<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): January 27, 1999
QUINTILES TRANSNATIONAL CORP.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 340-23520 56-1714315
(State or other jurisdiction (Commission File No.) (I.R.S. Employer
of incorporation) Identification Number)
4709 CREEKSTONE DRIVE, RIVERBIRCH BUILDING, SUITE 200,
DURHAM, NORTH CAROLINA 27703-8411
(Address of principal executive offices)
(919) 998-2000
(Registrant's telephone number, including area code)
N/A
(Former name or former address, if changed since last report)
<PAGE> 2
Item 5 is hereby amended and restated as follows:
ITEM 5. OTHER EVENTS.
Quintiles Transnational Corp. (the "Company") has entered into (i) a
definitive agreement to acquire all of the outstanding shares of capital stock
of Pharmaceutical Marketing Services, Inc., a Delaware corporation ("PMSI"),
subject to approval by PMSI's shareholders, as described in greater detail in
the Company's Current Report on Form 8-K dated December 16, 1998, and (ii) a
definitive agreement to acquire all of the outstanding shares of capital stock
of ENVOY Corporation, a Tennessee corporation ("ENVOY"), subject to approval by
ENVOY's shareholders, as described in greater detail in the Company's Current
Report on Form 8-K dated December 17, 1998. The issuance of shares of Quintiles
Common Stock in the ENVOY transaction is also subject to approval by the
Company's shareholders. In accordance with Rule 3-05 and Article 11 of
Regulation S-X, the Company provides the historical financial statements of each
of ENVOY and PMSI and pro forma financial information described below.
Item Description Page
---------------- ----
1) Consolidated Financial Statements of ENVOY
a. Reports of Independent Auditors 5
b. Consolidated Balance Sheets as of December 31,
1997 and 1996 8
c. Consolidated Statements of Operations for each
of the three years in the period ended December 31,
1997 10
d. Consolidated Statements of Shareholders' Equity
for each of the three years in the period ended
December 31, 1997 12
e. Consolidated Statements of Cash Flows for each
of the three years in the period ended December 31,
1997 13
f. Notes to Consolidated Financial Statements 15
g. Consolidated Balance Sheets as of September
30, 1998 and December 31, 1997 (Unaudited) 42
h. Consolidated Statements of Operations for the
Three Months Ended September 30, 1998 and 1997
and the Nine Months Ended September 30, 1998
and 1997 (Unaudited) 43
i. Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1998 and 1997
(Unaudited) 44
j. Notes to Consolidated Financial Statements (Unaudited) 45
2
<PAGE> 3
Item Description Page
---------------- ----
2) Consolidated Financial Statements of PMSI
a. Report of Independent Accountants 51
b. Consolidated Balance Sheets as of June 30, 1997
and 1998 52
c. Consolidated Statements of Operations for the
Years Ended June 30, 1996, 1997 and 1998 53
d. Consolidated Statements of Stockholders' Equity
for the Years Ended June 30, 1996, 1997 and 1998 54
e. Consolidated Statements of Cash Flows for the
Years Ended June 30, 1996, 1997 and 1998 55
f. Notes to Consolidated Financial Statements 57
g. Consolidated Balance Sheet as of September
30, 1998 (Unaudited) 80
h. Consolidated Statements of Operations for the
Three Months Ended September 30, 1998 and 1997
(Unaudited) 81
i. Consolidated Statements of Comprehensive
Income for the Three Months Ended September 30,
1998 and 1997 (Unaudited) 82
j. Consolidated Statements of Cash Flows for the
Three Months Ended September 30, 1998 and 1997
(Unaudited) 83
k. Notes to Consolidated Financial Statements (Unaudited) 84
3) Unaudited Pro Forma Combined Condensed Financial Statements
of the Company, PMSI and ENVOY
a. Introduction to Unaudited Pro Forma Combined Condensed
Financial Data 86
b. Unaudited Pro Forma Combined Condensed Balance Sheet
as of September 30, 1998 88
c. Notes to Unaudited Pro Forma Combined Condensed
Balance Sheet as of September 30, 1998 89
3
<PAGE> 4
Item Description Page
---------------- ----
d. Unaudited Pro Forma Combined Condensed Statement of
Operations for the Nine Months ended September
30, 1998 92
e. Notes to Unaudited Pro Forma Combined Condensed
Statement of Operations for the Nine Months Ended
September 30, 1998 93
f. Unaudited Pro Forma Combined Condensed Statement of
Operations for the Year Ended December 31, 1997 95
g. Notes to Unaudited Pro Forma Combined Condensed
Statement of Operations for the Year Ended
December 31, 1997 96
4) Unaudited Pro Forma Combined Condensed Financial Statements
of the Company and ENVOY
a. Introduction to Unaudited Pro Forma Combined
Condensed Financial Data 98
b. Unaudited Pro Forma Combined Condensed Balance
Sheet as of September 30, 1998 99
c. Unaudited Pro Forma Combined Condensed Statements
of Operations for the Nine Months Ended September 30,
1998 and 1997 100
d. Unaudited Pro Forma Combined Condensed Statements
of Operations for each of the Three Years Ended
December 31, 1997, 1996 and 1995 102
4
<PAGE> 5
Report of Independent Auditors
Board of Directors and Shareholders
ENVOY Corporation
We have audited the accompanying consolidated balance sheets of ENVOY
Corporation and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. Our audits also
included the accompanying financial statement schedule filed herewith. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits. We did not audit the financial
statements of Professional Office Services, Inc. and XpiData, Inc., which
statements reflect total assets constituting 6% in 1997 and 4% in 1996, and
total revenues constituting 18% in 1997, 16% in 1996, and 24% in 1995 of the
related consolidated totals. Those statements were audited by other auditors
whose reports have been furnished to us, and our opinion, insofar as it relates
to data included for Professional Office Services, Inc. and XpiData, Inc., is
based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of ENVOY Corporation and subsidiaries at
December 31, 1997 and 1996, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed more fully in Note 2, the Company and the staff of the Securities
and Exchange Commission have had discussions with respect to the methods used by
the Company to value acquired in-process technology. As a result of these
discussions, the Company has modified the methods used to value acquired
in-process technology recorded and written off in connection with the Company's
1996 acquisition of National Electronic Information Corporation and 1997
acquisitions of Healthcare Data Interchange Corporation and Diverse Software
Solutions and accordingly, has restated the consolidated financial statements
for the years ended December 31, 1997 and 1996 to reflect this change.
Additionally, as discussed more fully in Note 2, the Company has given
retroactive effect to the change in accounting for its convertible securities
having a beneficial conversion feature.
/s/ Ernst & Young LLP
Ernst & Young LLP
Nashville, Tennessee
March 5, 1998, except for the business
combinations accounted for as poolings
of interests referred to in Notes 1 and 4,
as to which the date is April 29, 1998;
the restatement for the beneficial conversion
feature referred to in Note 2, as to
which the date is June 26, 1998; the
restatement related to acquired in-process
technology referred to in Note 2 and the
subsequent event referred to in Note 22,
as to which the date is November 9, 1998.
5
<PAGE> 6
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Professional Office Services, Inc.:
We have audited the balance sheets of PROFESSIONAL OFFICE SERVICES,
INC., not separately presented herein, as of December 31, 1997 and 1996, and the
related statements of operations, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Professional Office Services,
Inc. as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Nashville, Tennessee
February 11, 1998
6
<PAGE> 7
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To XpiData, Inc.:
We have audited the balance sheets of XPIDATA, INC., not separately presented
herein, as of December 31, 1997 and 1996, and the related statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of XpiData, Inc. as of December
31, 1997 and 1996, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Nashville, Tennessee
January 30, 1998
7
<PAGE> 8
ENVOY Corporation
Consolidated Balance Sheets
(In thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
----------------------- ------------------------
(Restated - see Note 2) (Restated - see Note 2)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $8,598 $36,737
Trade accounts receivable, less allowance for
doubtful accounts of $3,641 and $2,228 in
1997 and 1996, respectively 33,510 24,549
Inventories 2,585 2,975
Deferred income taxes 1,797 1,309
Other 1,811 3,000
------------ -----------
Total current assets 48,301 68,570
Property and equipment:
Equipment 35,890 26,791
Furniture and fixtures 2,433 3,197
Leasehold improvements 2,766 2,156
------------ -----------
41,089 32,144
Less accumulated depreciation and amortization (21,581) (15,507)
------------ -----------
19,508 16,637
Other assets:
Goodwill, net of amortization 67,001 42,992
Other intangibles, net of amortization 27,384 25,682
Other 4,431 2,487
------------ -----------
Total assets $166,625 $156,368
============ ===========
</TABLE>
See accompanying notes.
8
<PAGE> 9
ENVOY Corporation
Consolidated Balance Sheets (continued)
(In thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
------------------------ ----------------------
<S> <C> <C>
Liabilities and shareholders' equity (Restated - see Note 2) (Restated - see Note 2)
Current liabilities:
Accounts payable $ 3,334 $5,707
Accrued expenses and other current liabilities 25,362 13,154
Short-term debt 1,315 1,781
Current portion of long-term debt 263 387
---------- -----------
Total current liabilities 30,274 21,029
Long-term debt, less current portion 527 8,926
Deferred income taxes 1,579 1,988
Other non-current liabilities 9,163 0
Shareholders' equity:
Preferred stock--No par value; authorized,
12,000,000 shares; issued, 3,730,233 55,021 55,021
Common stock--No par value;
authorized, 48,000,000 shares;
issued, 20,075,822 and 18,854,531 in
1997 and 1996, respectively 114,652 103,265
Additional paid-in capital 7,208 7,193
Retained deficit (51,799) (41,054)
---------- -----------
Total shareholders' equity 125,082 124,425
---------- -----------
Total liabilities and shareholders' equity $166,625 $156,368
========== ===========
</TABLE>
See accompanying notes.
9
<PAGE> 10
ENVOY Corporation
Consolidated Statements of Operations
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
------------------------------------------
(Restated - (Restated -
see Note 2) see Note 2)
<S> <C> <C> <C>
Revenues $137,605 90,572 $ 34,197
Operating costs and expenses:
Cost of revenues 64,247 43,500 18,967
Selling, general and administrative expenses 32,734 24,631 11,156
Research and development expenses 2,192 1,779 1,466
Depreciation and amortization expenses 34,432 25,497 2,725
Merger and facility integration costs 0 4,664 0
Write-off of acquired in-process technology 6,600 8,700 0
EMC losses 0 540 0
------------------------------------------
Operating loss (2,600) (18,739) (117)
Other income (expense):
Interest income 1,312 1,032 380
Interest expense (1,577) (2,872) (659)
------------------------------------------
(265) (1,840) (279)
------------------------------------------
Loss from continuing operations
before income taxes and loss in investee (2,865) (20,579) (396)
Provision (benefit) for income taxes 6,333 1,717 (50)
Loss in investee 0 0 (1,776)
------------------------------------------
Loss from continuing operations (9,198) (22,296) (2,122)
Income from discontinued operations, net of
income taxes 0 0 30
First Data transaction expenses, including income 0 0 (2,431)
taxes
------------------------------------------
Loss from discontinued operations 0 0 (2,401)
------------------------------------------
Net loss (9,198) (22,296) (4,523)
Less preferred stock dividends 0 (14,921) 0
------------------------------------------
Net loss applicable to common stock $ (9,198) $ (37,217) $(4,523)
==========================================
</TABLE>
(CONTINUED)
10
<PAGE> 11
ENVOY Corporation
Consolidated Statements of Operations (Continued)
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
------------ ----------- ---------
Basic and diluted net loss per common share: (RESTATED - (RESTATED -
SEE NOTE 2) SEE NOTE 2)
<S> <C> <C> <C>
Loss from continuing operations $ (0.47) $ (2.25) $ (0.14)
Loss from discontinued operations 0 0 (0.17)
-------- --------- ---------
Basic and diluted net loss per common share $ (0.47) $ (2.25) $ (0.31)
======== ========= =========
Weighted average shares outstanding 19,686 16,519 14,739
======== ========= =========
Pro forma net loss data (unaudited), reflecting pro
forma tax provision on income of ExpressBill
companies (see Notes 4 and 16):
Historical loss from continuing operations
applicable to common stock $ (9,198) $ (37,217) $ (2,122)
pro forma adjustment to provision for
income taxes 1,032 165 0
-------- --------- ---------
Pro forma loss from continuing operations
applicable to common stock (10,230) (37,382) (2,122)
Loss from discontinued operations 0 0 (2,401)
-------- --------- ---------
Pro forma net loss applicable to common $(10,230) $(37,382) $(4,523)
stock
======== ========= =========
Basic and diluted pro forma loss per
common share
Pro forma loss-continuing $(0.52) $(2.26) $(0.14)
operations
Pro forma loss-discontinued
operations 0 0 (0.17)
-------- --------- ---------
Basic and diluted pro forma net loss per
common share $(0.52) $(2.26) $(0.31)
======== ========= =========
</TABLE>
See accompanying notes.
11
<PAGE> 12
ENVOY Corporation
Consolidated Statements of Shareholders' Equity
(In thousands)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PREFERRED STOCK PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------- -------- ----- --------- ------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 14,514 $11,081 $35,190
Stock options exercised 271 271 349
Income tax benefit realized on exercise of stock 0 0 46
options
First Data merger:
Stock option compensation charge 0 0 0
Equity transfer 0 0 (28,430)
Capital distributions of ExpressBill 0 0 0
Capital contributions of ExpressBill 4 3 28
Net loss 0 0 0
------- -------- ----- --------- ------
Balance at December 31, 1995 14,789 11,355 7,183
Stock options exercised 163 510 0
Stock issued in connection with acquisitions 413 6,650 3,730 $40,100 0
Conversion of debt to common stock 170 1,786 0 0 0
Proceeds from issuance of stock 3,320 82,964 0 0 0
Capital distributions of ExpressBill 0 0 0 0 0
Capital contributions of ExpressBill 0 0 0 0 10
Accretion of Series B preferred stock dividends 0 0 0 14,921 0
Net loss 0 0 0 0 0
------- -------- ----- --------- ------
Balance at December 31, 1996 (Restated - See Note 2) 18,855 103,265 3,730 55,021 7,193
Stock options exercised 437 1,844 0 0 0
Income tax benefit realized on exercise of stock 0 1,249 0 0 0
options
Conversion of debt to common stock 781 8,214 0 0 0
Proceeds from issuance of stock 3 80 0 0 0
Capital distributions of ExpressBill 0 0 0 0 0
Capital contributions of ExpressBill 0 0 0 0 15
Net loss 0 0 0 0 0
------- -------- ----- --------- ------
Balance at December 31, 1997 (Restated - See Note (2) 20,076 $114,652 3,730 $55,021 $7,208
======= ======== ===== ========= ======
</TABLE>
<TABLE>
<CAPTION>
RETAINED TOTAL
EARNINGS DEFERRED SHAREHOLDERS'
(DEFICIT) COMPENSATION EQUITY
------- --------- -------
<S> <C> <C> <C>
Balance at December 31, 1994 $8,558 $(1,264) $53,565
Stock options exercised 0 0 620
Income tax benefit realized on exercise of stock 0 0 46
options
First data merger:
Stock option compensation charge 0 1,264 1,264
Equity transfer (6,989) 0 (35,419)
Capital distributions of ExpressBill (212) 0 (212)
Capital contributions of ExpressBill 0 0 31
Net loss (4,523) 0 (4,523)
------- --------- -------
Balance at December 31, 1995 (3,166) 0 15,372
Stock options exercised 0 0 510
Stock issued in connection with acquisitions 0 0 46,750
Conversion of debt to common stock 0 0 1,786
Proceeds from issuance of stock 0 0 82,964
Capital distributions of ExpressBill (671) 0 (671)
Capital contributions of ExpressBill 0 0 10
Accretion of Series B preferred stock dividends (14,921) 0 0
Net loss (22,296) 0 (22,296)
------- --------- -------
Balance at December 31, 1996 (Restated - See Note 2) (41,054) 0 124,425
Stock options exercised 0 0 1,844
Income tax benefit realized on exercise of stock 0 0 1,249
options
Conversion of debt to common stock 0 0 8,214
Proceeds from issuance of stock 0 0 80
Capital distributions of ExpressBill (1,547) 0 (1,547)
Capital contributions of ExpressBill 0 0 15
Net loss (9,198) 0 (9,198)
------- --------- -------
Balance at December 31, 1997 (Restated - See Note (2) $(51,799) $0 $125,082
======== ========= ========
</TABLE>
See accompanying notes.
12
<PAGE> 13
ENVOY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
----------------- ----------------- ---------
(Restated - see Note 2) (Restated - see Note 2)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
NET LOSS $ (9,198) $ (22,296) $ (4,523)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 34,432 25,507 3,807
Stock option compensation expense 0 0 1,264
Provision for losses on accounts receivable 1,461 1,112 430
Deferred income tax provision (benefit) (995) 339 11
Write-off of certain assets and investments 6,600 10,281 820
Changes in assets and liabilities, net of First
Data transaction and acquired businesses:
Decrease (increase) in accounts receivable (9,782) (8,709) 66
Decrease (increase) in inventories 388 (543) (1,643)
Decrease (increase) in other current assets 981 (1,887) (619)
Increase (decrease) in accounts payable, accrued
expenses and other current liabilities (1,900) (621) 2,180
--------- --------- ---------
Net cash provided by operating activities 21,987 3,183 1,793
INVESTING ACTIVITIES
Net (increase) decrease in short-term investments 0 5,103 (5,103)
Purchases of property and equipment (8,744) (5,356) (8,507)
Decrease (increase) in other assets (1,998) 0 1,047
Investment in EMC 0 0 (750)
Payments for businesses acquired, net of cash acquired of
$5,543 in 1996 (40,412) (93,744) 0
--------- --------- ---------
Net cash used in investing activities (51,154) (93,997) (13,313)
FINANCING ACTIVITIES
Proceeds from issuance of preferred stock 0 40,100 0
Proceeds from issuance of common stock 3,174 88,474 623
Capital distributions of Express Bill (1,391) (671) (212)
Capital contributions of Express Bill 15 10 0
Proceeds from long-term debt 0 44,267 10,457
Payments on long-term debt (304) (44,387) (1,447)
Proceeds from (payments on) short-term debt (466) 639 741
Payment of deferred financing costs 0 (1,200) 0
Cash transferred in First Data transaction 0 0 (2,743)
--------- --------- ---------
Net cash provided by financing activities 1,028 127,232 7,419
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (28,139) 36,418 (4,101)
Cash and cash equivalents at beginning of year 36,737 319 4,420
--------- --------- ---------
Cash and cash equivalents at end of year $ 8,598 $ 36,737 $ 319
========= ========= =========
</TABLE>
(Continued)
13
<PAGE> 14
ENVOY Corporation
Consolidated Statements of Cash Flows (continued)
(In thousands)
<TABLE>
<CAPTION> YEAR ENDED DECEMBER 31,
1997 1996 1995
------------------------------------------------
(Restated - (Restated -
see Note 2) see Note 2)
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ (238) $ (2,357) $ (659)
Interest received 1,250 1,024 380
Income taxes paid (5,952) (371) (496)
NONCASH TRANSACTIONS
First Data transaction:
Book value of assets transferred, excluding
cash $ 0 $ 0 $ 36,083
Liabilities transferred 0 0 (3,407)
Equity transferred 0 0 (35,419)
-------------------------------------------------
Cash transferred $ 0 $ 0 $ (2,743)
=================================================
ACQUISITIONS
Working capital $ 0 $ 302 $ 0
Intangible assets 0 1,348 0
Common stock issued 0 (1,650) 0
------------------------------------------------
Cash transferred $ 0 $ 0 $ 0
================================================
CONVERSION OF DEBT TO COMMON STOCK $ 8,214 $ 1,786 $ 0
================================================
</TABLE>
See accompanying notes.
14
<PAGE> 15
ENVOY Corporation
Notes to Consolidated Financial Statements
1. ORGANIZATION
ENVOY Corporation, a Tennessee corporation (the "Company" or "New ENVOY"), was
incorporated in August 1994 as a wholly-owned subsidiary of ENVOY Corporation, a
Delaware corporation ("Old ENVOY"), and through a stock dividend distribution by
Old ENVOY of all of the outstanding shares of the common stock of New ENVOY (the
"Distribution") the Company ceased to be a wholly-owned subsidiary of Old ENVOY.
Immediately after the Distribution, Old ENVOY was merged with and into First
Data Corporation ("First Data") (see Note 3). Old ENVOY was formed in 1981 to
develop and market electronic transaction processing services to capture and
transmit time critical information for the financial services and health care
markets. In 1995, the assets and liabilities of Old ENVOY associated with the
electronic transaction processing for the health care markets and governmental
benefits programs were transferred to New ENVOY. For accounting purposes, the
Company's financial statements for 1995 include financial information for its
predecessor, Old ENVOY, with the financial services electronic processing
business (the "Financial Business") shown as discontinued operations. For
purposes of the notes to the consolidated financial statements, the "Company"
refers to Old ENVOY and New ENVOY for the period prior to June 6, 1995. The
Company currently provides electronic data interchange ("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.
As more fully discussed in Note 4, on February 27, 1998, the Company completed
business combinations with Professional Office Services, Inc. ("POS"), XpiData,
Inc. ("XpiData") and Automated Revenue Management, Inc. ("ARM"; and together
with POS and XpiData sometimes collectively referred to as the "ExpressBill
Companies"). These transactions have been accounted for as poolings of interests
and the Company's historical consolidated financial statements for 1997, 1996
and 1995 have been restated to include the accounts and results of operations of
the ExpressBill Companies.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments with a maturity of three months
or less when purchased to be cash equivalents. The carrying amount approximates
fair value because of the short maturity of those instruments.
SHORT-TERM INVESTMENTS
Short-term investments include investments in fixed rate securities consisting
primarily of bonds and corporate notes. These investments have maturity dates of
one to five years from the date of purchase and are accounted for in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." All short-term
investments were sold prior to December 31, 1996.
Proceeds, gross realized gains and gross realized losses from the sale of
available-for-sale securities were $6,126,000, $1,911, and $39,138,
respectively, in 1996 and $9,470,000, $288,000, and $9,000, respectively, in
1995. The cost of securities sold is based on the specific identification
method.
15
<PAGE> 16
ENVOY Corporation
Notes to Consolidated Financial Statements
CONCENTRATION OF CREDIT RISK
The Company has one customer that accounted for approximately 12% of the
Company's consolidated revenues for 1997 and accounted for approximately 16% of
consolidated accounts receivable. No single customer accounted for more than 10%
of consolidated revenues in 1996 or 1995.
INVENTORIES
Inventories consist primarily of point-of-service terminals and supplies used in
the patient statement business, and are stated at the lower of cost (first-in,
first-out method) or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided over the
estimated lives of the respective assets on the straight-line basis principally
over five to seven years. Depreciation expense totaled $6,141,000, $4,920,000
and $2,674,000 for 1997, 1996 and 1995, respectively.
OTHER ASSETS
Other assets consist primarily of goodwill and other intangible assets as
follows (in thousands):
<TABLE>
<CAPTION>
December 31, Amortization
1997 1996 Period
-------------------------------------- ------------
<S> <C> <C> <C>
Goodwill $ 105,059 $ 59,466 3-15 years
Less accumulated amortization (38,058) (16,474)
-------------------------------------
$ 67,001 $ 42,992
======================================
Submitter and payor relationships $ 12,700 $ 12,400 9 years
Customer contracts 13,554 8,554 9-10 years
Developed technology 4,300 2,100 2 years
Covenants not to compete 4,081 4,133 2 years
Trademarks and tradenames 350 0 3-7 years
Assembled work force 3,140 2,600 3-7 years
-------------------------------------
38,125 29,787
Less accumulated amortization (10,741) (4,105)
-------------------------------------
$ 27,384 $ 25,682
======================================
</TABLE>
Amortization expense related to such intangible assets for the years ended
December 31, 1997, 1996 and 1995 was $28,292,000, $20,578,000 and $39,000,
respectively. In establishing the amortization periods for intangible assets,
the Company considers several factors, including legal, regulatory, or
contractual provisions; effects of obsolescence, demand, competition and other
economic factors; service life expectancies of employees; and expected actions
of competitors and others. The Company reviews its long-lived and intangible
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount may not be recoverable. The measurement of possible
impairment is based upon determining whether projected undiscounted future cash
flows of the acquired business or from the use of the asset over the remaining
amortization period is less than the carrying amount of the asset. As of
December 31, 1997, in the opinion of management, there has been no such
impairment.
