVITIES:
NET LOSS $ (20,710) $(38,307) $ (4,523)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 26,095 19,518 3,807
Stock option compensation expense 0 0 1,264
Provision for losses on accounts receivable 1,461 1,112 430
Deferred income tax provision (benefit) (12,546) 339 11
Write-off of certain assets and investments 38,000 32,281 820
Changes in assets and liabilities, net of First
Data transaction and acquired businesses:
Decrease (increase) in accounts receivable (9,782) (8,709) 66
Decrease (increase) in inventories 388 (543) (1,643)
Decrease (increase) in other current assets 981 (1,887) (619)
Increase (decrease) in accounts payable, accrued
expenses and other current liabilities (1,900) (621) 2,180
-----------------------------------------
Net cash provided by operating activities 21,987 3,183 1,793
INVESTING ACTIVITIES
Net (increase) decrease in short-term investments 0 5,103 (5,103)
Purchases of property and equipment (8,744) (5,356) (8,507)
Decrease (increase) in other assets (1,998) 0 1,047
Investment in EMC 0 0 (750)
Payments for businesses acquired, net of cash
acquired of $5,543 in 1996 (40,412) (93,744) 0
-----------------------------------------
Net cash used in investing activities (51,154) (93,997) (13,313)
FINANCING ACTIVITIES
Proceeds from issuance of preferred stock 0 40,100 0
Proceeds from issuance of common stock 3,174 88,474 623
Capital distributions of ExpressBill (1,391) (671) (212)
Capital contributions of ExpressBill 15 10 0
Proceeds from long-term debt 0 44,267 10,457
Payments on long-term debt (304) (44,387) (1,447)
Proceeds from (payments on) short-term debt (466) 639 741
Payment of deferred financing costs 0 (1,200) 0
Cash transferred in First Data transaction 0 0 (2,743)
-----------------------------------------
Net cash provided by financing activities 1,028 127,232 7,419
-----------------------------------------
Net increase (decrease) in cash and
cash equivalents (28,139) 36,418 (4,101)
Cash and cash equivalents at beginning of year 36,737 319 4,420
-----------------------------------------
Cash and cash equivalents at end of year $ 8,598 $ 36,737 $ 319
=========================================
(Continued)
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ENVOY Corporation
Consolidated Statements of Cash Flows (continued)
(In thousands)
YEAR ENDED DECEMBER 31,
1997 1996 1995
-----------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ (238) $ (2,357) $ (659)
Interest received $ 1,250 $ 1,024 $ 380
Income taxes paid $ (5,952) $ (371) $ (496)
NONCASH TRANSACTIONS
First Data transaction:
Book value of assets transferred, excluding
cash $ 0 $ 0 $ 36,083
Liabilities transferred 0 0 (3,407)
Equity transferred 0 0 (35,419)
-----------------------------------------
Cash transferred $ 0 $ 0 $ (2,743)
=========================================
ACQUISITIONS
Working capital $ 0 $ 302 $ 0
Intangible assets 0 1,348 0
Common stock Issued 0 (1,650) 0
-----------------------------------------
Cash transferred $ 0 $ 0 $ 0
=========================================
Conversion of debt to common stock $ 8,214 $ 1,786 $ 0
=========================================
See accompanying notes
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ENVOY Corporation
Notes to Consolidated Financial Statements
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 for 1995 include financial information for its
predecessor, Old Envoy, with the financial services electronic processing
business (the "Financial Business") shown as discontinued operations. For
purposes of the notes to the consolidated financial statements, the "Company"
refers to Old Envoy and New Envoy for the period prior to June 6, 1995. The
Company currently provides electronic data interchange services to participants
in the health care market, including pharmacies, physicians, hospitals,
dentists, billing services, commercial insurance companies, managed care
organizations, state and federal government agencies and others.
As more fully discussed in Note 4, on February 27, 1998, the Company completed
business combinations with Professional Office Services, Inc. ("POS"), XpiData,
Inc. ("XpiData") and Automated Revenue Management, Inc. ("ARM"; and together
with POS and XpiData sometimes collectively referred to as the "ExpressBill
Companies"). These transactions have been accounted for as poolings of interests
and the Company's historical consolidated financial statements for 1997, 1996
and 1995 have been restated to include the accounts and results of operations of
the ExpressBill Companies.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated in consolidation.
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." All short-term
investments were sold prior to December 31, 1996.
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ENVOY Corporation
Notes to Consolidated Financial Statements
Proceeds, gross realized gains and gross realized losses from the sale of
available-for-sale securities were $6,126,000, $1,911, and $39,138,
respectively, in 1996 and $9,470,000, $288,000, and $9,000, respectively, in
1995. The cost of securities sold is based on the specific identification
method.
CONCENTRATION OF CREDIT RISK
The Company has one customer that accounted for approximately 12% of the
Company's consolidated revenues for 1997 and accounted for approximately 16% of
consolidated accounts receivable. No single customer accounted for more than 10%
of consolidated revenues in 1996 or 1995.
INVENTORIES
Inventories consist primarily of point-of-service terminals and supplies used in
the patient statement business, and 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. Depreciation expense totaled $6,141,000, $4,920,000
and $2,674,000 for 1997, 1996 and 1995, respectively.
