1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A No. 1
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
COMMISSION FILE NUMBER: 0-25062
ENVOY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TENNESSEE
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
62-1575729
(I.R.S. EMPLOYER IDENTIFICATION NUMBER)
TWO LAKEVIEW PLACE, 15 CENTURY BLVD.
SUITE 600, NASHVILLE, TN 37214
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(615) 885-3700
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
SHARES OUTSTANDING AS OF AUGUST 12, 1998:
21,196,354
CLASS:
COMMON STOCK, NO PAR VALUE PER SHARE
2
This Quarterly Report on Form 10-Q/A No. 1 amends and supersedes,
to the extent set forth herein, the Registrant's previously filed Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 1998.
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENVOY CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
1998 1997
--------- ------------
(Restated -- (Restated --
See Note B) See Note B)
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 14,951 $ 8,598
ACCOUNTS RECEIVABLE - NET 37,293 33,510
INVENTORIES 2,018 2,585
DEFERRED INCOME TAXES 1,997 1,797
OTHER 2,874 1,811
--------- ---------
TOTAL CURRENT ASSETS 59,133 48,301
PROPERTY AND EQUIPMENT, NET 19,405 19,508
OTHER ASSETS 93,288 98,816
--------- ---------
TOTAL ASSETS $ 171,826 $ 166,625
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER
CURRENT LIABILITIES $ 34,881 $ 30,011
CURRENT PORTION OF LONG-TERM DEBT 82 263
--------- ---------
TOTAL CURRENT LIABILITIES 34,963 30,274
LONG-TERM DEBT, LESS CURRENT PORTION 588 527
DEFERRED INCOME TAXES 1,138 1,579
OTHER NON-CURRENT LIABILITIES 8,577 9,163
SHAREHOLDERS' EQUITY:
PREFERRED STOCK -- No par value; authorized, 12,000,000 shares;
issued 2,800,000 and 3,730,233 in 1998 and in 1997, respectively 41,300 55,021
COMMON STOCK -- No par value; authorized, 48,000,000 shares;
issued, 21,191,459 and 20,075,822 in 1998 and 1997,
respectively 125,767 114,652
ADDITIONAL PAID-IN CAPITAL 8,485 7,208
RETAINED DEFICIT (48,992) (51,799)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 126,560 125,082
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 171,826 $ 166,625
========= =========
See accompanying notes to unaudited consolidated financial statements.
3
ENVOY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
-------- -------- -------- --------
(Restated -- (Restated -- (Restated -- (Restated --
See Note B) See Note B) See Note B) See Note B)
REVENUES $ 42,949 $ 32,169 $ 85,473 $ 62,932
OPERATING COSTS AND EXPENSES:
COST OF REVENUES 19,808 15,025 39,205 29,532
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 9,067 7,758 19,285 15,518
RESEARCH AND DEVELOPMENT
EXPENSES 651 521 1,273 1,236
DEPRECIATION AND AMORTIZATION
EXPENSES 8,665 8,159 18,057 16,074
WRITE OFF OF ACQUIRED IN-PROCESS
TECHNOLOGY 0 0 0 600
-------- -------- -------- --------
OPERATING INCOME (LOSS) 4,758 706 7,653 (28)
OTHER INCOME (EXPENSE):
INTEREST INCOME 205 485 333 937
INTEREST EXPENSE (405) (221) (825) (606)
-------- -------- -------- --------
(200) 264 (492) 331
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 4,558 970 7,161 303
INCOME TAX PROVISION 3,944 1,908 6,473 3,556
-------- -------- -------- --------
NET INCOME (LOSS) $ 614 $ (938) $ 688 $ (3,253)
======== ======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE
BASIC $ 0.03 $ (0.05) $ 0.03 $ (0.17)
======== ======== ======== ========
DILUTED $ 0.02 $ (0.05) $ 0.03 $ (0.17)
======== ======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC 21,127 19,668 20,912 19,324
======== ======== ======== ========
DILUTED 25,296 19,668 25,169 19,324
======== ======== ======== ========
See accompanying notes to unaudited consolidated financial statements.
4
ENVOY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
1998 1997
-------- --------
(Restated -- (Restated --
See Note B) See Note B)
NET CASH PROVIDED BY
OPERATING ACTIVITIES $ 19,741 $ 8,854
INVESTING ACTIVITIES:
PURCHASES OF PROPERTY AND EQUIPMENT (3,099) (4,242)
DECREASE IN OTHER ASSETS (121) (2,029)
PAYMENTS FOR BUSINESSES ACQUIRED LESS CASH
ACQUIRED OF $550 (9,419) (4,000)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (12,639) (10,271)
FINANCING ACTIVITIES:
PROCEEDS FROM ISSUANCE OF COMMON
STOCK 1,113 945
CAPITAL DISTRIBUTIONS OF EXPRESSBILL COMPANIES (318) (350)
PROCEEDS FROM SHORT-TERM AND LONG-TERM DEBT 0 880
PAYMENTS ON SHORT-TERM AND LONG-TERM DEBT (1,544) (168)
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (749) 1,307
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,353 (110)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 8,598 36,737
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 14,951 $ 36,627
======== ========
See accompanying notes to unaudited consolidated financial statements.
5
ENVOY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1998
A. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of ENVOY
Corporation (the "Company" or "ENVOY") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments consisting of normal recurring accruals
considered necessary for a fair presentation have been included. Operating
results for the three-month and six-month periods ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998.