16
<PAGE> 17
ENVOY Corporation
Notes to Consolidated Financial Statements
REVENUE RECOGNITION
Processing services revenue is recognized as the transactions are processed. The
Company recognizes revenue from software sales in accordance with the American
Institute of Certified Public Accountants ("AICPA") Statement of Position 91-1,
"Software Revenue Recognition." Revenue from software product sales is
recognized upon delivery to the customer provided the collection of the sales
proceeds is deemed probable and no significant vendor obligations remain. Other
revenue, including hardware sales, maintenance, licensing and support
activities, is generally recognized as hardware is shipped or as services are
provided. Receivables generally are due within 30 days and do not require
collateral.
In October 1997, the AICPA issued Statement of Position 97-2 ("SOP 97-2"),
"Software Revenue Recognition." SOP 97-2 is effective for fiscal years beginning
after December 15, 1997, and is not expected to have a material impact on the
Company's financial statements. Effective January 1, 1998, the Company adopted
SOP 97-2.
LOSS PER COMMON SHARE
In 1997, the Company adopted the provisions of SFAS No. 128, "Earnings per
Share." SFAS No. 128 replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. The adoption of SFAS No. 128 had
no impact on the Company's computation of earnings per share for the current or
prior periods.
RESEARCH AND DEVELOPMENT
Research and development expenses of $2,192,000 in 1997, $1,779,000 in 1996 and
$1,466,000 in 1995 were charged to expense as incurred until technological
feasibility had been established for the product. Thereafter, all software
development costs are capitalized until the products are available for general
use by customers. The Company has not capitalized any significant software costs
to date.
INCOME TAXES
The Company and XpiData have used the liability method of accounting for income
taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." The former
stockholders of POS and ARM elected under Subchapter S of the Internal Revenue
Code (the "Code") to include such companies' income in their own income for
federal and state income tax purposes. Accordingly, POS and ARM were not subject
to federal or state income taxes for periods prior to the Company's business
combinations with the ExpressBill Companies.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
STOCK BASED COMPENSATION
Under various benefit plans, the Company grants stock options for a fixed number
of shares to employees and directors with an exercise price which approximates
the fair value of the shares at the date of grant. The Company also has an
Employee Stock Purchase Plan, which is qualified under Section 423 of the Code.
The Company accounts for stock based compensation in accordance with Accounting
Principles Board ("APB") Opinion No. 25,
17
<PAGE> 18
ENVOY Corporation
Notes to Consolidated Financial Statements
("APB No. 25") "Accounting for Stock Issued to Employees," and, accordingly,
recognizes no compensation expense.
RECLASSIFICATIONS
Certain reclassifications have been made in the 1996 and 1995 consolidated
financial statements to conform with the 1997 presentation.
RESTATEMENT OF FINANCIAL STATEMENTS
Restatement for Beneficial Conversion Feature
The results of operations presented in the financial statements for the year
ended December 31, 1996 have been restated to give effect to the accounting
treatment announced by the Securities and Exchange Commission at the March 13,
1997 meeting of the Emerging Issues Task Force relevant to the Company's Series
B Convertible Preferred Stock (the "Series B Preferred Stock") (see Notes 4 and
13) which has a "beneficial conversion" feature. The purchase price for the
Series B Preferred Stock ($10.75 per share) was established on October 25, 1996,
when the letter of intent related to the financing of the acquisition of
National Electronic Information Corporation ("NEIC") was executed. The Series B
Preferred Stock Purchase Agreement (the "Stock Purchase Agreement") was executed
on November 30, 1995, at which time the fair value of the Common Stock was
$14.75 per share and, pursuant to the terms of the Stock Purchase Agreement, was
convertible into Common Stock on the date of issuance on a one-for-one basis.
The discount between the issuance price of $40.1 million or $10.75 per share and
the fair value on the date of the Stock Purchase Agreement of $55.0 million or
$14.75 per share gives rise to a beneficial conversion feature. Under the
accounting treatment discussed above, the value of the discount has been
reflected in the restated financial statements as preferred dividends and has
been accreted on the date of issuance, March 6, 1996, which is also the first
possible conversion date. Accordingly, the entire discount is treated as a
dividend on the Series B Preferred Stock for the year ended December 31, 1996.
The restatement has no effect on cash flows of the Company.
Restatement Related to Acquired In-Process Technology
The management of the Company and the staff of the Securities and Exchange
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 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 AICPA, 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 customer contracts)
and goodwill by $48.4 million.
18
<PAGE> 19
ENVOY Corporation
Notes to Consolidated Financial Statements
Summary of Effects of Restatements
The effects of the restatement for the beneficial conversion feature and the
effects of the restatement related to acquired in-process technology resulted in
the following impact on the Company's results of operations for the years ended
December 31, 1997 and 1996 and its financial position at December 31, 1997 and
1996 (in thousands).
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Results of operations:
Loss from continuing operations before income taxes as previously reported $(25,928) $(36,590)
Adjustment related to acquired in-process technology* 23,063 16,011
-------- --------
Restated $ (2,865) $(20,579)
======== ========
Net loss, as previously reported $(20,710) $(38,307)
Adjustment related to acquired in-process technology* 11,512 16,011
Adjustment related to beneficial conversion feature -- (14,921)
-------- --------
Restated net loss applicable to common stock $ (9,198) $(37,217)
======== ========
Loss per share:
As previously reported $ (1.05) $ (2.32)
Adjustment related to acquired in-process technology* 0.58 0.97
Adjustment related to beneficial conversion feature -- (0.90)
-------- --------
Restated $ (0.47) $ (2.25)
======== ========
</TABLE>
*The adjustment results from the decrease in the value assigned to acquired
in-process technology and the increased amortization of goodwill and other
intangibles.
19
<PAGE> 20
ENVOY Corporation
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
1997 1996
--------- ----------
<S> <C> <C>
Financial Position:
Goodwill, as previously reported $ 32,719 $ 26,981
Adjustment related to acquired in-process technology 34,282 16,011
-------- --------
Restated $ 67,001 $ 42,992
======== ========
Other intangibles, as previously reported $ 22,592 $ 25,682
Adjustment related to acquired in-process technology 4,792 --
-------- --------
Restated $ 27,384 $ 25,682
======== ========
Deferred tax asset (liability), as originally reported $ 9,972 $ (1,988)
Adjustment related to acquired in-process technology (11,551) --
-------- --------
Restated $ (1,579) $ (1,988)
======== ========
Retained deficit, as previously reported $(79,322) $(57,065)
Adjustment related to acquired in-process technology * 27,523 16,011
-------- --------
Restated $(51,799) $(41,054)
======== ========
</TABLE>
* The adjustment results from the decrease in the value assigned to acquired
in-process technology and the increased amortization of goodwill and other
intangibles.
3. DISCONTINUED OPERATIONS--TRANSACTION WITH FIRST DATA CORPORATION
On June 6, 1995, the Company completed a merger of its Financial Business with
First Data (the "First Data Merger"). Pursuant to a management services
agreement entered into in connection with the First Data Merger, the Company
received a fee from First Data of $1,500,000 per annum, payable in quarterly
installments of $375,000, during the first two years following the First Data
Merger. Management fees of $650,000, $1,500,000 and $850,000 for the years ended
December 31, 1997, 1996 and 1995 are classified in revenues in the consolidated
statements of operations.
The net assets of the Financial Business were merged with and into First Data
and were accounted for as discontinued operations.
Revenues of the Financial Business were $12,828,000 for the period January 1,
1995 through June 6, 1995.
The Company incurred $1,997,000 in expense related to the Distribution and First
Data Merger for the year ended December 31, 1995. These expenses consisted
primarily of legal, accounting and financial advisor fees. As set forth in the
merger agreement, First Data paid 50% of the costs of the transactions up to a
maximum expense to First Data of $2,000,000. The $1,997,000 incurred by the
Company is net of the $2,000,000 paid by First Data. The costs associated with
the First Data Merger have been included in discontinued operations including
applicable income taxes of $434,000 for the year ended December 31, 1995 and
reflect the reversal of tax benefits previously recognized for such charges.
20
<PAGE> 21
ENVOY Corporation
Notes to Consolidated Financial Statements
4. BUSINESS COMBINATIONS
BUSINESS COMBINATIONS ACCOUNTED FOR AS POOLINGS OF INTERESTS
On February 27, 1998, the Company completed business combinations with the three
companies operating the ExpressBill patient statement processing and printing
services businesses, for an aggregate of 3,500,000 shares of ENVOY Common Stock
("Common Stock"). Shareholders of XpiData, based in Scottsdale, Arizona,
received 1,365,000 shares and shareholders of POS and its affiliated company,
ARM, both of which are based in Toledo, Ohio, received an aggregate of 2,135,000
shares. The ExpressBill patient statement services include electronic data
transmission and formatting, statement printing and mailing services for health
care providers and practice management system vendors. These transactions have
been accounted for as poolings of interests. Accordingly, the Company's
historical consolidated financial statements for 1997, 1996 and 1995 have been
restated to include the accounts and results of operations of the ExpressBill
Companies. A reconciliation of previously reported revenues and earnings,
restated to reflect the modifications referred to in Note 2, appears below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
--------- --------- ---------
(In thousands, except per share data)
<S> <C> <C> <C>
REVENUES:
ENVOY $ 113,693 $ 76,584 $ 26,055
ExpressBill Companies 23,912 13,988 8,142
--------- --------- ---------
Combined $ 137,605 $ 90,572 $ 34,197
========= ========= =========
Net income (loss)from continuing operations applicable
to common stock
ENVOY $ (12,251) $ (37,810) $ (2,000)
ExpressBill Companies 3,053 593 (122)
--------- --------- ---------
Combined $ (9,198) $ (37,217) $ (2,122)
========= ========= =========
Net loss per common share from continuing operations
ENVOY $ (0.76) $ (2.90) $ (0.18)
Combined $ (0.47) $ (2.25) $ (0.14)
</TABLE>
BUSINESS COMBINATIONS ACCOUNTED FOR AS PURCHASES
Each of the following acquisitions was accounted for under the purchase method
of accounting, applying the provisions of APB Opinion No. 16 ("APB 16") and, as
a result, the Company recorded the assets and liabilities of the acquired
companies at their estimated fair values with the excess of the purchase price
over these amounts being recorded as goodwill. The financial statements reflect
the operations of the acquired businesses for the periods after their respective
dates of acquisition.
NATIONAL ELECTRONIC INFORMATION CORPORATION
On March 6, 1996, the Company's shareholders approved the acquisition of NEIC
for an aggregate purchase price of approximately $94,301,000, consisting of
$88,354,000 paid to the NEIC stockholders and certain other transaction and
acquisition costs of $5,947,000, summarized as follows (in thousands):
21
<PAGE> 22
ENVOY Corporation
Notes to Consolidated Financial Statements
<TABLE>
<S> <C>
Purchase price $ 94,301
Add liabilities assumed:
Current liabilities 9,033
Long-term obligations 186
Other liabilities 111
Deferred tax liability 7,682
-------
17,012
Less assets acquired:
Current assets (14,085)
Property, plant and equipment, net (3,000)
Deferred tax asset (5,797)
Deferred loan costs (1,200)
Identifiable intangibles:
Developed technology (2,100)
Covenant not to compete (4,000)
Assembled work force (1,400)
Submitter and payor relationships (12,100)
-------
(43,682)
Less write-off of acquired in-process technology (8,000)
-------
Goodwill $ 59,631
=======
</TABLE>
Goodwill of $59,631,000 is being amortized over three years. Submittor and payor
relationships are being amortized over nine years; developed technology and
covenants not to compete are being amortized over two years; and assembled work
force is being amortized over seven years. In connection with the NEIC
acquisition, the Company incurred a one time write-off of acquired in-process
technology of $8,000,000. This amount represents an allocation of purchase price
to projects aimed at facilitating the ease of participation of health care
providers into clearinghouse technologies and ensuring compliance with
regulatory and other industry standards. Such amounts were charged to expense in
1996 because the projects related to research and development that had not
reached technological feasibility and for which there was no alternative future
use.
The NEIC acquisition was financed through equity and debt financing. An
aggregate of 3,730,233 shares of Series B Preferred Stock were issued to three
investors for a total purchase price of $40,100,000. Additionally, the Company
issued 333,333 shares of Common Stock to various investors for an aggregate
purchase price of $5,000,000. The Company also entered into a credit agreement,
whereby the Company obtained $50,000,000 in bank financing in the form of a
$25,000,000 revolving credit facility and a $25,000,000 term loan. An additional
840 shares of NEIC cumulative redeemable preferred stock were redeemed by the
Company on August 1, 1996 at a redemption price of approximately $2,200,000.
22
<PAGE> 23
ENVOY Corporation
Notes to Consolidated Financial Statements
TELECLAIMS, INC. ("TELECLAIMS")
On March 1, 1996, the Company acquired all the issued and outstanding capital
stock of Teleclaims in exchange for 73,242 shares of Common Stock yielding a
purchase price of approximately $1,500,000, summarized as follows (in
thousands):
<TABLE>
<S> <C>
Purchase price $ 1,500
Add liabilities assumed 229
Less assets acquired:
Current assets (137)
Property and equipment, net (172)
Other assets (72)
Submittor and payor relationships (300)
-------
(681)
Less write-off of acquired in process technology (700)
-------
Goodwill $ 348
=======
</TABLE>
Goodwill of $348,000 is being amortized over three years and submittor and payor
relationships in the amount of $300,000 are being amortized over nine years.
Also recorded as part of the Teleclaims acquisition was a one time write-off of
acquired in-process technology of $700,000. This amount represents an allocation
of purchase price to projects for the development of new products for health
care transaction processing. Such amounts were charged to expense in 1996
because the projects related to research and development that had not reached
technological feasibility and for which there was no alternative future use.
NATIONAL VERIFICATION SYSTEMS, L. P. ("NVS")
On September 13, 1996, the Company completed the acquisition of certain assets
and liabilities of NVS for $2,150,000 in cash and the assumption of certain
liabilities, summarized as follows (in thousands):
<TABLE>
<S> <C>
Purchase price $ 2,150
Add liabilities assumed 51
Less assets acquired:
Current assets (83)
Property and equipment, net (254)
Customer contracts (1,500)
-------
(1,837)
-------
Goodwill $ 364
=======
</TABLE>
Goodwill of $364,000 is being amortized over three years and customer contracts
in the amount of $1,500,000 are being amortized over nine years.
23
<PAGE> 24
ENVOY Corporation
Notes to Consolidated Financial Statements
PROFESSIONAL OFFICE SYSTEMS, INC. ("POSI")
On October 31, 1996, the Company acquired all the issued and outstanding capital
stock of POSI, the electronic data interchange clearinghouse for Blue Cross and
Blue Shield of the National Capital Area, for approximately $6,400,000 in cash
and the assumption of certain liabilities, summarized as follows (in thousands):
<TABLE>
<S> <C>
Purchase price $ 6,400
Add liabilities assumed 1,581
Less assets acquired:
Current assets (1,059)
Property and equipment, net (180)
Identifiable intangibles:
Customer contracts (5,100)
Assembled work force (1,200)
-------
(7,539)
-------
Goodwill $ 442
=======
</TABLE>
Goodwill of $442,000 is being amortized over three years. Customer contracts are
being amortized over nine years and assembled work force is being amortized over
seven years.
DIVERSE SOFTWARE SOLUTIONS, INC.
On March 11, 1997, the Company completed the acquisition of certain assets of
DSS for $4,000,000 in cash, plus a variable payment based upon revenue earned
during a specified period following the acquisition, and the assumption of
certain liabilities, summarized as follows (in thousands):
<TABLE>
<S> <C>
Purchase price $ 4,000
Add liabilities assumed:
Current liabilities 2,490
Variable payment 2,200
--------
4,690
Less assets acquired:
Current assets (446)
Property and equipment, net (80)
Identifiable intangibles:
Developed technology (600)
Assembled work force (340)
Submittor and payor relationships (300)
Tradenames (100)
--------
(1,866)
Less write-off of acquired in-process technology (600)
--------
Goodwill $ 6,224
========
</TABLE>
Goodwill of $6,224,000 is being amortized over a period of 15 years. Developed
technology is being amortized over two years; assembled work force is being
amortized over seven years; submittor and payor relationships are being
amortized over nine years; and tradenames are being amortized over seven years.
At December 31, 1997, the Company had recorded a liability of $2,200,000 related
to the variable payments, which were paid in February 1998. This obligation is
included in accrued expenses at December 31, 1997. Also recorded as part of the
DSS acquisition was a one-time write-off of acquired in-process technology of
$600,000. This amount represents an allocation of
24
<PAGE> 25
ENVOY Corporation
Notes to Consolidated Financial Statements
purchase price to projects for the development of additional interfaces and
functionality for accounts receivable management service offerings provided by
DSS. This amount was charged to expense in 1997 because the projects related to
research and development that had not reached technological feasibility and for
which there was no alternative future use.
HEALTHCARE DATA INTERCHANGE CORPORATION
On August 7, 1997, the Company acquired all the issued and outstanding capital
stock of HDIC, the EDI health care services subsidiary of Aetna U.S. Healthcare,
Inc. ("AUSHC"), for approximately $36,400,000 in cash and the assumption of
approximately $14,800,000 of liabilities, summarized as follows (in thousands):
<TABLE>
<S> <C>
Purchase price $ 36,400
Add liabilities assumed:
Unfavorable contracts 13,800
Other liabilities 993
--------
14,793
Less assets acquired:
Cash (11)
Property and equipment, net (52)
Identifiable intangibles:
Customer contract (5,000)
Developed technology (1,600)
Tradenames (250)
Assembled work force (200)
--------
(7,113)
Less write-off of acquired in process technology (6,000)
--------
Goodwill $ 38,080
========
</TABLE>
Goodwill of $38,080,000 is being amortized over a period of 15 years; developed
technology is being amortized over two years; tradenames and assembled work
force are being amortized over three years. In addition, the Company and AUSHC
simultaneously entered into a 10-year services agreement under which AUSHC has
agreed to use the Company as its single source clearinghouse and EDI network for
all AUSHC electronic health care transactions. The amount recorded for this
customer contract is being amortized over 10 years. Liabilities assumed include
approximately $13,800,000 relating to the assumption of unfavorable contracts.
At December 31, 1997, the remaining liability for unfavorable contracts was
$13,073,000, with $9,163,000 classified as a non-current liability, and
$3,910,000 classified as a current liability in accrued expenses and other
current liabilities. Also recorded as part of the HDIC acquisition was a
one-time write-off of acquired in-process technology of $6,000,000. This amount
represents an allocation of purchase price to projects for the development of
new transaction sets which would allow health care providers to submit
additional health care transactions electronically. This amount was charged to
expense in 1997 because the projects related to research and development that
had not reached technological feasibility and for which there was no alternative
future use.
The following presents unaudited pro forma results of operations (including the
one-time write-offs of acquired in- process technology and all merger and
facility integration costs) for the years ended December 31, 1997, 1996 and 1995
assuming the acquisitions accounted for as purchases, including EMC*Express,
Inc. ("EMC") (see Note 7), had been consummated at the beginning of the periods
presented (in thousands, except per share data):
25
<PAGE> 26
ENVOY Corporation
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
---------- --------- -------
<S> <C> <C> <C>
Revenues $144,099 $115,978 $87,104
Net loss applicable to common stock
(13,985) (45,744) (40,431)
Net loss per common share (0.71) (2.72) (2.67)
</TABLE>
5. SALE OF THE GOVERNMENT SERVICES BUSINESS
On September 16, 1997, the Company completed the sale of substantially all of
the assets related to the Company's hunting and fishing licenses and electronic
benefit transfer business (collectively "the Government Services Business") for
(i) $500,000 payable in the form of a promissory note due and payable in full on
August 31, 1999 and (ii) certain contingent payment amounts based upon the
achievement of specified future operating results of the Government Services
Business. The Company recorded a gain of $500,000 related to the sale of the
Government Services Business in 1997. The results of operations of the
Government Services Business are included in the Company's consolidated
statements of operations through the date of disposition.
6. MERGER AND FACILITY INTEGRATION COSTS
As a result of the acquisitions of NEIC and Teleclaims in March 1996, the
Company approved a plan that reorganized certain of its operations, personnel
and facilities to gain the effects of potential cost savings and operating
synergies. Certain costs of this plan to reorganize were accrued in accordance
with the guidance set forth in Emerging Issues Task Force Issue 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)" and were not
part of the purchase price allocation. The costs for the year ended December 31,
1996 associated with this plan that were accrued totaled $1,772,000 consisting
of $372,000 for exit costs associated with lease terminations, $200,000 for
personnel costs, and $1,200,000 for writedowns of impaired assets. These costs
were incurred as a direct result of the plan and do not benefit future
continuing operations. The employee groups terminated included accounting,
marketing and certain areas of the systems and operations departments. The
number of employees terminated was approximately 120. Amounts charged against
this liability for 1997 and 1996 were approximately $385,000 and $1,434,000,
respectively. Additionally, the Company incurred costs of $2,892,000 to
integrate the acquired businesses with the Company, consisting primarily of
travel costs incurred by employees during the transition and integration of the
acquired businesses' operations and costs paid to consultants to assist the
Company during the transition and integration process. These costs benefit the
future continuing operations of the Company and, accordingly, were expensed as
incurred. The Company does not expect to incur any further merger and facility
integration costs related to NEIC and Teleclaims.
7. LOSS IN INVESTEE
On January 28, 1995, the Company purchased 17.5% of the capital stock of EMC for
approximately $570,000. In connection therewith, the Company paid $250,000 for
an option to purchase the remainder of the capital stock of EMC (the "Option"),
and also entered into a management agreement to provide management services to
EMC (the "Management Agreement"). Under the terms of the Management Agreement,
the Company agreed to fund certain operating costs of EMC in the form of
advances. The Management Agreement could be terminated by the Company at any
time on 60 days written notice, at which time the Option would be terminated.
The Company gave notice to terminate the Management Agreement on January 31,
1996. As a result of the termination notice and other facts and circumstances,
the Company determined that it was probable an impairment to its investment had
occurred. Accordingly, the Company recorded an adjustment in the fourth quarter
of 1995 in the amount of $1,637,000 to
26
<PAGE> 27
ENVOY Corporation
Notes to Consolidated Financial Statements
recognize an impairment in the carrying value of its investment including
writing off advances and providing for future commitments to EMC. During 1995,
the Company recognized losses for its initial investment and option aggregating
$820,000, advances of $817,000 and equity losses of $139,000 for a total loss in
the EMC investment of $1,776,000.
Based on the Company's decision to terminate the Management Agreement, the
Company discontinued the equity method of accounting for EMC and began
accounting for the investment on a cost basis during the fourth quarter of 1995.
Accordingly, the funding of EMC's operating costs in 1996 were charged to
operating expenses. The Company was committed through March 31, 1996 to continue
to fund certain operating costs of EMC. The amounts disbursed for the funding of
these costs during the first two quarters of 1996 were $540,000.
Following the termination of the Management Agreement and the Option, certain
shareholders of EMC filed a lawsuit in March 1996 against the Company asserting
claims for breach of contract and negligent conduct. On October 18, 1996, the
Company settled this lawsuit for $300,000. Concurrent with the settlement of the
lawsuit, the Company completed the acquisition of the remaining 82.5% interest
in EMC for approximately $2,000,000 in cash. The EMC acquisition was accounted
for under the purchase method of accounting applying the provisions of APB No.
16 and, as a result, the Company recorded the assets and liabilities at their
estimated fair values. The Company recorded $1,954,000 of other identifiable
intangible assets related to the EMC acquisition. The operations of EMC are
included in the consolidated statements of operations from the date of
acquisition.
8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consists of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
-------------------------
<S> <C> <C>
Current portion of liability for unfavorable contracts $3,910 $0
Liability to former owners of DSS 2,200 0
Unearned income 1,942 0
Accrued communication expense 1,982 2,263
Accrued income taxes 1,679 1,898
Accrued salaries and benefits 2,348 2,104
Accrued vendor incentives 1,808 1,110
Customer deposits 1,894 833
Other 7,599 4,946
-------------------------
$25,362 $13,154
=========================
</TABLE>
The liability to former owners of DSS was paid in February 1998 and is related
to the DSS acquisition, and the liability for unfavorable contracts is related
to the HDIC acquisition (see Note 4).
9. SHORT-TERM DEBT
At December 31, 1997, the ExpressBill Companies had various lines of credit
collateralized by certain assets. The lines of credit charged interest at rates
ranging from prime rate to prime plus 2%, which resulted in interest rates
ranging from 8.5% to 10.5% at December 31, 1997. These lines of credit included
various financial and other covenants, and were due on demand. The Company was
in compliance with these covenants or obtained appropriate waivers at December
31, 1997. The outstanding balance under these lines of credit was $1,315,000 at
December 31, 1997.