OTHER ASSETS
Other assets, including goodwill, customer lists, covenants not to compete,
developed technology, assembled work force, and submitter/payor relationships,
are being amortized on a straight-line basis over two to fifteen year time
periods, as applicable. The Company periodically evaluates the recoverability of
such intangibles resulting from business acquisitions and measures the amount of
impairment, if any, by assessing current and future levels of income and cash
flows as well as other factors, such as business trends and prospects and market
and economic conditions. Amortization expense related to such intangible assets
for 1997, 1996 and 1995 was $19,955,000, $14,589,000 and $39,000, respectively.
At December 31, 1997 and 1996, accumulated amortization of intangible assets was
$34,473,000 and $14,590,000, respectively.
REVENUE RECOGNITION
Processing services revenue is recognized as the transactions are processed.
Receivables generally are due within 30 days and do not require collateral.
LOSS PER COMMON SHARE
In 1997, the Company adopted the provisions of SFAS No. 128, Earnings per Share.
SFAS 128 replaced the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. The adoption of SFAS No. 128 had no impact
on the Company's computation of earnings per share for the current or prior
periods.
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ENVOY Corporation
Notes to Consolidated Financial Statements
RESEARCH AND DEVELOPMENT
Research and development expenses of $2,135,000 in 1997, $1,779,000 in 1996 and
$1,466,000 in 1995 were charged to cost of revenue as incurred until
technological feasibility had been established for the product. Thereafter, all
software development costs are capitalized until the products are available for
general use by customers. The Company has not capitalized any significant
software costs to date.
INCOME TAXES
The Company and XpiData have used the liability method of accounting for income
taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." The former
stockholders of POS and ARM elected under Subchapter S of the Internal Revenue
Code (the "Code") to include such companies' income in their own income for
federal and state income tax purposes. Accordingly, POS and ARM were not subject
to federal or state income taxes for periods prior to the Company's business
combinations with the ExpressBill Companies.
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.
STOCK BASED COMPENSATION
Under various benefit plans, the Company grants stock options for a fixed number
of shares to employees and directors with an exercise price which approximates
the fair value of the shares at the date of grant. The Company also has an
Employee Stock Purchase Plan, which is qualified under Section 423 of the Code.
The Company accounts for stock based compensation in accordance with Accounting
Principles Board ("APB") Opinion No. 25, ("APB No. 25") "Accounting for Stock
Issued to Employees," and, accordingly, recognizes no compensation expense.
RECLASSIFICATIONS
Certain reclassifications have been made in the 1996 and 1995 consolidated
financial statements to conform with the 1997 presentation.
3. DISCONTINUED OPERATIONS--TRANSACTION WITH FIRST DATA CORPORATION
On June 6, 1995, the Company completed a merger of its Financial Business with
First Data (the "First Data Merger"). Pursuant to a management services
agreement entered into in connection with the First Data Merger, the Company
received 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 First Data
Merger. Management fees of $650,000, $1,500,000 and $850,000 for the years ended
December 31, 1997, 1996 and 1995 are classified in revenues in the consolidated
statements of operations.
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ENVOY Corporation
Notes to Consolidated Financial Statements
The net assets of the Financial Business were merged with and into First Data
and were accounted for as discontinued operations.
Revenues of the Financial Business were $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 First
Data 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 transactions up to a
maximum expense to First Data of $2,000,000. The $1,997,000 incurred by the
Company is net of 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 and
reflect the reversal of tax benefits previously recognized for such charges.
4. BUSINESS COMBINATIONS
BUSINESS COMBINATIONS ACCOUNTED FOR AS POOLINGS OF INTERESTS
On February 27, 1998, the Company completed business combinations with the three
companies operating the ExpressBill patient statement processing and printing
services businesses, for an aggregate of 3,500,000 shares of ENVOY Common Stock
("Common Stock"). Shareholders of XpiData, based in Scottsdale, Arizona,
received 1,365,000 shares and shareholders of POS and its affiliated company,
ARM, both of which are based in Toledo, Ohio, received an aggregate of 2,135,000
shares. The ExpressBill patient statement services include electronic data
transmission and formatting, statement printing and mailing services for health
care providers and practice management system vendors. These transactions have
been accounted for as poolings of interests. Accordingly, the Company's
historical consolidated financial statements for 1997, 1996 and 1995 have been
restated to include the accounts and results of operations of the ExpressBill
Companies. A reconciliation of previously reported revenues and earnings appears
below:
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ENVOY Corporation
Notes to Consolidated Financial Statements
YEAR ENDED DECEMBER 31,
1997 1996 1995
-----------------------------------------
(In thousands, except per share data)
REVENUES:
Previously reported $ 113,693 $ 76,584 $ 26,055
ExpressBill Companies 23,912 13,988 8,142
-----------------------------------------
Restated $ 137,605 $ 90,572 $ 34,197
=========================================
Net income (loss) from continuing operations
Previously reported $ (23,763) $(38,900) $ (2,000)
ExpressBill Companies 3,053 593 (122)
-----------------------------------------
Restated $ (20,710) $(38,307) $ (2,122)
=========================================
Net loss per common share from continuing operations
Previously reported $ (1.47) $ (2.99) $ (0.18)
Restated $ (1.05) $ (2.32) $ (0.14)
BUSINESS COMBINATIONS ACCOUNTED FOR AS PURCHASES
Each of the following acquisitions was accounted for under the purchase method
of accounting, applying the provisions of APB Opinion No. 16 ("APB 16") and, as
a result, the Company recorded the assets and liabilities of the acquired
companies at their estimated fair values with the excess of the purchase price
over these amounts being recorded as goodwill. Actual allocations of goodwill
and identifiable intangibles will be based upon further studies and may change
during the allocation period, generally one year following the date of
acquisition. The financial statements reflect the operations of the acquired
businesses for the periods after their respective dates of acquisition.
