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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 12, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ENVOY CORPORATION
(Exact Name of Registrant as Specified in its Charter)
TENNESSEE 62-1575729
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
15 CENTURY BOULEVARD, SUITE 600, NASHVILLE, TENNESSEE 37214
(615) 885-3700
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
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GREGORY T. STEVENS
VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
15 CENTURY BOULEVARD, SUITE 600
NASHVILLE, TENNESSEE 37214
(615) 885-3700
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
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BOB F. THOMPSON FREDERICK W. KANNER
BASS, BERRY & SIMS PLC DEWEY BALLANTINE LLP
2700 FIRST AMERICAN CENTER 1301 AVENUE OF THE AMERICAS
NASHVILLE, TENNESSEE 37238 NEW YORK, NEW YORK 10019
(615) 742-6200 (212) 259-8000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
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If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF SHARES TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) FEE
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Common Stock, no par value per
share............................ 2,012,500(2) $39.375 $79,242,188 $23,377
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(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c) based upon the average of the high and low
reported prices of the Common Stock on the Nasdaq National Market on May
7, 1998.
(2) Includes 262,500 shares that may be sold pursuant to the over-allotment
option granted to the Underwriters. See "Underwriting."
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL
PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
JURISDICTION.
SUBJECT TO COMPLETION, DATED MAY 12, 1998
PROSPECTUS
1,750,000 SHARES
(ENVOY CORPORATION LOGO)
COMMON STOCK
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All of the 1,750,000 shares (the "Shares") of Common Stock, no par value
per share (the "Common Stock"), of ENVOY Corporation ("ENVOY" or the "Company")
offered hereby are being offered by certain shareholders of the Company (the
"Selling Shareholders"). See "Selling Shareholders." The Company will not
receive any proceeds from the sale of the Common Stock offered hereby.
The Common Stock is listed on The Nasdaq Stock Market's National Market
("The Nasdaq Stock Market") under the symbol "ENVY." The last reported sale
price of the Common Stock on The Nasdaq Stock Market on May 11, 1998 was $43.00
per share. See "Price Range of Common Stock."
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SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK
OFFERED HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND SELLING
PUBLIC COMMISSIONS(1) SHAREHOLDERS(2)
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Per Share $ $ $
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Total(3) $ $ $
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(1) For information regarding indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting expenses estimated at $ , of which $ is
payable by the Company and $ is payable by the Selling
Shareholders.
(3) The Selling Shareholders have granted the Underwriters a 30-day option to
purchase up to 262,500 additional shares of Common Stock on the same
terms as set forth above solely to cover over-allotments, if any. See
"Underwriting." If such option is exercised in full, the total Price to
Public, Underwriting Discounts and Commissions and Proceeds to Selling
Shareholders will be $ , $ and $ , respectively.
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The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that certificates for the shares
of Common Stock offered hereby will be available for delivery on or about
, 1998, at the office of Smith Barney Inc., 333 West 34th Street,
New York, New York 10001.
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SALOMON SMITH BARNEY MORGAN STANLEY DEAN WITTER
J.C. BRADFORD & CO. DEUTSCHE MORGAN GRENFELL
HAMBRECHT & QUIST LOEWENBAUM & COMPANY INCORPORATED
May , 1998
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As required by Rule 304 of Regulation S-T, the following is a
narrative description of the artwork and text that appear on the inside front
cover page of the Prospectus.
A circular graph depicting the movement of information between
participants in the health care industry. The following text appears above the
graph: "ENVOY provides the connectivity required to move information between
participants in the health care industry." The following text appears below the
graph:
Selected Current & Potential Health Care EDI Information Exchanges
Hospitals Payors Physicians & Dentists Pharmacies
- -------------------------------- ----------------------- ------------------------------ ---------------------------
Claims* Claims* Eligibility* Eligibility*
Remittance* Patient Roster* Referral Management* Electronic Prescriptions*
Patient Census Enrollment Lab Order Formulary
Pre-admission Medical/Patient Records Just-In-Time Inventory*
Remittance*
Pharmacy Benefit
Laboratories Patients Managers
--------------------------- ---------------------------- --------------------------
Claims* Enrollment Claims*
Referrals* Provider Directories Formulary
Results Reporting Patient Statements*
* Indicates health care EDI exchanges currently offered by the Company.
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CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
INCLUDING BY OVER-ALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus or
incorporated herein by reference. Except as otherwise indicated, (i) all
references herein to "ENVOY" and the "Company" shall include the Company and its
wholly-owned subsidiaries; (ii) the Company's historical financial and other
statistical data included or incorporated by reference herein have been restated
to include the accounts and results of operations of XpiData, Inc., Professional
Office Services, Inc. and Automated Revenue Management, Inc. (collectively, the
"ExpressBill Companies") as a result of the Company's business combinations with
the ExpressBill Companies completed in February 1998, which were accounted for
as poolings of interests; and (iii) all information contained in this Prospectus
assumes no exercise of the Underwriters' over-allotment option. Investors should
carefully consider the information set forth under the heading "Risk Factors."
THE COMPANY
ENVOY is a leading provider of electronic data interchange ("EDI") and
transaction processing services to participants in the health care market,
including pharmacies, physicians, hospitals, dentists, billing services,
commercial insurance companies, managed care organizations, state and federal
governmental agencies and others. The Company provides health care EDI services
on a real-time and batch-processing basis by utilizing proprietary computer and
telecommunications software and microprocessor technology. ENVOY is one of the
largest processors of electronic real-time pharmacy and commercial third-party
payor batch transactions in the United States based upon annual transaction
volume. Through the Company's recently completed business combinations with the
ExpressBill Companies, the Company believes that it has the largest patient
statement processing and printing services business in the United States,
processing more than 100 million patient statements annually. ENVOY's
transaction network, which processed approximately 984.3 million transactions in
the 12 months ended March 31, 1998, consisted of approximately 200,000
physicians, 35,000 pharmacies, 40,000 dentists, 4,500 hospitals and 811 payors,
including approximately 46 Blue Cross Blue Shield Plans, 59 Medicare Plans and
38 Medicaid Plans as of March 31, 1998.
There are many types of transactions, information exchanges and other
communications that occur between participants in the health care industry.
Although the majority of these transactions traditionally have been paper based
and manually processed, technological advances and the evolution of electronic
transaction processing in recent years have created a framework for automation
which is achieving growing acceptance in the health care market. According to
the Health Data Directory, the percentage of health care claims filed
electronically has increased from 41% in 1993 to 60% in 1997. As health care
industry participants look for ways to lower costs, improve decision-making and
be more competitive, the Company anticipates that more payors, providers and
purchasers of health care services will become linked electronically. In
addition to the adjudication of health care claims, health care participants
need, among other things, information and services relating to eligibility,
encounters, referrals, pre-admission certifications, electronic prescriptions,
credit card services, patient statements and lab ordering. The Company believes
that, once an intermediary, such as ENVOY, has established electronic
connectivity between health care payors and providers, these value added
transaction services create opportunities for additional revenues without
significant costs. The Company believes that private and governmental efforts to
contain health care costs, the growth of managed care and the creation of
various health care alliances, as well as other changes in the health care
delivery mechanisms, will accelerate the transition to health care EDI.
ENVOY's strategy is to maintain and enhance its leadership position in the
health care EDI and transaction processing industry by (i) leveraging its
current strengths in the health care EDI and transaction processing industry,
(ii) expanding its product and service offerings, (iii) extending its EDI and
transaction processing network within the health care industry and (iv) pursuing
strategic acquisitions. The Company believes that its reputation for providing
quality and cost-effective services and products and its extensive EDI network
enhance ENVOY's ability to attract and retain customers.
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As part of its strategy to maintain and enhance its leadership position in
the health care EDI and transaction processing industry, the Company has
completed several recent business combinations, including the following:
- National Electronic Information Corporation. With the acquisition of
National Electronic Information Corporation ("NEIC") in March 1996, the
Company became one of the largest processors of commercial third-party
payor claims based on the number of transactions processed. The NEIC
acquisition significantly enhanced the Company's transaction network by
giving ENVOY the largest number of direct electronic connections to
commercial third-party payors in the health care EDI and transaction
processing industry.
- Healthcare Data Interchange Corporation. In August 1997, the Company
completed the acquisition of all the issued and outstanding capital stock
of Healthcare Data Interchange Corporation ("HDIC"), the health care EDI
subsidiary of Aetna U.S. Healthcare, Inc. ("AUSHC"). In connection with
the acquisition, the parties entered into a long-term services agreement
under which AUSHC has agreed to use the Company as its single source EDI
technology partner to process all AUSHC electronic health care
transactions.
- ExpressBill Companies. In February 1998, the Company completed business
combinations with the ExpressBill Companies. The ExpressBill Companies'
patient statement services include electronic data transmission and
formatting, statement printing and mailing services for health care
providers and practice management system vendors. The addition of the
ExpressBill Companies' patient statement services further expands the
breadth of ENVOY's product and service offerings to health care
providers.
- Synergy Healthcare, Inc. In May 1998, the Company acquired all the
issued and outstanding capital stock of Synergy Healthcare, Inc.
("Synergy"), which provides health care information products and services
to participants in the health care market. Synergy's products and
services include health care data warehousing and analysis, performance
tracking, patient studies and disease management support. This
acquisition is anticipated to allow ENVOY to offer new data analysis
services to certain of its existing customers, as well as to various
other participants in the health care market.
The Company's executive offices are located at 15 Century Boulevard, Suite
600, Nashville, Tennessee 37214, and its telephone number at that location is
(615) 885-3700.
THE OFFERING
Common Stock offered by the Selling Shareholders........................... 1,750,000 shares
Common Stock outstanding after the offering(1)............................. 21,101,783 shares
Use of proceeds............................................................ All proceeds from the offering will go
to the Selling Shareholders.
The Nasdaq Stock Market symbol............................................. ENVY
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(1) Excludes (i) 3,743,502 shares of Common Stock issuable upon the exercise of
options granted pursuant to the Company's existing stock option plans, of
which 1,074,467 shares were exercisable at a weighted average exercise price
per share of $6.31, as of May 3, 1998 and (ii) 2,800,000 shares of Common
Stock issuable upon conversion of the Company's Series B Convertible
Preferred Stock, no par value per share (the "Series B Preferred Stock").
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SUMMARY FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER OPERATING DATA)
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
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1995(1) 1996 1997 1997 1998
------- -------- -------- ------- -------
STATEMENTS OF OPERATIONS DATA:
Revenues................................................. $34,197 $ 90,572 $137,605 $30,763 $42,524
Operating costs and expenses:
Cost of revenues....................................... 20,433 45,279 66,439 15,222 20,019
Selling, general and administrative.................... 11,156 24,631 32,734 7,760 10,218
Depreciation and amortization(2)....................... 2,725 19,508 26,095 6,073 6,993
Merger and facility integration costs(3)............... -- 4,664 -- -- --
Write-off of acquired in-process technology(4)......... -- 30,700 38,000 3,000 --
EMC losses............................................. -- 540 -- -- --
------- -------- -------- ------- -------
Operating income (loss).................................. (117) (34,750) (25,663) (1,292) 5,294
Other income (expense):
Interest income........................................ 380 1,032 1,312 453 145
Interest expense....................................... (659) (2,872) (1,577) (386) (437)
------- -------- -------- ------- -------
Income (loss) from continuing operations before income
taxes and loss in investee............................. (396) (36,590) (25,928) (1,225) 5,002
Provision (benefit) for income taxes..................... (50) 1,717 (5,218) 739 2,744
Loss in investee......................................... (1,776) -- -- -- --
------- -------- -------- ------- -------
Income (loss) from continuing operations................. $(2,122) $(38,307) $(20,710) $(1,964) $ 2,258
======= ======== ======== ======= =======
Income (loss) per common share from continuing operations
assuming dilution...................................... $ (0.14) $ (2.32) $ (1.05) $ (0.10) $ 0.09
======= ======== ======== ======= =======
Weighted average shares outstanding assuming dilution.... 14,739 16,519 19,686 18,976 25,102
======= ======== ======== ======= =======
OTHER OPERATING DATA:
Transactions (in millions)............................. 403.0 665.5 912.9 212.4 283.8
MARCH 31, 1998
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BALANCE SHEET DATA:
Working capital............................................. $ 25,207
Total assets................................................ 142,656
Long-term debt, less current portion........................ 231
Total shareholders' equity.................................. 99,967
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(1) The Company was incorporated in August 1994 as a wholly-owned subsidiary of
ENVOY Corporation, a Delaware corporation which was formed in 1981 (the
"Predecessor"). The Predecessor was formed to develop and market electronic
transaction processing services for the financial services and health care
markets. In June 1995, in order to facilitate the transfer of the financial
services business to First Data Corporation ("First Data"), the assets and
liabilities of the Predecessor associated with the health care business were
transferred to the Company. The Company was spun-off to shareholders through
a stock dividend distribution, and the Predecessor was merged into First
Data. The Company's financial statements incorporated by reference herein
include financial information for the Predecessor through June 1995, with
the financial services business shown as a discontinued operation. The above
amounts exclude the results of discontinued operations as a result of the
Predecessor's merger with First Data.