As more fully discussed in Note C, on February 27, 1998, the Company
completed business combinations with Professional Office Services, Inc. ("POS"),
XpiData, Inc. ("XpiData") and Automated Revenue Management, Inc. ("ARM")
(collectively referred to as the "ExpressBill Companies"). These transactions
have been accounted for as poolings of interests and the Company's historical
consolidated financial statements have been restated to include the accounts and
results of operations of the ExpressBill Companies.
These financial statements, footnote disclosures and other information
should be read in conjunction with the audited financial statements and the
accompanying notes thereto in the Company's Annual Report on Form 10-K for the
year ended December 31, 1997, as amended by Form 10-K/A No. 1 on November 20,
1998.
B. RESTATEMENT OF FINANCIAL STATEMENTS
The management of the Company and the staff of the Securities and
Exchange Commission (the "Commission") have had discussions with respect to the
methods used to value acquired in-process technology recorded and written off at
the date of acquisition. As a result of these discussions, the Company has
modified the methods used to value acquired in-process technology in connection
with the Company's 1996 acquisition of National Electronic Information
Corporation ("NEIC") and 1997 acquisitions of Healthcare Data Interchange
Corporation ("HDIC") and Diverse Software Solutions ("DSS"). Initial
calculations of value of the acquired in-process technology were based on the
cost required to complete each project, the after-tax cash flows attributable to
each project, and the selection of an appropriate rate of return to reflect the
risk associated with the stage of completion of each project. Revised
calculations of the value of the acquired in-process technology are based on
adjusted after-tax cash flows that give explicit consideration to the Staff's
views on in-process research and development as set forth in its September 15,
1998 letter to the American Institute of Certified Public Accountants and the
Staff's comments for the Company to consider (i) the stage of completion of the
in-process technology at the dates of acquisition, (ii) contributions of the
Company's own distinct and unique proprietary advantages, and (iii) the
estimated total project costs of the in-process research and development in
arriving at the valuation amount. As a result of this modification, the Company
has decreased the amount of the purchase price allocated to acquired in-process
technology in the NEIC acquisition from $30 million to $8 million, in the HDIC
acquisition from $35 million to $6 million, and in the DSS acquisition from $3
million to $600,000. As a result, the Company increased other intangibles by $5
million (for a customer contract) and goodwill by $48.4 million.
The effects of the restatement resulted in the following impact on the
Company's previously reported results of operations for the three and six month
periods ended June 30, 1998 and 1997 (in thousands).
1998
-------------------------------
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1998 1998
--------------------------------
Income before income taxes:
As previously reported $ 6,956 $ 11,958
* Adjustment related to acquired in-process technology (2,398) (4,797)
-----------------------------
Restated $ 4,558 $ 7,161
=============================
Net income:
As previously reported $ 2,786 $ 5,044
* Adjustment related to acquired in-process technology (2,172) (4,356)
-----------------------------
Restated $ 614 $ 688
=============================
Earnings per share - Basic:
As previously reported $ 0.13 $ 0.24
* Adjustment related to acquired in-process technology (0.10) (0.21)
-----------------------------
Restated $ 0.03 $ 0.03
=============================
Earnings per share - Diluted:
As previously reported $ 0.11 $ 0.20
* Adjustment related to acquired in-process technology (0.09) (0.17)
-----------------------------
Restated $ 0.02 $ 0.03
=============================
* The adjustment results from the decrease in the value assigned to acquired
in-process technology, the increased amortization of goodwill, and related tax
effects.
1997
--------------------------------
THREE SIX
MONTHS MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1997 1997
--------------------------------
Income before income taxes:
As previously reported $ 2,843 $ 1,618
* Adjustment related to acquired in-process technology (1,873) (1,315)
--------------------------------
Restated $ 970 $ 303
================================
Net income (loss):
As previously reported $ 920 $ (1,044)
* Adjustment related to acquired in-process technology (1,858) (2,209)
--------------------------------
Restated $ (938) $ (3,253)
================================
Net income (loss) per share - Basic:
As previously reported $ 0.05 $ (0.05)
* Adjustment related to acquired in-process technology (0.10) (0.12)
--------------------------------
Restated $ (0.05) $ (0.17)
================================
Net income (loss) per share - Diluted:
As previously reported $ 0.04 $ (0.05)
* Adjustment related to acquired in-process technology (0.09) (0.12)
--------------------------------
Restated $ (0.05) $ (0.17)
================================
* The adjustment results from the decrease in the value assigned to acquired
in-process technology, the increased amortization of goodwill, and related tax
effects.
C. POOLING WITH EXPRESSBILL COMPANIES
On February 27, 1998, the Company completed business combinations with
the three companies operating the ExpressBill patient statement processing and
printing services businesses, for an aggregate of 3,500,000 shares of ENVOY
Common Stock. Shareholders of XpiData, based in Scottsdale, Arizona, received
1,365,000 shares and shareholders of POS and its affiliated company, ARM, both
of which are based in Toledo, Ohio, received an aggregate of 2,135,000 shares.