NATIONAL ELECTRONIC INFORMATION CORPORATION ("NEIC")
On March 6, 1996, the Company's shareholders approved the acquisition of NEIC
for an aggregate purchase price of approximately $94,301,000, consisting of
$88,354,000 paid to the NEIC stockholders and certain other transaction and
acquisition costs of $5,947,000. The Company recorded $37,631,000 in goodwill
and $19,600,000 of identifiable intangible assets related to the NEIC
acquisition.
In connection with the NEIC acquisition, the Company incurred a one time
write-off of acquired in-process technology of $30,000,000. Such amount was
charged to expense in 1996 because this amount related to research and
development that had not reached technological feasibility and for which there
was no alternative future use.
The NEIC acquisition was financed through equity and debt financing. An
aggregate of 3,730,233 shares of the Company's Series B Convertible Preferred
Stock (the "Series B Preferred Stock") were issued to three investors for a
total purchase price of $40,100,000. Additionally, the Company issued 333,333
shares of Common Stock to various investors for an aggregate purchase price of
$5,000,000. The Company also entered into a credit agreement, whereby the
Company obtained $50,000,000 in bank
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ENVOY Corporation
Notes to Consolidated Financial Statements
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 were redeemed by the Company on 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 in exchange for 73,242 shares of Common Stock yielding a
purchase price of approximately $1,500,000. Goodwill and identifiable
intangibles in the amount of $648,000 were recorded in connection with the
acquisition of Teleclaims. Also recorded as part of the Teleclaims acquisition
was a one time write-off of acquired in-process technology of $700,000. Such
amount was charged to expense in 1996 because this amount related to research
and development that had not reached technological feasibility and for which
there was no alternative future use.
NATIONAL VERIFICATION SYSTEMS, L. P. ("NVS")
On September 13, 1996, the Company completed the acquisition of certain assets
and liabilities of NVS for $2,150,000 in cash and the assumption of certain
liabilities. Goodwill and other identifiable intangible assets in the amount of
$1,864,000 were recorded in connection with the NVS acquisition.
PROFESSIONAL OFFICE SYSTEMS, INC. ("POSI")
On October 31, 1996, the Company acquired all the issued and outstanding capital
stock of POSI, the electronic data interchange clearinghouse for Blue Cross and
Blue Shield of the National Capital Area, for approximately $6,400,000 in cash
and the assumption of certain liabilities. Goodwill and identifiable intangibles
in the amount of $6,742,000 were recorded in connection with the acquisition of
POSI.
DIVERSE SOFTWARE SOLUTIONS, INC. ("DSS")
On March 11, 1997, the Company completed the acquisition of certain assets of
DSS for $4,000,000 in cash, plus a variable payout based upon revenue earned
during a specified period following the acquisition, and the assumption of
certain liabilities. At December 31, 1997, the Company had recorded a liability
of $2,200,000 related to the variable payments, which were paid in February
1998. This obligation is included in accrued expenses at December 31, 1997. The
Company recorded $5,164,000 of goodwill and other identifiable intangible assets
related to the DSS acquisition. Also recorded as part of the DSS acquisition was
a one-time write-off of acquired in-process technology of $3,000,000. Such
amount was charged to expense in 1997 because this amount related to research
and development that had not reached technological feasibility and for which
there was no alternative future use.
HEALTHCARE DATA INTERCHANGE CORPORATION ("HDIC")
On August 7, 1997, the Company acquired all the issued and outstanding capital
stock of HDIC, the electronic data interchange ("EDI") health care services
subsidiary of Aetna U.S. Healthcare, Inc. ("AUSHC"), for approximately
$36,400,000 in cash and the assumption of approximately $14,800,000 in
liabilities including approximately $13,800,000 relating to the assumption of
unfavorable contracts. At December 31, 1997, the remaining liability for
unfavorable contracts was $13,073,000, with $9,163,000 classified as a
non-current liability, and $3,910,000 classified as a current liability in
accrued expenses and other current liabilities. In addition, the Company and
AUSHC simultaneously entered into a long-term services agreement under which
AUSHC has agreed to use the
16
17
ENVOY Corporation
Notes to Consolidated Financial Statements
Company as its single source clearinghouse and EDI network for all AUSHC
electronic health care transactions. Based upon management's preliminary
estimates, the Company recorded approximately $16,100,000 for goodwill and other
identifiable intangible assets related to the HDIC acquisition. Also recorded as
part of the HDIC acquisition was a one-time write-off of acquired in-process
technology of $35,000,000. Such amount was charged to expense in 1997 because
this amount related to research and development that had not reached
technological feasibility and for which there was no alternative future use.