(2) Depreciation and amortization expense primarily relates to acquisitions and
includes amortization of goodwill and identifiable intangible assets of
$14.6 million and $20.0 million in 1996 and 1997, and $4.6 million and $5.3
million in the three month periods ended March 31, 1997 and 1998,
respectively. As of March 31, 1998, amortization expense related to
acquisitions was expected to be approximately $18.7 million in 1998, $7.2
million in 1999 and $4.1 million in 2000. Although goodwill associated with
the acquisition of NEIC will become fully amortized during the first quarter
of 1999, the consummation of additional acquisitions may significantly
increase future amortization costs.
(3) The 1996 results include expenses of $4.7 million relating to merger and
facility integration costs in conjunction with the NEIC and Teleclaims, Inc.
("Teleclaims") acquisitions.
(4) Results for the years ended December 31, 1996 and 1997 and the three months
ended March 31, 1997 include expenses of $30.7 million, $35.0 million and
$3.0 million, respectively, related to the write-off of acquired in-process
technology in conjunction with the acquisitions of NEIC, HDIC and Diverse
Software Solutions, Inc. ("DSS").
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RISK FACTORS
In addition to the other information included or incorporated by reference
in this Prospectus, the following risk factors should be considered carefully in
evaluating an investment in the Common Stock offered by this Prospectus.
Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance that
the forward-looking statements included herein will prove to be accurate. There
are many factors that may cause actual results to differ materially from those
indicated by the forward-looking statements, including, among others,
competitive pressures, changes in pricing policies, delays in product
development, business conditions in the marketplace, general economic conditions
and the various risk factors set forth below. In light of the significant
uncertainties inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a representation by the
Company that the objectives and plans of the Company will be achieved.
Limited Operating History; Recent Losses. The electronic health care
transaction processing industry is relatively new, and the Company's operating
history is relatively limited. Although ENVOY was profitable during the first
quarter of fiscal 1998, ENVOY has experienced substantial net losses in recent
years, including a net loss of approximately $20.7 million for the year ended
December 31, 1997, and had an accumulated deficit of approximately $62.3 million
as of March 31, 1998. In order to achieve long-term profitability, the Company
must successfully implement its business strategy and increase its revenues,
while controlling expenses. There can be no assurance that the Company will
achieve long-term profitability.
Financial Impact of Recent Acquisitions. The Company has recently
completed several acquisitions, which have created a significant expansion of
ENVOY's overall business. As a result of the accounting treatment for these
acquisitions, including the acquisitions of NEIC in March 1996 and HDIC in
August 1997, the Company's results of operations have been negatively impacted.
A brief description of significant terms of the NEIC and HDIC acquisitions
follows:
NEIC. The Company acquired NEIC for approximately $94.3 million,
including fees, expenses and other costs associated with the acquisition.
In connection with the acquisition, the Company recognized a one-time
write-off of acquired in-process technology of approximately $30.0 million.
As a result of the NEIC acquisition, the Company is amortizing $37.6
million of goodwill over a three year period, and such amortization will
adversely affect the Company's results of operations through March 1999.
HDIC. The Company completed the acquisition of HDIC for approximately
$36.4 million in cash and the assumption of approximately $14.8 million of
liabilities. In addition, the Company and AUSHC simultaneously entered into
a long-term services agreement under which AUSHC agreed to use the 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 $16.1 million of goodwill and
identifiable intangible assets related to the HDIC acquisition and is
amortizing the related goodwill of $14.1 million over a period of 15 years.
Also recorded as part of the HDIC acquisition was a one-time write-off of
acquired in-process technology of $35.0 million.
As of March 31, 1998, amortization expense related to acquisitions was expected
to be approximately $18.7 million in 1998 and $7.2 million in 1999, including
$3.7 million in the three months ended March 31, 1999. The consummation of
additional acquisitions, including the acquisition of Synergy, may significantly
increase amortization costs.
Acquisition Strategy; Impact on Operating Results; Need for Capital. The
Company's strategy includes acquisitions of related health care information
businesses and other companies complementary to its business. The success of any
such acquisition will depend on many factors, including the Company's ability to
identify suitable acquisition candidates, the purchase price, the availability
and terms of financing, and management's ability to integrate effectively the
acquired services, technologies (including different transaction processing
systems) or businesses into the Company's operations. Significant competition
for acquisition opportunities exists in the health care industry, which may
significantly increase the costs of and decrease the opportunities for
acquisitions. Although ENVOY is actively pursuing potential acquisitions, there
can be no assurance that
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any acquisition will be consummated. Further, to the extent that the Company is
able to consummate an acquisition, no assurance can be given that the Company
will be able to operate any acquired business profitably or otherwise
successfully implement its expansion strategy. In that regard, the Company has,
in the past, experienced temporary declines in customer service in connection
with the integration of certain acquired businesses. ENVOY may finance future
acquisitions through borrowings or the issuance of debt or equity securities.
Although the Company historically has obtained financing on reasonable terms,
there can be no assurances that future lenders will extend credit, or extend
credit on favorable terms. Further, any issuance of equity securities could have
a dilutive effect on the holders of Common Stock. Such acquisitions may result
in the recognition by the Company of significant goodwill and increases in the
amount of depreciation and amortization expense which could adversely affect the
Company's operating results in future periods.
Customer Concentration. Primarily as a result of the HDIC acquisition, the
Company has one customer, AUSHC, that accounted for approximately 12% of the
Company's consolidated revenues for 1997. Prior to 1997, no customer accounted
for more than 10% of the Company's revenues. Further consolidation in the health
care industry is likely to increase customer concentration and may increase the
Company's dependency on a limited number of customers. In addition, a
significant portion of NEIC's revenues has been generated by five major
insurance company payors who were shareholders of NEIC before its acquisition by
ENVOY. Although each of these carriers has continued to use the Company's
services after the acquisition of NEIC, they have no minimum transaction
commitment to the Company in the future, and there can be no assurance that the
volume of business generated by these payors will not decline or terminate. The
loss of one or more significant customers could have a material adverse effect
on the Company's business, operating results or financial condition.
Year 2000 Compliance. The Year 2000 issue is primarily the result of many
computer programs and data structures' failure to include the century when
storing the representation for a year. During 1997, the Company developed and
began implementing a plan to ensure its computer systems will be Year 2000
compliant. An inventory of all relevant software and hardware was taken to
determine the state of compliance. Some systems require no changes because they
already conform to the 4-digit-year configuration which is the basis for the
Year 2000 issue. The Company intends to replace or modify the remaining systems
as needed to properly display dates and perform date arithmetic. The Company
anticipates commencing testing with customers and other third parties in the
second quarter of 1998 with completion expected in June 1999. In addition to
validating the Company's internal program changes, this testing will determine
the readiness of the Company's customers to deal with the Year 2000 issue in
their own systems. Where warranted, the Company may assist customers in dealing
with the changes required to be compliant to ensure successful information
processing for all parties. Because of the nature of the Company's business, the
success of the Company's efforts may depend on the success of providers, payors
and others in dealing with the Year 2000 issue. Total cost of the Company's Year
2000 project is estimated to be $4.0 million and is being funded through
operating cash flows. The Company is expensing all costs associated with these
system changes as the costs are incurred. The Company estimates that Year 2000
expense for 1998 will be approximately $2.5 million. There can be no assurance,
however, that actual costs necessary to deal with these issues will not exceed
estimated amounts. If the Company or the third parties with which it interacts
are unable to deal successfully with the Year 2000 issue, such inability could
have a material adverse effect on the Company's business, results of operation
or financial condition.
Reliance on Data Centers. ENVOY's real-time electronic transaction
processing services depend on its host computer system which is contained in a
single data center facility. In addition, the Company's primary batch claims
processing capacity is outsourced to one vendor that processes claims through a
single computer center. The Company also operates a batch claims processing
center which is contained in a single data center facility in Oklahoma City,
Oklahoma for the processing of Blue Cross, Blue Shield, Medicare and Medicaid
claims. Although ENVOY is currently evaluating certain disaster recovery
alternatives, neither the real-time host computer system nor the Oklahoma City
batch claims center have a remote backup data center. There can be no assurance
that fire or other disaster affecting such data centers would not disable the
Company's respective systems or otherwise have a material adverse effect on the
Company's business, financial condition or results of operations. In addition, a
disruption in service from the vendor providing batch claims processing
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services to the Company could have a material adverse effect on the Company's
business, operating results or financial condition.
Development of Electronic Processing in the Health Care Industry. ENVOY's
strategy anticipates that electronic processing of health care transactions,
including transactions involving clinical as well as financial information, will
win market acceptance and that providers and third-party payors increasingly
will use electronic processing networks for the processing and transmission of
data. Electronic transmission of health care transactions is still developing,
and complexities in the nature and types of transactions which must be processed
has hindered to some degree the development and acceptance of electronic
processing in this market. In addition, while the multiplicity of claims forms
and formats used by the many different third-party payors has fostered the
development of electronic clearinghouses, the standardization of these claims
formats, whether due to consolidation in the industry or otherwise, could reduce
the use of electronic clearinghouses. There can be no assurance that continued
conversion from paper-based transaction processing to electronic transaction
processing in the health care market will occur or that, to the extent it does
occur, health care providers and payors will use independent networks such as
those being developed by the Company.
Competition. ENVOY faces significant competition in the health care sector
of the electronic transaction processing market from companies that are
similarly specialized, including former regional partners of the Company that
have direct provider relationships, and also from companies that are involved in
other, more highly developed sectors of the electronic transaction processing
market. The Company also faces competition from other companies, such as vendors
of provider information management systems, which have added or may add their
own proprietary transaction processing systems to existing or future products.
As a result of such competition, the Company may be pressured to reduce per
transaction prices or eliminate per transaction prices altogether. If electronic
transaction processing becomes the standard for claims and information
processing, a number of larger and better capitalized entities may elect to
enter the industry and further increase competitive pricing pressures. Many of
the Company's existing and potential competitors are larger and have
significantly greater financial, marketing, technological and other resources
than the Company.
Availability of Direct Links. Certain third-party payors provide
electronic data transmission systems to health care providers that establish a
direct link between the provider and the payor, bypassing third-party processors
such as the Company. Any significant increase in the utilization of direct links
between health care providers and payors would have a material adverse effect on
the Company's business, operating results and financial condition.
Uncertain Regulatory Environment and Consolidation in the Health Care
Industry. The health care industry is subject to changing political, economic
and regulatory influences that may affect the procurement practices and
operations of health care industry participants. Federal and state legislatures
periodically consider programs to modify or amend the United States health care
system at both the federal and state level. These programs may contain proposals
to increase governmental involvement in health care, lower reimbursement rates
or otherwise change the environment in which health care industry participants
operate. Health care industry participants may react to these proposals and the
uncertainty surrounding such proposals by curtailing or deferring investments,
including investments in the Company's services and products.
In addition, many health care providers are consolidating to create larger
health care delivery organizations. This consolidation reduces the number of
potential customers for the Company's services, and the increased bargaining
power of these organizations could lead to reductions in the amounts paid for
the Company's services. Industry developments are increasing the amount of
capitation-based health care and reducing the need for providers to make claims
of reimbursement for products or services. Other health care information
companies, such as billing services and practice management vendors, which
currently utilize the Company's services, have developed or acquired transaction
processing and networking capabilities and may cease utilizing the Company's
services in the future. The impact of these developments in the health care
industry is difficult to predict and could have a material adverse effect on the
Company's business, operating results or financial condition.
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Health Care Data Legislation. The Health Insurance Portability and
Accountability Act of 1996 ("HIPAA") mandates the use of standard transactions,
standard identifiers, security and other provisions, the use of which is
currently scheduled to occur as early as the year 2000. HIPAA specifically names
clearinghouses as the compliance facilitators for providers and payors.
Clearinghouses are given the freedom to utilize non-standard transactions and
convert them to the mandated standards on behalf of their clients. The Company
is preparing to comply with the mandated standards within three to six months
after their publication; however, the success of the Company's compliance
efforts may be dependent on the success of providers, payors and others in
dealing with the standards.
Legislation which would impose restrictions on the ability of third-party
processors to transmit certain patient data without specific patient consent
also recently has been introduced in the U.S. Congress. Such legislation, if
adopted, could adversely affect the ability of third-party processors to
transmit certain data, including treatment and clinical data. The impact of the
foregoing or other legislation is difficult to predict and could materially
adversely affect the Company's business, operating results or financial
condition.