The ExpressBill patient statement services include electronic data transmission
and formatting, statement printing and mailing services for health care
providers and practice management system vendors. These transactions have been
accounted for as poolings of interests. Accordingly, the Company's historical
consolidated financial statements have been restated to include the accounts and
results of operations of the ExpressBill Companies. A reconciliation of revenues
and earnings for the three-month and six-month periods ended June 30, 1997,
restated to reflect the modifications referred to in Note B above, appears
below:
Three Months Six Months
Ended Ended
June 30, June 30,
1997 1997
(in thousands, (in thousands,
except except
per share data) per share data)
--------------- ---------------
Revenues:
ENVOY $ 26,416 $52,508
ExpressBill Companies 5,753 10,424
-------- -------
Combined $ 32,169 $62,932
======== =======
Net income (loss):
ENVOY $ (2,023) $(4,607)
ExpressBill Companies 1,085 1,354
-------- -------
Combined $ (938) $(3,253)
======== =======
Net loss per common share:
ENVOY $ (0.13) $ (0.29)
Combined $ (0.05) $ (0.17)
6
D. ACQUISITION
On May 6, 1998, the Company acquired all the issued and outstanding
capital stock of Synergy Health Care, Inc. ("Synergy"), which provides health
care information products and services to participants in the health care
market, for $10,200,000 in cash, including amounts paid to certain selling
stockholders for noncompete agreements. The acquisition was accounted for under
the purchase method of accounting, applying the provisions of APB Opinion No.
16. The financial statements for the three and six month periods ended
June 30, 1998, reflect the operations of Synergy for the period after the date
of acquisition. The purchase price has been allocated based upon the Company's
preliminary estimates, and actual allocations will be based on further studies
and may change during the allocation period, generally one year following the
date of acquisition. Pro forma financial information for the six months ended
June 30, 1998 has not been presented because the results of operations of
Synergy are not material to those of the Company.
E. NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted net
income (loss) per common share (in thousands, except for per share data):
Three Months Ended June 30, Six Months Ended June 30,
1998 1997 1998 1997
-------- ------- -------- ---------
Numerator:
Numerator for basic and diluted
earnings per share - net income (loss)
available to common shares $ 614 $ (938) $ 688 (3,253)
======== ======= ======== =========
Denominator:
Denominator for basic earnings per share -
weighted average shares 21,127 19,668 20,912 19,324
Effect of dilutive securities:
Employee stock options 1,369 - (1) 1,298 - (1)
Convertible preferred stock 2,800 - (1) 2,959 - (1)
-------- ------- ------- ---------
Denominator for diluted earnings per share -
adjusted weighted average shares 25,296 19,668 25,169 19,324
======== ======= ======== =========
Basic net income (loss) per common share $ 0.03 $ (0.05) $ 0.03 $ (0.17)
======== ======= ======== =========
Diluted net income (loss) per common share $ 0.02 $ (0.05) $ 0.03 $ (0.17)
======== ======= ======== =========
(1) Stock options to purchase 3,325,000 shares of Common Stock for the three
month and six month periods ended June 30, 1997, respectively, and
3,730,233 shares of Series B Convertible Preferred Stock (convertible in
3,730,233 shares of common stock) were the only securities issued which
would have been included in the diluted earnings per share calculation for
the three month and six month periods ended June 30, 1997 had they not been
antidilutive due to the net loss reported by the Company.
F. EFFECT OF NEW ACCOUNTING PRONOUNCEMENT
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 130, "Reporting Comprehensive Income," which establishes standards
for reporting and displaying comprehensive income and its components in a full
set of general purpose financial statements. FASB Statement 130 is effective for
interim and annual periods beginning after December 15, 1997. Comprehensive
income encompasses all changes in shareholders' equity (except those arising
from transactions with owners) and includes net income, net unrealized capital
gains or losses on available for sale securities and foreign currency
translation adjustments. Adoption of this pronouncement has not had a material
impact on the Company's results of operations, as comprehensive income for the
three months and six months ended June 30, 1998 was the same as net income for
the Company.
7
ITEM 2. 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, included herein.
Except for historical information contained herein, this report contains
forward-looking statements as defined in Section 21E of the Securities Exchange
Act of 1934, as amended. Such forward-looking statements are subject to various
risks and uncertainties that could cause actual results to differ materially
from those projected in the forward- looking statements. These risks and
uncertainties are discussed in more detail in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997 (the "Form 10-K"), as
amended by Form 10-K/A No. 1 filed November 20, 1998 (the "Form 10-K/A"), and
the other documents and periodic reports filed by the Company with the
Securities and Exchange Commission (the "Commission"). These forward-looking
statements generally can be identified as such because the content of the
statements usually will contain such words as the Company or management
"believes," "anticipates," "expects," "hopes," and words of similar import.
Similarly, statements that describe the Company's future plans, objectives,
goals or strategies are forward-looking statements.
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 May 6, 1998, the Company acquired all the issued and outstanding
capital stock of Synergy Health Care, Inc. ("Synergy"), which provides health
care information products and services to participants in the health care
market, for $10,200,000 in cash, including amounts paid to certain selling
stockholders for noncompete agreements.
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 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 National Electronic Information Corporation
("NEIC") and several other businesses in 1996 (collectively, the "1996 Acquired
Businesses") and Healthcare Data Interchange Corporation ("HDIC") and Diverse
Software Solutions, Inc. ("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 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. In connection with the allocation
of purchase price for these Acquired Businesses, valuations of all identified
intangible assets of these Acquired Businesses were made. The intangible assets
of the Acquired Businesses included in-process technology projects, among other
assets, which were related to research and development that had not reached
technological feasibility and for which there was no alternative future use.