The following presents unaudited pro forma results of operations (including the
one-time write-offs of acquired in-process technology and all merger and
facility integration costs) for the years ended December 31, 1997, 1996 and 1995
assuming the business combinations with the ExpressBill Companies and all
acquisitions accounted for as purchases, including EMC*Express, Inc. ("EMC")
(see Note 7), had been consummated at the beginning of the periods presented (in
thousands, except per share data):
YEAR ENDED DECEMBER 31,
1997 1996 1995
------------------------------------------
Revenues $ 144,099 $ 115,978 $ 87,104
Net loss (25,826) (46,107) (40,431)
Net loss per common share (1.31) (2.74) (2.67)
5. SALE OF THE GOVERNMENT SERVICES BUSINESS
On September 16, 1997, the Company completed the sale of substantially all of
the assets related to the Company's hunting and fishing licenses and electronic
benefit transfer business (collectively "the Government Services Business") for
(i) $500,000 payable in the form of a promissory note due and payable in full on
August 31, 1999 and (ii) certain contingent payment amounts based upon the
achievement of specified future operating results of the Government Services
Business. The Company recorded a gain of $500,000 related to the sale of the
Government Services Business in 1997. The results of operations of the
Government Services Business are included in the Company's consolidated
statements of operations through the date of disposition.
6. 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 was
recognized as incurred in accordance with the guidance set forth in Emerging
Issues Task Force Issue 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)" and was not part of the purchase price
allocation. The costs for the year ended December 31, 1996 associated with this
plan of $4,664,000 represent exit costs associated with lease terminations,
personnel costs, writedowns of impaired assets and other related costs that were
incurred as a direct result of the plan and were classified as merger and
facility integration costs in the consolidated statements of operations. The
employee groups terminated included accounting, marketing and certain areas of
the systems and operations departments. The number of employees terminated was
approximately 120. Amounts charged against the liability for 1997 and 1996 were
approximately $385,000 and $1,434,000, respectively.
17
18
ENVOY Corporation
Notes to Consolidated Financial Statements
7. LOSS IN INVESTEE
On January 28, 1995, the Company purchased 17.5% of the capital stock of EMC for
approximately $570,000. In connection therewith, the Company paid $250,000 for
an option to purchase the remainder of the capital stock of EMC (the "Option"),
and also entered into a management agreement to provide management services to
EMC (the "Management Agreement"). Under the terms of the Management Agreement,
the Company agreed to fund certain operating costs of EMC in the form of
advances. The Management Agreement could be terminated by the Company at any
time on 60 days written notice, at which time the Option would be terminated.
The Company gave notice to terminate the Management Agreement on January 31,
1996. As a result of the termination notice and other facts and circumstances,
the Company determined that it was probable an impairment to its investment had
occurred. Accordingly, the Company recorded an adjustment in the fourth quarter
of 1995 in the amount of $1,637,000 to recognize an impairment in the carrying
value of its investment and cumulative advances. During 1995, the Company
recognized losses for its initial investment and option aggregating $820,000,
advances of $817,000 and equity losses of $139,000 for a total loss in the EMC
investment of $1,776,000.
Based on the Company's decision to terminate the Management Agreement, the
Company discontinued the equity method of accounting for EMC and began
accounting for the investment on a cost basis during the fourth quarter of 1995.
Accordingly, the funding of EMC's operating costs in 1996 were charged to
operating expenses. The Company was committed through March 31, 1996 to continue
to fund certain operating costs of EMC. The amounts disbursed for the funding of
these costs during the first two quarters of 1996 were $540,000.
Following the termination of the Management Agreement and the Option, certain
shareholders of EMC filed a lawsuit in March 1996 against the Company asserting
claims for breach of contract and negligent conduct. On October 18, 1996, the
Company settled this lawsuit for $300,000. Concurrent with the settlement of the
lawsuit, the Company completed the acquisition of the remaining 82.5% interest
in EMC for approximately $2,000,000 in cash. The EMC acquisition was accounted
for under the purchase method of accounting applying the provisions of APB No.
16 and, as a result, the Company recorded the assets and liabilities at their
estimated fair values. The Company recorded $1,954,000 of other identifiable
intangible assets related to the EMC acquisition. The operations of EMC are
included in the consolidated statements of operations from the date of
acquisition.
18
19
ENVOY Corporation
Notes to Consolidated Financial Statements
8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consists of the following (in
thousands):
DECEMBER 31,
1997 1996
---------------------
Current portion of liability for unfavorable contracts $ 3,910 $ 0
Liability to former owners of DSS 2,200 0
Unearned income 1,942 0
Accrued communication expense 1,982 2,263
Accrued income taxes 1,679 1,898
Accrued salaries and benefits 2,348 2,104
Accrued vendor incentives 1,808 1,110
Customer deposits 1,894 833
Other 7,599 4,946
---------------------
$25,362 $13,154
=====================
The liability to former owners of DSS was paid in February 1998 and is related
to the DSS acquisition, and the liability for unfavorable contracts is related
to the HDIC acquisition (see Note 4).