Evolving Industry Standards and Rapid Technological Changes. The market
for the Company's business is characterized by rapidly changing technology,
evolving industry standards and frequent introduction of new and enhanced
products and services. ENVOY's success will depend upon its continued ability to
enhance its existing products and services, to introduce new products and
services on a timely and cost-effective basis to meet evolving customer
requirements, to achieve market acceptance for new products and services and to
respond to emerging industry standards and other technological changes. There
can be no assurance that the Company will be able to respond effectively to
technological changes or new industry standards. Moreover, there can be no
assurance that competitive products and services will not be developed, or that
any such competitive services will not have an adverse effect upon the Company's
business, operating results or financial condition.
Dependence on Technology; Risk of Infringement. ENVOY's ability to compete
effectively depends to a significant extent on its ability to protect its
proprietary information. The Company relies primarily on copyright, trade secret
and patent laws, confidentiality procedures and licensing arrangements to
protect its intellectual property rights. The Company generally enters into
confidentiality agreements with its consultants and employees and generally
limits access to and distribution of its technology, software and other
proprietary information. Although the Company intends to defend its intellectual
property, there can be no assurance that the steps taken by ENVOY to protect its
proprietary information will be adequate to prevent misappropriation of its
technology or that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technology. ENVOY is also subject to the risk of alleged infringement by ENVOY
of the intellectual property rights of others. Although the Company is not
currently aware of any pending or threatened infringement claims with respect to
the Company's current or future products, there can be no assurance that third
parties will not assert such claims. Any such claims could require the Company
to enter into license arrangements or could result in protracted and costly
litigation, regardless of the merits of such claims. No assurance can be given
that any necessary licenses will be available or that, if available, such
licenses can be obtained on commercially reasonable terms. Furthermore,
litigation may be necessary to enforce ENVOY's intellectual property rights, to
protect the Company's trade secrets, to determine the validity and scope of the
proprietary rights of others or to defend against claims of infringement. Such
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on the Company's business, operating
results or financial condition.
Certain Anti-takeover Provisions. The charter, bylaws and shareholders'
rights plan of the Company, and Tennessee law, contain certain provisions that
may have the effect of inhibiting a non-negotiated merger or other business
combination involving the Company. Such provisions are intended to encourage any
person interested in acquiring the Company to negotiate with and obtain the
approval of the Company's Board of Directors (the "Board of Directors") in
connection with any such transaction. These provisions include a staggered Board
of Directors, blank check preferred stock, supermajority voting provisions, the
ability to issue stock purchase rights, and the application of Tennessee law
provisions on business combinations. Certain of these provisions may discourage
a future acquisition of the Company not approved by the Board of Directors in
which shareholders might receive a premium value for their shares. As a result,
shareholders who might
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desire to participate in such a transaction may not have the opportunity to do
so. In addition, the Board of Directors has the power to designate the issuance
of shares of preferred stock. The rights and preferences for any series or class
of preferred stock may be set by the Board of Directors, in its sole discretion
and without approval of the holders of the Common Stock, and the rights and
preferences of any such preferred stock may be superior to those of the Common
Stock, thus adversely affecting the rights of the holders of Common Stock.
Furthermore, there are currently authorized and outstanding 2,800,000 shares of
Series B Preferred Stock. The Series B Preferred Stock has a liquidation
preference to the Common Stock and the creation of any other class or series of
preferred stock senior to or pari passu with the Series B Preferred Stock.
Volatility of Stock Price; Absence of Dividends. From time to time, there
may be significant volatility in the market price for the Common Stock.
Quarterly operating results of the Company, changes in earnings estimates by
analysts, changes in general conditions in the Company's industry or the economy
or the financial markets or other developments affecting the Company could cause
the market price of the Common Stock to fluctuate substantially. In addition, in
recent years the stock market has experienced significant price and volume
fluctuations. This volatility has had a significant effect on the market prices
of securities issued by many companies for reasons unrelated to their operating
performance. For the foreseeable future, it is expected that earnings, if any,
generated from ENVOY's operations will be used to finance the growth of its
business, and that no dividends will be paid to holders of the Common Stock.
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PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock is listed on The Nasdaq Stock Market under the symbol
"ENVY." The following table sets forth, for the periods indicated, the high and
low sale prices for the Common Stock as reported by The Nasdaq Stock Market.
HIGH LOW
------ ------
1996
First Quarter............................................. $24.25 $17.13
Second Quarter............................................ 32.75 23.25
Third Quarter............................................. 40.50 21.50
Fourth Quarter............................................ 42.25 34.00
1997
First Quarter............................................. $38.25 $21.88
Second Quarter............................................ 35.75 20.38
Third Quarter............................................. 37.25 25.50
Fourth Quarter............................................ 32.75 22.38
1998
First Quarter............................................. $46.63 $26.38
Second Quarter (through May 11, 1998)..................... 44.75 37.50
On May 11, 1998, the last reported sale price for the Common Stock on The
Nasdaq Stock Market was $43.00 per share. At May 5, 1998, there were
approximately 5,700 beneficial holders of the Common Stock, including
approximately 230 holders of record.
The Company has never declared or paid a cash dividend on its Common Stock.
It is the present policy of the Board of Directors to retain all earnings to
support operations and to finance expansion; therefore, the Company does not
anticipate declaring or paying cash dividends on the Common Stock in the
foreseeable future. The declaration and payment of dividends in the future will
be determined by the Board of Directors based on a number of factors, including,
but not limited to, the Company's earnings, financial condition and
requirements, restrictions in financing agreements (if any) and other factors
deemed relevant by the Board of Directors.
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SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below are derived from
the Company's financial statements. The selected consolidated financial
information for the three months ended March 31, 1997 and 1998 are derived from
the unaudited consolidated financial statements which, in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the financial position and the
results of operations for these periods.
Operating results for the three-month period ended March 31, 1998 are not
necessarily indicative of results for the full year. The selected consolidated
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
consolidated financial statements and notes thereto included or incorporated by
reference in this Prospectus. The financial and other statistical data have been
restated to include the accounts and results of operations of the ExpressBill
Companies.
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------- ------------------
1995(1) 1996 1997 1997 1998
------- -------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Revenues.................................................... $34,197 $ 90,572 $137,605 $ 30,763 $42,524
Operating costs and expenses:
Cost of revenues.......................................... 20,433 45,279 66,439 15,222 20,019
Selling, general and administrative....................... 11,156 24,631 32,734 7,760 10,218
Depreciation and amortization(2).......................... 2,725 19,508 26,095 6,073 6,993
Merger and facility integration costs(3).................. -- 4,664 -- -- --
Write-off of acquired in-process technology(4)............ -- 30,700 38,000 3,000 --
EMC losses................................................ -- 540 -- -- --
------- -------- -------- -------- -------
Operating income (loss)..................................... (117) (34,750) (25,663) (1,292) 5,294
Other income (expense):
Interest income........................................... 380 1,032 1,312 453 145
Interest expense.......................................... (659) (2,872) (1,577) (386) (437)
------- -------- -------- -------- -------
Income (loss) from continuing operations before income taxes
and loss in investee...................................... (396) (36,590) (25,928) (1,225) 5,002
Provision (benefit) for income taxes........................ (50) 1,717 (5,218) 739 2,744
Loss in investee............................................ (1,776) -- -- -- --
------- -------- -------- -------- -------
Income (loss) from continuing operations.................... $(2,122) $(38,307) $(20,710) $ (1,964) $ 2,258
======= ======== ======== ======== =======
Income (loss) per common share from continuing operations
assuming dilution......................................... $(0.14) $ (2.32) $ (1.05) $ (0.10) $ 0.09
======= ======== ======== ======== =======
Weighted average shares outstanding assuming dilution....... 14,739 16,519 19,686 18,976 25,102
======= ======== ======== ======== =======
DECEMBER 31, MARCH 31,
------------------- ---------
1996 1997 1998
-------- -------- ---------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital............................................. $ 47,541 $ 18,027 $ 25,207
Total assets................................................ 140,357 137,523 142,656
Long-term debt, less current portion........................ 8,926 527 231
Total shareholders' equity.................................. 108,414 97,559 99,967
- ---------------
(1) The Company was incorporated in August 1994 as a wholly-owned subsidiary of
the Predecessor. The Predecessor was formed to develop and market electronic
transaction processing services for the financial services and health care
markets. In June 1995, in order to facilitate the transfer of the financial
services business to First Data, the assets and liabilities of the
Predecessor associated with the health care business were transferred to the
Company. The Company was spun-off to shareholders through a stock dividend
distribution, and the Predecessor was merged into First Data. The Company's
financial statements incorporated by reference herein include financial
information for the Predecessor through June 1995, with the financial
services business shown as a discontinued operation. The above amounts
exclude the results of discontinued operations as a result of the
Predecessor's merger with First Data.
(2) Depreciation and amortization expense primarily relates to acquisitions and
includes amortization of goodwill and identifiable intangible assets of
$14.6 million and $20.0 million in 1996 and 1997, and $4.6 million and $5.3
million, in the three month periods ended March 31, 1997 and 1998,
respectively. As of March 31, 1998, amortization expense related to
acquisitions was expected to be approximately $18.7 million in 1998, $7.2
million in 1999 and $4.1 million in 2000. Although goodwill associated with
the acquisition of NEIC will become fully amortized during the first quarter
of 1999, the consummation of additional acquisitions may significantly
increase future amortization costs.
(3) The 1996 results include expenses of $4.7 million relating to merger and
facility integration costs in conjunction with the NEIC and Teleclaims
acquisitions.
(4) Results for the years ended December 31, 1996 and 1997 and the three months
ended March 31, 1997 include expenses of $30.7 million, $35.0 million, and
$3.0 million, respectively, related to the write-off of acquired in-process
technology in conjunction with the acquisitions of NEIC, HDIC and DSS.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with,
and is qualified in its entirety by, the Company's consolidated financial
statements, including the notes thereto, incorporated by reference herein.
OVERVIEW
The Company is a leading provider of EDI and transaction processing
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.
On February 27, 1998, the Company completed business combinations with the
ExpressBill Companies pursuant to separate agreements and plans of merger for an
aggregate of 3.5 million shares of ENVOY Common Stock. These combinations have
been accounted for as poolings of interests, and the historical financial
statements of the Company for all periods have been restated to include the
accounts and results of operations of the ExpressBill Companies.
The Company also has made several acquisitions since the beginning of 1996,
including the acquisitions of NEIC and several other businesses in 1996
(collectively, the "1996 Acquired Businesses") and HDIC and DSS in 1997
(collectively, the "1997 Acquired Businesses"). The 1996 Acquired Businesses and
1997 Acquired Businesses are sometimes collectively referred to herein as the
"Acquired Businesses." These acquisitions were accounted for under the purchase
method of accounting and, as a result, the Company has recorded the assets and
liabilities of the Acquired Businesses at their estimated fair values, with the
excess of the purchase price over these amounts being recorded as goodwill. The
financial statements for all periods reflect the operations of the Acquired
Businesses for the periods after their respective dates of acquisition.
The Company's revenues principally have been derived from EDI and
transaction processing services to the health care market which generally are
paid for by the health care providers or third-party payors. Revenues generally
are earned on a per transaction basis. In addition, total revenues include
non-transaction based revenues derived from the ExpressBill Companies and some
of the Acquired Businesses. This revenue includes maintenance, licensing and
support activities, as well as the sale of ancillary software and hardware
products and, in the case of the ExpressBill Companies, certain printing
services.
The Company's revenues generally are comprised of the following types of
transaction processing services: (i) pharmacy EDI, (ii) medical and other EDI
and (iii) patient statements. The table below shows the number of transactions
processed by the Company for the periods presented:
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------- -------------------
1995 1996 1997 1997 1998
------- ------- ------- -------- --------
(IN THOUSANDS)
Pharmacy EDI............................. 363,084 478,526 597,609 146,662 178,512
Medical and other EDI.................... 15,308 132,724 215,437 46,164 71,647
Patient statements....................... 24,582 54,251 99,823 19,546 33,637
------- ------- ------- ------- -------
Totals......................... 402,974 665,501 912,869 212,372 283,796
======= ======= ======= ======= =======
The transactions reflected above include the transactions of the Acquired
Businesses from the date of acquisition, and include the transactions of the
ExpressBill Companies for all periods.