27
<PAGE> 28
ENVOY Corporation
Notes to Consolidated Financial Statements
10. LONG-TERM DEBT
In connection with the Distribution and First Data Merger, the Company entered
into a $10,000,000 note agreement with First Data on June 6, 1995 (the
"Convertible Note"). The Convertible Note was convertible, at the option of the
holder at any time, into fully paid and nonassessable shares of Common Stock at
the rate of one share for each $10.52 face amount. The conversion price and
conversion rights were subject to adjustment for stock dividends, subdivision,
and combinations, subsequent issuances of Common Stock, issuances of certain
rights, stock purchase rights or convertible securities and certain issuer
tender offers. During 1996, First Data sold the Convertible Note to an unrelated
third party for $13,500,000.
On November 7, 1996, the Company filed a registration statement with the
Securities and Exchange Commission covering the offering of 321,289 shares of
Common Stock pursuant to the demand of the current holders of the Convertible
Note under a Registration Rights Agreement dated June 6, 1995. The Company was
advised by the holders of the Convertible Notes that they intended to convert
$3,380,000 principal amount of the Convertible Notes into 321,289 shares of
Common Stock to permit their sale pursuant to the registration statement. Prior
to the termination of the registration statement on May 19, 1997, an aggregate
of $2,245,000 in principal amount of the Convertible Notes was converted into
213,389 shares of Common Stock and sold pursuant to the registration statement.
In a series of unrelated transactions, the remaining $7,755,000 in principal
amount of the Convertible Notes was converted into 737,167 shares of Common
Stock through June 1997. Accordingly, no Convertible Notes remain outstanding.
In November 1996, the Company amended its revolving credit facility to increase
the amount of credit available thereunder to $50,000,000. As of December 31,
1997, the Company had no amounts outstanding under the amended credit facility.
Any outstanding borrowing made against the amended credit facility would bear
interest at a rate equal to the Base Rate (as defined in the amended credit
facility) or LIBOR. The amended credit facility expires June 30, 2000. The
amended credit facility contains financial covenants applicable to the Company
including ratios of debt to capital, annualized EBITDA to annualized interest
expense, restrictions on payment of dividends, and certain other financial
covenants customarily included in a credit facility of this type. The Company
and its subsidiaries also are subject to certain restrictions relating to
payment of dividends, acquisitions, incurrence of debt and other restrictive
provisions. The amended credit facility is secured by substantially all of the
assets of the Company and its subsidiaries.
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1996
---------------------------
<S> <C> <C>
Convertible note $ 0 $ 8,214
Other debt and capital lease obligations,
payable through 2002, interest ranging from
9.25% to 22% secured by assets 790 1,099
---------------------------
790 9,313
Less current portion (263) (387)
---------------------------
$ 527 $ 8,926
===========================
</TABLE>
28
<PAGE> 29
ENVOY Corporation
Notes to Consolidated Financial Statements
Annual long-term debt and capital lease obligations principal requirements are
as follows (in thousands):
<TABLE>
<S> <C>
1998 $263
1999 307
2000 163
2001 50
2002 7
----
$790
====
</TABLE>
11. LEASES AND COMMITMENTS
The Company leases certain equipment and office space under operating leases.
Rental expense incurred under the leases during the years ended December 31,
1997, 1996 and 1995 was approximately $2,207,000, $1,955,000 and $1,304,000,
respectively.
Future minimum rental payments at December 31, 1997 under operating lease
arrangements are as follows (in thousands):
<TABLE>
<S> <C>
1998 $ 3,099
1999 3,207
2000 2,872
2001 2,438
2002 1,603
Thereafter 1,055
-------
Total minimum lease payments $14,274
=======
</TABLE>
12. STOCK INCENTIVE PLANS
The Company has elected to follow APB No. 25 and related Interpretations in
accounting for its stock options because, as discussed below, the alternative
fair value accounting provided for under SFAS No. 123, "Accounting for
Stock-Based Compensation," requires use of option valuation models that were not
developed for use in valuing stock options. Under APB No. 25, because the
exercise price of the Company's stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
29
<PAGE> 30
ENVOY Corporation
Notes to Consolidated Financial Statements
At December 31, 1997, the Company had reserved 4,214,640 shares of Common Stock
for issuance in connection with the stock option plans. Summaries of stock
options outstanding are as follows:
<TABLE>
<CAPTION>
WEIGHTED-
NUMBER OF OPTION PRICE PER AVERAGE
SHARES SHARE EXERCISE PRICE
<S> <C> <C> <C>
Outstanding, December 31, 1994 1,477,000 $1.83-$7.00 $2.61
Granted 1,829,000 2.19-18.00 9.54
Exercised (271,000) 1.83-3.79 2.28
------------------------------------------------------
Outstanding, December 31, 1995 3,035,000 1.83-18.00 6.81
Granted 625,000 20.25-40.25 24.53
Exercised (163,000) 1.83-7.75 3.12
Canceled (268,000) 7.75-10.00 9.02
------------------------------------------------------
Outstanding, December 31, 1996 3,229,000 1.83-40.25 10.25
Granted 834,000 21.25-36.75 23.22
Exercised (437,000) 1.83-20.75 4.25
Canceled (224,000) 7.75-30.00 19.92
------------------------------------------------------
Outstanding, December 31, 1997 3,402,000 $1.83-$37.00 $13.58
======================================================
</TABLE>
The number of stock options exercisable and the weighted average exercise price
of these options was 1,147,500 and $5.76 and 1,254,000 and $3.47 at December 31,
1997 and 1996, respectively. The weighted-average fair value of options granted
during 1997 and 1996 was $10.96 and $13.93, respectively. The weighted-average
remaining contractual life of those options is 5 years.
The Company's Amended and Restated 1995 Employee Stock Incentive Plan has
authorized the grant of options for up to 3,000,000 shares of Common Stock. All
options granted have 10 year terms from the grant date and vest over periods
from one to five years from the date of grant. At December 31, 1997, options for
the purchase of 2,691,000 shares were outstanding under this plan.
The Company's Amended and Restated 1995 Stock Option Plan for Outside Directors
has authorized the grant of options to the Company's non-employee directors for
up to 60,000 shares of Common Stock. All options granted have 10 year terms and
become fully exercisable one year from the date of grant. At December 31, 1997,
options for the purchase of 24,000 shares were outstanding under this plan.
Prior to the First Data Merger, Old ENVOY had outstanding non-qualified stock
options for the purchase of 1,214,640 shares of Common Stock. The grants were
made under the 1987 Stock Option Plan, the 1990 Director Stock Option Plan, the
1990 Officer and Employee Stock Option Plan, the 1992 Non-Employee Directors'
Plan and the 1992 Incentive Plan. Because all of these grants were made prior to
the First Data Merger, no further grants may be made under these plans. All
options granted thereunder have 10 year terms from the grant date. In connection
with the Distribution and First Data Merger, each holder of an outstanding
option to purchase shares of Old ENVOY common stock (an "Old ENVOY Option")
received an option to purchase an equal number of shares of Common Stock (a "New
ENVOY Option"). The exercise price of the New ENVOY Option is equal to a
percentage (the "distribution percentage") of the exercise price of the Old
ENVOY Option. The distribution percentage was established based upon the market
prices of Common Stock and Old ENVOY Common Stock as determined by the ratio of
(i) the average of the closing prices of Common Stock on the three trading days
immediately following the
30
<PAGE> 31
ENVOY Corporation
Notes to Consolidated Financial Statements
First Data Merger to (ii) the closing price of Old ENVOY Common Stock
immediately prior to the First Data Merger. The distribution percentage was
33.33% and resulted in a retroactive correspondingly downward adjustment of each
New ENVOY Option. The distribution percentage adjustment was designed to place
the holder of an Old ENVOY Option in the same economic position after the First
Data Merger as before the First Data Merger. At December 31, 1997, options for
the purchase of 687,000 shares were outstanding and fully exercisable under
these plans.
The Compensation Committee of the Board of Directors amended the 1992 Incentive
Plan in August 1994 to provide that all options thereunder would vest
immediately preceding the expiration of such option grant or earlier upon the
attainment of certain performance criteria. This amendment resulted in the
recording of deferred compensation and additional paid-in capital of
approximately $1,974,000. The deferred compensation was recognized as an expense
over the vesting period. As a result of the First Data Merger, the vesting of
all outstanding options was accelerated and all options became fully vested as
of the effective date of the First Data Merger. Accordingly, during the year
ended December 31, 1995, the remaining deferred compensation expense of
$1,264,000 was recognized.
Pro forma information regarding net loss and loss per share is required by SFAS
No. 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method. The fair value for these options
was estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted-average assumptions for 1997 and 1996, respectively:
risk-free interest rates of 5.77% and ranging from 5.36% to 6.69%; no dividend
yield; volatility factors of the expected market price of Common Stock ranging
from .436 to .455 and .385 to .419, respectively; and a weighted-average
expected life of the option of 5 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands, except for loss per share information):
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------------
<S> <C> <C> <C>
Pro forma net loss applicable to
common stock $(12,435) $(38,957) $(4,960)
Proforma loss per common share (0.63) (2.36) (.34)
</TABLE>
Because SFAS No. 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until the
new rules are applied to all outstanding awards.
The Company implemented the ENVOY Corporation Employee Stock Purchase Plan (the
"ESPP") effective July 1, 1997, at which time participating employees became
entitled to purchase Common Stock at a discounted price through accumulated
payroll deductions. Under the terms of the ESPP, the purchase price of the
Common Stock for participating employees will be the lesser of (i) 85% of the
closing market price of the Common Stock on the last trading day of each
quarterly enrollment period or (ii) 85% of the closing market price of the
Common Stock on the first trading day of each quarterly enrollment period. The
Company has reserved 1,000,000 shares of Common
31
<PAGE> 32
ENVOY Corporation
Notes to Consolidated Financial Statements
Stock for issuance under the ESPP. As of December 31, 1997, approximately 3,000
shares had been issued under the ESPP.
13. SERIES B PREFERRED STOCK
In March 1996, the Company issued 3,730,233 shares of Series B Preferred Stock
in connection with the NEIC acquisition (see Notes 2 and 4). The Series B
Preferred Stock is recorded in the accompanying consolidated balance sheets at
the fair market value of the underlying shares on the date of the related Stock
Purchase Agreement, $55,021,000 in the aggregate, or $14.75 per share. Each
share of Series B Preferred Stock is convertible into one share of Common Stock
at any time. Each share of Series B Preferred Stock shall be entitled to vote on
all matters that the holders of Common Stock are entitled to vote upon, on an
as-if-converted basis, and shall be entitled to vote as a class with respect to
actions adverse to any rights of the Series B Preferred Stock and the creation
of any other class of preferred stock senior to or pari passu with the Series B
Preferred Stock. The Series B Preferred Stock shall be entitled to dividends
only to the extent cash dividends are declared and paid on the Common Stock on
an as if converted basis. From and after January 1, 1999, the Company shall have
an optional right to redeem all of the outstanding Series B Preferred Stock at a
redemption price of $10.75 per share, provided that the average sale price of
Common Stock for 60 trading days prior to the notice of redemption is not less
than $21.50 per share. In February 1998, 930,233 shares of Series B Preferred
Stock were converted into an equal number of shares of Common Stock.
14. SHAREHOLDER RIGHTS PLAN
In connection with the First Data Merger, the Board of Directors adopted a
shareholder rights plan for the Company. The purpose of the shareholder rights
plan is to protect the interests of the Company's shareholders if the Company is
confronted with coercive or potentially unfair takeover tactics by encouraging
third parties interested in acquiring the Company to negotiate with the Board of
Directors.
The shareholder rights plan is a plan by which the Company has distributed
rights ("Rights") to purchase (at the rate of one Right per share of Common
Stock) one-tenth of one share of Series A Preferred Stock at an exercise price
of $60 per tenth of a share. The Rights are attached to the Common Stock and may
be exercised only if a person or group (excluding certain share acquisitions as
described in the plan) acquires 20% of the outstanding Common Stock or initiates
a tender or exchange offer that would result in such person or group acquiring
10% or more of the outstanding Common Stock. Upon such an event, the Rights
"flip-in" and each holder of a Right will thereafter have the right to receive,
upon exercise, Series A Preferred Stock having a value equal to two times the
exercise price. All Rights beneficially owned by the acquiring person or group
triggering the "flip-in" will be null and void. Additionally, if a third party
were to take certain action to acquire the Company, such as a merger or other
business combination, the Rights would "flip-over" and entitle the holder to
acquire shares of the acquiring person with a value of two times the exercise
price. The Rights are redeemable by the Company at any time before they become
exercisable for $0.01 per Right and expire in 2005.
15. COMMON STOCK OFFERING
In August 1996, the Company completed an underwritten public offering of
3,320,000 shares of Common Stock at $26.50 per share. Net proceeds from this
offering were approximately $83,000,000, and were used to retire indebtedness of
$25,000,000 outstanding under a term loan agreement and indebtedness of
approximately $12,900,000 outstanding under a $25,000,000 revolving credit
facility. The remaining proceeds were used for general corporate purposes,
including funding working capital requirements and acquisitions.
32
<PAGE> 33
ENVOY Corporation
Notes to Consolidated Financial Statements
16. INCOME TAXES
The provision for income taxes was comprised of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996 1995
--------------------------------
<S> <C> <C> <C>
Current:
Federal $ 4,957 $ 271 $ 359
State 2,429 1,107 55
------- ------- -----
Total current 7,386 1,378 414
Deferred:
Federal 421 1,139 16
State (1,474) (800) (4)
------- ------- -----
Total deferred (1,053) 339 12
------- ------- -----
Provision for income taxes $ 6,333 $ 1,717 $ 426
======= ======= =====
</TABLE>
The reconciliation of income tax computed by applying the U.S. federal statutory
rate to the actual income tax provision follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996 1995
----------------------------------
<S> <C> <C> <C>
Income tax benefit at U.S. federal
statutory rate $(1,003) $(6,997) $(1,388)
Nondeductible merger costs 0 2,979 679
Nondeductible goodwill amortization 7,066 5,447 0
State income taxes, net of federal
benefit 630 203 34
Change in valuation allowance 238 163 1,130
Other,net (598) (78) (29)
------- ------- -------
Income tax provision $ 6,333 $ 1,717 $ 426
======= ======= =======
</TABLE>
33
<PAGE> 34
ENVOY Corporation
Notes to Consolidated Financial Statements
The classification of the provision for income taxes in the consolidated
statements of operations is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996 1995
-----------------------------
<S> <C> <C> <C>
Income tax provision (benefit) attributable to
continuing operations $6,333 $1,717 $ (50)
Discontinued operations:
Income from operations 0 0 42
First Data transaction expense 0 0 434
------ ------ -----
Total provision from discontinued
operations 0 0 476
------ ------ -----
Total income tax provision $6,333 $1,717 $ 426
====== ====== =====
</TABLE>
Deferred income taxes reflects the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The tax effects of
significant items comprising the Company's temporary differences are as follows
(in thousands):
34
<PAGE> 35
ENVOY Corporation
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
------------------
<S> <C> <C>
Deferred tax liability:
Difference between book and tax depreciation
and amortization related to property and equipment $(2,348) $(2,211)
Difference between book and tax amortization
related to goodwill and other intangibles (3,517) (6,158)
------- -------
Total deferred tax liabilities (5,865) (8,369)
------- -------
Deferred tax assets:
Difference between book and tax amortization related to
write-off of acquired in-process technology 2,432 0
Difference between book and tax treatment
of leased assets 585 516
Reserves and accruals not currently deductible 1,683 1,250
Net operating loss 398 4,629
Difference between book and tax treatment
of investments 900 880
Difference between book and tax treatment
of compensation expense 408 581
Tax credits 583 503
Other 119 118
------- -------
Total deferred tax assets 7,108 8,477
Valuation allowance for deferred tax assets (1,025) (787)
------- -------
Net deferred tax assets 6,083 7,690
------- -------
Net deferred tax assets(liability) $ 218 $ (679)
======= =======
</TABLE>
At December 31, 1997, the Company had federal and state net operating loss
carryforwards of approximately $12,400,000 and $17,800,000, respectively. All of
the federal and approximately $7,400,000 of the state net operating losses
relate to the exercise of employee stock options and the tax benefit will be
allocated to equity when realized on the Company's tax returns. These losses
begin to expire in 2003.
Of the $12,400,000 federal net operating losses, $10,800,000 are attributable to
pre-acquisition years of NEIC and their use is limited by the Code to
approximately $4,700,000 per year. The remaining $1,600,000 of federal net
operating losses are attributable to pre-acquisition years of EMC and their use
is limited by the Code to approximately $141,000 per year.
The Company evaluates the amounts recorded for the valuation allowance for
deferred tax assets each year. The valuation allowance at December 31, 1996
relates to the loss on the investment in EMC. The valuation allowance at
December 31, 1997 relates to the loss on the investment in EMC plus certain tax
credits that expire in 1997 and might not be realized on the Company's 1997 tax
returns. The allowance was increased in 1997 to include these credits. In
evaluating the requirement for the valuation allowance, the Company considered
its deferred tax liabilities, which were $5,865,000 and $8,369,000 at December
31, 1997 and 1996, respectively, as a possible
35
<PAGE> 36
ENVOY Corporation
Notes to Consolidated Financial Statements
source of taxable income. In addition, the Company considered its taxable income
as reported on its 1996 tax return, approximately $4,300,000, and its projected
taxable income for 1997. Management believes that it is more likely than not
that the deferred tax assets in excess of the valuation reserves will be
realized.
As previously discussed, POS and ARM operated under Subchapter S of the Code and
were not subject to corporate federal or state income taxes. Had POS and ARM
filed federal and state income tax returns as C corporations for 1997, 1996 and
1995, income tax expense (benefit) from continuing operations under the
provisions of SFAS No. 109 would have been $7,365,000, $1,882,000, and
$(50,000), respectively.
17. PROFIT-SHARING PLANS
The Company and its subsidiaries sponsor 401(k) profit-sharing plans and other
noncontributory plans covering all employees who meet certain length of service
and age requirements. Eligible employees may elect to reduce their current
compensation and contribute to the 401(k) plans through salary deferral
contributions. The Company matches employee contributions, generally up to 25%
of the first 6% of compensation deferred by the employee. The amount of expense
for the Company contribution for all plans was approximately $613,000, $583,000
and $112,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheet for cash and
cash equivalents, accounts receivable, and accounts payable approximate fair
value. The carrying amount reported in the balance sheet for short-term and
long-term debt also approximates fair value. The fair value of the Company's
short-term and long-term debt is estimated using discounted cash flows and the
Company's current incremental borrowing rate for similar types of borrowing
arrangements.
36
<PAGE> 37
ENVOY Corporation
Notes to Consolidated Financial Statements
19. LOSS PER COMMON SHARE
The following table sets forth the computation of loss per common share (in
thousands, except per share data):
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------
Numerator for loss per common share:
<S> <C> <C> <C>
Loss from continuing operations $ (9,198) $(22,296) $ (2,122)
Income from discontinued operations, net of
income taxes 0 0 30
First Data transaction expenses, including
income taxes 0 0 (2,431)
----------------------------------------
Loss from discontinued operations 0 0 (2,401)
----------------------------------------
Net loss (9,198) (22,296) (4,523)
Less preferred stock dividends -- (14,921) --
----------------------------------------
Net loss applicable to common shares $ (9,198) $(37,217) $ (4,523)
========================================
Denominator:
Weighted average shares (1) 19,686 16,519 14,739
========================================
Loss per common share:
Continuing operations $ (0.47) $ (2.25) $ (0.14)
Discontinued operations 0 0 (0.17)
----------------------------------------
Net loss per common share $ (0.47) $ (2.25) $ (0.31)
========================================
</TABLE>
(1) Stock options to purchase 3,402,000, 3,229,000, and 3,035,000
shares of common stock in 1997, 1996, and 1995, respectively; the
Series B Preferred Stock (convertible into 3,730,233 shares of
common stock in 1997 and 1996); and the Convertible Note
(convertible into 0, 629,281, and 950,570 shares of Common Stock
in 1997, 1996, and 1995, respectively) were the only securities
issued which would have been included in the diluted earnings per
share calculation had they not been antidilutive due to the net
loss reported by the Company.
37
<PAGE> 38
ENVOY Corporation
Notes to Consolidated Financial Statements
20. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1997
--------------------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
--------------------------------------------------------------------
(In thousands, except per share data)
Revenues
<S> <C> <C> <C> <C>
As previously reported $ 26,092 $ 26,416 $ 28,590 $ 32,595
Adjustment (a) 4,671 5,753 6,103 7,385
As restated $ 30,763 $ 32,169 $ 34,693 $ 39,980
Gross profit
As previously reported $ 13,226 $ 13,484 $ 14,779 $ 17,181
Adjustment (a) and (b) 3,031 3,660 3,593 4,404
As restated $ 16,257 $ 17,144 $ 18,372 $ 21,585
Net loss applicable to common stock
As previously reported $ (2,233) $ (165) $ (21,210) $ (155)
Adjustment (a) and (c) (82) (773) 16,575 (1,155)
As restated $ (2,315) (d) $ (938) $ (4,635) (e) $ (1,310)
Net loss per common share
As previously reported $ (0.14) $ (0.01) $ (1.28) $ (0.01)
As restated $ (0.12) (d) $ (0.05) $ (0.23) (e) $ (0.07)
</TABLE>
<TABLE>
<CAPTION>
1996
----------------------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------------------------------------------------------------------
(In thousands, except per share data)
Revenues
<S> <C> <C> <C> <C>
As previously reported $ 10,330 $ 19,590 $ 21,502 $ 25,162
Adjustment (a) 2,654 3,090 3,873 4,371
As restated $ 12,984 $ 22,680 $ 25,375 $ 29,533
Gross profit
As previously reported $ 5,027 $ 9,842 $ 10,729 $ 12,734
Adjustment (a) and (b) 1,692 1,942 2,372 2,734
As restated $ 6,719 $ 11,784 $ 13,101 $ 15,468
Net loss applicable to common stock
As previously reported $ (33,910) $ (1,417) $ (1,963) $ (1,610)
Adjustment (a), (c) and (f) 6,763 (1,554) (1,505) (2,021)
As restated $ (27,147) (f),(g) $ (2,971) $ (3,468) (h) $ (3,631)
Net loss per common share
As previously reported $ (2.97) $ (0.12) $ (0.14) $ (0.11)
As restated $ (1.82) (f),(g) $ (0.20) $ (0.20) (h) $ (0.19)
</TABLE>
38
<PAGE> 39
ENVOY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(a) Amounts include effects of the restatement for the Company's business
combinations with the ExpressBill Companies which were accounted for as
poolings-of-interests (See Note 4).
(b) Reflects the reclassification of research and development expenses from
the cost of revenue to separately classify such expenses in accordance
with SFAS No.2. The amounts reclassified for the first, second, third,
and fourth quarters of 1997 were $716,000, $521,000, $452,000, and
$503,000, respectively, after restatement for the poolings with the
ExpressBill Companies. The amounts reclassified for the first, second,
third, and fourth quarters of 1996 were $441,000, $442,000, $447,000,
and $449,000, respectively, after restatement for the pooling with the
ExpressBill Companies.
(c) Amounts include effects of the restatement referred to in Note 2 and
reflect the decrease in the value of acquired in-process technology and
the increased amortization of goodwill and other intangibles. The
adjustments for the restatement of the write-off of acquired in-process
technology resulted in an increase to income of $2,400,000 in the first
quarter of 1997 related to DSS, $29,000,000 in the third quarter of
1997 related to HDIC and $22,000,000 in the first quarter of 1996
related to NEIC. The adjustments for the restatement of amortization of
goodwill and other intangibles resulted in decreases to income of
$1,842,000, $1,873,000, $2,223,000, and $2,398,000 in the first,
second, third, and fourth quarters of 1997, respectively, $489,000 in
the first quarter of 1996, and $1,833,000 each quarter in the second,
third, and fourth quarters of 1996. The related effects of these
adjustments on the provision for income taxes resulted in increases in
(decreases to) net income of ($909,000), $15,000, ($10,872,000), and
$215,000 in the first, second, third, and fourth quarters of 1997,
respectively. There were no related tax effects resulting from the
adjustments in 1996.
(d) The Company recorded a $600,000 write-off of acquired in-process
technology related to the DSS acquisition (see Note 2 and Note 4).
(e) The Company recorded a $6,000,000 write-off of acquired in-process
technology related to the HDIC acquisition, less a related deferred
income tax benefit of $2,280,000 (see Note 2 and Note 4).
(f) Amounts include the effect of the accounting treatment announced by the
staff of the Securities and Exchange Commission at the March 13, 1997
meeting of the Emerging Issues Task Force relevant to the Company's
Series B Convertible Preferred Stock having a "beneficial conversion"
feature. For the three months ended March 31, 1996, the adjustment
resulted in an increase in preferred dividends and net loss applicable
to common stock of $14,921,000 (see Note 2 and Note 13).
(g) The Company recorded a $8,700,000 write-off of acquired in-process
technology related to the NEIC and Teleclaims acquisitions (see Note 2
and Note 4).