Pursuant to applicable accounting pronouncements, the amounts of the purchase
price allocated to these projects were expensed. In previously issued financial
statements, the Company recorded write-offs for acquired in-process technology
of $30.7 million in 1996 and $38.0 million in 1997 in connection with certain of
the Acquired Businesses, including NEIC, DSS and HDIC. After discussions with
the Staff of the Commission, the Company has reduced the amount of the
write-offs for acquired in-process technology to $8.7 million in 1996 and $6.6
million in 1997. These reductions have been reallocated to goodwill and to other
intangible assets and the Company's consolidated financial statements have been
restated to reflect such adjustments as described herein and in Note 2 of the
Notes to Consolidated Financial Statements of the Form 10-K/A. See also
"--Acquired In-Process Technology." 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. These revenues include 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.
8
The Company's revenues generally are comprised of the following types
of EDI and 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 Six Months Ended
June 30, June 30,
1998 1997 1998 1997
------- ------- ------- -------
(in thousands) (in thousands)
Pharmacy EDI 175,529 139,840 354,041 286,502
Medical and other EDI 68,899 49,363 140,546 95,527
Patient statements 38,855 23,167 72,491 42,713
------- ------- ------- -------
Totals 283,283 212,370 567,078 424,742
======= ======= ======= =======
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 on a per transaction basis than those received for medical
EDI and patient statement transactions. As a result, pharmacy EDI revenue
constituted less than 16% of the Company's total revenues in the three month and
six month periods ended June 30, 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. The Company believes the limited growth
in the Company's pharmacy EDI revenues as compared to the Company's medical EDI
and patient statement revenues primarily is the result of two factors. First,
the acquisitions of the Acquired Businesses have contributed significantly to
the growth of the medical EDI and patient statement business, and the Company
has not made any acquisitions in the pharmacy EDI business. In addition, the
Company believes that the growth in the pharmacy EDI business has not been as
great as in the medical EDI and patient statement business because of the larger
market penetration in the more mature pharmacy EDI business. As a result, the
Company expects its pharmacy EDI 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 receives a large number of medical EDI transactions from
practice management system ("PMS") vendors and other claims clearinghouses.
These third parties aggregate medical EDI transactions from health care
providers, but require a clearinghouse (such as ENVOY) with direct connections
to payors in order to complete the processing of the transactions. ENVOY
typically receives revenue from payors on these transactions, and pays rebates
based on volume to exclusive and preferred vendors as an inducement to use ENVOY
as the clearinghouse for these transactions. If the mix of transaction volume
continues to shift to large PMS vendors or claims clearinghouses, the Company's
business may increasingly become dependent on the Company's ability to maintain
or establish successful relationships with such third parties. In the event the
Company is not able to maintain or establish relationships with major third
party PMS and claims clearinghouse vendors to induce them to continue to send
transactions to ENVOY, the Company's business, operating results or financial
condition may be adversely affected.
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.
9
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the percentage
relationship certain statements of operations items bear to revenues.
Three Months Six Months
Ended Ended
June 30, June 30,
1998 1997 1998 1997
----------------------------------------------
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 46.1 46.7 45.9 46.9
Selling, general and administrative expenses 21.1 24.1 22.5 24.7
Research and development expenses 1.5 1.6 1.5 2.0
Depreciation and amortization expenses 20.2 25.4 21.1 25.5
Write-off of acquired in-process technology 0 0 0 1.0
---------------------------------------------
Operating income 11.1 2.2 9.0 0.0
Interest income .4 1.5 0.4 1.5
Interest expense (.9) (0.7) (1.0) (1.0)
---------------------------------------------
Income before income taxes 10.6 3.0 8.4 0.5
Provision for income taxes 9.2 5.9 7.6 5.7
---------------------------------------------
Net income (loss) 1.4% (2.9)% 0.8% (5.2)%
=============================================
THREE MONTHS ENDED JUNE 30, 1998 AS COMPARED WITH THREE MONTHS ENDED
JUNE 30, 1997
Revenues. Revenues for the quarter ended June 30, 1998 were $42.9
million compared to $32.2 million for the same period last year, an increase of
$10.8 million or 33.5%. The increase in revenue is primarily the result of
higher transaction volumes, which increased 33.4% in the three months ended June
30, 1998 compared to the same period in 1997. The increases were primarily the
result of medical EDI and patient statement internal transaction growth, and, to
a lesser extent, the acquisition of HDIC. Without the increased transaction
volume from HDIC, transaction volumes would have increased 30.9% in the second
quarter of 1998 compared to the same period in 1997.
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 second quarter of 1998
was $19.8 million compared to $15.0 million for the first quarter of 1997, an
increase of $4.8 million or 31.8%. The dollar increase is attributable to the
additional costs associated with the increased transaction volume and, to a
lesser extent, increases in rebates paid to third parties in connection with
medical EDI transactions. These third parties aggregate medical EDI transactions
from health care providers, but require a clearinghouse (such as ENVOY) with
direct connections to payors in order to complete the processing of the
transactions. ENVOY typically receives revenue from payors on these
transactions, and pays rebates based on volume to certain of these third parties
as an inducement to use ENVOY as their clearinghouse for these transactions. The
increase in rebates paid to third parties was approximately $227,000 and
primarily results from an increase in the volume of claims received from certain
large third party vendors and claims clearinghouses. If the mix of revenues
continues to shift toward larger vendors and claims 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 46.1% in the
second quarter of 1998 compared to 46.7% in the second quarter of 1997. The
improvement is primarily 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 June 30, 1998 were $9.1 million compared to $7.8 million in the
same period in 1997, an increase of 16.9%. As a percentage of revenues, however,
selling, general and administrative expenses were 21.1% for the second quarter
of 1998 compared to 24.1% for the second quarter of 1997. The improvement is
attributable to the Company's ability to spread its infrastructure costs over a
larger base of revenues.