While pharmacy EDI transactions currently represent a majority of the
Company's total transactions, the fees associated with these transactions are
significantly less than those received for medical EDI and patient statement
transactions. As a result, pharmacy EDI revenue constituted less than 19% of the
Company's total revenues in 1997, and less than 17% of the Company's total
revenues in the first quarter of 1998. For 1997, the pharmacy EDI business grew
at less than half the rate experienced in the Company's other businesses based
on the number of transactions processed. As a result of this trend, the Company
expects its pharmacy EDI
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business as presently conducted to represent a decreasing portion of the
Company's total revenues in the future. As the mix of the Company's business
changes, a decline in the growth rates associated with the Company's medical and
other EDI and patient statement business could have a material adverse effect on
the financial condition and operating results of the Company. There can be no
assurance that the mix of the Company's business or growth rates will continue
at their current level.
The Company continues to actively pursue the acquisition of health care
information businesses and other companies complementary to its business. The
Company's ability to successfully negotiate and close acquisitions will
materially impact the financial condition and operating results of the Company.
There can be no assurance that the Company will find attractive acquisition
candidates, be able to successfully finance and complete the acquisitions,
consolidate and integrate such businesses following the acquisition or
successfully operate them on a going forward basis.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the percentage
relationship certain statements of operations items bear to revenues.
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
----------------------- --------------
1995 1996 1997 1997 1998
----- ----- ----- ----- -----
Revenues........................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues................................... 59.8 50.0 48.3 49.5 47.1
Selling, general and administrative expenses....... 32.6 27.2 23.8 25.2 24.0
Depreciation and amortization...................... 8.0 21.5 19.0 19.7 16.4
Merger and facility integration costs.............. -- 5.2 -- -- --
Write-off of acquired in-process technology........ -- 33.9 27.6 9.8 --
EMC losses......................................... -- 0.6 -- -- --
----- ----- ----- ----- -----
Operating income (loss)............................ (0.3) (38.4) (18.7) (4.2) 12.5
Interest income.................................... 1.1 1.1 1.0 1.5 0.4
Interest expense................................... (1.9) (3.2) (1.2) (1.3) (1.1)
----- ----- ----- ----- -----
Income (loss) from continuing operations before
income taxes and loss in investee................ (1.2) (40.4) (18.8) (4.0) 11.8
Provision (benefit) for income taxes............... (0.2) 1.9 (3.8) 2.4 6.5
Loss in investee................................... (5.2) -- -- -- --
----- ----- ----- ----- -----
Income (loss) from continuing operations........... (6.2)% (42.3)% (15.1)% (6.4)% 5.3%
===== ===== ===== ===== =====
THREE MONTHS ENDED MARCH 31, 1998 AS COMPARED WITH THREE MONTHS ENDED MARCH 31,
1997
Revenues. Revenues for the quarter ended March 31, 1998 were $42.5 million
compared to $30.8 million for the same period last year, an increase of $11.7
million or 38.0%. The increase is attributable to internal growth of transaction
volume and additional revenues generated from the 1997 Acquired Businesses.
Cost of Revenues. Cost of revenues includes the cost of communications,
computer operations, operating supplies, product development and customer
support, as well as the cost of hardware sales and rebates to third parties for
transaction processing volume. Cost of revenues in the first quarter of 1998 was
$20.0 million compared to $15.2 million for the first quarter of 1997, an
increase of $4.8 million or 31.6%. The dollar increase is attributable to the
additional costs associated with the increased transaction volume and increases
in rebates paid to third parties in connection with medical EDI transactions.
The increase in rebates paid to third parties primarily results from an increase
in the mix of claims received from large third party vendors and claim
clearinghouses. If the mix of revenues continues to shift toward larger vendors
and clearinghouses, the Company expects rebates to represent an increasing
portion of its costs of revenues. As a percentage of revenues, cost of revenues
continued to improve to 47.1% in the first quarter of 1998 compared
14
17
to 49.5% in the first quarter of 1997. The improvement primarily is attributable
to the Company's ability to spread certain fixed costs of revenue over a larger
base of revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include marketing, finance, accounting and
administrative costs. Selling, general and administrative expenses for the three
months ended March 31, 1998 were $10.2 million compared to $7.8 million in the
same period in 1997, an increase of 30.8%. As a percentage of revenues, however,
selling, general and administrative expenses were 24.0% for the first quarter of
1998 compared to 25.2% for the first quarter of 1997. The improvement is
attributable to the Company's ability to spread its infrastructure costs over a
larger base of revenues. Transaction costs related to the business combinations
with the ExpressBill Companies totaled $780,000 in the first quarter of 1998 and
are included in selling, general and administrative expenses. Excluding these
transaction costs, selling, general and administrative expenses as a percentage
of revenues for the first quarter of 1998 would have been 22.1%.
Depreciation and Amortization. Depreciation and amortization expense
relates primarily to host computers, communications equipment and goodwill and
identifiable intangible assets related to acquisitions. Depreciation and
amortization expense for the first quarter of 1998 was $7.0 million compared to
$6.1 million for the comparable period in 1997. The increase is primarily the
result of the amortization of goodwill and identifiable intangible assets
related to the 1997 Acquired Businesses. At March 31, 1998, the Company had net
goodwill of $29.2 million associated with the Acquired Businesses remaining to
be amortized over periods of three to 15 years following the acquisitions. In
addition, the Company had net identifiable intangible assets of $21.0 million
remaining to be amortized over two to nine year time periods, as applicable.
Write-off of Acquired In-Process Technology. The Company incurred a
one-time write-off of acquired in-process technology of $3.0 million in
connection with the March 1997 acquisition of DSS. Such amount was charged to
expense because this amount related to research and development that had not
reached technological feasibility and for which there was no alternative future
use.
Net Interest Income (Expense). The Company recorded net interest expense
of $292,000 for the three months ended March 31, 1998 compared to net interest
income of $67,000 for the first quarter in 1997. Interest income decreased from
$453,000 in the first quarter of 1997 to $145,000 in the first quarter of 1998.
In August 1997, the Company acquired HDIC for approximately $36.4 million in
cash and the assumption of certain liabilities associated with unfavorable
contracts. Following this acquisition, the Company had less cash available for
investment, accounting for the reduction in interest income in the first quarter
of 1998. Interest expense increased from $386,000 in the first quarter of 1997
to $437,000 in the first quarter of 1998. Interest expense in 1998 resulted
primarily from interest expense that is required to be imputed in order to
account for the unfavorable long-term contracts assumed in the HDIC acquisition.
Interest expense in the three months ended March 31, 1997 resulted primarily
from the Company's $10.0 million 9% convertible subordinated notes issued in
June 1995 (the "Convertible Notes"). In a series of transactions completed
during 1996 and 1997, all of the Convertible Notes were converted into shares of
Common Stock and, therefore, were not outstanding during the first quarter of
1998.
Income Tax Provision. The Company's income tax provision for the first
quarter of 1998 was $2.7 million compared to $739,000 in the comparable period
in 1997. Amortization of certain goodwill and identifiable intangible assets is
not deductible for income tax purposes.
FISCAL YEAR 1997 AS COMPARED WITH 1996
Revenues. Revenues for the year ended December 31, 1997 were $137.6
million compared to $90.6 million for the same period last year, an increase of
$47.0 million or 51.9%. The increase is attributable to internal growth of
transaction volume and additional revenues generated from the Acquired
Businesses following the date of acquisition, including non-transaction based
sources of revenue from certain of the Acquired Businesses, such as software
licenses, maintenance and support activities.
Cost of Revenues. Cost of revenues in 1997 was $66.4 million compared to
$45.3 million for 1996, an increase of $21.1 million or 46.6%. The dollar
increase is attributable to the additional costs associated with
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the increased transaction volume, the inclusion of the Acquired Businesses
following the date of acquisition and increases in rebates paid to third
parties. As a percentage of revenues, cost of revenues improved to 48.3% in 1997
compared to 50.0% in 1996. The improvement primarily is attributable to the
Company's ability to spread certain fixed costs of revenue over a larger base of
revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for 1997 were $32.7 million compared to $24.6 million in
1996, an increase of 32.9%. The dollar increase is the result of the inclusion
of the Acquired Businesses following the date of acquisition and the required
infrastructure to support the larger base of revenues. As a percentage of
revenues, selling, general and administrative expenses decreased to 23.8% for
1997 compared to 27.2% for 1996. The improvement is attributable to a larger
base of revenues and the elimination of certain duplicative costs realized in
connection with the Acquired Businesses following the date of acquisition.
Depreciation and Amortization. Depreciation and amortization expense for
1997 was $26.1 million compared to $19.5 million for 1996. The increase in 1997
is primarily the result of the amortization of $20.0 million in goodwill and
identifiable intangible assets related to the Acquired Businesses, compared with
$14.6 million in 1996. Depreciation and amortization increased further as the
result of the additional investment in host computer systems and software to
expand the Company's transaction processing capabilities.
Merger and Facility Integration Costs. The Company recognized merger and
facility integration costs in 1996 of $4.7 million related primarily to the NEIC
and Teleclaims acquisitions. These charges represent costs incurred as a direct
result of the plan to integrate NEIC and Teleclaims. The Company estimates that
no future costs will be charged to merger and facility integration costs related
to NEIC and Teleclaims.
Write-off of Acquired In-Process Technology. The Company recorded
write-offs of acquired in-process technology of $38.0 million and $30.7 million
in 1997 and 1996, respectively. The 1997 write-offs related to the HDIC and DSS
acquisitions, and the 1996 write-offs related to the NEIC and Teleclaims
acquisitions. Such amounts were charged to expense because the amounts related
to research and development that had not reached technological feasibility and
for which there was no alternative future use.
Net Interest Expense. The Company recorded net interest expense of
$265,000 for 1997 compared to net interest expense of $1.8 million for 1996. The
Company incurred additional interest expense in 1997 resulting from the imputed
interest expense related to certain unfavorable contracts assumed as part of the
HDIC acquisition. This additional interest expense was offset partially by
interest income earned on cash and cash equivalents. Net interest expense in
1996 primarily resulted from interest on outstanding borrowings under the
Company's credit facilities and the Convertible Notes. The borrowings, which
consisted of a $25 million term loan and approximately $12.9 million outstanding
under the Company's revolving credit facility, were repaid in 1996 with a
portion of the proceeds from the Company's August 1996 public offering of
3,320,000 shares of Common Stock.
Income Tax Provision (Benefit). The Company's income tax benefit for 1997
was $5.2 million compared to a tax provision of $1.7 million in 1996. The tax
benefit recorded in 1997 reflects a deferred income tax benefit of $13.3 million
associated with the $35.0 million charge for the write-off of acquired in-
process technology related to the HDIC acquisition.
FISCAL YEAR 1996 AS COMPARED WITH 1995
Revenues. Revenues for the year ended December 31, 1996 were $90.6 million
compared to $34.2 million for the same period in 1995, an increase of $56.4
million or 165%. This increase is primarily attributable to additional revenues
generated from the 1996 Acquired Businesses following the date of acquisition
and an increase in pharmacy EDI transactions over 1995.
Cost of Revenues. Cost of revenues in 1996 was $45.3 million compared to
$20.4 million in 1995, an increase of 122%. The dollar increase is attributable
to the inclusion of results of the 1996 Acquired Businesses following the date
of acquisition and increased transaction volume in the Company's pre-acquisition
business. As a percentage of revenues, cost of revenues was 50.0% in 1996
compared to 59.8% in 1995. The improvement is attributable to the inclusion of
results of the 1996 Acquired Businesses following the date of
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acquisition, which historically experienced higher gross profit margins than
those of the Company's pre-acquisition business.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for 1996 were $24.6 million compared to $11.2 million in
1995, an increase of 120%. These expenses increased due to the inclusion of
results of the 1996 Acquired Businesses following the date of acquisition and
the additional costs associated with such acquisitions. As a percentage of
revenues, selling, general and administrative expenses decreased to 27.2% for
1996 compared to 32.6% for 1995. The improvement is attributable to a larger
base of revenues as well as the elimination of certain duplicative costs
realized in connection with the 1996 Acquired Businesses following the date of
acquisition.
Depreciation and Amortization. Depreciation and amortization expense for
1996 was $19.5 million compared to $2.7 million for 1995. The increase is the
result of the amortization of goodwill and identifiable intangible assets during
1996 of $14.6 million primarily related to the 1996 Acquired Businesses.
Depreciation and amortization increased further as the result of the additional
investment in host computer systems during 1996 to expand the Company's
transaction processing capabilities.
Merger and Facility Integration Costs. The Company recognized merger and
facility integration costs in 1996 of $4.7 million related to the NEIC and
Teleclaims acquisitions.
Write-off of Acquired In-Process Technology. The Company recorded a
write-off of acquired in-process technology of $30.7 million in 1996 related to
the NEIC and Teleclaims acquisitions. Such amounts were charged to expense
because the amounts related to research and development that had not reached
technological feasibility and for which there was no alternative future use.