9. SHORT-TERM DEBT
At December 31, 1997, the ExpressBill Companies had various lines of credit
collateralized by certain assets. The lines of credit charged interest at rates
ranging from prime rate to prime plus 2%, which resulted in interest rates
ranging from 8.5% to 10.5% at December 31, 1997. These lines of credit included
various financial and other covenants, and were due on demand. The Company was
in compliance with these covenants or obtained appropriate waivers at December
31, 1997. The outstanding balance under these lines of credit was $1,315,000 at
December 31, 1997.
10. LONG-TERM DEBT
In connection with the Distribution and First Data Merger, the Company entered
into a $10,000,000 note agreement with First Data on June 6, 1995 (the
"Convertible Note"). The Convertible Note was convertible, at the option of the
holder, into fully paid and nonassessable shares of Common Stock, on terms
subject to adjustment for stock dividends, subdivision, and combinations,
subsequent issuances of Common Stock, issuances of certain rights, stock
purchase rights or convertible securities and certain issuer tender offers.
During 1996, First Data sold the Convertible Note to an unrelated third party
for $13,500,000.
On November 7, 1996, the Company filed a registration statement with the
Securities and Exchange Commission covering the offering of 321,289 shares of
Common Stock pursuant to the demand of the current holders of the Convertible
Note under a Registration Rights
19
20
ENVOY Corporation
Notes to Consolidated Financial Statements
Agreement dated June 6, 1995. The Company was advised by the holders of the
Convertible Notes that they intended to convert $3,380,000 principal amount of
the Convertible Notes into 321,289 shares of Common Stock to permit their sale
pursuant to the registration statement. Prior to the termination of the
registration statement on May 19, 1997, an aggregate of $2,245,000 in principal
amount of the Convertible Notes was converted into 213,389 shares of Common
Stock and sold pursuant to the registration statement. In a series of unrelated
transactions, the remaining $7,755,000 in principal amount of the Convertible
Notes was converted into 737,167 shares of Common Stock through June 1997.
Accordingly, no Convertible Notes remain outstanding.
In November 1996, the Company amended its revolving credit facility to increase
the amount of credit available thereunder to $50,000,000. As of December 31,
1997, the Company had no amounts outstanding under the amended credit facility.
Any outstanding borrowing made against the amended credit facility would bear
interest at a rate equal to the Base Rate (as defined in the amended credit
facility) or LIBOR. The amended credit facility expires June 30, 2000. The
amended credit facility contains financial covenants applicable to the Company
including ratios of debt to capital, annualized EBITDA to annualized interest
expense, restrictions on payment of dividends, and certain other financial
covenants customarily included in a credit facility of this type. The Company
and its subsidiaries also are subject to certain restrictions relating to
payment of dividends, acquisitions, incurrence of debt and other restrictive
provisions. The amended credit facility is secured by substantially all of the
assets of the Company and its subsidiaries.
20
21
ENVOY Corporation
Notes to Consolidated Financial Statements
Long-term debt consists of the following (in thousands):
DECEMBER 31,
-----------------------
1997 1996
----------------------
Convertible note $ 0 $ 8,214
Other debt and capital lease obligations,
payable through 2002, interest ranging
from 9.25% to 22% secured by assets 790 1,099
----------------------
790 9,313
Less current portion (263) (387)
----------------------
$ 527 $ 8,926
======================
Annual long-term debt and capital lease obligations principal requirements are
as follows (in thousands):
1998 $263
1999 307
2000 163
2001 50
2002 7
----
$790
====
11. 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,
1997, 1996 and 1995 was approximately $2,207,000, $1,955,000 and $1,304,000,
respectively.
21
22
ENVOY Corporation
Notes to Consolidated Financial Statements
Future minimum rental payments at December 31, 1997 under operating lease
arrangements are as follows (in thousands):
1998 $ 3,099
1999 3,207
2000 2,872
2001 2,438
2002 1,603
Thereafter 1,055
-------
Total minimum lease payments $14,274
=======
12. STOCK INCENTIVE PLANS
The Company has elected to follow APB No. 25 and related Interpretations in
accounting for its stock options because, as discussed below, the alternative
fair value accounting provided for under SFAS No. 123, "Accounting for
Stock-Based Compensation," requires use of option valuation models that were not
developed for use in valuing stock options. Under APB No. 25, because the
exercise price of the Company's stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
22
23
ENVOY Corporation
Notes to Consolidated Financial Statements
At December 31, 1997, the Company had reserved 4,214,640 shares of Common Stock
for issuance in connection with the stock option plans. Summaries of stock
options outstanding are as follows:
WEIGHTED-
NUMBER OF OPTION PRICE PER AVERAGE
SHARES SHARE EXERCISE PRICE
--------------------------------------------------
Outstanding, December 31, 1994 1,477,000 $ 1.83 - $ 7.00 $ 2.61
Granted 1,829,000 2.19 - 18.00 9.54
Exercised (271,000) 1.83 - 3.79 2.28
---------------------------------------------
Outstanding, December 31, 1995 3,035,000 1.83 - 18.00 6.81
Granted 625,000 20.25 - 40.25 24.53
Exercised (163,000) 1.83 - 7.75 3.12
Canceled (268,000) 7.75 - 10.00 9.02
---------------------------------------------
Outstanding, December 31, 1996 3,229,000 1.83 - 40.25 10.25
Granted 834,000 21.25 - 36.75 23.22
Exercised (437,000) 1.83 - 20.75 4.25
Canceled (224,000) 7.75 - 30.00 19.92
---------------------------------------------
Outstanding, December 31, 1997 3,402,000 $ 1.83 - $37.00 $13.58
=============================================
The number of stock options exercisable and the weighted average exercise price
of these options was 1,147,500 and $5.76 and 1,254,000 and $3.47 at December 31,
1997 and 1996, respectively. The weighted-average fair value of options granted
during 1997 and 1996 was $10.96 and $13.93, respectively. The weighted-average
remaining contractual life of those options is 5 years.