Research and Development Expenses. Expenses related to research and
development of new products are expensed as incurred until technological
feasibility is established for the product. Thereafter, all development costs
are capitalized until the products are available for general use by customers.
Research and development expenses for the three months ended June 30, 1998 were
$651,000 compared to $521,000 for the comparable period in 1997.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses relate primarily to host computers, communications equipment and
goodwill and identifiable intangible assets related to acquisitions.
Depreciation and amortization expense for the second quarter of 1998 was $8.7
million, compared to $8.2 million in the second quarter of 1997. At June 30,
1998, the
10
Company had net goodwill of $62.2 million remaining to be amortized over periods
of three to 15 years following the acquisitions. In addition, the Company had
net identifiable intangible assets of $26.5 million remaining to be amortized
over two to ten year periods, as applicable. See "Acquired In-Process
Technology."
Net Interest Income (Expense). The Company recorded net interest
expense of $200,000 for the three months ended June 30, 1998 compared to net
interest income of $264,000 for the second quarter in 1997. Interest income
decreased to $205,000 in the second quarter of 1998 from $485,000 in the second
quarter of 1997. 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
1998. Interest expense increased to $405,000 in the second quarter of 1998 from
$221,000 in the second quarter of 1997. Interest expense in the second quarter
of 1998 resulted primarily from interest expense that is required to be imputed
in order to account for certain unfavorable contracts assumed in the HDIC
acquisition. Interest expense in the three months ended June 30, 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 three
months ended June 30, 1998.
Income Tax Provision. The Company's income tax provision for the second
quarter of 1998 was $3.9 million compared to $1.9 million for the comparable
period in 1997. Income tax expense recorded is based on estimated taxable
income. Amortization of certain goodwill and identifiable intangible assets is
not deductible for income tax purposes.
SIX MONTHS ENDED JUNE 30, 1998 AS COMPARED WITH SIX MONTHS ENDED JUNE 30, 1997
Revenues. Revenues for the six month period ended June 30, 1998 were
$85.5 million compared to $62.9 million for the same period in the prior year,
an increase of $22.5 million or 35.8%. The increase in revenue is primarily the
result of higher transaction volumes, which increased 33.5% in the six months
ended June 30, 1998 compared to the same period in 1997. The increases were
primarily the result of medical EDI and patient statement internal transaction
growth, and, to a lesser extent, the acquisition of HDIC. Without the increased
transaction volume from HDIC, transaction volumes would have increased 29.9% in
the six months ended June 30, 1998 compared to the same period in 1997.
Cost of Revenue. Cost of revenues for the six-month period ended June
30, 1998 was $39.2 million compared to $29.5 for the six-month period ended June
30, 1997. 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 was approximately $1.8 million and results primarily from
an increase in the volume of claims received from certain large third party
vendors and claims clearinghouses. As a percentage of revenues, cost of revenues
improved to 45.9% for the six-month period ended June 30, 1998 compared to 46.9%
in the same period last year. The improvement is primarily 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 the six-month period ended June 30, 1998 were $19.3
million compared with $15.5 million for the same period last year, an increase
of $3.8 million or 24.3%. The dollar increase is a 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 were 22.5% for the
six-month period ended June 30, 1998 compared with 24.7% in the same period last
year. The improvement as a percentage of revenue is a result of a larger revenue
base to support these expenses, as well as the elimination of certain
duplicative costs realized in connection with the Acquired Businesses following
the date of acquisition. Transaction costs related to the business combinations
with the ExpressBill Companies totaled $780,000 in the six months ended June 30,
1998 and consisted of approximately $500,000 in legal and accounting fees,
$200,000 for financial advisory services and $80,000 in filing fees and other
transaction costs. These amounts 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 six months of
1998 would have been 21.6%.
Research and Development Expenses. Research and development expenses
for the six months ended June 30, 1998 were $1.3 million compared to $1.2
million for the first six months of 1997.
Depreciation and Amortization. Depreciation and amortization expenses
for the six-month period ended June 30, 1998 were $18.1 million compared to
$16.1 million for the comparable period in 1997. The increase primarily
resulted from a full six-month period of amortization of goodwill and other
intangibles in 1998 related to the 1997 Acquired Businesses. See "Acquired
In-Process Technology."
Write-off of Acquired In-Process Technology. The Company incurred a
one-time write-off of acquired in-process technology of $600,000 in connection
with the March 1997 acquisition of DSS. This amount represents an allocation of
the purchase price
11
to the projects that consisted primarily of the development of additional
interfaces and functionality for DSS service offerings. Such amount was charged
to expense because the projects related to research and development that had not
reached technological feasibility and for which there was no alternative future
use. See "Acquired In-Process Technology."
Net Interest Income (Expense). The Company recorded net interest
expense of $492,000 for the six-month period ended June 30, 1998 compared to net
interest income of $331,000 in the comparable period in 1997. Interest income
decreased to $333,000 in the six months ended June 30, 1998 from $937,000 in the
same period of 1997. 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
1998. Interest expense increased to $825,000 in the six months ended June 30,
1998 from $606,000 in the same period of 1997. Interest expense in 1998 resulted
primarily from interest expense that is required to be imputed in order to
account for certain unfavorable contracts assumed in the HDIC acquisition.
Interest expense in the six months ended June 30, 1997 resulted primarily from
the Convertible Notes.