EMC Losses. In January 1995, ENVOY acquired a 17.5% interest in
EMC*Express, Inc. ("EMC") and also entered into an agreement for the management
of EMC which required the Company to fund certain of EMC's operating costs in
the form of advances. The Company determined that it was probable an impairment
of its equity investment in EMC as of December 31, 1995 had occurred. As a
result, the Company recognized losses in 1996 of $540,000 relating to the
funding of EMC operating losses through the termination date of the management
agreement in March 1996. Based upon the Company's decision to terminate the
management agreement, the Company discontinued the equity method of accounting
for EMC and began accounting for the investment on a cost basis. Accordingly,
the loss related to EMC has been charged to operating expense. Following the
termination of the management agreement, certain shareholders of EMC filed a
lawsuit against the Company asserting claims for breach of contract and
negligent conduct. In October 1996, the Company acquired the remaining 82.5%
interest in EMC and settled the related lawsuit.
Net Interest Expense. The Company recorded net interest expense in 1996 of
$1.8 million compared to $279,000 of net interest expense for 1995. The increase
in interest expense is the result of increased borrowings under the Company's
bank credit facilities and interest associated with the Convertible Notes, which
more than offset interest income on the Company's available cash.
Income Tax Provision (Benefit). The Company's income tax provision in 1996
was $1.7 million compared to an income tax benefit of $50,000 in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred operating losses in recent years primarily as a
result of the write-off of acquired in-process technology related to the
Acquired Businesses, together with substantial non-cash depreciation and
amortization charges. During these periods, however, operations have generated
positive cash flows of $1.8 million in 1995, $3.2 million in 1996, $22.0 million
in 1997 and $12.7 million for the three months ended March 31, 1998.
Investing activities consist primarily of payments for acquired businesses
and purchases of property and equipment. Investing activities used $13.3 million
in 1995, $94.0 million in 1996, $51.2 million in 1997 and $1.4 million in the
three months ended March 31, 1998.
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Financing activities consist primarily of proceeds from the issuance of
capital stock, and proceeds from and payments on debt. Financing activities
provided $7.4 million in 1995, $127.2 million in 1996 and $1.0 million in 1997,
and used $1.6 million in the three months ended March 31, 1998.
On May 6, 1998, the Company completed the acquisition of Synergy for $10.0
million in cash. Following this acquisition and as of May 6, 1998, the Company
had available cash and cash equivalents of approximately $7.0 million.
The Company purchases additional computer hardware and software products
from time to time as required to support the Company's business. The Company
incurred capital expenditures of $8.7 million and $5.4 million for 1997 and
1996, respectively, primarily for computer hardware and software products. The
Company currently estimates that total capital expenditures for 1998 will be
approximately $8 to $9 million.
The Company is expensing as incurred all costs associated with system
changes related to its Year 2000 compliance project. The Company estimates that
the total cost of the Year 2000 expenses will be approximately $4.0 million, of
which approximately $2.5 million will be incurred during 1998. These costs are
being funded with available cash. See "Risk Factors -- Year 2000 Compliance."
At May 6, 1998, the Company had no amounts outstanding under its $50
million revolving credit facility. Any future borrowings made under the credit
facility would bear interest at a rate equal to the Base Rate (as defined in the
credit facility) or an index tied to LIBOR. Any future borrowings under the
credit facility would be due and payable in full on June 30, 2000. The credit
facility contains financial covenants applicable to the Company and its
subsidiaries, including ratios of debt to capital, annualized EBITDA to
annualized interest expense and certain other financial covenants customarily
included in a credit facility of this type. The Company and its subsidiaries
also are subject to certain restrictions relating to payment of dividends,
acquisitions, incurrence of debt and other restrictive provisions. The credit
facility is secured by substantially all of the assets of the Company and its
subsidiaries.
In February 1998, the Company issued 3.5 million shares of Common Stock in
connection with the ExpressBill Companies' business combinations. Also in
February 1998, 930,233 shares of the Company's Series B Preferred Stock were
converted into an equal number of shares of Common Stock. As a result of these
transactions, the number of shares of Common Stock outstanding increased by
approximately 4.4 million shares, or 27%, to 21.1 million shares.
From time to time, the Company has engaged and will continue to engage in
acquisition discussions with health care information businesses and other
companies complementary to its business. In the event the Company engages in
such acquisitions in the future, its currently available capital resources may
not be sufficient for such purposes and the Company may be required to incur
additional indebtedness or issue additional capital stock, which could result in
increased interest expense or dilution to existing investors.
Based on current operations, anticipated capital needs to fund known
expenditures and current acquisitions, the Company believes its available cash,
cash flow from operations and the $50.0 million revolving credit facility will
provide the capital resources necessary to meet its liquidity and cash flow
requirements over the next 12 months, including the Company's current short-term
obligations. The Company believes that present funding sources will provide the
ability to meet long-term obligations as they mature. The Company's available
cash is invested in interest bearing securities with maturities of up to 30
days.
SEASONALITY
ENVOY's business is to some extent seasonal, with more revenues being
generated from September through March as a result of a greater number of health
care transactions arising in those months, while operating expenses tend to
remain relatively constant over the course of the year.
IMPACT OF INFLATION
Inflation has not had a significant impact on ENVOY's results of operations
to date.
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BUSINESS
GENERAL
ENVOY is a leading provider of EDI and transaction processing services to
participants in the health care market, including pharmacies, physicians,
hospitals, dentists, billing services, commercial insurance companies, managed
care organizations, state and federal governmental agencies and others. The
Company provides health care EDI services on a real-time and batch-processing
basis by utilizing proprietary computer and telecommunications software and
microprocessor technology. ENVOY is one of the largest processors of electronic
real-time pharmacy and commercial third-party payor batch transactions in the
United States based upon annual transaction volume. Through the Company's
recently completed business combinations with the ExpressBill Companies, the
Company believes that it has the largest patient statement processing and
printing services business in the United States, processing more than 100
million patient statements annually. ENVOY's transaction network, which
processed approximately 984.3 million transactions in the 12 months ended March
31, 1998, consisted of approximately 200,000 physicians, 35,000 pharmacies,
40,000 dentists, 4,500 hospitals and 811 payors, including approximately 46 Blue
Cross Blue Shield Plans, 59 Medicare Plans and 38 Medicaid Plans as of March 31,
1998.
INDUSTRY BACKGROUND
Throughout the 1980's, advances in computer software, telecommunications
and microprocessor technology enabled the development of on-line, real-time
systems that electronically capture and transmit information, replacing the
recording and processing of transaction information on paper. In addition to
offering greater convenience, these electronic systems reduce processing costs,
settlement delays and losses from fraudulent transactions. The earliest and most
significant advances in electronic transaction processing occurred in the
financial services market, particularly in the areas of credit card
authorization and settlement. The Company believes the evolution of electronic
transaction processing in the financial services market has created the
framework for automation of other markets, such as health care, still dominated
by paper-based processing.
The first major departure from paper-based claims processing in the health
care market occurred in the late 1980s in the pharmacy industry. Medicare and
Medicaid payment reforms and cost saving initiatives by third-party commercial
payors and large retail pharmacy chains led to a significant increase in
electronic processing of pharmacy third-party claims. The development and use by
pharmacies of practice management software products that include the capability
of connecting with an electronic claims processing network also facilitated the
movement to electronic claims processing.
The Company believes EDI transaction processing offers a number of benefits
to health care payors and providers. The elimination or reduction of paper-based
transactions significantly lowers claims processing costs of payors, and on-line
encounter and referral information provides more efficient medical cost
management for managed care organizations and networked providers. In addition,
payors are able to more easily detect fraud and screen for unusual utilization
trends. From the health care providers' standpoint, information pertaining to
eligibility, authorization and reimbursement can be more easily accessed and
transmitted. By processing claims electronically, providers also reduce overhead
costs and staff time and improve accounts receivable management.
There are many types of transactions, information exchanges and other
communications that occur between the various participants in the health care
industry, including patients, pharmacies, physicians, hospitals, dentists,
billing services, commercial insurance companies, managed care organizations,
state and federal government agencies and others. While electronic transaction
processing for certain portions of the health care market has increased over the
past few years, many health care transactions continue to be paper-based and
manually-processed. Existing EDI services in this market primarily consist of:
(i) on-line verification of patient eligibility by pharmacies, health care
providers and third-party payors (both commercial and governmental) through
direct network communications; (ii) verification that the provider is eligible
to treat the patient; (iii) verification that the patient is eligible for the
treatment; (iv) filing of encounter data;
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(v) referral management for providers and payors; and (vi) batch processing of
health care reimbursement claims through a central clearinghouse.
Health care providers initiate electronic transaction processing through
dedicated point-of-service terminals, stand alone software or software
integrated with the provider's management information system. Providers can
verify patient eligibility or obtain authorization for services at the time of
appointment or registration by transmitting patient data to the processor across
a telecommunication line. The processor then interfaces with the payor to obtain
an eligibility or authorization confirmation which is transmitted back to the
provider. The submission of claims generally occurs by providers aggregating
claims throughout the day and submitting them electronically to a clearinghouse
in batch. Claims are sorted, formatted and edited by the clearinghouse, and are
then forwarded electronically to the payor. The claim is processed by the payor
and the adjudicated response is communicated back to the provider. To the extent
required, the payor sends a check to the provider or, in certain circumstances,
initiates an electronic funds transfer to the provider's account.
According to the Health Data Directory, approximately 86% of the 1.7
billion third-party pharmacy claims processed in 1997 were processed
electronically. The Company believes that only a small percentage of nonclaim
pharmacy transactions, such as the delivery of prescriptions by the physician to
the pharmacist or formulary inquiries to pharmacy benefit managers, are
delivered electronically through real-time on-line systems. The Company believes
that there are opportunities to expand electronic processing to other areas in
the pharmacy market. Also, as the population continues to grow and more benefit
plans include prescription programs, the Company believes the demand for
real-time processing of pharmacy transactions should continue to increase
correspondingly.
In addition to pharmacies, other providers, including hospitals, physicians
and dentists, transmit third-party reimbursement claims electronically, largely
on a batch basis through claims clearinghouses. According to the Health Data
Directory, approximately 42% of the 2.5 billion non-pharmacy health care claims
processed in 1997 were processed electronically. The recent growth of managed
care and governmental health care cost containment efforts have increased the
use of real time transaction processing by hospitals and physicians by
emphasizing not only lower costs, but improved operating efficiencies and
increasing accountability. Certain state Medicaid programs permit providers to
electronically verify Medicaid eligibility on a real-time basis, and certain
managed care companies have encouraged their provider networks to utilize
real-time EDI for authorizations, encounter reports and referrals. The Company
believes that there are significant opportunities for further expansion of EDI
transactions to the non-pharmacy sector of the health care market, both for
claims processing as well as for clinical and other purposes.
STRATEGY
ENVOY's strategy is to maintain and enhance its leadership position in the
health care EDI and transaction processing industry. The key elements of this
strategy include:
Leverage current strengths in the health care EDI and transaction
processing industry. ENVOY intends to continue to expand its real-time
pharmacy and health care EDI and transaction processing business through
aggressive marketing and strategic alliances with third parties that have
access to a large number of health care industry participants. The Company
believes that its strengths include an extensive transaction network and
range of health care EDI delivery platforms between payors and providers
and high quality customer service. In addition, the Company will seek to
leverage its transaction volume in an effort to be the low cost provider of
health care EDI services.
Expand product and service offerings. The Company believes that much
of the information that flows from and among each of the various
participants in the health care market can be transmitted electronically
and by third parties, such as the Company, with greater efficiency and cost
effectiveness. The Company intends to expand its health care EDI and
transaction processing business to include electronic prescriptions, lab
orders, lab results and other transactions. The Company's software enables
providers and payors to electronically process transactions such as
remittance advice, patient rosters, electronic fund transfers and E-mail.
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Extend EDI and transaction processing network within the health care
industry. The Company plans to increase the connection to and
interconnection among physicians, hospitals, pharmacies, managed care
organizations and other third-party payors, laboratories, medical equipment
suppliers and, eventually, employers and patients. The Company believes
that a higher degree of interconnectivity among these health care
participants will increase the overall level of electronic and related
transactions.
Pursue strategic acquisitions. The Company expects to continue to
pursue acquisitions of related health care information businesses in order
to achieve greater economies of scale and to remain a cost effective
provider of transaction processing services. In addition, the Company
believes that as the currently fragmented health care EDI and transaction
processing industry grows and consolidates, acquisition opportunities
should arise for the Company as well as other market competitors and, thus,
lead to the emergence of a few industry leaders. The Company believes that,
among other opportunities, low volume processors may eventually seek to
sell their portfolios of physician and hospital customer relationships to
higher volume electronic transaction processors such as the Company. The
Company also intends to continue to pursue strategic acquisitions as a
means of broadening its product and service offerings, as it did with the
business combinations with the ExpressBill Companies and the acquisition of
Synergy.