(h) The Company recorded a $300,000 charge related to the settlement of the
EMC lawsuit (see Note 7).
39
<PAGE> 40
ENVOY Corporation
Notes to Consolidated Financial Statements
21. RELATED PARTY TRANSACTIONS
As a result of the business combinations with the ExpressBill Companies, the
Company leases office space from a partnership of a significant stockholder.
Rentals paid were approximately $92,000 annually in each of the years in the
three year period ended December 31, 1997. During 1997, the Company entered into
a lease, which extends through February 2013, for a new operating facility with
this same partnership, with rentals to commence in March 1998. Annual rentals
under this new lease will be $457,500 through February 2003, $503,250 through
February 2008, and $553,575 through February 2013.
22. SUBSEQUENT EVENTS
Class action complaints were filed on each of August 20, 1998, August 21, 1998
and September 15, 1998 (the "Complaints"), in the United States District Court,
Middle District of Tennessee, Nashville Division, against the Company and
certain of its executive officers. The Court has ordered that the three
Complaints be consolidated into a single class action lawsuit in the United
States District Court, Middle District of Tennessee, Nashville Division. The
Complaints allege, among other things, that from February 12, 1997 to August 18,
1998 (the "Class Period") the defendants issued materially false and misleading
statements about the Company, its business, operations and financial position
and failed to disclose material facts necessary to make defendants' statements
not false and misleading in violation of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated
thereunder. Plaintiffs allege that the Company failed to disclose that the
Company's financial statements were not prepared in accordance with generally
accepted accounting principles due to the improper write-off of certain acquired
in-process technology, resulting in the Company's stock trading at allegedly
artificially inflated prices during the Class Period. The Complaints seek
unspecified compensatory damages, attorney's fees and other relief. The Company
believes that these claims are without merit and intends to defend the
allegations vigorously.
40
<PAGE> 41
ENVOY Corporation
Notes to Consolidated Financial Statements
Schedule II
Valuation and Qualifying Accounts
December 31, 1995
<TABLE>
<CAPTION>
Balance at Charged to Balance
Beginning Charged to Other Accounts- Deductions End of
Description of Period Costs & Expenses Describe Describe Period
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts $ 518,256 647,938 0 a 464,231 $ 701,963
----------------------------------------------------------------------------------------
$ 518,256 647,938 0 464,231 $ 701,963
========================================================================================
</TABLE>
December 31, 1996
<TABLE>
<CAPTION>
Balance at Charged to Balance
Beginning Charged to Other Accounts- Deductions End of
Description of Period Costs & Expenses Describe Describe Period
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts $ 701,963 1,112,360 c 499,014 b 85,672 $ 2,227,665
----------------------------------------------------------------------------------------
$ 701,963 1,112,360 499,014 85,672 $ 2,227,665
========================================================================================
</TABLE>
December 31, 1997
<TABLE>
<CAPTION>
Balance at Charged to Balance
Beginning Charged to Other Accounts- Deductions End of
Description of Period Costs & Expenses Describe Describe Period
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts $ 2,227,665 1,518,716 c 600,000 b 705,036 $ 3,641,345
-----------------------------------------------------------------------------------------
$ 2,227,665 1,518,716 600,000 705,036 $ 3,641,345
=========================================================================================
</TABLE>
a. Of this amount, $264,231 represents allowance for doubtful accounts
associated with the spin-off of the Financial Business which was
transferred to First Data. The remaining $200,000 represents a
write-off of known uncollectible receivables against the allowance
account.
b. This amount represents a write-off of known uncollectible receivables
against the allowance account.
c. These amounts represent amounts recorded in connection with the opening
balances of the Acquired Businesses. See Notes 4 and 7 of Notes to
Consolidated Financial Statements.
41
<PAGE> 42
ENVOY CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 22,095 $ 8,598
ACCOUNTS RECEIVABLE - NET 44,429 33,510
INVENTORIES 2,225 2,585
DEFERRED INCOME TAXES 1,369 1,797
OTHER 2,628 1,811
--------- ---------
TOTAL CURRENT ASSETS 72,746 48,301
PROPERTY AND EQUIPMENT, NET 18,898 19,508
OTHER ASSETS 87,406 98,816
--------- ---------
TOTAL ASSETS $ 179,050 $ 166,625
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER
CURRENT LIABILITIES $ 39,441 $ 30,011
CURRENT PORTION OF LONG-TERM DEBT 84 263
--------- ---------
TOTAL CURRENT LIABILITIES 39,525 30,274
LONG-TERM DEBT, LESS CURRENT PORTION 561 527
OTHER NON-CURRENT LIABILITIES 8,558 9,163
DEFERRED INCOME TAXES 573 1,579
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, 21,559,504 and 20,075,822 in 1998 and 1997,
respectively 126,773 114,652
ADDITIONAL PAID-IN CAPITAL 8,485 7,208
RETAINED DEFICIT (46,725) (51,799)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 129,833 125,082
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 179,050 $ 166,625
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
42
<PAGE> 43
ENVOY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
-------- -------- --------- --------
<S> <C> <C> <C> <C>
REVENUES $ 47,290 $ 34,693 $ 132,763 $ 97,625
OPERATING COSTS AND EXPENSES:
COST OF REVENUES 19,669 16,321 58,875 45,852
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 10,443 7,657 29,728 23,175
RESEARCH AND DEVELOPMENT
EXPENSES 690 452 1,963 1,689
DEPRECIATION AND AMORTIZATION
EXPENSES 8,890 8,938 26,948 25,013
WRITE OFF OF ACQUIRED IN-PROCESS
TECHNOLOGY 0 6,000 0 6,600
-------- -------- --------- --------
OPERATING INCOME (LOSS) 7,598 (4,675) 15,249 (4,704)
OTHER INCOME (EXPENSE):
INTEREST INCOME 256 282 589 1,219
INTEREST EXPENSE (401) (470) (1,226) (1,076)
-------- -------- --------- --------
(145) (188) (637) 143
-------- -------- --------- --------
INCOME (LOSS) BEFORE INCOME TAXES 7,453 (4,863) 14,612 (4,561)
INCOME TAX PROVISION (BENEFIT) 5,180 (228) 11,653 3,327
-------- -------- --------- --------
NET INCOME (LOSS) $ 2,273 $ (4,635) $ 2,959 $ (7,888)
======== ======== ========= ========
NET INCOME (LOSS) PER COMMON SHARE
BASIC $ 0.11 $ (0.23) $ 0.14 $ (0.40)
======== ======== ========= ========
DILUTED $ 0.09 $ (0.23) $ 0.12 $ (0.40)
======== ======== ========= ========
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC 21,316 20,014 21,048 19,556
======== ======== ========= ========
DILUTED 25,315 20,014 25,029 19,556
======== ======== ========= ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
43
<PAGE> 44
ENVOY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
-------- --------
<S> <C> <C>
NET CASH PROVIDED BY
OPERATING ACTIVITIES $ 27,236 $ 16,504
INVESTING ACTIVITIES:
PURCHASES OF PROPERTY AND EQUIPMENT (4,360) (6,903)
INCREASE IN OTHER ASSETS (162) (3,294)
PAYMENTS FOR BUSINESSES ACQUIRED LESS CASH
ACQUIRED OF $550 IN 1998 (9,419) (40,412)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (13,941) (50,609)
FINANCING ACTIVITIES:
PROCEEDS FROM ISSUANCE OF COMMON
STOCK 2,119 1,813
CAPITAL DISTRIBUTIONS OF EXPRESSBILL COMPANIES (318) (779)
PROCEEDS FROM SHORT-TERM AND LONG-TERM DEBT 0 880
PAYMENTS ON SHORT-TERM AND LONG-TERM DEBT (1,599) (718)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 202 1,196
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 13,497 (32,909)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 8,598 36,737
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 22,095 $ 3,828
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
44
<PAGE> 45
ENVOY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 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 nine-month periods ended September 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 Current Report on Form 8- K/A No. 2,
filed on November 16, 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.
45
<PAGE> 46
The changes related to acquired in-process technology are reflected in the
accompanying financial statements. These changes reduced the amounts reported
for net income for the three month period ended September 30, 1998 by
$2,172,000, or $0.10 and $0.09 on a basic and diluted per share basis,
respectively.
The effects of the restatement resulted in the following impact on the
Company's previously reported results of operations for the first and second
quarters of 1998 and the first, second, and third quarters of 1997 (in
thousands).
<TABLE>
<CAPTION>
1998
------------------------------------------------
THREE MONTHS THREE MONTHS SIX MONTHS
ENDED ENDED ENDED
MARCH 31, JUNE 30, JUNE 30,
1998 1998 1998
-----------------------------------------------
<S> <C> <C> <C>
Income before income taxes:
As previously reported $ 5,002 $ 6,956 $ 11,958
* Adjustment related to acquired in-process technology (2,398) (2,398) (4,797)
-----------------------------------------------
Restated $ 2,604 $ 4,558 $ 7,161
===============================================
Net income:
As previously reported $ 2,258 $ 2,786 $ 5,044
* Adjustment related to acquired in-process technology (2,184) (2,172) (4,356)
-----------------------------------------------
Restated $ 74 $ 614 $ 688
===============================================
Earnings per share - Basic:
As previously reported $ 0.11 $ 0.13 $ 0.24
* Adjustment related to acquired in-process technology (0.11) (0.10) (0.21)
-----------------------------------------------
Restated -- $ 0.03 $ 0.03
===============================================
Earnings per share - Diluted:
As previously reported $ 0.09 $ 0.11 $ 0.20
* Adjustment related to acquired in-process technology (0.09) (0.09) (0.17)
-----------------------------------------------
Restated -- $ 0.02 $ 0.03
===============================================
</TABLE>
* The adjustment results from the decrease in the value assigned to acquired
in-process technology, the increased amortization of goodwill, and related tax
effects.
46
<PAGE> 47
<TABLE>
<CAPTION>
1997
-------------------------------------------------------------------------
THREE THREE THREE SIX NINE
MONTHS MONTHS MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED ENDED
MARCH 31, JUNE 30, SEPT. 30, JUNE 30, SEPT. 30,
1997 1997 1997 1997 1997
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income before income taxes:
As previously reported $ (1,225) $ 2,843 $ (31,640) $ 1,618 $ (30,022)
* Adjustment related to acquired in-process technology 558 (1,873) 26,777 (1,315) 25,461
-------------------------------------------------------------------------
Restated $ (667) $ 970 $ (4,863) $ 303 $ (4,561)
=========================================================================
Net income:
As previously reported $ (1,964) $ 920 $ (20,540) $ (1,044) $ (21,584)
* Adjustment related to acquired in-process technology (351) (1,858) 15,905 (2,209) 13,696
-------------------------------------------------------------------------
Restated $ (2,315) $ (938) $ (4,635) $ (3,253) $ (7,888)
=========================================================================
Earnings per share - Basic:
As previously reported $ (0.10) $ 0.05 $ (1.03) $ (0.05) $ (1.10)
* Adjustment related to acquired in-process technology (0.02) (0.10) 0.80 (0.12) 0.70
-------------------------------------------------------------------------
Restated $ (0.12) $ (0.05) $ (0.23) $ (0.17) $ (0.40)
=========================================================================
Earnings per share - Diluted:
As previously reported $ (0.10) $ 0.04 $ (1.03) $ (0.05) $ (1.10)
* Adjustment related to acquired in-process technology (0.02) (0.09) 0.80 (0.12) 0.70
-------------------------------------------------------------------------
Restated $ (0.12) $ (0.05) $ (0.23) $ (0.17) $ (0.40)
=========================================================================
</TABLE>
* The adjustment results from the decrease in the value assigned to acquired
in-process technology, the increased amortization of goodwill, and related tax
effects.
47
<PAGE> 48
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
previously reported revenues and earnings for the three-month and nine-month
periods ended September 30, 1997, restated to reflect the modifications referred
to in Note B above, appears below:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1997
(IN THOUSANDS, (IN THOUSANDS,
EXCEPT EXCEPT
PER SHARE DATA) PER SHARE DATA)
--------------- ---------------
<S> <C> <C>
Revenues:
ENVOY $ 28,590 $ 81,098
ExpressBill Companies 6,103 16,527
-------- --------
Combined $ 34,693 $ 97,625
======== ========
Net income (loss):
ENVOY $ (5,305) $ (9,912)
ExpressBill Companies 670 2,024
-------- --------
Combined $ (4,635) $ (7,888)
======== ========
Net (loss) per common share:
ENVOY $ (0.27) $ (0.51)
Combined $ (0.23) $ (0.40)
</TABLE>
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 nine-month periods ended September 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 nine months ended
September 30, 1998 has not been presented because the results of operations of
Synergy are not material to those of the Company.
48
<PAGE> 49
E. NET INCOME 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):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1998 1997 1998 1997
------- ---------- ------- --------
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic and diluted
earnings per share - net income (loss)
available to common shares $ 2,273 $ (4,635) $ 2,959 $ (7,888)
======= ========== ======= ========
Denominator:
Denominator for basic earnings per share -
weighted average shares 21,316 20,014 21,048 19,556
Effect of dilutive securities:
Employee stock options 1,199 -(1) 1,078 -(1)
Convertible preferred stock 2,800 -(1) 2,903 -(1)
------- ---------- ------- --------
Denominator for diluted earnings per share -
adjusted weighted average shares 25,315 20,014 25,029 19,556
======= ========== ======= ========
Basic net income (loss) per common share $ 0.11 $ (0.23) $ 0.14 $ (0.40)
======= ========== ======= ========
Diluted net income (loss) per common share $ 0.09 $ (0.23) $ 0.12 $ (0.40)
======= ========== ======= ========
</TABLE>
- ---------------
(1) Stock options to purchase 3,384,000 shares of Common Stock for the three-
month and nine-month periods ended September 30, 1997, and 3,730,233 shares
Series B Preferred Stock (convertible into 3,730,233 shares of common
stock) for the three-month and nine-month periods ended September 30, 1997
were the only securities issued which would have been included in the
diluted earnings per share calculation for the three-month and nine-month
periods ended September 30, 1997 had they not been antidilutive due to the
net loss reported by the Company.
49
<PAGE> 50
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 nine months ended September 30, 1998 was the same as net income
for the Company.
G. CONTINGENCIES
Class action complaints were filed on each of August 20, 1998, August 21,
1998 and September 15, 1998 (the "Complaints"), in the United States District
Court, Middle District of Tennessee, Nashville Division, against the Company and
certain of its executive officers. The Court has ordered that the three
Complaints be consolidated into a single class action lawsuit in the United
States District Court, Middle District of Tennessee, Nashville Division. The
Complaints allege, among other things, that from February 12, 1997 to August 18,
1998 (the "Class Period") the defendants issued materially false and misleading
statements about the Company, its business, operations and financial position
and failed to disclose material facts necessary to make defendants' statements
not false and misleading in violation of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated
thereunder. Plaintiffs allege that the Company failed to disclose that the
Company's financial statements were not prepared in accordance with generally
accepted accounting principles due to the improper write-off of certain acquired
in-process technology, resulting in the Company's stock trading at allegedly
artificially inflated prices during the Class Period. The Complaints seek
unspecified compensatory damages, attorney's fees and other relief. The Company
believes that these claims are without merit and intends to defend the
allegations vigorously.
H. SUBSEQUENT EVENT
On October 22, 1998, the Company completed the acquisition of substantially
all of the assets of Control-O-Fax Corporation and its wholly owned subsidiary
Control-O-Fax Systems, Inc. (collectively, "Control-O-Fax"), which provides EDI
patient statement and other printing and processing services to participants in
the health care market, for $8,250,000 in cash. This acquisition will be
accounted for under the purchase method of accounting, and, as a result, the
Company will record the net assets acquired at their estimated fair values with
the excess of the purchase price over these amounts being recorded as goodwill.
Pro forma financial information for the nine months ended September 30, 1998
will not be presented for this acquisition because the results of operations of
Control-O-Fax are not material to those of the Company.
50
<PAGE> 51
REPORT OF INDEPENDENT ACCOUNTANTS
Stamford, Connecticut
August 14, 1998, except for Note
21, as to which the date is
September 2, 1998.
To the Board of Directors and Stockholders of
Pharmaceutical Marketing Services Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity and cash
flows present fairly, in all material respects, the financial position of
Pharmaceutical Marketing Services Inc. and Subsidiaries (the "Company") as of
June 30, 1997 and 1998 and the results of their operations and their cash flows
for each of the three years in the period ended June 30, 1998, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
51
<PAGE> 52
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share numbers)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30, 1997 JUNE 30, 1998
------------- -------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 32,414 $ 42,315
Marketable securities 24,738 50,097
Accounts receivable, principally trade (less
allowance for doubtful accounts of $388 and $538,
respectively) 27,442 21,332
Work in process 3,798 1,489
Prepaid expenses and other current assets 4,905 9,866
Net current assets held for sale 4,236 --
--------- ---------
Total current assets 97,533 125,099
Marketable securities 7,384 19,444
Property and equipment, net 11,761 9,548
Goodwill, net 25,303 22,063
Other assets, net 6,424 10,204
Net assets held for sale 18,797 --
--------- ---------
Total assets $ 167,202 $ 186,358
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 407 $ 61
Accounts payable 5,036 5,730
Accrued liabilities
(including employee compensation and
benefits of $3,234 and $5,429, respectively) 10,507 23,499
Unearned income 17,373 22,087
--------- ---------
Total current liabilities 33,323 51,377
Long-term debt 69,552 69,114
Other liabilities 583 7,761
--------- ---------
Total liabilities 103,458 128,252
Commitments and contingencies
Stockholders' equity
Common stock, $0.01 par value, 25,000,000
shares authorized and 13,199,475 and 13,314,975
shares issued, respectively 132 133
Paid-in capital 87,179 88,199
Treasury stock at cost, 0 and 918,254 shares, respectively -- (8,494)
Accumulated deficit (20,029) (20,332)
Cumulative translation adjustment (3,534) (7,170)
Unrealized gain (loss) on investments, net of income
tax (benefits) provisions of $(4) and $4,010, respectively (4) 5,770
--------- ---------
Total stockholders' equity 63,744 58,106
--------- ---------
Total liabilities and stockholders' equity $ 167,202 $ 186,358
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements
52
<PAGE> 53
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands,except for per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Revenue $ 93,027 $ 98,485 $ 77,966
Production costs (51,605) (54,457) (43,663)
Selling, general and administrative expenses (34,208) (34,847) (34,243)
In-process research and development write-off -- -- (12,046)
Amortization of intangible assets (2,012) (1,733) (1,596)
Income from assets held for sale -- 76 (281)
Impairment of long-lived assets (2,368) -- --
Impairment of assets held for sale -- -- (14,735)
Restructuring costs (2,314) -- --
Transaction costs -- -- (1,151)
-------- -------- --------
Operating income (loss) 520 7,524 (29,749)
Gain on sale of operations, net of loss -- -- 34,106
Interest and other income 2,503 3,299 5,677
Interest expense (2,633) (3,490) (4,632)
-------- -------- --------
Income from continuing operations
before income taxes 390 7,333 5,402
Income tax provision (1,156) (2,655) (5,705)
Minority interest 57 (17) --
-------- -------- --------
Income (loss) from continuing operations (709) 4,661 (303)
Discontinued operations:
Loss from discontinued operations, net (8,915) (9,914) --
-------- -------- --------
Net loss $ (9,624) $ (5,253) $ (303)
======== ======== ========
Basic and diluted earnings (loss) per share:
Continuing operations $ (0.05) $ 0.35 $ (0.02)
Discontinued operations, net (0.68) (0.75) --
-------- -------- --------
Net loss per share $ (0.73) $ (0.40) $ (0.02)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
53
<PAGE> 54
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Cumulative
No. of Paid-in Accumulated Translation
Shares Amount Capital Deficit Adjustment
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance June 30, 1995 13,085 $ 131 $ 86,176 $ (5,152) $ 5,544
Net loss -- -- -- (9,624) --
Stock options exercised 84 1 747 -- --
Change in unrealized loss on
marketable securities, net of
income tax benefit of $30 -- -- -- -- --
Foreign currency translation -- -- -- -- (4,822)
-------- -------- -------- -------- --------
Balance June 30, 1996 13,169 132 86,923 (14,776) 722
Net loss -- -- -- (5,253) --
Stock options exercised 30 -- 256 -- --
Change in unrealized loss on
marketable securities, net of
income tax provision of $29 -- -- -- -- --
Foreign currency translation -- -- -- -- (4,256)
-------- -------- -------- -------- --------
Balance June 30, 1997 13,199 132 87,179 (20,029) (3,534)
Net loss -- -- -- (303) --
Stock options exercised 116 1 1,020 -- --
Treasury stock -- -- -- -- --
Change in unrealized gain (loss) on
investments, net of income tax
provision of $4,014 -- -- -- -- --
Foreign currency translation -- -- -- -- (3,636)
-------- -------- -------- -------- --------
Balance June 30, 1998 13,315 $ 133 $ 88,199 $(20,332) $ (7,170)
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Gain (Loss) on Treasury Stock
Investments No. of Paid-in
net of tax Shares Capital
-------- -------- --------
<S> <C> <C> <C>
Balance June 30, 1995 $ (2) -- --
Net loss -- -- --
Stock options exercised -- -- --
Change in unrealized loss on
marketable securities, net of
income tax benefit of $30 (45) -- --
Foreign currency translation -- -- --
-------- -------- --------
Balance June 30, 1996 (47) -- --
Net loss -- -- --
Stock options exercised -- -- --
Change in unrealized loss on
marketable securities, net of
income tax provision of $29 43 -- --
Foreign currency translation -- -- --
-------- -------- --------
Balance June 30, 1997 (4) -- --
Net loss -- -- --
Stock options exercised -- -- --
Treasury stock -- (918) $ (8,494)
Change in unrealized gain (loss) on
investments, net of income tax
provision of $4,014 5,774 -- --
Foreign currency translation -- -- --
-------- -------- --------
Balance June 30, 1998 $ 5,770 (918) $ (8,494)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
54
<PAGE> 55
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended June 30,
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net loss $ (9,624) $ (5,253) $ (303)
Loss from discontinued operations 8,915 9,914 --
Adjustments to reconcile net income (loss) to net cash (used in) provided by
operating activities:
Depreciation and amortization 3,372 3,715 3,289
Loss (gain) on disposal of businesses, net -- 773 (34,106)
Deferred taxes (789) 953 (6,560)
Minority interest share of net income (loss) (57) 17 --
Restructuring costs 2,314 -- --
Impairment of long lived assets 2,368 -- --
Impairment of assets held for sale -- -- 14,735
In-process research and development write-off -- -- 12,046
Change in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable (5,716) 881 999
Work-in-process (781) (986) 898
Prepaid expenses and other assets (822) 3,471 (934)
Accounts payable and accrued liabilities (6,221) (561) 161
Unearned income 5,156 3,199 (741)
Other liabilities 200 5 98
-------- -------- --------
Total adjustments (976) 11,467 (10,115)
-------- -------- --------
Net cash (used in) provided by operating activities (1,685) 16,128 (10,418)
-------- -------- --------
Cash flows provided by (used in) investing activities:
Capital expenditures (2,166) (4,592) (2,138)
Proceeds from disposal of fixed assets 115 66 5
Proceeds from businesses disposed, net of selling costs -- 4,285 15,793
Cash consideration advanced to Source Europe under a line of
credit -- -- (6,433)
Cash acquired in Source Europe -- -- 9,942
Sale (purchase) of marketable securities, net (5,743) 2,610 3,685
Acquisition and contingent purchase price payments (624) (2,799) (2,159)
-------- -------- --------
Net cash provided by (used in) investing activities (8,418) (430) 18,695
-------- -------- --------
Cash flows provided by (used in) financing activities:
Net proceeds from options exercised 748 256 1,021
Repayments of long-term debt and capital lease
obligations (245) (195) (262)
-------- -------- --------
Net cash provided by financing activities 503 61 759
-------- -------- --------
Effect of discontinued operations and assets held for sale (2,038) 5,838 2,160
Effect of exchange rate movements (3,521) (1,852) (1,295)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (15,159) 19,745 9,901
Cash and cash equivalents at beginning of period 27,828 12,669 32,414
-------- -------- --------
Cash and cash equivalents at end of period $ 12,669 $ 32,414 $ 42,315
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
55
<PAGE> 56
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended June 30,
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Supplemental information:
Cash paid during the period for:
Interest $ 4,474 $ 4,521 $ 4,345
Income taxes $ 1,381 $ 1,694 $ 8,430
======== ======== ========
Supplemental disclosure of non-cash investing and financing activities:
Fair value of assets acquired $ 19,104
PMSI shares received 8,494
In-process research and development 12,046
Completed technology acquired 1,363
--------
Liabilities assumed $ 41,007
========
Cancellation of amounts due from Source Europe under a line of credit $ (6,433)
========
National Data Corporation shares received $ 35,328
========
Capital leases $ 40 $ 802 $ 262
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
56
<PAGE> 57
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Pharmaceutical Marketing Services Inc. ("PMSI") provides a range of
information services to pharmaceutical and healthcare companies in the
United States, Europe and Japan to enable them to optimize their sales
and marketing performance in a value driven environment. The services
are comprised of targeting information services, prescription database
services and added value services. Most of PMSI's information services
are generated from its own proprietary databases containing unique
prescription, managed care, healthcare market and medical prescriber
data. On August 5, 1998, PMSI entered into a transaction whereby it
sold substantially all of its non-US operations (see note 20).