Income Tax Provision. The Company's income tax provision for the
six-month period ended June 30, 1998 was $6.5 million compared to $3.6 million
in the comparable period in 1997. Income tax expense recorded is based upon
estimated taxable income. Amortization of certain goodwill and identifiable
intangibles are not deductible for income tax purposes.
ACQUIRED IN-PROCESS TECHNOLOGY
In connection with the purchases of certain of the Acquired Businesses,
including NEIC, DSS and HDIC, the Company made allocations of the purchase price
to acquired in-process technology. These amounts were expensed as non-recurring
charges on the respective acquisition dates of the Acquired Businesses because
the acquired in-process technology had not yet reached technological feasibility
and had no future alternative uses. In previously issued financial statements,
the Company recorded write-offs for acquired in-process technology of $30.7
million in 1996 and $38.0 million in 1997 in connection with such acquisitions.
The Staff of the Commission, in its review of the registration statement filed
by the Company in May 1998 relating to a proposed underwritten public offering
by certain shareholders of the Company, commented on the valuation of the
in-process research and development costs for the NEIC, DSS and HDIC
acquisitions. After further discussions with the Staff of the Commission, the
Company has reduced the amount of the write-offs for acquired in-process
technology to $8.7 million in 1996 and $6.6 million in 1997. These reductions
have been reallocated to goodwill or other intangible assets to reflect such
adjustments as more particularly set forth below.
Since the respective dates of acquisition, the Company has used the acquired
in-process technology to develop new health care EDI and transaction processing
product and service offerings, which have or will become part of the Company's
suite of products when completed. The nature of the efforts required to develop
the acquired in-process technology into commercially viable products principally
relate to the completion of all planning, designing and testing activities that
are necessary to establish that the product or service can be produced to meet
its design requirements, including functions, features and technical performance
requirements. The Company currently expects that the acquired in-process
technology will be successfully developed, but there can be no assurance that
commercial viability of these products will be achieved. Furthermore, future
developments in the health care EDI and transaction processing industry, changes
in EDI and transaction processing technology, changes in other product and
service offerings or other developments may cause the Company to alter or
abandon these plans. Failure to complete the development of these projects in
their entirety, or in a timely manner, could have a material adverse impact on
the Company's operating results, financial condition and results of operations.
A description of the acquired in-process technology and the estimates made
by the Company for each of NEIC, DSS and HDIC is set forth below.
NEIC
The in-process technology acquired in the NEIC acquisition consisted of five
significant research and development projects. These projects were all aimed at
facilitating the ease of participation of health care providers into
clearinghouse technologies and ensuring compliance with regulatory and other
industry standards. After acquiring NEIC, the Company continued the development
of these in-process projects.
At the time of the NEIC acquisition, the Company assigned a value of $30.0
million to the NEIC in-process technology with the assistance of an independent
valuation prepared at such time. In an effort to facilitate the completion of
the Commission's review of its registration
12
statement, the Company engaged a second appraisal firm to conduct additional
valuation analyses, which indicated a value of $28.9 million. Based on further
discussions with the Staff of the Commission, the Company has determined to
value the related in-process research and development projects at $8.0 million.
In arriving at this value, the Company considered the previously-obtained
independent appraisals, the Staff's views on in-process research and development
as set forth in its September 15, 1998 letter to the American Institute of
Certified Public Accountants ("AICPA Letter"), and the Staff's comments for the
Company to consider (i) the stage of completion of the in-process technology at
the date of acquisition, (ii) other contributions of the Company's own distinct
and unique proprietary advantages, and (iii) the estimated total project costs
of the in-process research and development in arriving at the valuation amount.
A brief description of the five in-process projects is set forth below:
- UniClaim. This product is a PC based claims processing system that
extracts Health Care Financing Administration 1500 claim formats from practice
management systems ("PMS"), performs edits and transports the file to a host
system where EDI formatting is completed for delivery to payors. The Company
estimates this project, which was completed in the second quarter of 1996, was
approximately 40% complete at the date of the NEIC acquisition.
- GTEDS. This product is a computerized system for the collection,
validation and distribution of claims from various sources to claims receivers.
The Company estimates this project, which was completed in the fourth quarter of
1996, was approximately 45% complete at the date of the NEIC acquisition.
- On-Line. This product is an application that performs "screen scraping"
(i.e., it captures data from a screen presentation and creates an American
National Standards Institute 270 eligibility request.) The Company estimates
this project, which was completed during the second quarter of 1998, was
approximately 35% complete at the date of the NEIC acquisition.
- SmartPost. This product is an application to populate a physician PMS with
remittance data for automatic posting to the PMS. In the first quarter of 1997,
the Company completed the acquisition of DSS, which already had a Receivables
Management product that included substantially the same functionality as the
SmartPost product, and determined to abandon further development of SmartPost.
The Company estimates this project was approximately 55% complete at the date of
the NEIC acquisition.
- Expect. This product is an application for screen scraping at payor
locations. In the first quarter of 1997, the Company identified an existing
software application with the same capabilities as Expect, and made a decision
to license that software and abandon the Expect project. The Company estimates
this project was approximately 35% complete at the date of the NEIC acquisition.
At the time of the NEIC valuation, the expected total costs of all such
projects were approximately $4.0 million. As of June 30, 1998, approximately
$1.8 million had been incurred since the date of the NEIC acquisition for these
projects, and there were no additional expected costs to complete the research
and development projects acquired from NEIC.