COMPANY SERVICES
ENVOY provides various EDI and transaction processing services to
participants in the health care market.
Real-time Transaction Processing. The Company provides real-time
transaction processing for pharmacy claim adjudication and managed care
transactions for health care providers and payors.
A standard pharmacy transaction commences with an inquiry by the pharmacy,
through a point-of-service terminal or personal computer terminal, to determine
whether the patient is covered by a benefit program. After eligibility is
confirmed, the claim is settled and the payor transmits to the pharmacy
information regarding the amount and timing of the pending payment. As of March
31, 1998, ENVOY's pharmacy EDI network was linked to approximately 35,000 of the
estimated 51,000 retail pharmacies in the United States, including 40 of the top
50 retail pharmacy chains.
ENVOY's real-time managed care transactions between providers and payors
include (i) verification of the patient's enrollment in a program; (ii)
verification that the provider is eligible to treat the patient; (iii)
verification that the patient is eligible for a particular treatment; (iv)
filing of encounter data; (v) referral to a specialist; and (vi) other ancillary
transactions. Through its EDI and transaction processing network, the Company
has real-time access to several of the largest managed care and commercial
insurer databases in the United States, including Prudential Healthcare, CIGNA,
AUSHC, Oxford Health Plans, MetraHealth, Pacificare, Empire Blue Cross and Blue
Shield and Blue Cross and Blue Shield for the National Capital Area, and is a
sponsored participant to the Blue Cross and Blue Shield BluesNet network. For
Medicaid eligibility verification and related transactions, the Company
currently has access to databases for 27 states. In addition, if a patient
wishes to pay the deductible or co-payment amounts by credit card, ENVOY's
services provide the ability to obtain payment authorization and verification at
the provider's offices.
Batch Transaction Processing. With the acquisition of NEIC, ENVOY became
one of the nation's largest processors of commercial third-party payor claims
and enhanced its electronic network with connections to a significant number of
health care providers and payors across the United States. Batch transactions
are predominantly used to process reimbursement claims in traditional
fee-for-service commercial or government payor systems and to process encounter
data in capitated environments. These transactions are not as time-sensitive or
as easily processed on a real-time basis and, as a result are processed on a
collective and delayed basis, usually daily. To submit claims, health care
providers collect data throughout the day and then electronically forward these
claims in bulk to a clearinghouse. ENVOY's clearinghouse electronically collects
and verifies receipt of the claims and performs reformatting and editing
required to conform to a
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particular payor's specifications, aggregates daily transactions by payor and
transmits claims to payors based upon each payor's chosen communications
protocols. As of March 31, 1998, ENVOY's transaction network was connected with
668 of the commercial third-party payors, including all of the top 20 commercial
payors (based upon the number of members covered by such third-party payors).
EDI Products and Interfaces. The Company has developed a range of hardware
and software products and interfaces to facilitate the adoption of EDI by its
customers. In addition, ENVOY supports industry standards of the American
National Standards Institute X12N Subcommittee and Healthcare Financing
Administration National Standards. These products, and the functions they
enable, include the following:
ENline(R). The Company's ENline family of proprietary software
products performs all of the transactions of a stand alone point-of-service
terminal and has enhanced functionality to facilitate both batch and
real-time processing. The point-of-service terminal product, called ENline
Genesis, is designed to handle real-time transactions and allow the Company
to rapidly and cost effectively connect a significant number of providers
into the transaction network. The point-of-service terminals can be
accessed remotely to modify application software and communications
parameters, allowing the Company the flexibility to implement changes in
services relatively easily. Point-of-service terminals often are purchased
from the Company by payors, who are sponsoring a managed care network, and
offered by the payors to providers free of charge. In addition, providers
may purchase terminals from the Company for a fee.
The Company also has developed certain ENline PC-based products with
enhanced functionality features and open Application Program Interfaces
("APIs"). The APIs are established at the operating system level and are
designed to enable the Company's software to run on a wide variety of
operating systems including DOS, UNIX and Windows. The ENline PC-based
products can either function as a stand alone data entry system or work in
conjunction with physician practice management software. The stand alone
version, ENline Companion, is offered directly to providers. ENline Synergy
is designed for integration into a practice management software product.
The Company, in conjunction with the practice management vendor, integrates
ENline Synergy into the practice management system for distribution by the
practice management vendor to the provider. ENline Synergy also controls
the editing and distribution of the information from the practice
management system to the Company's network.
Automatic Eligibility Verification. During 1996, the Company acquired
technology for the automation of eligibility requests through the
acquisition of National Verification Systems, L.P. ("NVS"). This technology
interfaces with hospital and large practice management information systems
to automatically verify patient eligibility at the time of admission or
scheduling. Eligibility requests are obtained from the Company's real-time
transaction processing network. In addition to eligibility verification,
the Company's eligibility verification system provides statistical
reporting on patient demographics for hospitals and/or physician practices.
Automatic Transaction Posting. Through the acquisition of
substantially all of the assets of DSS in March 1997, the Company acquired
EDI technology used for automatic posting of transactions into a hospital
or practice management information system. This technology, which has been
integrated to work in tandem with NVS's automatic eligibility verification
technology, uses transactions obtained from the Company's real-time and
batch processing centers to perform automated remittance posting,
accelerated secondary billing and member update of eligibility information.
Patient Statements. Through the business combinations with the ExpressBill
Companies, the Company is able to offer automated patient billing services to
the hospital and other health care provider markets. The Company believes it has
the largest stand alone patient statement processing and printing services
business in the United States, processing more than 100 million patient
statements annually. The Company's patient statement services include electronic
data transmission and formatting, statement printing and mailing services for
health care providers and practice management system vendors.
Customer Service. As an adjunct to its transaction processing services,
the Company maintains customer service facilities with help desks for customer
inquiries. Client support employs a modern call
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tracking and response system which is directly connected to the real-time and
batch processing centers. The customer service staff is available via a
toll-free telephone number. Customer support services are frequently included in
the contract price for transaction processing services, but also may be billed
separately, depending upon the specific contract terms. The Company also offers
other services, such as on-site and telephone product training, installation and
terminal repair and replacement.
SALES AND MARKETING
The Company develops and maintains payor, provider and vendor relationships
primarily through its direct sales and marketing personnel located throughout
the United States. As of May 8, 1998, ENVOY employed approximately 115 sales and
marketing personnel. The Company's primary sales and marketing strategy focuses
on selling its services to organizations that have relationships with or access
to a large number of providers, including major health care practice management
system vendors. These relationships give ENVOY access to a large health care
provider population as the Company expands the breadth of its services from the
payor to the health care providers' desktop.
In the pharmacy segment, the Company traditionally has established
relationships with large retail pharmacy chains and pharmacy software vendors.
To market its batch claims processing services, the Company develops
relationships with third-party payors and large submitters of claims. Real-time
managed care EDI services are offered to providers either directly by the
Company's sales force or indirectly through commercial managed care
organizations. In addition, the Company works closely with practice management
system vendors to provide an integrated solution to health care industry
participants.
CUSTOMERS
The Company's principal customers consist of health care providers, such as
pharmacies, physicians, hospitals, dentists and billing services, and
third-party payors, such as commercial indemnity insurers, managed care
organizations and state and federal governmental agencies. Primarily as a result
of the HDIC acquisition, the Company has one customer, AUSHC, that accounted for
approximately 12% of the Company's revenues during 1997. Prior to 1997, no
customer accounted for more than 10% of the Company's revenues.
OPERATIONS
The Company delivers its services through an integrated electronic
transaction processing system, which includes ENVOY-designed software, host
computer hardware, network management, switching services and the ability to
interact with customers' personal computers and a variety of point-of-service
devices, most of which were originally designed by the Company.
ENVOY's real-time host computer system consists of Stratus and Data General
mini computers designed and configured to operate 24 hours a day, seven days a
week. The Stratus systems are scaleable and are designed and manufactured to
accommodate a fault-tolerant, nonstop environment. A fault-tolerant environment
is provided for the Data General systems by maintaining on-line standby
computers. The real-time host computer system data center is protected by
automated fire suppression systems designed to extinguish fire with minimal
damage to the computer equipment. The data center is further protected by
uninterruptible power supply systems consisting of diesel generators and battery
backups. In case of loss of commercial power, these systems can supply power to
the data center to continue operations. The data center can only be entered by
accessing a password protected security lock. The software and related data
files are backed up nightly and stored off-site.
The Company's real-time communications network consists of dedicated
circuits, T-l facilities and dial-up modem ports, which facilitate electronic
real-time communication among payors, providers and other users of
time-sensitive health care information. This communications network is designed
to provide a low cost, multipath host access from a computer modem or point of
service device with minimal delays and a high degree of accuracy and integrity.
The Company manages multiple lease lines to pharmacies and third-party
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payors. The Company uses a number of different nationwide public communications
networks to provide access to substantially all potential domestic customers.
To minimize the possibility that a customer might experience delay by a
failed or overloaded circuit, at least two potential communications paths are
provided for each transaction. Utilizing ENVOY's call tracking system,
transactions are rerouted under centralized control to receive the lowest
communications cost available and to bypass failed or overloaded communications
nodes.
A substantial portion of the Company's batch claim processing is
outsourced. Utilizing the Company's proprietary software, a third-party
processes batch transactions on an IBM 3090 mainframe computer coupled with a
RISC-based communications network server. The contractual arrangement between
the Company and the third-party processor requires the processor to maintain 24
hours a day, seven days a week processing capability and a "hot site" disaster
recovery system. The Company's current contract with this third-party processor
expires in December 1998.
PROPRIETARY RIGHTS
ENVOY owns certain of the software and systems designs that it uses and has
a limited, perpetual, nonexclusive, royalty-free license to use other software
and systems designs, such as the point-of-service device designs which were
developed by the Predecessor. The Company also licenses certain other software
from third parties.
The Company's success is dependent in part upon electronic transaction
processing technology developed by the Company. A combination of trade secrets,
service mark, copyrights, patents and contract protection is used to establish
and protect that technology. There can be no assurance these legal protections
and the precautions taken by the Company will be adequate to prevent
misappropriation of technology used by ENVOY. In addition, the legal protections
do not prevent independent third-party development of competitive technology.
COMPETITION
The Company faces potential competition in the health care EDI and
transaction processing market not only from other companies that are similarly
specialized, including former regional partners of the Company that have direct
provider relationships, but also from companies involved in other, more highly
developed sectors of the electronic transaction processing market. Such
companies could enter into, or focus more attention on, the health care EDI and
transaction processing market as it develops. In addition, the Company faces
competition by selected providers bypassing the Company's electronic network and
going directly to the payor. Many of ENVOY's existing and potential competitors
have greater financial, marketing and technological resources. There can be no
assurance that the Company can continue to compete successfully with its
existing and potential competitors in the health care EDI and transaction
processing market.
Factors influencing competition in the health care market include (i)
compatibility with the provider's software and inclusion in practice management
software products, (ii) in the case of the pharmacy market, relationships with
major retail pharmacy chains, and (iii) relationships with third-party payors
and managed care organizations. The Company believes that the breadth, price and
quality of its services are the most significant factors in developing and
maintaining relationships with pharmaceutical chains, third-party payors and
managed care organizations.
EMPLOYEES
As of May 8, 1998, ENVOY had approximately 850 employees, including
approximately 600 salaried and 250 non-salaried employees (including temporary
employees). None of these employees is represented by a union. ENVOY believes
its relationship with its employees is good.
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GOVERNMENT REGULATION
Governmental regulatory policies affect the charges for and the terms of
ENVOY's access to private line and public communications networks. ENVOY also
must obtain certification on the applicable communications network for design
innovations for point-of-service devices and proprietary software. Any delays in
obtaining necessary certifications with respect to future products and services
could delay their introduction. In addition, the Federal Communications
Commission requires ENVOY's products and services to comply with certain rules
and regulations governing performance. The Company believes its existing
products and services comply with all current rules and regulations. The Company
can give no assurance, however, that such rules and regulations regarding access
to communications networks will not change in the future. In addition,
legislation has been proposed which would mandate standards and impose
restrictions on the Company's ability to transmit health care EDI and
transaction data. See "Risk Factors -- Health Care Data Legislation." Changes in
such rules, regulations or policies or the adoption of legislation that make it
more costly to communicate on networks could adversely affect the demand for or
the cost of supplying services in the health care EDI transaction processing
business.