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION. The consolidated
financial statements comprise the accounts of PMSI and its
subsidiaries. The consolidated financial statements have been restated
where applicable for discontinued operations (see Note 19). The
accompanying notes present amounts related to continuing operations
only. All intercompany balances and transactions have been eliminated.
CASH EQUIVALENTS. Cash equivalents consist primarily of highly liquid
investments with a maturity of three months or less at the date of
acquisition.
MARKETABLE SECURITIES. PMSI accounts for its marketable securities in
accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities"
("FAS 115").
As required by FAS 115, management determines the appropriate
classification of its investments in debt and equity securities at the
time of purchase and re-evaluates such determination at each balance
sheet date. Debt securities for which PMSI does not have the intent or
ability to hold to maturity are classified as available-for-sale, along
with any investment in equity securities. Available-for-sale securities
are carried at fair value, as determined by the quoted market value at
the balance sheet date, with the unrealized gains and losses, net of
tax, reported in a separate component of stockholders' equity. At June
30, 1998, PMSI had no investments that qualified as trading or held to
maturity.
WORK IN PROCESS. Work in process consists of unbilled costs incurred on
behalf of clients, principally outside vendor costs attributable to
PMSI's products and services.
PROPERTY AND EQUIPMENT. Property and equipment is recorded at cost. All
maintenance and repairs are expensed as incurred.
Depreciation is provided using the straight-line method. Furniture,
office equipment and computer equipment are depreciated over five years
and automobiles over four years. Leasehold improvements are amortized
over the shorter of their useful lives or
57
<PAGE> 58
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
the terms of the respective leases. Buildings are depreciated over
their estimated useful lives ranging from twenty to thirty years.
On disposal, costs and accumulated depreciation are removed from the
financial statements and gains (losses) are recognized in the statement
of operations.
GOODWILL. Under the purchase method of accounting, the excess of the
purchase price of businesses acquired over the fair value of net
tangible and intangible assets at the dates of acquisition has been
assigned to goodwill. The net assets and results of operations of the
acquisitions have been included in the consolidated financial
statements of PMSI from their respective dates of purchase. Goodwill is
amortized on a straight-line basis over periods between five and forty
years.
PMSI assesses the recoverability of goodwill, on a subsidiary by
subsidiary basis, by determining whether amortization of goodwill can
be recovered through undiscounted future cash flows based on projected
net income, excluding goodwill amortization, of the respective
subsidiary. Impairment is measured by discounted future cash flows
based on projected net income, excluding goodwill amortization, using a
discount rate reflecting PMSI's cost of funds.
DATABASES. Acquired databases have been valued at their estimated fair
values at the dates of acquisition. Databases are amortized using
straight-line and accelerated methods over periods of up to five years.
Costs associated with maintenance and updating of databases are
expensed as incurred.
SOFTWARE ACQUIRED. Computer software of businesses acquired is recorded
at its fair value at the date of acquisition. This software is
amortized on a straight-line basis over its useful life, which is
estimated to be two to five years.
FOREIGN CURRENCY. The balance sheets and results of operations of
PMSI's subsidiaries that operate outside the United States are measured
using local currency as the functional currency.
Assets and liabilities have been translated into United States dollars
at the rates of exchange at the balance sheet date. Translation gains
and losses arising from the use of differing exchange rates from year
to year are included in the cumulative translation adjustment on the
balance sheet. Revenues and costs are translated into United States
dollars at the average rate during the period.
Transaction gains and losses are recognized in the statement of
operations as incurred. For the periods presented these amounts were
not material.
REVENUE RECOGNITION. Revenue is recognized on delivery of a product or
as the service is rendered. Subscription-type revenue is recognized
over the life of the
58
<PAGE> 59
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
subscription. Prebillings for products that have not been delivered or
for services not yet rendered are classified as unearned income until
the earnings process is complete.
CONCENTRATION OF CREDIT RISK. Financial instruments that potentially
subject PMSI to concentrations of credit risk consist principally of
cash and cash equivalents, marketable securities and trade receivables.
PMSI invests its excess cash with major banks and cash equivalents and
marketable securities in a professionally managed fund. At June 30,
1998 marketable securities included 903,950 shares of common stock of
National Data Corporation ("NDC") with a fair value of $39,548,000.
PMSI's customer base principally comprises companies within the
pharmaceutical industry. Although PMSI's receivables are concentrated
in the pharmaceutical industry, the concentration of credit risk is
limited due to the credit worthiness of the customers. PMSI does not
require collateral from its customers.
INCOME TAXES. Federal, foreign and state income taxes in the
consolidated financial statements have been computed on a stand-alone
return basis according to the fiscal and legal structure under which
the various tax paying entities operate. Deferred income taxes are
recorded to reflect the tax consequences on future years of differences
between the tax basis of assets and liabilities and financial reporting
amounts at each year-end.
EARNINGS/LOSS PER SHARE. In 1998, PMSI adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("FAS 128").
Previously reported earnings per share amounts have been restated to
comply with FAS 128. Basic earnings (loss) per share amounts are
calculated by dividing income (loss) amounts by the weighted average
number of common shares outstanding. Diluted earnings (loss) per share
amounts are calculated by dividing income (loss) amounts by the
weighted average number of common shares outstanding increased, if
dilutive, by the effects of potentially dilutive common shares which
includes stock options and convertible debentures. Dilutive potential
common shares are calculated in accordance with the treasury stock
method.
USE OF ESTIMATES IN THE PREPARATION OF THE FINANCIAL STATEMENTS. The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates. The most significant estimates that affect the
financial statements are those related to goodwill and deferred tax
assets.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying value of certain of
PMSI's financial instruments including cash and cash equivalents,
accounts payable and other accrued liabilities approximates fair value
due to their short maturities. The fair value of PMSI's debentures is
based on quoted market prices.
59
<PAGE> 60
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
ALLOCATION OF INTEREST TO DISCONTINUED OPERATIONS. Enterprise interest
is allocated to discontinued operations in proportion to net assets.
2. TRANSACTIONS WITH SOURCE
Effective as of December 31, 1991, Walsh International Inc.
("Walsh") transferred to PMSI all the assets and liabilities of the
PMSI business in exchange for shares of PMSI common stock. In
connection with the transfer, PMSI and Walsh entered into two
long-term license agreements permitting the use by PMSI of certain
Walsh proprietary databases. In addition, PMSI and Walsh entered into
further agreements, covering data processing, administrative and
management services and subleasing of certain facilities for various
periods of time, all subject to renewal terms. During fiscal year 1996,
Walsh separated into two independent companies ("the spin-off"): Walsh
International Inc. and Source Informatics Inc. ("Source") and the
agreements were assigned from Walsh to Source. All agreements were
terminated effective December 15, 1997 upon the sale of certain assets
to NDC. The principal agreements and terms were as follows:
ALPHA (PRESCRIPTION) DATABASE LICENSE AGREEMENT. Source had granted
PMSI an exclusive license to use its US databases for a period of
five years through December 2001, with an option to renew for two
additional 5-year periods. The license fee amounts paid to Source in
the years ended June 30, 1996, 1997 and for the period ended December
15, 1997 in respect of this agreement were $3,094,000, $3,126,000 and
$1,728,000, respectively.
DATA PROCESSING AGREEMENT. PMSI contracted for Source to provide
specific data processing services in the US. In the years ended June
30, 1996 and 1997 and for the period ended December 15, 1997 costs
incurred by PMSI in connection with the data processing agreement
totaled $3,353,000, $5,395,000 and $3,041,000, respectively. These
costs are included in production costs.
FACILITIES AGREEMENT. PMSI sublet space from Source in the US. The net
cost to PMSI in the years ended June 30, 1996 and 1997 and for the
period ended December 15, 1997 totaled $545,000, $29,000 and $45,000,
respectively. Such amounts have been included in selling, general and
administrative expenses.
MANAGEMENT AND EXECUTIVE SERVICES AGREEMENT. Source provided
administrative, management and executive services to PMSI in the US
which resulted in a net cost to PMSI of $2,319,000, $977,000 and
$542,000 in the years ended June 30, 1996 and 1997 and for the period
ended December 15, 1997, respectively. These costs are included in
selling, general and administrative expenses.
60
<PAGE> 61
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
At June 30, 1998 there were no amounts receivable or payable
from/to Source. At June 30, 1997, PMSI had a net current receivable
from Source of $1,646,000, which was included in other current assets.
Source held 831,144 shares or 6.3% of PMSI's Common Stock at June 30,
1997 which represented the remaining shares that were transferred to
Source in the "spin-off" of the Source businesses from Walsh. These
shares, together with a further 87,110 shares, were transferred to PMSI
as part of the assets acquired on the purchase of the Source Europe
companies from Source on December 15, 1997 (see note 3).
3. ACQUISITIONS AND DIVESTITURES
ACQUISITIONS. The consolidated financial statements comprise various
business operations and entities that have been acquired by PMSI. These
acquisitions have been accounted for as purchases. Accordingly, the
acquired assets and assumed liabilities have been recorded at their
estimated fair value at the dates of acquisition. The results of
operations are included in the consolidated financial statements from
the respective dates of acquisition.
SOURCE INFORMATICS EUROPEAN HOLDINGS LLC
On December 15, 1997 PMSI acquired Source Informatics European
Holdings L.L.C. and its subsidiaries ("Source Europe") from Source for
consideration of $8.4 million in the form of the cancellation of
amounts advanced to Source under a line of credit of $6.4 million and
direct costs of $2.0 million.
Source Europe is a developing business involved in building
databases of information from prescriptions dispensed in the UK,
Germany, France, Belgium and Italy and in developing the software
technology to support, access and generate information from such
databases. This information enables pharmaceutical companies to measure
and analyze product performance at a detailed geographical level,
namely small groups of physicians or at the individual physician level
and thereby improve salesforce productivity. Currently, the businesses
are at various stages of development, but revenues are being generated
at an increasing level as more products begin to be delivered to
clients throughout Europe.
The excess of the purchase price over the fair value of the
net assets acquired of $13.4 million was allocated to in-process
research and development and completed technology as follows:
<TABLE>
<S> <C>
In-Process Research & Development $12,046
Completed Technology $ 1,363
-------
$13,409
-------
</TABLE>
Included in the assets acquired in Source Europe were 918,254
shares of common stock of PMSI with a fair value on December 15, 1997
of $8.5 million.
61
<PAGE> 62
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
These shares were placed in treasury upon acquisition during the second
quarter of fiscal 1998.
Presented below are summarized unaudited pro forma results as
if the acquisition of Source Europe had occurred on July 1, 1996 and
July 1, 1997. The pro forma results include pro forma adjustments
related principally to the amortization of completed technology and the
elimination of inter-company transactions.
<TABLE>
<CAPTION>
Unaudited Unaudited
Year Ended Year Ended
June 30 ,1997 June 30, 1998
------------- -------------
<S> <C> <C>
Revenue $ 98,892 $ 79,502
Net loss $(26,198) $(14,152)
Net loss per share $ (1.97) $ (1.11)
</TABLE>
MEDIPHASE LIMITED
On July 1, 1994, PMSI acquired 80% of the common stock of
Mediphase Limited, a specialist software and information company in the
United Kingdom. During the year ended June 30, 1998, PMSI purchased the
remaining 20% of the common stock of Mediphase Limited for $1.7
million.
IMR FINANCE
During 1993, PMSI purchased an 80% holding in IMR Finance, a
French corporation. The owners of the minority interest had the option
to require PMSI to purchase their holding based on a multiple of
projected pre-tax earnings.
During May 1997, the minority shareholders exercised their
option, and PMSI purchased the remaining 20% of the outstanding share
capital of IMR Finance. The purchase price of $2.6 million has been
accounted for in net assets held for sale.
DIVESTITURES.
On December 15, 1997, PMSI sold to NDC (i) PMSI's interest in
the US joint operating venture with Source ("Source US") and (ii) its
OTC Physician Database business in the US. PMSI received 1,084,950
registered shares of common stock of NDC, with a market value on
December 15, 1997 of $35.3 million, plus $6.5 million in cash. This
resulted in a pre-tax gain of $33.6 million.
PMSI sold IMR (see Note 18), its French point of sale
marketing business, on March 31, 1998. This was the last remaining
business to be sold as a result of PMSI's decision in the third quarter
of fiscal 1996 to discontinue its non-database segment. The business
was sold for consideration of approximately
62
<PAGE> 63
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
$3.2 million in cash. The assets sold included cash and cash
equivalents of $1.2 million.
On July 1, 1997 PMSI sold its Dutch and US-based international
publishing and communications operations to Excerpta Medica, the
medical communications division of Elsevier Science, for approximately
$9 million, resulting in a net gain on sale of $2.6 million.
During the third quarter of fiscal 1997, Marketing Resources
International Limited in the United Kingdom and Patient Programs in the
US were divested by PMSI for $0.4 million. The total revenue and
operating loss from these businesses included in the consolidated
statement of operations for the year ended June 30, 1996 were $0.7
million and $1.0 million, respectively. The total revenue and operating
loss for the year ended June 30, 1997 were $1.1 million and $1.0
million, respectively.
63
<PAGE> 64
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. MARKETABLE SECURITIES
Marketable securities consisted of the following as of June
30, 1997 and 1998 (in thousands):
<TABLE>
<CAPTION>
Amortized Fair Value
Name of Issuer Cost of at Balance Unrealized Gains
and Title of Each Issue Sheet Date (Losses), net
Each Issue at June 30, at June 30, at June 30,
----------------------- ----------------------- ------------------------
1997 1998 1997 1998 1997 1998
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Equity Securities $ -- $ 30,319 $ -- $ 40,109 $- $ 9,790
Corporate debt securities 41,486 47,925 41,482 47,909 (4) (16)
Debt securities issued by the U.S.
Treasury and other U.S.
government corporations and
agencies 4,121 400 4,121 400 -- --
Debt securities issued by foreign
governments 4,228 2,059 4,226 2,060 (2) 1
-------- -------- -------- -------- -------- --------
$ 49,835 $ 80,703 $ 49,829 $ 90,478 $ (6) $ 9,775
======== ======== ======== ======== ======== ========
Maturities
Cash equivalents (1) $ 17,708 $ 20,942 $ 17,707 $ 20,937 $ (1) $ (5)
Short-term investments (2) 24,742 40,313 24,738 50,097 (4) 9,784
Due after one year through three years 7,385 19,448 7,384 19,444 (1) (4)
-------- -------- -------- -------- -------- --------
$ 49,835 $ 80,703 $ 49,829 $ 90,478 $ (6) $ 9,775
======== ======== ======== ======== ======== ========
</TABLE>
(1) Maturities of three months or less at acquisition.
(2) Short-term investments include debt securities with maturities greater than
3 months and equity securities.
For the years ended June 30, 1996 and 1997, gross realized gains
and losses were not significant. Gross realized gains for the year ended
June 30, 1998 were $1.7 million, and were included in interest and other
income within the consolidated statement of operations. In computing
realized gains and losses, PMSI compares the cost of its investments on a
specific identification basis. Such cost includes the direct cost to
acquire the securities adjusted for the amortization of any discount or
premium.
64
<PAGE> 65
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5. PROPERTY AND EQUIPMENT
Property and equipment at June 30, 1997 and 1998 comprised the
following (in thousands):
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Land and buildings including leasehold
improvements $ 5,546 $ 6,187
Furniture and office equipment 2,528 3,077
Computer equipment 7,756 4,936
Automobiles 321 425
-------- --------
16,151 14,625
Less accumulated depreciation
and amortization (4,390) (5,077)
-------- --------
$ 11,761 $ 9,548
======== ========
</TABLE>
Depreciation and amortization charged to operations for the
years ended June 30, 1996, 1997 and 1998 were $1,342,000, $1,981,000
and $1,461,000, respectively.
6. GOODWILL
Goodwill at June 30, 1997 and 1998 comprised the following (in
thousands):
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Goodwill on acquisition $ 34,752 $ 29,175
Accumulated amortization (9,449) (7,112)
-------- --------
$ 25,303 $ 22,063
======== ========
</TABLE>
The decrease in goodwill on acquisition is a result of the
sale of the Bugamor and Medialert businesses.
Amortization charged to operations for the years ended June
30, 1996, 1997 and 1998 was $1,639,000, $1,522,000 and $1,160,000,
respectively.
65
<PAGE> 66
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. OTHER ASSETS
Other assets at June 30, 1997 and 1998 consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Software $ 5,206 $ 6,381
Acquired databases 21,539 22,193
------------ -------------
26,745 28,574
Less accumulated amortization (26,324) (26,671)
------------ -------------
421 1,903
Debenture financing costs 1,302 (1) 1,070 (1)
Deposits 766 4,432
Deferred taxes 723 452
Investments 1,670 725
Deferred charges 422 455
Note receivable from Walsh 1,120 (2) 1,167 (2)
------------ -------------
$ 6,424 $ 10,204
============ =============
</TABLE>
(1) Debenture financing costs are being amortized over the life of
the debentures. The amortization charge for the years ended
June 30, 1996, 1997 and 1998 was $232,000.
(2) Represents an interest free note receivable of $1,200,000 due
from Walsh in June 1999 relating to the Scriptrac acquisition.
The note receivable was recorded initially at its present
value and as a result of accretion, the balance at June 30,
1998 is $1,167,000.
Amortization of acquired databases and software charged to operations
for the years ended June 30, 1996, 1997 and 1998 was $373,000, $211,000 and
$436,000, respectively.
66
<PAGE> 67
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. LONG-TERM DEBT
Long-term debt at June 30, 1997 and 1998 consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Debentures (1) $ 69,000 $ 69,000
Other long-term debt (2) 959 175
------------- -------------
69,959 69,175
Less current portion (407) (61)
------------- -------------
$ 69,552 $ 69,114
============= =============
</TABLE>
(1) On February 3, 1993 PMSI completed an offering of an aggregate $69
million Convertible Subordinated Debentures due in 2003. The
debentures, issued at par, bear annual interest at 6-1/4% and are
convertible into Common Stock of PMSI at a conversion price of $20 per
share, subject to adjustments for certain events. The current value of
the debentures at June 30, 1998, based on quoted market prices, was
$66,240,000.
(2) Capital lease obligations (see Note 13).
67
<PAGE> 68
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. STOCK OPTIONS AND RESTRICTED STOCK PURCHASE PLAN
A Stock Option and Restricted Stock Purchase Plan (the "Plan")
was established on August 17, 1991 for employees, officers and
directors of PMSI or any of its subsidiaries. The number of stock
options authorized by the Plan is 2,250,000. The Plan provides for the
granting of "non-qualified stock options" and "incentive stock options"
to acquire Common Stock of PMSI and/or the granting of rights to
purchase Common Stock. The terms and conditions of individual option
agreements may vary, subject to the following guidelines: (i) the
option price of incentive stock options may not be less than market
value on the date of grant; the option price of non-qualified options
may be less than market value on the date of grant, (ii) the term of
all incentive stock options may not exceed ten years from the date of
grant; the term of non-qualified stock options may exceed ten years,
(iii) no options may be granted after August 17, 2001 and (iv) in
general, options vest evenly over a period of five years from the date
of issue.
A Non-Employee Directors' Stock Option Plan (the "Directors
Plan") was adopted on May 27, 1993. The Directors' Plan provides for
the granting of non-qualified stock options to purchase shares of
PMSI's Common Stock. The terms and conditions of individual option
agreements may vary, subject to the following guidelines: (i) the
option exercise price will be equal to 100% of the fair market value of
the Common Stock on the date of grant, (ii) the term of the stock
options may not exceed ten years from the date of grant, (iii) in
general, options vest evenly over a period of three years from the date
of issue (iv) the total number of shares of Common Stock that may be
subject to options pursuant to the Directors' Plan is 120,000, subject
to automatic adjustments following certain events, and (v) no options
may be granted after May 27, 2003.
Additional information relating to the Plan and the Directors
Plan is as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Options outstanding at July 1, 1995,
1996 and 1997 1,786,400 1,848,200 1,903,750
Options granted 234,250 392,200 458,600
Options exercised (84,050) (30,200) (115,050)
Options lapsed (88,400) (306,450) (253,400)
----------- ----------- -----------
Options outstanding at June 30 1,848,200 1,903,750 1,993,900
=========== =========== ===========
Options exercisable at June 30 980,700 1,150,610 1,229,300
=========== =========== ===========
Option prices per share:
Granted $8-$14 $9-$10 $9
Exercised $8-$10 $8-$9.50 $8-$10.75
Outstanding $8-$22 $8-$22 $8-$22
</TABLE>
68
<PAGE> 69
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The exercise price of options granted during the years ended June 30,
1996, 1997 and 1998 equaled the market price of PMSI's common stock on
the date of the grant. As of June 30, 1998 the Plan and the Directors
Plan had available 76,900 and 40,000 shares of common stock,
respectively, available for future grants.
10. ACCOUNTING FOR STOCK-BASED COMPENSATION
PMSI has elected to continue to use the intrinsic value based
method to account for all of its employee stock-based compensation
plans. Under APB Opinion No. 25, "Accounting for Stock Issued to
Employees" PMSI has recorded no compensation costs related to its stock
option plans for the years ended June 30, 1996, 1997 and 1998.
Pursuant to SFAS 123, "Accounting for Stock-Based
Compensation," PMSI is required to disclose the pro-forma effects on
net loss and net loss per share data as if PMSI had elected to use the
fair value approach to account for all its stock-based compensation
plans. Had compensation cost for PMSI's plans been determined
consistent with the fair value approach enumerated in SFAS No.123
PMSI's net loss and net loss per share for the years ended June 30,
1996, 1997 and 1998 would have changed as indicated below (in
thousands, except per share data):
<TABLE>
<CAPTION>
Year Ended June 30,
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Net loss:
As reported $ (9,624) $ (5,253) $ (303)
Pro-forma $ (9,726) $ (5,556) $ (747)
Net loss per share:
As reported $ (0.73) $ (0.40) $ (0.02)
Pro-forma $ (0.74) $ (0.42) $ (0.05)
</TABLE>
The fair value of options granted was estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in fiscal years 1996, 1997
and 1998; risk-free interest rate of 6%; expected life of 6 years; 41%
expected volatility and no dividends. The weighted average fair value
of options granted during the years ended June 30, 1996, 1997 and 1998
were $13.34, $9.38 and $9.02.
Since option grants vest over several years and additional
grants are expected in the future, the pro forma results noted above
are not likely to be representative of the effects on future years of
the application of the fair value based method.