DSS
The in-process technology acquired in the DSS acquisition consisted
primarily of projects related to DSS's Receivables Management product line and
four peripheral products expected to be used as add-on features to the
Receivables Management product. DSS's Receivables Management product line works
with existing hospital information system ("HIS") and PMS software and provides
claims and receivables management, including billings, collections and cash
applications, among other functions. At the time of acquisition, DSS was selling
versions of the Receivables Management product to work with certain HIS and PMS
products; however, the Company noted that there was still substantial
development work required in order to complete versions which were adapted to
other major HIS and PMS products. The Company estimates this project, which was
completed during the fourth quarter of 1997, was approximately 35% complete at
the date of the DSS acquisition.
At the time of the DSS acquisition, the Company assigned a value of $3.0
million to the DSS in-process technology with the assistance of an independent
valuation prepared at such time. In an effort to facilitate the completion of
the Commission's review of its registration statement, the Company engaged a
second appraisal firm to conduct additional valuation analyses, which indicated
a value of $2.8 million. Based on further discussions with the Staff of the
Commission, the Company has determined to value the related in-process research
and development projects at $600,000. In arriving at this value, the Company
considered the previously-obtained independent appraisals, the Commission's
views on in-process research and developments as set forth in the AICPA Letter,
and the Staff's comments for the Company to consider (i) the stage of completion
of the in-process technology at the date of acquisition, (ii) other
contributions of the Company's own distinct and unique proprietary advantages,
and (iii) the estimated total project costs of the in-process research and
development in arriving at the valuation amount.
13
A brief description of each of the four add-on features is set forth below:
- Materials Management. This product incorporates certain customized
features into licensed software to allow for online transaction processing of
inventory data. The Company estimates this project, which was completed during
the third quarter of 1997, was approximately 50% complete at the date of the DSS
acquisition.
- Billing and 72-Hour Compliance. This product processes all emergency room
billings and collections, in addition to tracking patients throughout the
emergency/casualty process. The Company estimates this project, which was
completed during the first quarter of 1998, was approximately 50% complete at
the date of the DSS acquisition.
- Registration. This product facilitates access to patient records, as well
as providing basic patient information to payors. The Company estimates this
project was approximately 25% complete at the date of the DSS acquisition. The
Company estimates that this project was approximately 45% complete as of
June 30, 1998, and is expected to be completed during the fourth quarter of
1998.
- Collections. This product assists the health care provider's HIS or PMS
system in the management of receivables. In the fourth quarter of 1997,
management placed further development of this project on hold while it evaluates
alternative technologies and development strategies. The Company estimates this
project was approximately 20% complete at the date of the DSS acquisition. At
the time that the project was placed on hold, the Company estimates that this
project was approximately 60% complete.
At the time of the DSS valuation, the expected total costs of all such
projects totaled approximately $300,000. Approximately $150,000 has been
incurred since the date of the DSS acquisition for these projects through June
30, 1998, and the Company estimates that approximately $50,000 will be required
to complete the remaining research and development projects. The remaining
efforts to complete the remaining DSS projects are primarily the selection of
appropriate sites for testing and completion of the work necessary to develop
and test the working prototypes.
HDIC
The in-process technology acquired in the HDIC acquisition consisted of
seven significant research and development projects associated with HDIC's
product line. At the time of acquisition, HDIC had developed on-line, real-time
claims transaction technology which permitted Aetna U.S. Healthcare Inc.
("AUSHC") to receive real-time EDI transactions, and was in the process of
developing new transaction sets which would allow health care providers to
submit additional health care transactions electronically. After acquiring HDIC,
the Company modified the Company's existing front-end transaction platforms to
accommodate HDIC's technology and continued the development of seven in-process
projects. The Company believes that the resulting technology has given, and will
continue to give, the Company a competitive advantage in the marketplace by
significantly enhancing the Company's existing EDI and transaction processing
capabilities with additional transaction sets.
At the time of the HDIC acquisition, the Company assigned a value of $35.0
million to the HDIC in-process technology with the assistance of an independent
valuation prepared at such time. In an effort to facilitate the completion of
the Commission's review of its registration statement, the Company engaged a
second appraisal firm to conduct additional valuation analyses, which indicated
a value of $32.9 million. Based on further discussions with the Staff of the
Commission, the Company has determined to value the related in-process research
and development projects at $6.0 million. In arriving at this value, the Company
considered the previously-obtained independent appraisals, the Commission's
views on in-process research and development as set forth in the AICPA Letter,
and the Staff's comments for the Company to consider (i) the stage of completion
of the in-process technology at the date of acquisition, (ii) other
contributions of the Company's own distinct and unique proprietary advantages,
and (iii) the estimated total project costs of the in-process research and
development in arriving at the valuation amount.
A brief description of each of the seven in-process projects is set forth
below:
- Real-time referrals. This product is designed to allow batch or on-line
real-time transaction processing for referral authorization and the ability to
receive or confirm acknowledgment through the Company's network that a valid
referral is on file with the primary care provider ("PCP"). The Company
estimates this project, which was completed during the second quarter of 1998,
was approximately 25% complete at the date of the HDIC acquisition.
- Vision claims. This product is designed to provide the capability for
health care providers to submit vision claims and vision related information
electronically. The Company estimates this project was approximately 35%
complete at the date of the HDIC acquisition. The Company estimates that the
project was approximately 85% complete at June 30, 1998, and is expected to be
completed during the third quarter of 1998.
14
- Lab utilization/results. This product is designed to allow electronic
transmission of lab testing requests and reporting of lab results. The Company
estimates this project was approximately 50% complete at the date of the HDIC
acquisition. The Company estimates that this project was approximately 95%
complete at June 30, 1998, and is expected to be completed during the third
quarter of 1998.