The Company's Amended and Restated 1995 Employee Stock Incentive Plan has
authorized the grant of options for up to 3,000,000 shares of Common Stock. All
options granted have 10 year terms from the grant date and vest over periods
from one to five years from the date of grant. At December 31, 1997, options for
the purchase of 2,691,000 shares were outstanding under this plan.
The Company's Amended and Restated 1995 Stock Option Plan for Outside Directors
has authorized the grant of options to the Company's non-employee directors for
up to 60,000 shares of Common Stock. All options granted have 10 year terms and
become fully exercisable one year from the date of grant. At December 31, 1997,
options for the purchase of 24,000 shares were outstanding under this plan.
Prior to the First Data Merger, Old Envoy had outstanding non-qualified stock
options for the purchase of 1,214,640 shares of Common Stock. The grants were
made under the 1987 Stock Option Plan, the 1990 Director Stock Option Plan, the
1990 Officer and Employee Stock Option Plan, the 1992 Non-Employee Directors'
Plan and the 1992 Incentive Plan. Because all of these grants were made prior to
the First Data Merger, no further grants may be made under these plans. All
options granted thereunder have 10 year terms from the
23
24
ENVOY Corporation
Notes to Consolidated Financial Statements
grant date. In connection with the Distribution and First Data Merger, each
holder of an outstanding option to purchase shares of Old Envoy common stock (an
"Old Envoy Option") received an option to purchase an equal number of shares of
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 Old Envoy Option. The distribution percentage was established based upon
the market prices of Common Stock and Old Envoy Common Stock as determined by
the ratio of (i) the average of the closing prices of Common Stock on the three
trading days immediately following the First Data Merger to (ii) the closing
price of Old Envoy Common Stock immediately prior to the First Data 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 First Data Merger as before the First Data Merger.
At December 31, 1997, options for the purchase of 687,000 shares were
outstanding and fully exercisable under these plans.
The Compensation Committee of the Board of Directors amended the 1992 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. The deferred compensation was recognized as an expense
over the vesting period. As a result of the First Data Merger, the vesting of
all outstanding options was accelerated and all options became fully vested as
of the effective date of the First Data Merger. Accordingly, during the year
ended December 31, 1995, the remaining deferred compensation expense of
$1,264,000 was recognized.
Pro forma information regarding net loss and loss per share is required by SFAS
No. 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method. The fair value for these options
was estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted-average assumptions for 1997 and 1996, respectively:
risk-free interest rates of 5.77% and ranging from 5.36% to 6.69%; no dividend
yield; volatility factors of the expected market price of Common Stock ranging
from .436 to .455 and .385 to .419, respectively; and a weighted-average
expected life of the option of 5 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its stock options.
24
25
ENVOY Corporation
Notes to Consolidated Financial Statements
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands, except for loss per share information):
1997 1996 1995
-------- -------- -------
Pro forma net loss $(23,947) $(40,047) $(4,960)
Pro forma loss per common share (1.22) (2.42) (.34)
Because SFAS No. 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until the
new rules are applied to all outstanding awards.
The Company implemented the ENVOY Corporation Employee Stock Purchase Plan (the
"ESPP") effective July 1, 1997, at which time participating employees became
entitled to purchase Common Stock at a discounted price through accumulated
payroll deductions. Under the terms of the ESPP, the purchase price of the
Common Stock for participating employees will be the lesser of (i) 85% of the
closing market price of the Common Stock on the last trading day of each
quarterly enrollment period or (ii) 85% of the closing market price of the
Common Stock on the first trading day of each quarterly enrollment period. The
Company has reserved 1,000,000 shares of Common Stock for issuance under the
ESPP. As of December 31, 1997, approximately 3,000 shares had been issued under
the ESPP.
12. SERIES B PREFERRED STOCK
In March 1996, the Company issued 3,730,233 shares of Series B Preferred Stock
in connection with the NEIC acquisition (see Note 4). The Series B Preferred
Stock is recorded in the accompanying consolidated balance sheet at its
liquidation preference of $10.75 per share, or $40,100,000 in the aggregate.