69
<PAGE> 70
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of PMSI's Plan and the Directors Plan
as of June 30, 1997 and 1998 and changes during the years ended on
those dates is as follows:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1998
------------- -------------
Number Weighted- Number Weighted-
of average of average
Fixed options shares exercise price shares exercise price
------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 1,848,200 $ 11.77 1,903,750 $ 11.02
Granted 392,200 $ 9.38 458,600 $ 9.02
Exercised (30,200) $ 8.48 (115,050) $ 9.07
Cancelled (306,450) $ 13.43 (253,400) $ 12.32
--------- ---------
Outstanding at end of year 1,903,750 $ 11.02 1,993,900 $ 10.49
========= =========
Options exercisable at end of year 1,150,610 $ 11.35 1,229,300 $ 11.06
========= =========
</TABLE>
A summary of information regarding the outstanding options and
those exercisable at June 30, 1998 is given in the following tables:
<TABLE>
<CAPTION>
Weighted Average
Number of remaining Number of
Exercise Price Options Contractual life of Options
($) Outstanding options outstanding Exercisable
(Yrs)
-------------- ----------- ------------------- -----------
<S> <C> <C> <C>
8.40 533,900 3.17 533,900
8.75 112,000 6.67 92,000
9.00 525,500 9.35 138,000
9.38 24,000 9.50 0
9.50 348,200 7.90 96,900
13.50 202,800 6.65 121,000
14.00 36,000 3.58 36,000
15.00 15,000 3.92 15,000
15.25 67,500 4.29 67,500
15.75 15,000 4.95 15,000
18.50 12,000 4.33 12,000
22.00 102,000 3.58 102,000
--------- ---- ---------
1,993,900 6.34 1,229,300
========= ==== =========
</TABLE>
70
<PAGE> 71
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. TAXES
The components of the income tax (provision) benefit for the
years ended June 30, 1996, 1997 and 1998 are comprised of the following
(in thousands):
<TABLE>
<CAPTION>
Year Ended
June 30,
---------------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
U.S. income tax (provision) benefit $(1,666) $ 9 $(8,363)
Foreign tax provision (279) (1,711) (3,902)
Deferred income tax (provision) benefit 789 (953) 6,560
------- ------- -------
$(1,156) $(2,655) $(5,705)
======= ======= =======
</TABLE>
The domestic and foreign components of income before income
taxes were as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended
June 30,
-----------------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Domestic $ 1,153 $ 4,022 $ 13,184
Foreign (763) 3,311 (7,782)
-------- -------- --------
$ 390 $ 7,333 $ 5,402
======== ======== ========
</TABLE>
The provision for income taxes differs from that computed
using the 35% statutory federal income tax rate as follows (in
thousands):
<TABLE>
<CAPTION>
Year Ended
June 30,
---------------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Provision based on federal statutory rate $ (133) $(2,493) $(1,891)
Goodwill and other non-deductible items (304) (301) (1,149)
Foreign earnings and dividends taxed at
different rates (538) 1,124 (254)
Tax refund claims, audit issues & other matters -- 833 (1,490)
State tax, net of federal benefit (135) (149) (2,148)
Purchase accounting adjustments (1,182) -- --
Disposal of assets held for sale -- -- 3,078
Valuation of temporary differences 848 (2,386) (990)
All other, net 288 717 (861)
------- ------- -------
Consolidated effective tax rate $(1,156) $(2,655) $(5,705)
======= ======= =======
</TABLE>
71
<PAGE> 72
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
An additional provision for taxes was recorded during the
second quarter of the fiscal year of $1.5 million for probable
liabilities arising from tax audits in progress. The full liability
assessed by the tax authorities was approximately $3.0 million which,
at the request of the tax authorities, PMSI paid into an escrow account
during the third quarter of fiscal 1998 pending the outcome of an
appeal. The escrow amount was included in other assets at June 30,
1998.
The tax effect of significant temporary differences
representing deferred tax assets and liabilities at June 30, 1997 and
1998 were as follows (in thousands):
<TABLE>
<CAPTION>
CURRENT ASSETS (LIABILITIES): 1997 1998
---- ----
<S> <C> <C>
Accrued liabilities $ 1,655 $ 2,427
Foreign tax credits -- --
Net operating losses -- 13,563
Prepaid and other current assets 212 2,768
Bad debts 130 115
-------- --------
1,997 18,873
Valuation allowance (405) (14,082)
-------- --------
Net current assets 1,592 4,791
-------- --------
NON-CURRENT ASSETS (LIABILITIES):
Fixed assets & intangibles (200) 496
Net operating losses 4,113 226
Other liabilities 222 88
-------- --------
4,135 810
Valuation allowance (3,412) (358)
-------- --------
Net non-current assets 723 452
-------- --------
Deferred taxes, net $ 2,315 $ 5,243
======== ========
</TABLE>
As of June 30, 1998, there was available for foreign income
tax purposes net operating loss carryforwards of approximately
$45,096,000 which expire as follows: 1999: $199,000, 2000: $146,000,
2001: $357,000, 2002: $2,343,000 and thereafter: $42,051,000.
The undistributed earnings of foreign subsidiary companies for
which deferred U.S. income taxes have not been provided at June 30,
1997 and June 30, 1998 because of permanent reinvestment of earnings in
the operations of those subsidiaries, amounted to $15,272,000 and
$1,041,000, respectively. It is not practicable to estimate the amount
of tax that might be payable on the eventual remittance of such
earnings. On remittance, certain foreign countries impose withholding
taxes. The amount of withholding taxes that would be payable on
remittance of the entire amount of such undistributed earnings would
approximate $3,727,000 and $206,000 at June 30, 1997 and June 30, 1998,
respectively.
72
<PAGE> 73
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. EMPLOYEE BENEFIT PLANS
Subsidiaries of PMSI in the United Kingdom, Holland, Japan and
the United States have defined contribution pension or profit sharing
plans covering substantially all their employees. The total costs
associated with these plans for the years ended June 30, 1996, 1997 and
1998 were $729,000, $1,245,000 and $1,007,000, respectively.
13. LEASE OBLIGATIONS & OTHER COMMITMENTS
Various PMSI subsidiaries lease certain property and
equipment. Obligations under long-term non-cancelable lease agreements
expiring at various dates have the following aggregate approximate
annual minimum rentals (in thousands):
<TABLE>
<CAPTION>
Capital Operating
------- ---------
<S> <C> <C>
1999 $ 120 $ 2,060
2000 83 1,702
2001 11 1,430
2002 - 1,121
After 2002 - 832
------------- -------------
214 $ 7,145
=============
Less amount representing interest (39)
-------------
Present value of minimum lease payments 175
Less current portion (61)
-------------
$ 114
-------------
</TABLE>
Operating lease rental expense for the years ended June 30,
1996, 1997 and 1998 was $1,471,000, $1,559,000 and $1,676,000,
respectively. Included in furniture, fixtures and equipment are assets
subject to capitalized leases with an original cost of $337,000 (1997:
$1,332,000) and accumulated amortization of $166,000 (1997: $351,000).
73
<PAGE> 74
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. GEOGRAPHIC DATA
The following table presents certain financial information by
geographic area (in thousands):
<TABLE>
<CAPTION>
As of and For the Year Ended
June 30, 1998
-------------
Operating Identifiable
Revenues Income(Loss) Assets
-------- ------------ ------
<S> <C> <C> <C>
United States $ 37,052 $ 7,221 $ 26,976
Europe and Pacific 40,914 (3,837) 48,339
General corporate -- (33,133) 111,043
-------- -------- --------
Total $ 77,966 $(29,749) $186,358
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
As of and For the Year Ended
June 30, 1997
-------------
Operating Identifiable
Revenues Income(Loss) Assets
-------- ------------ ------
<S> <C> <C> <C>
United States $ 47,555 $ 9,552 $ 32,142
Europe and Pacific 50,930 2,887 74,694
General corporate -- (4,915) 60,366
-------- -------- --------
Total $ 98,485 $ 7,524 $167,202
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
As of and For the Year Ended
June 30, 1996
-------------
Operating Identifiable
Revenues Income(Loss) Assets
-------- ------------ ------
<S> <C> <C> <C>
United States $ 41,421 $ 5,566 $ 28,023
Europe and Pacific 51,256 1,508 56,614
General corporate 350 (6,554) 45,900
-------- -------- --------
Total $ 93,027 $ 520 $130,537
======== ======== ========
</TABLE>
74
<PAGE> 75
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. SUPPLEMENTAL OPERATIONS STATEMENT DATA
Advertising costs are charged to costs and expensed as
incurred and for the years ended June 30, 1996, 1997 and 1998 amounted
to $1,308,000, $1,391,000 and $893,000, respectively.
16. RESTRUCTURING COSTS
During the third quarter of fiscal 1996, following the
completion of a strategic review of PMSI's operations, PMSI recorded a
$2.3 million ($1.3 million after tax) restructuring charge for
elimination of non-core product lines. These products were unprofitable
and there was no assurance of future profitability. The charge related
primarily to the write-off of prepaid data acquisition expenses and
severance payments. The $2.3 million charge included estimated cash
payments of $1.5 million and non-cash asset write-offs of $0.8 million.
The balance of the restructuring liability as of June 30, 1996 was $0.9
million, which was fully utilized during fiscal year 1997.
17. IMPAIRMENT
During the third quarter of fiscal 1996, following the
completion of a strategic review of PMSI's entire operations,
management concluded that, as well as divesting the non-database
businesses, the value of certain long-lived assets recorded in its
balance sheet could not be recovered, based upon a discounted cash flow
analysis, due to changes in market conditions. Therefore, in accordance
with Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of" and PMSI's existing accounting policy, PMSI recorded a
pre-tax charge of $2.4 million ($1.6 million after tax). This
principally related to the write-off of goodwill and capitalized
database costs arising on the acquisition of database businesses now
being exited.
75
<PAGE> 76
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
During the third quarter of fiscal 1996, PMSI announced its
decision to develop its business as a focused information services
provider to the pharmaceutical and healthcare industries and that its
European marketing and communication businesses would be divested.
These businesses, comprising the non-database segment of PMSI's
operations, were accounted for as discontinued operations and,
accordingly, their operations through divestment have been segregated
in the accompanying statements of operations.
During the second quarter of fiscal 1997, PMSI recorded an
additional net charge for the loss on disposal of the discontinued
operations of $9.9 million. The charge was based upon PMSI's quarterly
review of the assumptions used in determining the estimated loss
relating to the discontinued operations. This further charge was
principally the result of revisions to the original estimates of
expected net proceeds from the remaining businesses to be sold. The
estimated proceeds from the French point of sale marketing business,
IMR, were reduced by $9.6 million following an independent valuation
report commissioned as part of the process of preparing the memorandum
of sale. A net increase in the estimated loss on sale of the remainder
of the discontinued businesses accounted for a $0.3 million charge due
to changes in estimated sale proceeds. All discontinued businesses were
sold during the measurement period except IMR.
Summary operating results of the discontinued operations for
the years ended June 30, 1996 and 1997 were as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended
June 30,
--------
1996 1997
---- ----
<S> <C> <C>
Results of discontinued operations:
Revenue $ 44,849 $ --
Income (loss) from operations:
Income (loss) before taxes (2,288) --
Income tax provision (917) --
-------- --------
Loss from discontinued operations (3,205) --
Loss on disposal of discontinued operations, net
of taxes of $1,236 and $0, respectively (5,710) (9,914)
-------- --------
Loss from discontinued operations $ (8,915) $ (9,914)
======== ========
</TABLE>
The operating loss from discontinued operations for the nine
months to March 31, 1997, when the measurement period ended, was $1.3
million net of income taxes.
At the end of the measurement period and at June 30, 1997, IMR
was the only operation that had not been sold and in accordance with
EITF 90-6, its net assets, together with the remaining accrual for the
loss expected to be generated on disposition, were reclassified to net
current assets held
76
<PAGE> 77
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for sale and net assets held for sale in the balance sheet at June 30,
1997. IMR's operating result for the fourth quarter of fiscal 1997 was
recorded in operating income as a separate item "income from assets
held for sale." The revenues attributable to assets held for sale in
the fourth quarter of fiscal 1997 and in the year ended June 30, 1998
were $5.2 million and $8.8 million, respectively.
On March 31, 1998, PMSI divested IMR for consideration of
approximately $3.2 million in cash. The assets sold included cash and
cash equivalents of $1.2 million. A net charge of $8.0 million relating
to IMR is reflected in the statement of operations for the year ended
June 30, 1998. This comprises a pre-tax loss on sale in the third
quarter (after selling costs) of $2.1 million, an impairment charge of
$14.7 million in the second quarter and a total tax benefit of $8.8
million.
19. INCOME (LOSS) PER SHARE
PMSI has adopted the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128, "Earnings
per Share" ("SFAS 128"). Basic per share amounts are computed using the
weighted average number of shares of Common Stock outstanding. Diluted
per share amounts include common equivalent shares, where dilutive,
(using the treasury stock method) from stock options and convertible
debt. The prior periods presented have been restated applying SFAS 128.
For the years ended June 30, 1996 and 1998 the effects of
common stock equivalents on the per share amounts were anti-dilutive
and accordingly such amounts were excluded from the computations. For
the year ended June 30, 1997, the effects of common stock equivalents
or per share amounts were not material.
These calculations are summarized below:
<TABLE>
<CAPTION>
Year Ended June 30,
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Weighted average common shares outstanding
Shares used in computing basic earnings per share 13,123,998 13,186,564 12,771,195
Assumed exercise of in the money
stock options 980,700 1,283,950 1,543,600
Less assumed buy-back under the treasury
stock method (706,082) (1,173,193) (1,185,368)
----------- ----------- -----------
Shares used in computing diluted earnings per
share if the result is dilutive 13,398,616 13,297,321 13,129,427
=========== =========== ===========
</TABLE>
Options to purchase 887,500, 607,800 and 450,300 shares of
common stock at prices ranging from $13.50 to $22.00 were outstanding
at June 30, 1996, 1997 and 1998, respectively, but were not included in
the computation of diluted earnings per share amounts for those years
because the options exercise price was greater than the average market
price of the common shares.
77
<PAGE> 78
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The convertible debentures have not been assumed converted for
the diluted earnings per share as the effect would be anti-dilutive.
Had the convertible debentures been included, the number of shares
would have increased by 3,450,000 for each of the years ended June 30,
1996, 1997 and 1998. The reduced interest expense would have had a
favorable impact on net income (loss) of $2,588,000 for each of these
years.
20. SALE OF NON-US OPERATING ASSETS
On August 5, 1998 PMSI announced that it had completed the
sale of its non-US operations, with the exception of its Source and
PMSI targeting businesses in Belgium, to IMS Health Incorporated ("IMS
Health") for consideration of 1,197,963 shares of IMS Health common
stock. IMS Health has an option to purchase PMSI's businesses in
Belgium within a three-month period.
As of June 30, 1998, the total assets and total liabilities of
the non-US operations totaled $48.4 million and $33.8 million,
respectively. Total revenues for the year ended June 30, 1998 from the
non-US operations totaled $40.9 million.
This transaction superseded the merger agreement signed with
Cognizant Corporation ("Cognizant") on March 23, 1998, whereby IMS
Health (as assignee of Cognizant) would have acquired all outstanding
shares of PMSI common stock.
21. RETIREMENT OF DEBENTURES
Between September 2 and September 15, 1998 PMSI redeemed an
aggregate amount of $17.7 million of its 6.25% Convertible Subordinated
Debentures due in 2003. The debentures were redeemed at 87% of the
principal amount with interest accrued through the date of redemption.
22. STOCKHOLDER RIGHTS PLAN
On December 30, 1997, the Board of Directors of PMSI adopted a
stockholder rights plan (the "Rights Plan") and declared a distribution
of one common share purchase right (a "Right") for each outstanding
share of common stock, $.01 par value (the "Common Shares"), of PMSI.
The distribution was payable to the stockholders of record on January
9, 1998. The Rights will automatically trade with PMSI's common stock.
Additional rights are issuable upon subsequent issuances of common
stock by PMSI so long as the Rights Plan is in effect.
The Rights are not currently exercisable but become
exercisable upon the earlier of (i) ten days following the first public
announcement that a person or group, which did not beneficially own 5%
of the common stock as of December 30, 1997, has acquired beneficial
ownership of 15% or more of PMSI's common stock, and (ii) ten business
days following the announcement of an offer the consummation of which
would result in the beneficial ownership by a person or group of 15% or
more of PMSI's common stock.
Once exercisable, the holder will be entitled to buy from PMSI
one-third (1/3) of a
78
<PAGE> 79
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Common Share of PMSI at a price of $60 per one-third of a Common Share
or in certain circumstances to buy at the Rights exercise price a
number of shares of PMSI's common stock having a market value of twice
the exercise price of each Right or, if PMSI is acquired in a merger or
a business combination, to buy at the Rights exercise price a number of
shares of common stock of an acquiring company having a market value of
twice the exercise price of each Right. At PMSI's option the Rights are
redeemable prior to becoming exercisable for $0.001 per Right. The
Rights expire on the close of business on the tenth anniversary of the
Rights Agreement.
79
<PAGE> 80
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands, except for share data)
(unaudited)
<TABLE>
<CAPTION>
September 30, 1998
Assets
<S> <C>
Current assets
Cash and cash equivalents $ 42,330
Marketable securities 97,306
Accounts receivable, principally trade 4,789
Work in process 599
Prepaid expenses and other current assets 1,806
---------
Total current assets 146,830
Marketable securities 20,435
Property and equipment, net 1,702
Goodwill, net 9,214
Other assets, net 5,752
---------
Total assets $ 183,933
=========
Liabilities and Stockholders' Equity
Current liabilities
Current maturities of long-term debt $ 20
Accounts payable 1,903
Accrued liabilities 14,387
Unearned income 7,781
---------
Total current liabilities 24,091
Long-term debt 49,340
Other liabilities 40
---------
Total liabilities 73,471
---------
Commitments and contingencies
Stockholders' equity
Common stock, $0.01 par value, 25,000,000
shares authorized, and 13,325,375
shares issued and outstanding 133
Paid-in capital 88,358
Treasury stock at cost - 918,254 shares (8,494)
Accumulated deficit 29,398
Unrealized gain on investments, net of
income tax expense of $745 1,067
---------
Total stockholders' equity 110,462
---------
Total liabilities and stockholders' equity $ 183,933
=========
</TABLE>
The accompanying notes are an integral part of these financial statements
80
<PAGE> 81
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------------
September 30
1998 1997
-------- --------
<S> <C> <C>
Revenue $ 10,870 $ 20,093
Production costs (3,690) (10,839)
Selling, general and administrative expenses (10,913) (8,282)
Amortization of intangible assets (270) (342)
Loss from assets held for sale -- (598)
-------- --------
Operating income (4,003) 32
Gain on sale of operations 52,844 2,631
Interest and other income 7,704 871
Interest expense (952) (1,166)
-------- --------
Income before income taxes and extraordinary item 55,593 2,368
Income tax (provision) benefit (7,017) 105
-------- --------
Net income before extraordinary item 48,576 2,473
Extraordinary gain on redemption of debt,
net of tax of $1,009 1,154 --
-------- --------
Net income $ 49,730 $ 2,473
======== ========
Earnings per share:
Basic -
Income before extraordinary item $ 3.92 $ 0.19
Extraordinary item 0.09 0.00
-------- --------
Net income $ 4.01 $ 0.19
======== ========
Diluted -
Income before extraordinary item $ 3.12 $ 0.18
Extraordinary item 0.07 0.00
-------- --------
Net income $ 3.19 $ 0.18
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
81
<PAGE> 82
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, except for share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------
September 30
1998 1997
<S> <C> <C>
Net income $ 49,730 $ 2,473
-------- -------
Other comprehensive income, net of tax:
Foreign currency translation adjustment, net of
tax of $0 and $606, respectively 0 (872)
Unrealized gains on investments:
Unrealized holding (losses) gains arising during period
net of tax of $3,268 and $0, respectively (4,703) (1)
Less: reclassification adjustment for gains included
in net income, net of tax of $2,439 and
$0, respectively (3,509) 0
-------- -------
Other comprehensive income (loss) (8,212) (873)
-------- -------
Comprehensive income $ 41,518 $ 1,600
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements
82
<PAGE> 83
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30
1998 1997
-------- --------
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income (loss) $ 49,730 $ 2,473
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 556 657
Loss on disposal of fixed assets -- 598
Profit on disposal of database businesses, net -- (2,631)
Profit on disposal of non-US businesses, net (52,844) --
Gain on redemption of debentures (2,163) --
Profit on sale of National Data Corporation common stock (5,948) --
Deferred taxes -- 2
Change in operating assets and liabilities, net of effect of
acquisitions:
Accounts receivable 4,365 4,838
Work-in-process 178 1,354
Prepaid expenses and other assets 446 (1,916)
Accounts payable and accrued liabilities 2,741 (2,644)
Unearned income (1,965) (1,825)
Other liabilities -- 74
-------- --------
Total adjustments (54,634) (1,493)
-------- --------
Net cash provided by (used in) operating activities $ (4,904) $ 980
-------- --------
Cash flows provided by (used in) investing activities:
Capital expenditures (66) (640)
Proceeds from businesses disposed, net of associated
selling expenses (1,831) 7,806
Loan to Source Informatics -- (1,500)
Sale (purchase) of marketable securities, net 24,322 (10,524)
Acquisition and contingent payments -- (2,159)
-------- --------
Net cash provided by (used in) investing activities 22,425 (7,017)
-------- --------
Cash flows provided by (used in) financing activities:
Net proceeds from options exercised 158 414
Repayments of long-term debt and capital lease
obligations (17,220) (87)
-------- --------
Net cash provided by (used in) financing activities (17,062) 327
-------- --------
Effect of assets held for sale -- 2,802
Effect of exchange rate movements (444) (596)
-------- --------
Net increase (decrease) in cash and cash equivalents 15 (3,504)
Cash and cash equivalents at beginning of period 42,315 32,414
-------- --------
Cash and cash equivalents at end of period $ 42,330 $ 28,910
======== ========
Supplemental disclosure of non-cash investing and financing activities:
IMS Health Incorporated shares received $ 71,279
</TABLE>
The accompanying notes are an integral part of these financial statements
83
<PAGE> 84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. INTERIM UNAUDITED FINANCIAL INFORMATION
The accompanying statements of operations for the three months ended
September 30, 1998 and 1997, the statements of cash flows for the three months
ended September 30, 1998 and 1997, the balance sheet as of September 30, 1998
and the related information of Pharmaceutical Marketing Services Inc. ("PMSI")
included in these notes to the financial statements are unaudited. In the
opinion of management, the interim financial information reflects all
adjustments (consisting only of items of a normal recurring nature), except for
items related to the sale of the non-US businesses and the extraordinary item
associated with the early redemption of PMSI's 6-1/4% Convertible Subordinated
Debentures ("6-1/4% Debentures"), necessary for the fair presentation of the
financial position, results of operations and cash flows for the periods
presented. The results of continuing operations for the three months ended
September 30, 1998 are not necessarily indicative of the results to be expected
for the entire fiscal year.
These interim financial statements should be read in conjunction with
the audited consolidated financial statements and related notes thereto included
herein for the year ended June 30, 1998.
2. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued FAS No.
130, "Reporting Comprehensive Income" which is effective for financial
statements issued for fiscal years commencing on or after December 15, 1997.
Comprehensive income represents the change in net assets of a company as a
result of non-owner transactions.
3. INCOME PER SHARE
PMSI has adopted the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS
128). Basic per share amounts are computed using the weighted average number of
shares of Common Stock outstanding. Diluted per share amounts include common
equivalent shares, where dilutive (using the treasury stock method), from stock
options and convertible debt. The prior periods presented have been restated
applying SFAS 128.
For all periods presented amounts used in both basic earnings per
share and diluted earnings per share are the amounts as stated below.
These calculations are summarized below:
84
<PAGE> 85
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1998 1997
<S> <C> <C>
Weighted average common shares outstanding
Shares used in computing basic earnings per share 12,406,442 13,219,043
Assumed exercise of in the money
stock options 1,545,200 1,219,550
Less assumed buy-back under the treasury
stock method (1,366,229) (940,480)
Assumed conversion of debentures 3,195,069 3,450,000
Shares used in computing diluted earnings per ---------- ----------
share if the result is dilutive 15,780,482 16,948,113
========== ==========
</TABLE>
Options to purchase 416,300 shares of Common Stock at prices ranging
from $11.13 to $22.00 were outstanding at September 30, 1998 but were not
included in the computation of diluted earnings per share for the three months
ended September 30, 1998 because the options exercise price was greater than the
average market price of the common shares.
Reduced interest expense for the debentures had a favorable impact on
net income for the diluted earnings per share of $545,340 and $647,000 for the
three months ended September 30, 1998 and 1997, respectively.
4. INCOME TAXES
The effective income tax rates for the quarters ended September 30,
1998 and 1997 were 13% and (4)%, respectively. In the quarter ended September
30, 1998 the income tax charge is net of the release of a $1.9 million state tax
provision which is no longer required. The gain on sale of operations during the
quarter has an associated tax charge of $7.0 million. The 1999 fiscal year
effective income tax rate, based on PMSI's projected mix of country profits
including actual results for the three months ended September 30, 1998, but
excluding the provision release and the gain on sale of non-US operations in the
first quarter, is 41%.
5. GOODWILL
PMSI assesses the recovery of its goodwill on a
subsidiary-by-subsidiary basis by determining whether amortization of goodwill
can be recovered through expected net future cash flows (undiscounted and
without interest charges). Impairment is measured based on the present value of
estimated expected future net cash flows using a discount rate reflecting PMSI's
cost of funds.
6. SALE OF OPERATIONS
On August 5, 1998, PMSI announced that it had completed the sale of
all of its non-US operating assets, with the exception of its Source
prescription database and PMSI targeting businesses in Belgium, to IMS Health
Incorporated ("IMS Health") for consideration of 1,197,963 shares of IMS Health
common stock, resulting in a profit before tax of $52.8 million reflected in the
statement of operations for the quarter ended September 30, 1998. The
transaction is more fully described in the Company's Form 8K filed August 18,
1998, as amended.
7. SUBSEQUENT EVENTS
On October 14, 1998, PMSI entered into a forward sale arrangement with
CIBC Oppenheimer ("CIBC") pursuant to which PMSI transfers all of the IMS Health
common stock received in the transaction described in Note 6, above, receives
aggregate proceeds of $73.0 million and places the 1,197,963 shares of IMS
Health common stock with CIBC as collateral against PMSI's delivery obligation
on August 12, 1999.