- Provider directories. This product is designed to allow for the
maintenance of reference information related to health care providers and
provider networks. The Company estimates this project was approximately 15%
complete at the date of the HDIC acquisition. The Company estimates that the
project was approximately 80% complete as of June 30, 1998, and is expected to
be completed in the fourth quarter of 1998.
- Real-time encounters/claims. This product is designed to allow batch or
on-line real-time transaction processing for the transmission of encounter data
from the PCP or a capitated specialist to the insurer, and the subsequent
acknowledgment of receipt. The Company estimates this project was approximately
45% complete at the date of the HDIC acquisition. The Company estimates that the
project was approximately 70% complete as of June 30, 1998, and is expected to
be completed during the first quarter of 1999.
- Electronic pre-certifications. This product is designed to allow batch or
real-time batch transaction processing for the request and authorization to
perform non-capitated procedures or hospital admissions. This transaction is
initiated from the PCP, specialist hospital or other delivery system. The
Company estimates this project was approximately 35% complete at the date of the
HDIC acquisition. The Company estimates that the project was approximately 40%
complete as of June 30, 1998, and is expected to be completed during the second
quarter of 1999.
- Rosters through the Internet. This product is designed to use the Internet
as a means to deliver to health care providers managed care program eligibility
status and capitated payment information. The Company estimates this project was
approximately 50% complete at the date of the HDIC acquisition. The Company
estimates that the project was approximately 80% complete as of June 30, 1998,
and is expected to be completed during the third quarter of 1999.
At the time of the HDIC valuation, the expected total costs of all such
projects was approximately $3.0 million. Approximately $400,000 has been
incurred since the date of the HDIC acquisition for these projects through June
30, 1998, and the Company estimates that approximately $1.4 million will be
required to complete the remaining research and development projects. The
remaining efforts to complete these projects include the processes of planning
and coding the primary applications and customer interfaces, testing such coding
and interfaces, and introducing such processes into production environments at
Company and customer locations.
15
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred operating losses in recent years primarily as
a result of substantial non-cash depreciation and amortization charges related
to the Acquired Businesses, together with the write-off of acquired in-process
technology. During the six months ended June 30, 1998, however, operations
generated positive cash flows of $19.7 million compared to $8.9 million for the
six months ended June 30, 1997.
Investing activities consist primarily of payments for acquired
businesses and purchases of property and equipment. Investing activities used
cash of $12.6 million in the six months ended June 30, 1998 and used cash of
$10.3 million in the six months ended June 30, 1997.
Financing activities consist primarily of proceeds from the issuance of
capital stock, and proceeds from and payments on debt. Financing activities used
cash of $749,000 in the six months ended June 30, 1998 and provided $1.3 million
of cash in the six months ended June 30, 1997.
On May 6, 1998, the Company completed the acquisition of Synergy for
$10.2 million in cash. Following this acquisition and as of June 30, 1998, the
Company had available cash and cash equivalents of approximately $15.0 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 $3.0 million and $4.2 million for the
six month periods ended June 30, 1998 and 1997, 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.
At June 30, 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 to
shareholders of the Company, acquisitions, incurrence of debt and other
restrictive provisions; however, there are no restrictions on the ability of the
Company's subsidiaries to transfer funds to the Company in the form of
dividends, loans or advances. 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 Convertible 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.
16
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. As of June 30, 1998, the
Company's long-term obligations totaled $10.3 million and consisted of $588,000
in long-term debt net of current portion, $1.1 million in deferred income tax
liabilities and $8.6 million in long-term obligations related to unfavorable
contracts assumed in connection with the HDIC acquisition. Such amounts relate
primarily to the Company's obligations under the AUSHC services agreement to
assume a portion of the transaction processing fees related to certain secondary
Medicare transactions, and existing agreements assumed by the Company with
several businesses that served as claims clearinghouses for AUSHC prior to the
HDIC acquisition. The Company's available cash is invested in interest bearing
securities with maturities of up to 30 days.
SEASONALITY
The Company's business is to some extent seasonal, with more revenues
being generated from September through March as a result of a greater number of
pharmaceutical claims arise in those months, while operating expenses tend to
remain relatively constant over the course of the year.
17
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10 Employment Agreement between the Company and Gregory T. Stevens*
27 Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K/A No. 1 on May 5, 1998 pursuant
to Item 7(b) thereof with the Commission to amend an earlier Form 8-K filed on
March 9, 1998. On November 16, 1998, the Company filed a Form 8-K/A No. 2 to
further amend such earlier Form 8-K/A No. 1. The amendments were filed for the
purpose of including certain financial information required to be filed as a
result of the business combinations with the ExpressBill Companies and to
restate the Company's financial statements as described in Note B of the
accompanying consolidated financial statements.
The Company filed a Current Report on Form 8-K on July 2, 1998 pursuant to Item
7(c) thereof with the Commission to file a material contract under Rule
601(b)(10) of Regulation S-K.
- ---------------
* previously filed
18
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENVOY CORPORATION
Date: November 20, 1998 By: /s/ Kevin M. McNamara
---------------------------------------
Kevin M. McNamara
Senior Vice President and
Chief Financial Officer
19
EXHIBIT INDEX
EXHIBIT NO. NAME
----------- ----
10 Employment Agreement between the Company and
Gregory T. Stevens*
27 Financial Data Schedule (for SEC use only)
- ------------
* previously filed