Each share of Series B Preferred Stock is convertible into 1 share of Common
Stock at any time. 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 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. 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. 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 for 60 trading days prior to the notice of redemption is
not less than $21.50 per share. In February 1998, 930,233 shares of Series B
Preferred Stock were converted into an equal number of shares of Common Stock.
13. SHAREHOLDER RIGHTS PLAN
In connection with the First Data 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.
25
26
ENVOY Corporation
Notes to Consolidated Financial Statements
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, Series A 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.
14. COMMON STOCK OFFERING
In August 1996, the Company completed an underwritten public offering of
3,320,000 shares of Common Stock at $26.50 per share. Net proceeds from this
offering were approximately $83,000,000, and were used to retire indebtedness of
$25,000,000 outstanding under a term loan agreement and indebtedness of
approximately $12,900,000 outstanding under a $25,000,000 revolving credit
facility. The remaining proceeds were used for general corporate purposes,
including funding working capital requirements and acquisitions.
15. INCOME TAXES
The provision (benefit) for income taxes was comprised of the following (in
thousands):
DECEMBER 31,
1997 1996 1995
------------------------------------
Current:
Federal $ 4,957 $ 271 $ 359
State 2,429 1,107 55
------------------------------------
Total current 7,386 1,378 414
Deferred:
Federal (10,091) 1,139 16
State (2,513) (800) (4)
------------------------------------
Total deferred (12,604) 339 12
------------------------------------
Provision (benefit) for income taxes $ (5,218) $ 1,717 $ 426
====================================
26
27
ENVOY Corporation
Notes to Consolidated Financial Statements
The reconciliation of income tax computed by applying the U.S. federal statutory
rate to the actual income tax provision (benefit) follows (in thousands):
DECEMBER 31,
1997 1996 1995
------------------------------------
Income tax benefit at U.S. federal
statutory rate $ (9,962) $(12,580) $(1,388)
Nondeductible merger costs 0 10,459 679
Nondeductible goodwill amortization 4,499 3,411 0
State income taxes, net of federal
benefit (38) 210 29
Change in valuation allowance 238 163 1,130
Other, net 45 54 (24)
------------------------------------
Income tax provision (benefit) $ (5,218) $ 1,717 $ 426
====================================
The classification of the provision (benefit) for income taxes in the
consolidated statements of operations is as follows (in thousands):
DECEMBER 31,
1997 1996 1995
------------------------------------
Income tax provision attributable to
continuing operations $ (5,218) $ 1,717 $ (50)
Discontinued operations:
Income from operations 0 0 42
First Data transaction expense 0 0 434
------------------------------------
Total provision from discontinued
operations 0 0 476
------------------------------------
Total income tax provision $ (5,218) $ 1,717 $ 426
====================================
27
28
ENVOY Corporation
Notes to Consolidated Financial Statements
Deferred income taxes reflects 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
(in thousands):
DECEMBER 31,
1997 1996
-----------------------
Deferred tax liability:
Difference between book and tax depreciation
and amortization related to property and equipment $ (2,348) $(2,211)
Difference between book and tax amortization
related to goodwill and other intangibles (3,552) (6,158)
-----------------------
Total deferred tax liabilities (5,900) (8,369)
-----------------------
Deferred tax assets:
Difference between book and tax amortization related to
write-off of acquired in-process technology 14,018 0
Difference between book and tax treatment
of leased assets 585 516
Reserves and accruals not currently deductible 1,683 1,250
Net operating loss 398 4,629
Difference between book and tax treatment
of investments 900 880
Difference between book and tax treatment
of compensation expense 408 581
Tax credits 583 503
Other 119 118
-----------------------
Total deferred tax assets 18,694 8,477
Valuation allowance for deferred tax assets (1,025) (787)
-----------------------
Net deferred tax assets 17,669 7,690
-----------------------
Net deferred tax assets (liability) $ 11,769 $ (679)
=======================
At December 31, 1997, the Company had federal and state net operating loss
carryforwards of approximately $12,400,000 and $17,800,000, respectively. All of
the federal and approximately $7,400,000 of the state net operating losses
relate to the exercise of employee stock options and the tax benefit will be
allocated to equity when realized on the Company's tax returns. These losses
begin to expire in 2003.
Of the $12,400,000 federal net operating losses, $10,800,000 are attributable to
pre-acquisition years of NEIC and their use is limited by the Code to
approximately $4,700,000 per year. The remaining $1,600,000 of federal net
operating losses are
28
29
ENVOY Corporation
Notes to Consolidated Financial Statements
attributable to pre-acquisition years of EMC and their use is limited by the
Code to approximately $141,000 per year.
The valuation allowance at December 31, 1996 relates to the loss on the
investment in EMC. The valuation allowance at December 31, 1997 relates to the
loss on the investment in EMC plus certain tax credits that expire in 1997 and
might not be realized on the Company's 1997 tax returns. The allowance was
increased in 1997 to include these credits.
As previously discussed, POS and ARM operated under Subchapter S of the Code and
were not subject to corporate federal or state income taxes. Had POS and ARM
filed federal and state income tax returns as C corporations for 1997, 1996 and
1995, income tax expense (benefit) from continuing operations under the
provisions of SFAS No. 109 would have been $(4,186,000), $1,882,000, and
$(50,000), respectively, as reflected in the pro forma net loss data in the
accompanying consolidated statements of operations.