85
<PAGE> 86
QUINTILES, PMSI AND ENVOY
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
The following unaudited pro forma combined condensed financial data and
explanatory notes are presented to show the impact on the historical financial
position and results of operations of Quintiles assuming the proposed business
combinations of Quintiles and PMSI, which is to be accounted for using the
purchase method of accounting, and Quintiles and ENVOY, which is to be accounted
for using the pooling of interests method of accounting, had occurred as
discussed below. PMSI prepares its financial statements on the basis of a fiscal
year ending on June 30. ENVOY's year end is December 31. Quintiles' year end is
December 31. To reflect PMSI results on a calendar year basis consistent with
Quintiles, PMSI's historical operating results for the year ended December 31,
1997 are based on PMSI's last two fiscal quarters of its fiscal year ended June
30, 1997, combined with the results of the six months ended December 31, 1997.
PMSI's operating results for the nine months ended September 30, 1998 are based
on PMSI's last two fiscal quarters of its fiscal year ended June 30, 1998 and
the three-month period ended September 30, 1998.
In the PMSI business combination, each share and share option of PMSI
common stock outstanding at the consummation of the purchase will be converted
into the right to receive a fraction of a share of Quintiles common stock that
is equal to $15.40 divided by the average closing price of the Quintiles common
stock during the 10 trading days ending on the day that is two days prior to the
consummation of the PMSI purchase. Quintiles will pay cash in lieu of fractional
shares. Since the number of shares to be issued in the PMSI business combination
will not be known until the last business day prior to its completion, the
unaudited pro forma combined condensed financial data assumes a hypothetical
exchange ratio of 0.308, which is based on a hypothetical Quintiles common stock
Average Trading Price of $50.00.
In the ENVOY business combination, each outstanding share of ENVOY common
stock and ENVOY Series B convertible preferred stock will be exchanged for 1.166
shares of Quintiles common stock. Based on a total of approximately 24,374,000
shares of ENVOY common stock and preferred stock outstanding on December 14,
1998, Quintiles would issue approximately 28,421,000 shares of Quintiles common
stock in the merger. Quintiles will pay cash in lieu of fractional shares.
Quintiles will also convert any remaining unexercised ENVOY stock options into
Quintiles stock options at the exchange ratio.
The unaudited pro forma combined condensed balance sheet reflects the
combined historical balance sheets of Quintiles, PMSI and ENVOY at September 30,
1998. The unaudited pro forma combined condensed statements of operations for
the year ended December 31, 1997 and for the nine months ended September 30,
1998 reflect the combined historical operating results of Quintiles, PMSI
(prepared as discussed in paragraph one above) and ENVOY for such periods.
The pro forma adjustments related to the unaudited pro forma combined
condensed balance sheet have been computed assuming the transactions were
consummated at the end of the most recent period for which a balance sheet is
presented. The pro forma adjustments related to the unaudited pro forma combined
condensed statements of operations have been computed assuming the transactions
were consummated at the beginning of the most recent fiscal period presented.
As applicable, the unaudited pro forma combined condensed financial data
reflect preliminary purchase price allocations related to the PMSI business
combination. Estimates
86
<PAGE> 87
relating to the fair value of certain assets and liabilities have been made as
more fully described in the notes to the unaudited pro forma combined condensed
financial data. The final purchase price allocation will be made on the basis of
appraisals and evaluations once the purchase is consummated and, therefore, the
actual purchase price allocation is likely to differ from that reflected in the
unaudited pro forma combined condensed financial data.
The unaudited pro forma combined condensed operating results presented do
not reflect any incremental direct costs, potential cost savings or revenue
enhancements which may result from the consolidation of certain operations of
Quintiles and PMSI, Quintiles and ENVOY, or Quintiles, PMSI and ENVOY.
Therefore, the unaudited pro forma combined condensed statements of operations
may not be indicative of the results of past or future operations. No assurances
can be given with respect to the ultimate level of cost savings and/or revenue
enhancements which may be realized following consummation of the proposed
transactions.
The historical financial data of PMSI shown in the unaudited pro forma
combined condensed financial data and explanatory notes reflect the impact on
the historical results of operations of certain operations sold by PMSI prior to
the consummation of the purchase. The pro forma portfolio changes reflect the
elimination of the results of operations of these disposed businesses. PMSI's
disposals of its (i) non-US operating assets, sold on December 3, 1998 and
August 5, 1998; (ii) IMR, sold on March 31, 1998; (iii) Source US and the OTC
businesses, sold on December 15, 1997; (iv) and Bugamor Publishing, sold on July
30, 1997, are collectively referred to as "Other Dispositions."
The Other Dispositions occurred prior to September 30, 1998 and,
accordingly, have been excluded from the September 30, 1998 unaudited PMSI
historical balance sheet, except for the December 3, 1998 disposal, which
disposal is not material to the September 30, 1998 unaudited PMSI historical
balance sheet. The unaudited pro forma combined condensed statements of
operations exclude the results of operations of the Other Dispositions for the
year ended December 31, 1997 and the nine months ended September 30, 1998 as if
the Other Dispositions had occurred at the beginning of the most recent fiscal
period presented.
The unaudited pro forma combined condensed financial data are not
necessarily indicative of the results that would have been obtained had the
business combinations occurred on the date indicated. The unaudited pro forma
combined condensed financial data should be read in conjunction with the related
historical financial statements and notes thereto of Quintiles, PMSI and ENVOY
incorporated by reference or included in this Current Report on Form 8-K.
87
<PAGE> 88
QUINTILES, PMSI AND ENVOY
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
QUINTILES,
QUINTILES PMSI AND
AND PMSI ENVOY
HISTORICAL PRO FORMA PRO HISTORICAL PRO FORMA PRO
QUINTILES PMSI ADJUSTMENTS FORMA ENVOY ADJUSTMENTS FORMA
--------- -------- ----------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.... $ 88,499 $ 42,330 $ 23,550(2),(4) $ 154,379 $ 22,095 $ -- $ 176,474
Accounts receivable and
unbilled services.......... 295,425 5,388 -- 300,813 44,429 -- 345,242
Investments.................. 44,448 97,306 -- 141,754 -- -- 141,754
Prepaid expenses............. 26,931 -- -- 26,931 1,471 -- 28,402
Other current assets......... 10,738 1,806 -- 12,544 4,751 -- 17,295
-------- -------- -------- -------- -------- -------- ----------
Total current assets....... 466,041 146,830 23,550 636,421 72,746 -- 709,167
Property and equipment........ 353,095 3,992 -- 357,087 45,785 -- 402,872
Less accumulated
depreciation................. 113,939 2,290 -- 116,229 26,887 -- 143,116
-------- -------- -------- --------- -------- -------- ----------
239,156 1,702 -- 240,858 18,898 -- 259,756
Intangibles and other assets:
Intangibles.................. 71,369 9,214 103,880(1) 184,463 82,416 -- 266,879
Investments.................. 59,514 20,435 -- 79,949 268 -- 80,217
Deferred income taxes........ 68,683 162 -- 68,845 -- -- 68,845
Deposits and other assets.... 33,189 5,590 (700)(2) 38,079 4,722 -- 42,801
-------- -------- -------- --------- -------- -------- ----------
232,755 35,401 103,180 371,336 87,406 -- 458,742
-------- -------- -------- --------- -------- -------- ----------
Total assets............... $937,952 $183,933 $126,730 $1,248,615 $179,050 $ -- $1,427,665
======== ======== ======== ========== ======== ======== ==========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Lines of credit.............. $ 366 $ -- $ -- $ 366 $ -- $ -- $ 366
Accounts payable and accrued
expenses................... 118,819 16,290 12,510(1) 147,619 26,702 20,000(6) 194,321
Credit arrangements,
current.................... 13,519 20 -- 13,539 84 -- 13,623
Unearned income.............. 120,827 7,781 -- 128,608 1,596 -- 130,204
Income taxes and other
current liabilities........ 14,843 -- 73,000(4) 87,843 11,143 -- 98,986
-------- -------- -------- --------- -------- -------- ----------
Total current
liabilities.............. 268,374 24,091 85,510 377,975 39,525 20,000 437,500
Long-term liabilities:
Credit arrangements, less
current portion............ 153,879 15 -- 153,894 561 -- 154,455
Long-term obligations........ 24,172 49,325 (49,325)(2) 24,172 -- -- 24,172
Deferred income taxes and
other liabilities.......... 26,580 40 2,657(1) 29,277 9,131 -- 38,408
-------- -------- -------- --------- -------- -------- ----------
204,631 49,380 (46,668) 207,343 9,692 -- 217,035
-------- -------- -------- --------- -------- -------- ----------
Total liabilities.......... 473,005 73,471 38,842 585,318 49,217 20,000 654,535
Shareholders' equity:
Preferred stock.............. -- -- -- -- 41,300 (41,300)(5) --
Common stock and additional
paid-in-capital............ 356,059 79,997 118,353(1) 554,409 135,258 41,300(5) 730,967
Retained earnings
(deficit).................. 112,379 29,398 (29,398)(1) 112,379 (46,725) (20,000)(6) 45,654
Other equity................. (3,491) 1,067 (1,067)(1) (3,491) -- -- (3,491)
-------- -------- -------- --------- -------- -------- ----------
Total shareholders'
equity................... 464,947 110,462 87,888 663,297(3) 129,833 (20,000) 773,130
-------- -------- -------- --------- -------- -------- ----------
Total liabilities and
shareholders' equity..... $937,952 $183,933 $126,730 $1,248,615 $179,050 $ -- $1,427,665
======== ======== ======== ========== ======== ======== ==========
</TABLE>
88
<PAGE> 89
QUINTILES, PMSI AND ENVOY
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
The unaudited pro forma combined condensed balance sheet is based on the
following adjustments and related assumptions.
The PMSI business combination will be accounted for as a purchase, and as
such, the final purchase price allocations will be made on the basis of
appraisals and evaluations once the purchase is consummated and, therefore, the
actual purchase price allocation is likely to differ from that reflected in the
unaudited pro forma combined condensed balance sheet.
The ENVOY business combination will be accounted for as a pooling of
interests.
NOTE 1
The pro forma preliminary purchase allocation to record the PMSI business
combination is summarized below:
<TABLE>
<S> <C>
Shares of PMSI common stock outstanding.................... 12,407,121(a)
Exchange Ratio............................................. 0.308(b)
-----------
Shares of Quintiles common stock assumed issued............ 3,821,393
===========
Share options of PMSI common stock outstanding............. 1,439,700(a)
Exchange Ratio............................................. 0.308(b)
-----------
Share options of Quintiles common stock assumed issued..... 443,428
===========
Consideration paid to PMSI shareholders for:
Quintiles common stock................................... $ 191,070(c)
Quintiles common stock options........................... 7,280(d)
-----------
Subtotal.............................................. 198,350 Note 3
Non-recurring transaction costs............................ 12,510(e)
-----------
Aggregate purchase price................................... 210,860
Less: historical net assets acquired....................... (110,462)
-----------
Premium to allocate........................................ $ 100,398
===========
Adjustments to fair value of net assets acquired:
Elimination of PMSI historical goodwill.................. $ (9,214)(f)
Intangible asset acquired -- software.................... 6,900(g)
Goodwill................................................. 106,194(g)
-----------
Total Intangibles..................................... 103,880
Elimination of PMSI original debt issuance costs......... (700)Note2
Non-recurring costs incurred............................. (125)Note2
Deferred tax liability................................... (2,657)(h)
-----------
$ 100,398
===========
</TABLE>
- -------------------------
(a) Outstanding on September 30, 1998.
(b) Using a hypothetical exchange ratio, based on an assumed Quintiles common
stock Average Trading Price of $50.00, each share and share option of PMSI
common stock outstanding at the consummation of the purchase will be
converted into the right to
89
<PAGE> 90
QUINTILES, PMSI AND ENVOY
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
BALANCE SHEET -- (CONTINUED)
receive 0.308 of a share of Quintiles common stock. In addition, all vested
and unvested options to purchase PMSI common stock will become options to
acquire Quintiles common stock based on the same exchange ratio. Under the
terms of the PMSI business combination, PMSI shareholders (and option
holders if options are exercised) may elect to defer receipt of half of the
Quintiles common stock to which they are entitled. If this election is
made, the shareholder will also be entitled to receive a contingent value
payment related to the deferred shares under specified conditions. Such
payment would relate to a decline in price of Quintiles common stock for 75
days subsequent to closing of the combination, as defined. Any payments
made would be charged to shareholders' equity.
(c) Based upon assumed Quintiles common stock Average Trading Price of $50.00.
(d) The estimated fair value using a Black-Scholes option pricing model based
upon the following assumptions:
Expected dividend yield 0%
Risk-free interest rate 4.53%
Expected volatility 40%
Expected life (in years from vest) 1
(e) Non-recurring transaction costs (as currently estimated by management)
consisting of severance (approximately $2.9 million), direct transactions
costs (approximately $4.8 million), consideration for the affirmation and
revision of a preacquisition contingency of PMSI (approximately
$4.5 million) and other costs related to the integration of the PMSI
business (approximately $300,000).
(f) Elimination of the unamortized goodwill of $9,214 recorded by PMSI in
conjunction with its acquisition of Scott-Levin.
(g) The final determination of adjustments to assets and liabilities will be
made based upon the fair values as of the consummation of the purchase and
after appraisals and evaluations are complete. The final amounts are likely
to differ from the estimates provided herein.
(h) Deferred income taxes are based on the intangible software asset
acquired($6,900) using a 38.5% tax rate.
The excess of the purchase price over the historical value of the net assets
acquired was allocated first to identifiable intangible assets with the
remainder recorded as goodwill. Quintiles' Executive Management along with its
outside advisors and the management of PMSI and Scott-Levin performed a
review to identify intangible assets and determine the value, if any, of such
assets. This review resulted in the identification of proprietary software and
proprietary databases (collectively, "software") as intangible assets that would
provide future benefit to the combined companies. The value of the proprietary
software was determined to be incidental and related totally to the proprietary
software's purpose, which was to facilitate the utilization of the proprietary
databases. Based upon the estimated replacement cost, the value of the
proprietary software was estimated to be $6.9 million of the excess of the
purchase price. The value of the proprietary databases was determined to be
dependent on the data with which they are populated. The value of the data is
limited to the period in which it relates. Once more recent data are available,
the value of the prior data is minimal. Based on the age of the data contained
in the proprietary databases, no additional value was ascribed to the identified
intangible asset, software. With software as the only identified intangible
asset, the remainder of the excess of the purchase price was allocated to
goodwill.
Quintiles' Executive Management and Board of Directors view this acquisition as
highly strategic, acknowledge the strong value of goodwill and believe 30 years
is an appropriate life for the goodwill. In reaching this conclusion regarding
the goodwill life, Executive Management and the Board of Directors considered a
number of factors. First, Scott-Levin provides healthcare-related market
research services, an industry that has evolved over the past 35 years and which
serves a stable client base, pharmaceutical companies. Second, Scott-Levin bears
a highly respected brand name and operates in a specialized market with few
competitors and significant barriers to entry. Third, Scott-Levin will form the
foundation for Quintiles to expand into the healthcare informatics industry, an
area that management believes will add value to the Company's existing services
and provide opportunities for future growth.
NOTE 2
As a condition to closing of the PMSI purchase, on February 1, 1999 PMSI
completed the redemption of all its outstanding 6.25% Convertible Subordinated
Debentures ($49,325 at September 30, 1998). Management estimates $125 in
non-recurring costs will be incurred in connection with the redemption. In
addition, original debt issuance costs of approximately $700 will be
written-off.
NOTE 3
Reconciliation of change in Shareholders' equity:
<TABLE>
<S> <C>
Beginning balance -- Quintiles.............................. $464,947
Add: Common stock and additional paid-in-capital.......... 198,350
--------
Ending Balance -- Pro Forma Quintiles and PMSI.............. $663,297
========
</TABLE>
NOTE 4
On October 14, 1998, PMSI entered into a forward sale arrangement with CIBC
Oppenheimer ("CIBC") pursuant to which PMSI transfers all of the IMS Health
common
90
<PAGE> 91
QUINTILES, PMSI AND ENVOY
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
BALANCE SHEET -- (CONTINUED)
stock received in its transaction with IMS Health, receives aggregate proceeds
of $73.0 million and places the 1,197,963 shares of IMS Health common stock with
CIBC as collateral against PMSI's delivery obligation on August 12, 1999.
Accordingly, cash and other current liabilities have been increased $73.0
million on a pro forma basis.
NOTE 5
To reflect that each outstanding share of ENVOY common stock and ENVOY
Series B convertible preferred stock will be exchanged for 1.166 shares of
Quintiles common stock. Based on a total of approximately 24,374,000 shares of
ENVOY common stock and preferred stock outstanding on December 14, 1998,
Quintiles would issue approximately 28,421,000 shares of Quintiles common stock
in the merger. Quintiles will pay cash in lieu of fractional shares.
NOTE 6
To accrue non-recurring transaction costs (as currently estimated by
management), consisting of financial advisor fees (approximately $17.0 million),
accounting and legal fees (approximately $1.5 million) and other direct
transaction costs such as filing fees, proxy solicitation and proxy printing and
distribution (approximately $1.5 million) which are anticipated to be incurred
in connection with the ENVOY transaction.
91
<PAGE> 92
QUINTILES, PMSI AND ENVOY
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
QUINTILES
AND
PRO FORMA PMSI
HISTORICAL PORTFOLIO PMSI HISTORICAL PRO FORMA PRO HISTORICAL
PMSI CHANGES(1) PRO FORMA QUINTILES ADJUSTMENTS FORMA ENVOY
---------- ---------- --------- ---------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenue........................ $47,170 $(26,786) $20,384 $848,379 $ -- $868,763 $132,763
Costs and expenses:
Direct........................... 25,373 (17,549) 7,824 444,369 -- 452,193 58,875
General and administrative....... 29,065 (17,468) 11,597 274,925 (386)(2) 286,136 29,728
Depreciation and amortization.... 1,182 (651) 531 40,431 3,545(2) 44,507 26,948
Transaction costs................ 1,151 (1,151) -- -- -- --
Research and development......... -- -- -- -- -- -- 1,963
Other............................ 93 (93) -- -- -- -- --
------- -------- ------- -------- ------- -------- --------
56,864 (36,912) 19,952 759,725 3,159 782,836 117,514
------- -------- ------- -------- ------- -------- --------
Income (loss) from operations...... (9,694) 10,126 432 88,654 (3,159) 85,927 15,249
Other income (expense), net........ 8,165 (48) 8,117 (1,917) (7,252)(3)(4) (1,052) (637)
Gain on sale of operations, net.... 50,711 (50,711) -- -- -- -- --
------- -------- ------- -------- ------- -------- --------
58,876 (50,759) 8,117 (1,917) (7,252) (1,052) (637)
------- -------- ------- -------- ------- -------- --------
Income (loss) before income
taxes............................ 49,182 (40,633) 8,549 86,737 (10,411) 84,875 14,612
Income taxes....................... 3,573 (67) 3,506 27,823 (3,381)(4)(5) 27,948 11,653
------- -------- ------- -------- ------- -------- --------
Income before extraordinary
gain(3).......................... $45,609 $(40,566) $ 5,043 $ 58,914 $(7,030) $ 56,927 $ 2,959
======= ======== ======= ======== ======= ======== ========
Basic income before extraordinary
gain per share................... $ 0.77 $ 0.71
======== ========
Diluted income before extraordinary
gain per share................... $ 0.76 $ 0.70
======== ========
Shares used in computing income
before extraordinary gain
per share:
Basic............................ 76,476 80,291
Diluted.......................... 77,987 81,864
<CAPTION>
QUINTILES
PMSI AND
PRO FORMA ENVOY
ADJUSTMENTS(6) PRO FORMA
-------------- ----------
<S> <C> <C>
Net revenue........................ $ -- $1,001,526
Costs and expenses:
Direct........................... -- 511,068
General and administrative....... (1,783)(7) 314,081
Depreciation and amortization.... -- 71,455
Transaction costs................ -- --
Research and development......... -- 1,963
Other............................ -- --
------- ----------
(1,783) 898,567
------- ----------
Income (loss) from operations...... 1,783 102,959
Other income (expense), net........ (1,783)(7) (3,472)
Gain on sale of operations, net.... -- --
------- ----------
(1,783) (3,472)
------- ----------
Income (loss) before income
taxes............................ -- 99,487
Income taxes....................... -- 39,601
------- ----------
Income before extraordinary
gain(3).......................... $ -- $ 59,886
======= ==========
Basic income before extraordinary
gain per share................... $ 0.57
==========
Diluted income before extraordinary
gain per share................... $ 0.54
==========
Shares used in computing income
before extraordinary gain
per share:
Basic............................ 104,833
Diluted.......................... 111,048
</TABLE>
92
<PAGE> 93
QUINTILES, PMSI AND ENVOY
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS ACTUAL)
NOTE 1
Pro forma portfolio changes are intended to adjust the PMSI portfolio of
businesses, removing results of operations of Other Dispositions to reflect the
ongoing businesses being acquired by Quintiles. Accordingly, these adjustments
to the results of operations for the nine months ended September 30, 1998,
principally affect:
a. the elimination of the operating results of PMSI's non-US operating
assets, which were sold on December 3, 1998 and August 5, 1998;
b. the elimination of the loss from assets held for sale of IMR, which
was sold on March 31, 1998;
c. the elimination of the net gain on the sale of IMR and PMSI's
remaining non-US operating assets;
d. the elimination of non-recurring transaction costs associated with
the sale of IMR and PMSI's remaining non-US operating assets.
NOTE 2
The pro forma purchase accounting adjustments related to the PMSI business
combination are summarized as follows:
<TABLE>
<S> <C>
Depreciation and amortization expense:
To eliminate PMSI historical goodwill amortization........ $ (531)
Amortization of incremental intangible assets............. 3,690
------
$3,159
======
</TABLE>
The identifiable intangible asset (software) is being amortized on a
straight-line basis over five years and goodwill is being amortized on a
straight-line basis over thirty years.
PMSI historical depreciation expense ($386) has been reclassified to be
consistent with the classification used by Quintiles.
93
<PAGE> 94
QUINTILES, PMSI AND ENVOY
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 -- (CONTINUED)
NOTE 3
The pro forma presentation assumes PMSI's $69.0 million 6.25% Convertible
Subordinated Debentures due 2003, 100% outstanding at January 1, 1998, would
have been redeemed for cash at January 1, 1998. The pro forma interest income is
calculated assuming $69.0 million invested at the average interest rate earned
by Quintiles during the period (approximately 5.3%). The pro forma impact is as
follows:
<TABLE>
<S> <C>
Eliminate interest income on cash used for redemption....... $(2,760)
Eliminate interest expense.................................. 3,132
-------
$ 372
=======
</TABLE>
In its historical statements of operations, PMSI reported an extraordinary
gain of $1,154 from the repurchase of the Subordinated Debentures which is not
reflected in the pro forma combined condensed statement of operations.
NOTE 4
To eliminate the gain of $7,624 (and resulting income tax expense of
$3,126) recorded related to the sale of NDC shares.
NOTE 5
Unless otherwise disclosed, income tax expense on pro forma adjustments
(excluding goodwill amortization expense) is reflected using a 38.5% tax rate.
NOTE 6
Non-recurring transaction costs of approximately $20 million (as currently
estimated by management), consisting of financial advisor fees (approximately
$17.0 million), accounting and legal fees (approximately $1.5 million) and other
direct transaction costs such as filing fees, proxy solicitation, and proxy
printing and distribution (approximately $1.5 million), are anticipated to be
incurred in connection with the ENVOY transaction. Such costs will be expensed
by Quintiles upon closing of the combination. Such costs have not been reflected
in the unaudited pro forma combined condensed statement of operations.
NOTE 7
For the nine months ended September 30, 1998, ENVOY historical transaction
related costs ($1,783) have been reclassified as other income (expense) to be
consistent with the classification used by Quintiles.