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MANAGEMENT
The directors and executive officers of the Company are as follows:
NAME AGE POSITION
- ---- --- --------
Fred C. Goad, Jr.(1)......... 57 Chairman of the Board, Co-Chief Executive Officer and
Director
Jim D. Kever(1).............. 45 President, Co-Chief Executive Officer and Director
Kevin M. McNamara............ 42 Senior Vice President, Chief Financial Officer and
Director
Harlan F. Seymour............ 48 Senior Vice President of Corporate Strategy and
Development and Director
William E. Ford(2)........... 36 Director
W. Marvin Gresham(3)......... 68 Director
Laurence E. Hirsch(1)(3)..... 52 Director
Richard A. McStay(2)......... 61 Director
Dewey A. Greene.............. 42 Chief Operating Officer
Sheila H. Schweitzer......... 50 Senior Vice President of Operations
Gregory T. Stevens........... 33 Vice President, General Counsel and Secretary
- ---------------
(1) Member of Executive Committee of the Board of Directors.
(2) Member of Audit Committee of the Board of Directors.
(3) Member of Compensation Committee of the Board of Directors.
Mr. Goad has served as the Company's Chairman of the Board and Co-Chief
Executive Officer since August 1995 and served as President and a Director since
the Company's incorporation in August 1994. Mr. Goad served as Chief Executive
Officer and a Director of the Predecessor from September 1985 through June 6,
1995. Mr. Goad also is a Director of Performance Food Group Company, a food
distribution company, and is a Director of Oacis Healthcare Systems, Inc., a
clinical healthcare software and services company.
Mr. Kever has served as the Company's President and Co-Chief Executive
Officer since August 1995, and as a Director since the Company's incorporation
in August 1994. Prior to such time, he served as the Company's Executive Vice
President, Secretary and General Counsel. Mr. Kever had served as a Director and
Secretary, Treasurer and General Counsel of the Predecessor since 1981 and as
Executive Vice President since 1984. Mr. Kever also is a Director of Transaction
Systems Architects, Inc., a supplier of electronic payment software products and
network integration solutions, and 3D Systems Corporation, a manufacturer of
technologically advanced solid imaging systems and prototype models.
Mr. McNamara has served as the Company's Senior Vice President and Chief
Financial Officer since February 1996, and as a Director since July 1997. Before
joining the Company, he served as President of NaBANCO Merchant Services
Corporation, a subsidiary of First Financial Management Corporation ("FFMC"),
from October 1994 to December 1995. Mr. McNamara served as Senior Executive Vice
President and Chief Financial Officer of National Bancard Corporation, another
subsidiary of FFMC, from January 1992 through September 1994.
Mr. Seymour has served as the Company's Senior Vice President of Corporate
Strategy and Development since August 1997, and as a Director since October
1996. Before joining the Company as a full-time employee in August 1997, Mr.
Seymour was a partner in Jefferson Capital Partners, Ltd., an investment banking
firm, from September 1996 to June 1997. Prior to such time, he served as
Executive Vice President and Chief Operating Officer, Business Development, of
Trigon Blue Cross Blue Shield, a leading health care insurance services company
("Trigon"), from August 1994 to June 1996. Before joining Trigon, Mr. Seymour
was with FFMC, for 11 years, serving in a variety of senior corporate positions,
where his last responsibility was President and Chief Executive Officer of First
Health Services Corporation, a wholly-owned subsidiary of FFMC.
Mr. Ford was appointed a Director of the Company on March 6, 1996. Mr. Ford
has served as a managing member of General Atlantic Partners LLC, the general
partner of General Atlantic Partners 25, L.P. and as a general partner of GAP
Coinvestment Partners, L.P. since 1991. Mr. Ford also serves as a
26
29
Director of GT Interactive Software Corporation, a provider of entertainment and
educational consumer software; MAPICS, Inc., a provider of enterprise resource
planning software applications for manufacturing enterprises; LHS Group, Inc., a
provider of scaleable client/server-based billing solutions to carriers in the
telecommunications industry; SS&C Technologies, Inc., a financial software
company; and E*Trade Group, Inc., a discount on-line electronic brokerage
company.
Mr. Gresham has served as a Director of the Company since February 1995 and
had served as a Director of the Predecessor from 1981 through June 6, 1995. Mr.
Gresham is the retired President of Gresham Drugs, Inc., a chain of pharmacies
in the State of Florida.
Mr. Hirsch has served as a Director of the Company since February 1995 and
had served as a Director of the Predecessor from 1987 through June 6, 1995. Mr.
Hirsch has served as the President of Centex Corporation, a corporation engaged
in home building, mortgage banking and related businesses, from March 1985 to
July 1991, as its Chief Executive Officer since July 1988, and as its Chairman
of the Board of Directors since July 1991. Mr. Hirsch also serves as a Director
of Commercial Metals Company, a company engaged in the manufacturing and
recycling of steel and metal products, and as a Trustee of BlackRock Investors,
Inc., a registered investment company.
Mr. McStay has served as a Director of the Company since February 1995 and
had served as a Director of the Predecessor from 1985 through June 6, 1995. Mr.
McStay served as President of Southern Capital Advisors, Inc., the investment
advisory subsidiary of Morgan Keegan & Company, Inc., from 1986 until his
retirement in March 1998, and is a Director of TBC Corporation, a wholesaler of
automobile tires and accessories.
Mr. Greene has served as the Company's Chief Operating Officer since March
1998. Before joining the Company, Mr. Greene served from March 1994 to September
1997 as a division president for Columbia/ HCA Healthcare Corporation. Prior to
such time, he served as Chief Executive Officer of Longview Regional Hospital, a
wholly-owned subsidiary of HealthTrust, Inc., from July 1991 to March 1994.
Ms. Schweitzer currently serves as the Company's Senior Vice President of
Operations. Before joining the Company in August 1995, Ms. Schweitzer served
from December 1991 to July 1995 as President and Chief Executive Officer of
Medical Management Resources, Inc., a health care EDI services company which is
a wholly-owned subsidiary of The Associated Group, Inc.
Mr. Stevens currently serves as the Company's Vice President, General
Counsel and Secretary. From 1990 until he joined the Company in September 1996,
Mr. Stevens was an attorney with the law firm of Bass, Berry & Sims PLC in
Nashville, Tennessee.
27
30
SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common Stock by the Selling Shareholders as of May 3, 1998, and as
adjusted to reflect the sale of the Common Stock offered hereby.
SHARES OF COMMON STOCK SHARES OF COMMON
BENEFICIALLY STOCK TO BE BENEFICIALLY
OWNED PRIOR TO OWNED
OFFERING(1) SHARES AFTER OFFERING(1)
------------------------ BEING ------------------------
NAME NUMBER PERCENT(2) OFFERED NUMBER PERCENT(2)
- ---- --------- ---------- --------- ---------- -----------
Richard B. McIntyre(3)................. 2,131,000 10.1%/8.9% 965,000 1,166,000 5.5%/4.9 %
Michael F. Marolf, Sr.(3).............. 713,854 3.4/3.0 305,937 407,917 1.9/1.7
Jeffrey B. Marolf(3)................... 217,048 1.0/* 93,021 124,027 */*
Lisa A. Marolf(3)...................... 217,048 1.0/* 93,021 124,027 */*
Michael F. Marolf, Jr.(3).............. 217,048 1.0/* 93,021 124,027 */*
Fred C. Goad, Jr.(4)................... 681,723(5) 3.2/2.8 100,000 581,723 2.7/2.4
Jim D. Kever(6)........................ 710,526(7) 3.3/2.9 100,000 610,526 2.8/2.5
--------- --------- --------- --------- --------
Total........................ 1,750,000
=========
- ---------------
* less than one percent
(1) For the purpose of determining "beneficial ownership," the rules of the
Securities and Exchange Commission ("SEC") require that every person who has
or shares the power to vote or dispose of shares of stock be reported as a
"beneficial owner" of all shares as to which such power exists. As a
consequence, multiple persons may be deemed to be the "beneficial owners" of
the same securities. The SEC rules also require that certain shares of stock
that a beneficial owner has the right to acquire pursuant to the exercise of
stock options within 60 days of the date as of which information is reported
are deemed to be outstanding for the purpose of calculating the percentage
ownership of such owner, but are not deemed outstanding for the purpose of
calculating the percentage ownership of any other person. At the close of
business on May 3, 1998, there were 21,101,783 and 2,800,000 shares of
Common Stock and Series B Preferred Stock, respectively, outstanding.
(2) The second percentage assumes conversion of all outstanding shares of Series
B Preferred Stock into Common Stock.
(3) The indicated shareholder received the shares of Common Stock in connection
with the Company's business combinations with the ExpressBill Companies. In
connection with these business combinations, the former shareholders of the
ExpressBill Companies received the right to demand the registration of the
shares being offered hereby pursuant to a Registration Rights Agreement,
dated February 27, 1998.
(4) Mr. Goad is the Chairman of the Board, Co-Chief Executive Officer and a
Director of ENVOY. See "Management."
(5) Includes 460,000 shares issuable pursuant to exercisable options for the
purchase of Common Stock.
(6) Mr. Kever is the President, Co-Chief Executive Officer and a Director of
ENVOY. See "Management."
(7) Includes 490,000 shares issuable pursuant to exercisable options for the
purchase of Common Stock.
28
31
UNDERWRITING
Upon the terms and subject to conditions stated in the Underwriting
Agreement dated the date hereof, each of the Underwriters named below (the
"Underwriters"), has severally agreed to purchase, and the Selling Shareholders
have agreed to sell to each such Underwriter, shares of Common Stock which equal
the number of shares of Common Stock set forth opposite the name of such
Underwriter below.
NUMBER OF
UNDERWRITER SHARES
----------- ---------
Smith Barney Inc............................................
Morgan Stanley & Co. Incorporated...........................
J.C. Bradford & Co. ........................................
Deutsche Morgan Grenfell Inc................................
Hambrecht & Quist LLC.......................................
Loewenbaum & Company Incorporated...........................
---------
Total............................................. 1,750,000
=========
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares are subject to
approval of certain legal matters by counsel and to certain other conditions.
The Underwriters are obligated to take and pay for all shares of Common Stock
offered hereby (other than those covered by the over-allotment option described
below) if any such shares are taken.
The Underwriters propose to offer a portion of the shares directly to the
public at the public offering price set forth on the cover page of this
Prospectus and a portion of the shares to certain dealers at a price which
represents a concession not in excess of $ per share below the public
offering price. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to other underwriters or to
certain other dealers. After the initial offering of the shares to the public,
the public offering price and such concessions may be changed by the
Underwriters.
The Selling Shareholders have granted to the Underwriters an option,
exercisable for 30 days from the date of this Prospectus, to purchase up to
262,500 additional shares of Common Stock at the price to public set forth on
the cover page of this Prospectus, less the underwriting discounts and
commissions. To the extent such option is exercised, each Selling Shareholder
will be obligated to sell approximately the same percentage of such additional
shares as the number of shares set forth opposite such Selling Shareholder's
name in the table of Selling Shareholders bears to the total number of shares
listed in such table. The Underwriters may exercise such option to purchase
additional shares solely for the purpose of covering over-allotments, if any, in
connection with the offering of the shares offered hereby. To the extent such
option is exercised, each Underwriter will be obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares as the number of shares set forth opposite each Underwriter's name in the
preceding table bears to the total number of shares listed in such table.
The Company, the directors and certain officers of the Company and the
Selling Shareholders have agreed that they will not, without the prior written
consent of Smith Barney Inc., for a period of 90 days after the date of this
Prospectus, offer, sell, contract to sell, pledge or otherwise dispose of, or
file (or participate in the filing of) a registration statement with the SEC in
respect of, or establish or increase a put equivalent position or liquidate or
decrease a call equivalent position within the meaning of Section 16 of the
Securities and Exchange Act of 1934, as amended (the "Exchange Act"), with
respect to, any shares of capital stock of the Company or any securities
convertible into or exercisable or exchangeable for such capital stock, or
publicly announce an intention to effect any such transaction, other than with
respect to shares of Common Stock disposed of as bona fide gifts approved by
Smith Barney Inc.
The Company, the Selling Shareholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act of 1933, as amended (the "Securities Act").
29
32
In connection with the Offering and in compliance with applicable law, the
Underwriters may over-allot (i.e., sell more Common Stock than the total amount
shown on the list of Underwriters and participations which appear above) and may
effect transactions which stabilize, maintain or otherwise affect the market
price of the Common Stock at levels above those which might otherwise prevail in
the open market. Such transactions may include placing bids for the Common Stock
or effecting purchases of Common Stock for the purpose of pegging, fixing or
maintaining the price of the Common Stock for the purpose of reducing a short
position created in connection with the Offering. A short position may be
covered by exercise of the option described above in lieu of or in addition to
open market purchases. In addition, the contractual arrangements between the
Underwriters include a provision whereby, if the Underwriters purchase Common
Stock in the open market for the account of the Underwriters and the securities
purchased can be traced to a particular Underwriter or member of the selling
group, the Underwriters may require the Underwriter or selling group member in
question to purchase the Common Stock in question at the cost price to the
Underwriters or may recover from (or decline to pay to) the Underwriter or
selling group member in question the selling concession applicable to the
securities in question. The Underwriters are not required to engage in any of
these activities, and any such activities, if commenced, may be discontinued at
any time.