16. PROFIT-SHARING PLANS
The Company and its subsidiaries sponsor 401(k) profit-sharing plans and other
noncontributory plans covering all employees who meet certain length of service
and age requirements. Eligible employees may elect to reduce their current
compensation and contribute to the 401(k) plans through salary deferral
contributions. The Company matches employee contributions, generally up to 25%
of the first 6% of compensation deferred by the employee. The amount of expense
for the Company contribution for all plans was approximately $613,000, $583,000
and $112,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheet for cash and
cash equivalents, accounts receivable, and accounts payable approximate fair
value. The carrying amount reported in the balance sheet for short-term and
long-term debt also approximates fair value. The fair value of the Company's
short-term and long-term debt is estimated using discounted cash flows and the
Company's current incremental borrowing rate for similar types of borrowing
arrangements.
29
30
ENVOY Corporation
Notes to Consolidated Financial Statements
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
1997
--------------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
--------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues $ 30,763 $ 32,169 $ 34,693 $ 39,980
Gross profit 15,541 16,623 17,920 21,082
Net loss (1,964)(a) 920 (20,540)(b) 874
Net loss per common share (0.10)(a) 0.05 (1.03)(b) 0.04
1996
--------------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
--------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues $ 12,984 $ 22,680 $ 25,375 $ 29,533
Gross profit 6,278 11,342 12,654 15,019
Net loss (33,549)(c) (888) (1,310)(d) (2,560)
Net loss per common share (2.25)(c) (0.06) (0.08)(d) (0.14)
(a) The Company recorded a $3,000,000 (or $0.16 per share) write-off of
acquired in-process technology related to the DSS acquisition (see Note 4).
(b) The Company recorded a $35,000,000 (or $1.75 per share) write-off of
acquired in-process technology related to the HDIC acquisition, less a
related deferred income tax benefit of $13,300,000 (or $0.66 per share)
(see Note 4).
(c) The Company recorded a $30,700,000 (or $2.06 per share) write-off of
acquired in-process technology related to the NEIC and Teleclaims
acquisitions (see Note 4).
(d) The Company recorded a $300,000 (or $0.02 per share) charge related to the
settlement of the EMC lawsuit (see Note 7).
19. RELATED PARTY TRANSACTIONS
As a result of the business combinations with the ExpressBill Companies, the
Company leases office space from a partnership of a significant stockholder.
Rentals paid were approximately $92,000 annually in each of the years in the
three year period ended December 31, 1997. During 1997, the Company entered into
a lease, which extends through February 2013, for a new operating facility with
this same partnership, with rentals to commence in March 1998. Annual rentals
under this new lease will be $457,500 through February 2003, $503,250 through
February 2008, and $553,575 through February 2013.
30
31
Schedule II
Valuation and Qualifying Accounts
December 31, 1995
Balance at Charged to Balance
Beginning Charged to Other Accounts- Deductions End of
Description of Period Costs & Expenses Describe Describe Period
- ----------------------------------------------------------------------------------------------------------------------------------
Allowance for Doubtful Accounts $518,256 647,938 a 464,231 $701,963
----------------------------------------------------------------------------------------------
$518,256 647,938 0 464,231 $701,963
============================================================================== ===============
December 31, 1996
Balance at Charged to Balance
Beginning Charged to Other Accounts- Deductions End of
Description of Period Costs & Expenses Describe Describe Period
- ----------------------------------------------------------------------------------------------------------------------------------
Allowance for Doubtful Accounts $701,963 1,112,360 c 499,014 b 85,672 $2,227,665
----------------------------------------------------------------------------------------------
$701,963 1,112,360 499,014 85,672 $2,227,665
==============================================================================================
December 31, 1997
Balance at Charged to Balance
Beginning Charged to Other Accounts- Deductions End of
Description of Period Costs & Expenses Describe Describe Period
- ----------------------------------------------------------------------------------------------------------------------------------
Allowance for Doubtful Accounts $2,227,665 1,518,716 c 600,000 b 705,036 $3,641,345
----------------------------------------------------------------------------------------------
$2,227,665 1,518,716 600,000 705,036 $3,641,345
==============================================================================================
a Of this amount, $264,231 represents allowance for doubtful accounts
associated with the spin-off of the Financial Business which was
transferred to First Data. The remaining $200,000 represents a write-off of
known uncollectible receivables against the allowance account.
b This amount represents a write-off of known uncollectible receivables
against the allowance account.
c These amounts represent amounts recorded in connection with the opening
balances of the Acquired Businesses. See Notes 4 and 7 of Notes to
Consolidated Financial Statements.
31
32
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: May 5, 1998 /s/ Kevin M. McNamara
----------------------
Kevin M. McNamara
Senior Vice President and Chief Financial Officer
33
EXHIBIT INDEX
Exhibit
- -------
23.1 Consent of Ernst & Young LLP
23.2 Consent of Arthur Andersen LLP
27 Financial Data Schedule (for SEC use only)