94
<PAGE> 95
QUINTILES, PMSI AND ENVOY
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA QUINTILES
HISTORICAL PORTFOLIO PMSI HISTORICAL PRO FORMA AND PMSI HISTORICAL
PMSI CHANGES(1) PRO FORMA QUINTILES ADJUSTMENTS PRO FORMA ENVOY
---------- ---------- --------- ---------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenue........................ $ 91,677 $(68,186) $23,491 $852,900 $ -- $876,391 $137,605
Costs and expenses:
Direct........................... 49,640 (38,768) 10,872 448,920 -- 459,792 64,247
General and administrative....... 32,923 (20,996) 11,927 277,238 (362)(2) 288,803 32,734
Depreciation and amortization.... 1,566 (858) 708 37,930 4,574(2) 43,212 34,432
In-process R&D writeoff.......... 12,046 (12,046) -- -- -- -- 6,600
Impairment of assets held for
sale........................... 15,333 (15,333) -- -- -- -- --
Income from assets held for
sale........................... (486) 486 -- -- -- -- --
Research and development......... -- -- -- -- -- -- 2,192
-------- -------- ------- -------- ------- -------- --------
111,022 (87,515) 23,507 764,088 4,212 791,807 140,205
-------- -------- ------- -------- ------- -------- --------
Income (loss) from operations...... (19,345) 19,329 (16) 88,812 (4,212) 84,584 (2,600)
Other income (expense):
Interest income.................. 3,849 -- 3,849 8,472 (3,588)(3) 8,733 1,312
Interest expense................. (4,283) 129 (4,154) (8,764) 4,154(3) (8,764) (1,577)
Other............................ -- -- -- (1,985) -- (1,985) --
Gain on sale of operations, net
of loss........................ 36,239 (36,239) -- -- -- -- --
-------- -------- ------- -------- ------- -------- --------
35,805 (36,110) (305) (2,277) 566 (2,016) (265)
-------- -------- ------- -------- ------- -------- --------
Income (loss) before income taxes
and minority interest............ 16,460 (16,781) (321) 86,535 (3,646) 82,568 (2,865)
Minority interest.................. (29) 29 -- -- -- -- --
Income taxes....................... 10,848 (10,366) 482 30,852 (313)(4) 31,021 6,333
-------- -------- ------- -------- ------- -------- --------
Income (loss) from continuing
operations(1).................... $ 5,641 $ (6,444) $ (803) $ 55,683 $(3,333) $ 51,547 $ (9,198)
======== ======== ======= ======== ======= ======== ========
Basic income from continuing
operations per share............. $ 0.76 $ 0.66
Diluted income from continuing
operations per share............. $ 0.74 $ 0.65
Shares used in computing income
from continuing operations
per share:
Basic............................ 73,739 77,799
Diluted.......................... 75,275 79,375
<CAPTION>
QUINTILES
PMSI AND
PRO FORMA ENVOY
ADJUSTMENTS(5) PRO FORMA
-------------- ----------
<S> <C> <C>
Net revenue........................ $ -- $1,013,996
Costs and expenses:
Direct........................... -- 524,039
General and administrative....... -- 321,537
Depreciation and amortization.... -- 77,644
In-process R&D writeoff.......... -- 6,600
Impairment of assets held for
sale........................... -- --
Income from assets held for
sale........................... -- --
Research and development......... -- 2,192
-------- ----------
-- 932,012
-------- ----------
Income (loss) from operations...... -- 81,984
Other income (expense):
Interest income.................. -- 10,045
Interest expense................. -- (10,341)
Other............................ -- (1,985)
Gain on sale of operations, net
of loss........................ -- --
-------- ----------
-- (2,281)
-------- ----------
Income (loss) before income taxes
and minority interest............ -- 79,703
Minority interest.................. -- --
Income taxes....................... -- 37,354
-------- ----------
Income (loss) from continuing
operations(1).................... $ -- $ 42,349
======== ==========
Basic income from continuing
operations per share............. $ 0.42
Diluted income from continuing
operations per share............. $ 0.39
Shares used in computing income
from continuing operations
per share:
Basic............................ 100,753
Diluted.......................... 107,980
</TABLE>
95
<PAGE> 96
QUINTILES, PMSI AND ENVOY
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS ACTUAL)
NOTE 1
Pro forma portfolio changes are intended to adjust the PMSI portfolio of
businesses, removing results of operations of Other Dispositions to reflect the
ongoing businesses being acquired by Quintiles. Accordingly, these adjustments
to the results of operations for the year ended December 31, 1997, principally
affect:
a. the elimination of non-recurring charges associated with the
write-off of in-process research and development related to the acquisition
of Source Europe, which was acquired on December 15, 1997, and
subsequently sold on December 3, 1998.
b. the elimination of the operating results of PMSI's non-US operating
assets, which were sold on December 3, 1998 and August 5, 1998;
c. the elimination of the impairment of assets held for sale associated
with PMSI's decision to dispose of IMR, which was sold on March 31, 1998;
d. the elimination of operating results of Source US and the OTC
Business, which were sold on December 15, 1997;
e. the elimination of the operating results of Bugamor Publishing, which
was sold on July 30, 1997;
f. the elimination of the gain on the sale of Source US, the OTC
Business and Bugamor Publishing.
In its historical statement of operations, PMSI reported a loss from
discontinued operations of $9.9 million which is not reflected in the pro forma
combined condensed statement of operations.
NOTE 2
The pro forma purchase accounting adjustments related to the PMSI business
combination are summarized as follows:
<TABLE>
<S> <C>
Depreciation and amortization expense:
To eliminate PMSI historical goodwill amortization........ $ (708)
Amortization of incremental intangible asset.............. 4,920
------
$4,212
======
</TABLE>
The identifiable intangible asset (software) is being amortized on a
straight-line basis over five years and goodwill is being amortized on a
straight-line basis over thirty years.
PMSI historical depreciation expense ($362) has been reclassified to be
consistent with the classification used by Quintiles.
96
<PAGE> 97
QUINTILES, PMSI AND ENVOY
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997 -- (CONTINUED)
NOTE 3
The pro forma presentation assumes PMSI's $69.0 million 6.25% Convertible
Subordinated Debentures due 2003, 100% outstanding at January 1, 1997, would
have been redeemed for cash at January 1, 1997. The pro forma interest income
is calculated assuming $69.0 million invested at the average interest rate
earned by Quintiles during this period (approximately 5.2%). The pro forma
impact is as follows:
<TABLE>
<S> <C>
Eliminate interest income on cash used for redemption....... $(3,588)
Eliminate interest expense incurred by continuing
operations................................................ 4,154
-------
$ 566
=======
</TABLE>
NOTE 4
Income tax expense on pro forma adjustments (excluding goodwill
amortization expense) is reflected using a 38.5% tax rate.
NOTE 5
Non-recurring transaction costs of approximately $20 million (as currently
estimated by management), consisting of financial advisor fees (approximately
$17.0 million), accounting and legal fees (approximately $1.5 million) and other
direct transaction costs such as filing fees, proxy solicitation and proxy
printing and distribution (approximately $1.5 million), are anticipated to be
incurred in connection with the ENVOY transaction. Such costs will be expensed
by Quintiles upon closing of the combination. Such costs have not been reflected
in the unaudited pro forma combined condensed statement of operations.
97
<PAGE> 98
QUINTILES AND ENVOY
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
The following unaudited pro forma combined condensed financial data and
explanatory notes are presented to show the impact on the historical financial
position and results of operations of Quintiles assuming the proposed business
combination of Quintiles and ENVOY, which is to be accounted for using the
pooling of interests method of accounting, had occurred. ENVOY's year end is
December 31. Quintiles' year end is December 31.
In the ENVOY business combination, each outstanding share of ENVOY common
stock and ENVOY Series B convertible preferred stock will be exchanged for 1.166
shares of Quintiles common stock. Based on a total of approximately 24,374,000
shares of ENVOY common stock and preferred stock outstanding on December 14,
1998, Quintiles would issue approximately 28,421,000 shares of Quintiles common
stock. Quintiles will pay cash in lieu of fractional shares. Quintiles also will
convert any remaining unexercised ENVOY stock options into Quintiles stock
options at the exchange ratio.
The unaudited pro forma combined condensed balance sheet reflects the
combined historical balance sheets of Quintiles and ENVOY at September 30, 1998.
The unaudited pro forma combined condensed statements of operations for the
years ended December 31, 1997, 1996 and 1995 and for the nine months ended
September 30, 1998 and 1997 reflect the combined historical operating results of
Quintiles and ENVOY for such periods.
The unaudited pro forma combined condensed results presented do not reflect
any incremental direct costs, potential cost savings or revenue enhancements
which may result from the consolidation of certain operations of Quintiles and
ENVOY. Therefore, the unaudited pro forma combined condensed statements of
operations may not be indicative of the results of past or future operations. No
assurances can be given with respect to the ultimate level of cost savings
and/or revenue enhancements which may be realized following consummation of the
proposed transaction.
The unaudited pro forma combined condensed financial data are not
necessarily indicative of the results that would have been obtained had the
business combination occurred on the dates indicated. The unaudited pro forma
combined condensed financial data should be read in conjunction with the related
historical financial statements and notes thereto of Quintiles and ENVOY
incorporated by reference in this Current Report on Form 8-K.
98
<PAGE> 99
QUINTILES AND ENVOY
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL QUINTILES
-------------------- PRO FORMA AND ENVOY
QUINTILES ENVOY ADJUSTMENTS PRO FORMA
--------- -------- ----------- ----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............. $ 88,499 $ 22,095 $ -- $ 110,594
Accounts receivable and unbilled
services............................. 295,425 44,429 -- 339,854
Investments............................ 44,448 -- -- 44,448
Prepaid expenses....................... 26,931 1,471 -- 28,402
Other current assets................... 10,738 4,751 -- 15,489
-------- -------- ----------- ----------
Total current assets................. 466,041 72,746 -- 538,787
Property and equipment................... 353,095 45,785 -- 398,880
Less accumulated depreciation............ 113,939 26,887 -- 140,826
-------- -------- ----------- ----------
239,156 18,898 -- 258,054
Intangibles and other assets
Intangibles............................ 71,369 82,416 -- 153,785
Investments............................ 59,514 268 -- 59,782
Deferred income taxes.................. 68,683 -- -- 68,683
Deposits and other assets.............. 33,189 4,722 -- 37,911
-------- -------- ----------- ----------
232,755 87,406 -- 320,161
-------- -------- ----------- ----------
Total assets......................... $937,952 $179,050 $ -- $1,117,002
======== ======== =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Lines of credit........................ $ 366 $ -- $ -- $ 366
Accounts payable and accrued
expenses............................. 118,819 26,702 20,000(1) 165,521
Credit arrangements, current........... 13,519 84 -- 13,603
Unearned income........................ 120,827 1,596 -- 122,423
Income taxes and other current
liabilities.......................... 14,843 11,143 -- 25,986
-------- -------- ----------- ----------
Total current liabilities............ 268,374 39,525 20,000 327,899
Long-term liabilities:
Credit arrangements, less current
portion.............................. 153,879 561 -- 154,440
Long-term obligations.................. 24,172 -- -- 24,172
Deferred income taxes and other
liabilities.......................... 26,580 9,131 -- 35,711
-------- -------- ----------- ----------
204,631 9,692 -- 214,323
-------- -------- ----------- ----------
Total liabilities.................... 473,005 49,217 20,000 542,222
Shareholders' equity:
Preferred stock........................ -- 41,300 (41,300)(2) --
Common stock and additional
paid-in-capital...................... 356,059 135,258 41,300(2) 532,617
Retained earnings (deficit)............ 112,379 (46,725) (20,000)(1) 45,654
Other equity........................... (3,491) -- -- (3,491)
-------- -------- ----------- ----------
Total shareholders' equity........... 464,947 129,833 (20,000) 574,780
======== ======== =========== ==========
Total liabilities and shareholders'
equity............................. $937,952 $179,050 $ -- $1,117,002
======== ======== =========== ==========
</TABLE>
- -------------------------
(1) To accrue non-recurring transaction costs (as currently estimated by
management), consisting of financial advisor fees (approximately $17.0
million), accounting and legal fees (approximately $1.5 million) and other
direct transaction costs such as filing fees, proxy solicitation and proxy
printing and distribution (approximately $1.5 million), which are
anticipated to be incurred in connection with the ENVOY transaction.
(2) To reflect that each outstanding share of ENVOY common stock and ENVOY
Series B convertible preferred stock will be exchanged for 1.166 shares of
Quintiles common stock. Based on a total of approximately 24,375,000 shares
of the ENVOY common stock and preferred stock outstanding on December 14,
1998, Quintiles would issue approximately 28,421,000 shares of Quintiles
common stock in the merger. Quintiles will pay cash in lieu of fractional
shares.
99
<PAGE> 100
QUINTILES AND ENVOY
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL QUINTILES
-------------------- PRO FORMA AND ENVOY
QUINTILES ENVOY ADJUSTMENTS(1) PRO FORMA
--------- -------- -------------- ---------
<S> <C> <C> <C> <C>
Net revenue.................... $848,379 $132,763 $ -- $981,142
Costs and expenses:
Direct....................... 444,369 58,875 -- 503,244
General and administrative... 274,925 29,728 (1,783)(2) 302,870
Depreciation and
amortization.............. 40,431 26,948 -- 67,379
Research and development..... -- 1,963 -- 1,963
-------- -------- -------- --------
759,725 117,514 (1,783) 875,456
-------- -------- -------- --------
Income from operations......... 88,654 15,249 1,783 105,686
Other expense, net............. (1,917) (637) (1,783)(2) (4,337)
-------- -------- -------- --------
Income before income taxes..... 86,737 14,612 -- 101,349
Income taxes................... 27,823 11,653 -- 39,476
-------- -------- -------- --------
Net income..................... $ 58,914 $ 2,959 $ -- $ 61,873
======== ======== ======== ========
Basic net income per share..... $ 0.77 $ 0.61
======== ========
Diluted net income per share... $ 0.76 $ 0.58
======== ========
Shares used in computing net
income per share:
Basic........................ 76,476 101,018
Diluted...................... 77,987 107,171
</TABLE>
- -------------------------
(1) Non-recurring transaction costs of approximately $20 million (as currently
estimated by management), consisting of financial advisor fees
(approximately $17.0 million), accounting and legal fees (approximately $1.5
million) and other direct transaction costs such as filing fees, proxy
solicitation and proxy printing and distribution (approximately $1.5
million), are anticipated to be incurred in connection with the ENVOY
transaction. Such costs will be expensed by Quintiles upon closing of the
business combination with ENVOY. Such costs have not been reflected in the
unaudited pro forma combined condensed statement of operations.
(2) For the nine months ended September 30, 1998, ENVOY historical transaction
related costs have been reclassified as other income (expense) to be
consistent with the classification used by Quintiles.
100
<PAGE> 101
QUINTILES AND ENVOY
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL QUINTILES
-------------------- PRO FORMA AND ENVOY
QUINTILES ENVOY ADJUSTMENTS PRO FORMA
--------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Net revenue.......................... $608,436 $ 97,625 $ -- $706,061
Costs and expenses:
Direct............................. 321,376 45,852 -- 367,228
General and administrative......... 196,922 23,175 -- 220,097
In-process R&D writeoff............ -- 6,600 -- 6,600
Depreciation and amortization...... 26,751 25,013 -- 51,764
Research and development........... -- 1,689 -- 1,689
-------- -------- -------- --------
545,049 102,329 -- 647,378
-------- -------- -------- --------
Income (loss) from operations........ 63,387 (4,704) -- 58,683
Other (expense) income, net.......... (2,000) 143 -- (1,857)
-------- -------- -------- --------
Income (loss) before income taxes.... 61,387 (4,561) -- 56,826
Income taxes......................... 22,525 3,327 -- 25,852
-------- -------- -------- --------
Net income (loss).................... $ 38,862 $ (7,888) $ -- $ 30,974
======== ======== ======== ========
Basic net income per share........... $ 0.53 $ 0.32
======== ========
Diluted net income per share......... $ 0.52 $ 0.30
======== ========
Shares used in computing net income
per share:
Basic.............................. 73,283 96,085
Diluted............................ 74,967 103,956
</TABLE>
101
<PAGE> 102
QUINTILES AND ENVOY
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL QUINTILES
-------------------- PRO FORMA AND ENVOY
QUINTILES ENVOY ADJUSTMENTS PRO FORMA
--------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Net revenue.......................... $852,900 $137,605 $ -- $990,505
Costs and expenses:
Direct............................. 448,920 64,247 -- 513,167
General and administrative......... 277,238 32,734 -- 309,972
Depreciation and amortization...... 37,930 34,432 -- 72,362
In-process R&D writeoff............ -- 6,600 -- 6,600
Research and development........... -- 2,192 -- 2,192
-------- -------- -------- --------
764,088 140,205 -- 904,293
-------- -------- --- --------
Income (loss) from operations........ 88,812 (2,600) -- 86,212
Other income (expense):
Interest income.................... 8,472 1,312 -- 9,784
Interest expense................... (8,764) (1,577) -- (10,341)
Other.............................. (1,985) -- -- (1,985)
-------- -------- -------- --------
(2,277) (265) -- (2,542)
-------- -------- -------- --------
Income (loss) before income taxes.... 86,535 (2,865) -- 83,670
Income taxes......................... 30,852 6,333 -- 37,185
-------- -------- -------- --------
Net income (loss) available for
common shareholders................ $ 55,683 $ (9,198) $ -- $ 46,485
======== ======== ======== ========
Basic net income per share........... $ 0.76 $ 0.48
Diluted net income per share......... $ 0.74 $ 0.45
Shares used in computing net income
per share:
Basic.............................. 73,739 96,693
Diluted............................ 75,275 103,881
</TABLE>
102
<PAGE> 103
QUINTILES AND ENVOY
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL QUINTILES
-------------------- PRO FORMA AND ENVOY
QUINTILES ENVOY ADJUSTMENTS PRO FORMA
--------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Net revenue....................... $600,100 $ 90,572 $ -- $690,672
Costs and expenses:
Direct.......................... 308,886 43,500 -- 352,386
General and administrative...... 206,251 24,631 -- 230,882
Depreciation and amortization... 25,681 25,497 -- 51,178
Non-recurring costs............. 15,431 -- 4,664(1) 20,095
In-process R&D writeoff......... -- 8,700 -- 8,700
Merger and facility integration
costs........................ -- 4,664 (4,664)(1) --
EMC losses...................... -- 540 -- 540
Research and development........ -- 1,779 -- 1,779
-------- -------- ------- --------
556,249 109,311 -- 665,560
-------- -------- ------- --------
Income (loss) from operations..... 43,851 (18,739) -- 25,112
Other income (expense):
Interest income................. 7,206 1,032 -- 8,238
Interest expense................ (9,716) (2,872) -- (12,588)
Non-recurring transaction
costs........................ (17,118) -- -- (17,118)
Other........................... 18 -- -- 18
-------- -------- ------- --------
(19,610) (1,840) -- (21,450)
-------- -------- ------- --------
Income (loss) before income
taxes........................... 24,241 (20,579) -- 3,662
Income taxes...................... 14,808 1,717 -- 16,525
-------- -------- ------- --------
Net income (loss)................. 9,433 (22,296) -- (12,863)
Non-equity dividend............... (1,785) (14,921) -- (16,706)
-------- -------- ------- --------
Net income (loss) available for
common shareholders............. $ 7,648 $(37,217) $ -- $(29,569)
======== ======== ======= ========
Basic net income (loss) per
share........................... $ 0.11 $ (0.33)
Diluted net income (loss) per
share........................... $ 0.11 $ (0.33)
Shares used in computing net
income (loss) per share:
Basic........................... 69,148 88,409
Diluted......................... 71,785 88,409
</TABLE>
- -------------------------
(1) For the twelve months ended December 31, 1996, ENVOY historical merger and
facility integration costs represent one-time acquisition costs, and as
such, have been reclassified as non-recurring costs to be consistent with
the classification used by Quintiles.
103
<PAGE> 104
QUINTILES AND ENVOY
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL QUINTILES
------------------- PRO FORMA AND ENVOY
QUINTILES ENVOY ADJUSTMENTS PRO FORMA
--------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Net revenue........................... $368,056 $34,197 $ -- $402,253
Costs and expenses:
Direct.............................. 192,899 18,967 -- 211,866
General and administrative.......... 126,969 11,156 -- 138,125
Depreciation and amortization....... 17,586 2,725 -- 20,311
Non-recurring costs................. 4,702 -- -- 4,702
Research and development............ -- 1,466 -- 1,466
-------- ------- -------- --------
342,156 34,314 -- 376,470
-------- ------- -------- --------
Income (loss) from operations......... 25,900 (117) -- 25,783
Other income (expense):
Interest income..................... 2,562 380 -- 2,942
Interest expense.................... (3,846) (659) -- (4,505)
Other............................... 39 -- -- 39
-------- ------- -------- --------
(1,245) (279) -- (1,524)
-------- ------- -------- --------
Income (loss) before income taxes..... 24,655 (396) -- 24,259
Loss in investee...................... -- 1,776 -- 1,776
Income taxes.......................... 9,310 (50) -- 9,260
-------- ------- -------- --------
Income (loss) from continuing
operations.......................... 15,345 (2,122) -- 13,223
Non-equity dividend................... (719) -- -- (719)
-------- ------- -------- --------
Income (loss) from continuing
operations available for
common shareholders(1).............. $ 14,626 $(2,122) $ -- $ 12,504
======== ======= ======== ========
Basic income from continuing
operations per share................ $ 0.23 $ 0.16
======== ========
Diluted income from continuing
operations per share................ $ 0.23 $ 0.15
======== ========
Shares used in computing income
from continuing operations
per share:
Basic............................... 63,171 80,357
Diluted............................. 64,946 82,717
</TABLE>
- ---------
(1) In its historical statement of operations, Envoy reported a loss from
discontinued operations of $2.4 million which is not reflected in the pro
forma combined condensed statement of operations.
104
<PAGE> 105
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits.
<TABLE>
<CAPTION>
Exhibit Number Description of Exhibit
-------------- ----------------------
<S> <C>
23.01 Consent of Ernst & Young LLP (Envoy)
23.02 Consent of Arthur Andersen LLP (Envoy)
23.03 Consent of PricewaterhouseCoopers LLP (PMSI)
</TABLE>
105
<PAGE> 106
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this amendment to this report to be signed on its
behalf by the undersigned hereunto duly authorized.
QUINTILES TRANSNATIONAL CORP.
By: /s/ Rachel R. Selisker
---------------------------------------------
Dated: February 17, 1999 Rachel R. Selisker
Chief Financial Officer and Executive Vice
President Finance
106
<PAGE> 107
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description of Exhibit
- -------------- ----------------------
<S> <C>
23.01 Consent of Ernst & Young LLP (Envoy)
23.02 Consent of Arthur Andersen LLP (Envoy)
23.03 Consent of PricewaterhouseCoopers LLP (PMSI)
</TABLE>
<PAGE> 1
EXHIBIT 23.01
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Nos. 33-91026, 333-03603, 333-16553, 333-40493, 333-60797, 333-19009,
333-28919, 333-38181, 333-40497 and 333-48403) of Quintiles Transnational Corp.
of our report dated March 5, 1998 except for the business combinations accounted
for as poolings of interests referred to in Notes 1 and 4, as to which the date
is April 29, 1998; the restatement for the beneficial conversion feature
referred to in Note 2, as to which the date is June 26, 1998; the restatement
related to acquired in-process technology referred to in Note 2 and the
subsequent event referred to in Note 22, as to which the date is November 9,
1998, with respect to the financial statements of ENVOY Corporation included in
this Current Report on Form 8-K to be filed with the Securities and Exchange
Commission on or about February 16, 1999.
/s/ Ernst & Young LLP
Nashville, Tennessee
February 16, 1999
<PAGE> 1
EXHIBIT 23.02
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated February 11, 1998 relating to the financial statements of
Professional Office Services, Inc. as of December 31, 1997 and 1996 and for each
of the three years in the period ended December 31, 1997 and the incorporation
of our report dated January 30, 1998 relating to the financial statements of
XpiData, Inc. as of December 31, 1997 and 1996 and for each of the three years
in the period ended December 31, 1997 included in this Current Report on Form
8-K, as amended of Quintiles Transnational Corp. into Quintiles Transnational
Corp.'s previously filed Registration Statement File Numbers 33-91026,
333-03603, 333-16553, 333-40493, 333-60797, 333-19009, 333-28919, 333-38181,
333-40497 and 333-48403. It should be noted that we have not audited any
financial statements of Professional Office Services, Inc. or XpiData, Inc.
subsequent to December 31, 1997 or performed any audit procedures subsequent to
the date of our reports.
/s/ ARTHUR ANDERSEN LLP
Nashville, Tennessee
February 16, 1999
<PAGE> 1
EXHIBIT 23.03
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of Quintiles Transnational Corp. on Form S-3 (File Nos. 333-19009, 333-28919,
333-38181, 333-40497 and 333-48403) and Form S-8 (File Nos. 33-91026, 333-03603,
333-16553, 333-40493 and 333-60797) of our report dated August 14, 1998, except
for Note 21, as to which the date is September 2, 1998, on our audits of the
consolidated financial statements of Pharmaceutical Marketing Services Inc. and
Subsidiaries as of June 30, 1998 and 1997 and for the years ended June 30, 1998,
1997 and 1996, which report is included in this Current Report on Form 8-K/A.
/s/ PricewaterhouseCoopers LLP
Stamford, Connecticut
February 16, 1999