Certain Underwriters and their affiliates have provided and may continue to
provide investment banking and other services to the Company. In particular, in
connection with the Company's business combinations with the ExpressBill
Companies in February 1998, Hambrecht & Quist LLC provided financial advisory
services to the Company, and received customary compensation therefor. Also, in
connection with this offering, Trilogy Capital Partners ("Trilogy") is being
paid a referral fee of $50,000 by the Underwriters. Trilogy provided financial
advisory services to the former shareholders of the ExpressBill Companies in
connection with the Company's business combinations with the ExpressBill
Companies, and may continue to provide such services to the former shareholders
of the ExpressBill Companies in the future.
LEGAL MATTERS
Certain legal matters with respect to the Common Stock offered hereby will
be passed upon for the Company and for Messrs. Goad and Kever by Bass, Berry &
Sims PLC, Nashville, Tennessee. Certain legal matters with respect to the Common
Stock offered hereby will be passed upon for the remaining Selling Shareholders
by Graham & James LLP, Palo Alto, California. Certain legal matters with respect
to the shares of Common Stock offered hereby will be passed upon for the
Underwriters by Dewey Ballantine LLP, New York, New York, who will rely on Bass,
Berry & Sims PLC for matters of Tennessee law.
EXPERTS
The consolidated financial statements and the schedule of ENVOY at December
31, 1997 and 1996, and for each of the three years in the period ended December
31, 1997, incorporated by reference in the registration statement, of which this
Prospectus forms a part, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon incorporated by reference
elsewhere herein, and are based in part on the reports of Arthur Andersen LLP,
independent public accountants. The financial statements and schedule referred
to above are incorporated by reference herein in reliance upon such reports
given upon the authority of such firms as experts in accounting and auditing.
The financial statements of the ExpressBill Companies incorporated by
reference in this Prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are incorporated herein in reliance upon the authority of said firm
as experts in giving such reports.
30
33
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Exchange Act
and, in accordance therewith, files reports, proxy statements and other
information with the SEC. Such reports, proxy statements and other information
may be inspected and copied at the office of the SEC at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549 or at its Regional Offices located in the
Citicorp Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661
and Seven World Trade Center, Suite 1300, New York, New York 10007. Copies of
such material also may be obtained from the Public Reference Section of the SEC,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Company's public filings are also available to the public at the web site
maintained by the SEC at "http://www.sec.gov." The Common Stock is listed on The
Nasdaq Stock Market, and such reports, proxy statements and other information
can also be inspected at the offices of Nasdaq Operations, 1735 K Street, N.W.,
Washington, D.C. 20006.
The Company has filed with the SEC a Registration Statement on Form S-3,
including amendments thereto, relating to the Common Stock offered hereby (the
"Registration Statement"). This Prospectus, which is part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. For further information with
respect to the Company and the Common Stock offered hereby, reference is hereby
made to the Registration Statement and such exhibits and schedules, which may be
inspected and copied in the manner and at the locations described above.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to are not necessarily complete and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement or as previously filed with the SEC and
incorporated herein by reference.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents or portions of documents filed by the Company with
the Commission are incorporated herein by reference:
(1) Annual Report on Form 10-K for the year ended December 31, 1997.
(2) Quarterly Report on Form 10-Q for the quarter ended March 31,
1998.
(3) Current Reports on Form 8-K filed on February 25, 1998 and on
March 9, 1998 (as amended by Form 8-K/A, filed on May 5, 1998).
(4) The description of the Common Stock contained in the Company's
Registration Statement under the Exchange Act on Form 10 on November 1,
1994, as amended through Post-Effective Amendment No. 4, filed on May 4,
1995.
All reports and other documents filed by the Company pursuant to Sections
13(a), 13(c), 14 or 15 (d) of the Exchange Act after the date of this Prospectus
and prior to the termination of the offering of Common Stock hereunder shall be
deemed to be incorporated by reference in this Prospectus and to be part hereof
from the filing date of such documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein,
or in any other subsequently filed document that also is incorporated or is
deemed to be incorporated by reference herein, modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
Subject to the foregoing, all information appearing in this Prospectus is
qualified in its entirety by the information appearing in the documents
incorporated herein by reference.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON WRITTEN OR ORAL
REQUEST, AT NO CHARGE, FROM THE COMPANY. REQUESTS SHOULD BE DIRECTED TO THE
COMPANY, 15 CENTURY BOULEVARD, SUITE 600, NASHVILLE, TENNESSEE 37214, ATTENTION:
INVESTOR RELATIONS.
31
34
======================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR BY ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES
OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THOSE TO WHICH IT
RELATES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH OFFER
IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT
THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.................... 3
Risk Factors.......................... 6
Price Range of Common Stock and
Dividend Policy..................... 11
Selected Consolidated Financial
Data................................ 12
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 13
Business.............................. 19
Management............................ 26
Selling Shareholders.................. 28
Underwriting.......................... 29
Legal Matters......................... 30
Experts............................... 30
Available Information................. 31
Incorporation of Certain Information
by Reference........................ 31
======================================================
======================================================
1,750,000 SHARES
(ENVOY CORPORATION LOGO)
COMMON STOCK
------------
PROSPECTUS
MAY , 1998
------------
SALOMON SMITH BARNEY
MORGAN STANLEY DEAN WITTER
J.C. BRADFORD & CO.
DEUTSCHE MORGAN GRENFELL
HAMBRECHT & QUIST
LOEWENBAUM & COMPANY
INCORPORATED
======================================================
35
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
SELLING
COMPANY SHAREHOLDERS
---------- ------------
SEC registration fee........................................ $ -- $ 23,377
NASD fee.................................................... -- 8,425
*Accounting fees and expenses...............................
*Legal fees and expenses....................................
*Printing and engraving expenses............................
*Blue Sky fees and expenses.................................
*Miscellaneous expenses.....................................
---------- ----------
*Total............................................ $ $
========== ==========
- ---------------
* To be filed by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Tennessee Business Corporation Act ("TBCA") provides that a corporation
may indemnify any of its directors and officers against liability incurred in
connection with a proceeding if (i) the director or officer acted in good faith,
(ii) in the case of conduct in his or her official capacity with the
corporation, the director or officer reasonably believed such conduct was in the
corporation's best interest, (iii) in all other cases, the director or officer
reasonably believed that his or her conduct was not opposed to the best interest
of the corporation, and (iv) in connection with any criminal proceeding, the
director or officer had no reasonable cause to believe that his or her conduct
was unlawful. In actions brought by or in the right of the corporation, however,
the TBCA provides that no indemnification may be made if the director or officer
was adjudged to be liable to the corporation. In cases where the director or
officer is wholly successful, on the merits or otherwise, in the defense of any
proceeding instigated because of his or her status as an officer or director of
a corporation, the TBCA mandates that the corporation indemnify the director or
officer against reasonable expenses incurred in the proceeding. The TBCA also
provides that in connection with any proceeding charging improper personal
benefit to an officer or director, no indemnification may be made if such
officer or director is adjudged liable on the basis that personal benefit was
improperly received. Notwithstanding the foregoing, the TBCA provides that a
court of competent jurisdiction, upon application, may order that an officer or
director be indemnified for reasonable expenses if, in consideration of all
relevant circumstances, the court determines that such individual is fairly and
reasonably entitled to indemnification, whether or not the standard of conduct
set forth above was met.
Article 8 of the Amended and Restated Charter (the "Charter") of the
Company and its Amended and Restated Bylaws (the "Bylaws") provide that the
Company shall indemnify against liability, and advance expenses to, any present
or former director or officer of the Company to the fullest extent allowed by
the TBCA, as amended from time to time, or any subsequent law, rule or
regulation adopted in lieu thereof. Additionally, the Charter provides that no
director of the Company shall be personally liable to the Company or any of its
shareholders for monetary damages for breach of any fiduciary duty except for
liability arising from (i) any breach of a director's duty of loyalty to the
Company or its shareholders, (ii) acts or omissions not in good faith or which
involved intentional misconduct or a knowing violation of law, (iii) any
unlawful distributions, or (iv) receiving any improper personal benefit. The
Company has entered into indemnification agreements with each of the Company's
directors and executive officers.
The Company currently has in effect an executive liability policy which
provides coverage for its directors and officers in amounts of $15.0 million per
claim and $15.0 million for annual aggregate claims. The policy covers any
error, misstatement, act or omission, or breach of duty committed by a director
or officer, subject to certain specified exclusions.
II-1
36
The proposed form of the Underwriting Agreement filed as Exhibit 1 to this
Registration Statement contains certain provisions relating to the
indemnification of the Company and its controlling persons by the Underwriters
and relating to the indemnification of the Underwriters by the Company and its
controlling persons.
ITEM 16. EXHIBITS.
See Index to Exhibits on Page II-4.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange
Act that is incorporated by reference in the Registration Statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the registrant
pursuant to the foregoing provisions, the registrant has been informed that in
the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered hereunder, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-2
37
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on this Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in Nashville, Tennessee on May 11, 1998.
ENVOY CORPORATION
By: /s/ FRED C. GOAD, JR.
------------------------------------
Fred C. Goad, Jr.
Chairman, Co-Chief Executive
Officer and Director
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Fred C. Goad, Jr., Jim D. Kever and
Gregory T. Stevens, jointly and severally, his attorneys-in-fact, each with the
power of substitution, for him in any and all capacities, to sign any amendments
to this Registration Statement, (including post-effective amendments and
amendments thereto) and any registration statement relating to the same offering
as this Registration Statement that is to be effective upon filing pursuant to
Rule 462(b) under the Securities Act of 1933, as amended, and to file the same,
with exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
NAME TITLE DATE
---- ----- ----
/s/ FRED C. GOAD, JR. Chairman of the Board, Co-Chief May 11, 1998
- ----------------------------------------------------- Executive Officer and Director
Fred C. Goad, Jr.
/s/ JIM D. KEVER President, Co-Chief Executive May 11, 1998
- ----------------------------------------------------- Officer and Director
Jim D. Kever
/s/ KEVIN M. MCNAMARA Senior Vice President, Chief May 11, 1998
- ----------------------------------------------------- Financial Officer and Director
Kevin M. McNamara (Principal Accounting Officer)
/s/ HARLAN F. SEYMOUR Senior Vice President of May 11, 1998
- ----------------------------------------------------- Corporate Strategy and
Harlan F. Seymour Development and Director
/s/ WILLIAM E. FORD Director May 11, 1998
- -----------------------------------------------------
William E. Ford
/s/ W. MARVIN GRESHAM Director May 11, 1998
- -----------------------------------------------------
W. Marvin Gresham
/s/ LAURENCE E. HIRSCH Director May 11, 1998
- -----------------------------------------------------
Laurence E. Hirsch
/s/ RICHARD A. MCSTAY Director May 11, 1998
- -----------------------------------------------------
Richard A. McStay
II-3
38
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
1 -- Underwriting Agreement*
4.1 -- Charter, as amended(1)
4.2 -- Shareholder Rights Plan(2)
4.3 -- Registration Rights Agreement dated March 6, 1996 by and
among ENVOY, General Atlantic Partners 25, L.P., GAP
Coinvestment Partners, L.P. and First Union Capital
Partners, Inc.(3)
4.4 -- Registration Rights Agreement dated March 6, 1996 by and
among ENVOY and the Purchasers set forth on the signature
pages thereto(3)
4.5 -- Registration Rights Agreement dated February 27, 1998, by
and between ENVOY and the Persons set forth on the signature
pages thereto(4)
5 -- Opinion of Bass, Berry & Sims PLC*
23.1 -- Consent of Ernst & Young LLP
23.2 -- Consent of Arthur Andersen LLP
23.3 -- Consent of Bass, Berry & Sims PLC (included in Exhibit 5)*
24 -- Power of Attorney (included on page II-3)
- ---------------
* To be filed by amendment.
(1) Charter as originally amended incorporated by reference to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995 and
Certificate of Designations setting forth terms of Series B Preferred Stock
incorporated by reference to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1997.
(2) Incorporated by reference to the Registrant's Form 10, as amended,
Commission File No. 0-25062.
(3) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed March 21, 1996.
(4) Incorporated by reference to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1997.