<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): February 17, 1999
QUINTILES TRANSNATIONAL CORP.
(Exact name of registrant as specified in its charter)
North Carolina 340-23520 56-1714315
(State or other (Commission File No.) (I.R.S. Employer
jurisdiction Identification Number)
of incorporation)
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. 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 the Company's common
stock in the ENVOY transaction is also subject to approval by the Company's
shareholders. The Company previously filed certain historical financial
statements of each of ENVOY and PMSI and pro forma financial information in
accordance with Rule 3-05 and Article 11 of Regulation S-X on its Form 8-K dated
January 27, 1999 (as amended February 17, 1999 by Form 8-K/A). For the purpose
of updating its disclosure pursuant to Rule 3-05, the Company provides the
historical financial information of each of PMSI and ENVOY described below.
<TABLE>
<CAPTION>
Item Description Page
---------------- ----
<S> <C>
1) Consolidated Financial Data of ENVOY
a. Index to Consolidated Financial Statements 4
b. Report of Independent Auditors 5
c. Consolidated Balance Sheets as of December 31, 8
1998 and 1997
d. Consolidated Statements of Operations - For the 9
Years Ended December 31, 1998, 1997 and 1996
e. Consolidated Statements of Shareholders' Equity - For 11
the Years Ended December 31, 1998, 1997 and 1996
f. Consolidated Statements of Cash Flows - For the 12
Years Ended December 31, 1998, 1997 and 1996
g. Notes to Consolidated Financial Statements 14
2) Consolidated Financial Data of PMSI
a. Consolidated Statements of Operations for the Three 37
and Six Months Ended December 31, 1998 and 1997
(Unaudited)
</TABLE>
2
<PAGE> 3
<TABLE>
<CAPTION>
Item Description Page
---------------- ----
<S> <C>
b. Consolidated Statements of Comprehensive Income for 38
the Three and Six Months Ended December 31, 1998
and 1997 (Unaudited)
c. Consolidated Balance Sheet as of December 31, 1998 39
(Unaudited)
d. Consolidated Statements of Cash Flows for the Six 40
Months Ended December 31, 1998 and 1997 (Unaudited)
e. Notes to Consolidated Financial Statements 42
(Unaudited)
</TABLE>
3
<PAGE> 4
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Reports of Independent Auditors and Independent Public Accountants ................................. 25
Consolidated Balance Sheets as of December 31, 1998 and 1997........................................ 28
Consolidated Statements of Operations - For the Years Ended December 31, 1998, 1997
and 1996............................................................................................ 29
Consolidated Statements of Shareholders' Equity - For the Years Ended December 31,
1998, 1997 and 1996................................................................................. 31
Consolidated Statements of Cash Flows - For the Years Ended December 31, 1998, 1997
and 1996............................................................................................ 32
Notes to Consolidated Financial Statements.......................................................... 34
</TABLE>
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, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1998. 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 did not audit the financial statements of two wholly-owned
subsidiaries, Professional Office Services, Inc. and XpiData, Inc. as of
December 31, 1997 and for each of the two years in the period ended December 31,
1997, which statements reflect total assets constituting 6% in 1997 and total
revenues constituting 18% in 1997 and 16% in 1996 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 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 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, 1998 and 1997, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
Nashville, Tennessee
January 29, 1999
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 the related statements
of operations, stockholders' equity and cash flows for each of the two 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 the results of its operations and its cash
flows for each of the two 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 sheet of XPIDATA, INC., not separately presented
herein, as of December 31, 1997, and the related statements of operations,
stockholders' equity and cash flows for each of the two 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 the results of its operations and its cash flows for each of the
two 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,
--------------------------
1998 1997
--------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 30,297 $ 8,598
Trade accounts receivable, less allowance for
doubtful accounts of $4,763 and $3,641 in 1998
and 1997, respectively 41,555 33,510
Inventories 2,588 2,585
Deferred income taxes 500 1,797
Other 3,311 1,811
--------- ---------
Total current assets 78,251 48,301
Property and equipment:
Equipment 41,984 35,890
Furniture and fixtures 3,003 2,433
Leasehold improvements 2,919 2,766
--------- ---------
47,906 41,089
Less accumulated depreciation and amortization (28,599) (21,581)
--------- ---------
19,307 19,508
Other assets:
Goodwill, net of amortization 53,509 67,001
Other intangibles, net of amortization 27,399 27,384
Other 5,053 4,431
--------- ---------
TOTAL ASSETS $ 183,519 $ 166,625
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,825 $ 3,334
Accrued expenses and other current liabilities 30,595 25,362
Short-term debt -- 1,315
Current portion of long-term debt 271 263
--------- ---------
Total current liabilities 33,691 30,274
Long-term debt, less current portion 366 527
Deferred income taxes 164 1,579
Other non-current liabilities 7,402 9,163
Shareholders' equity:
Preferred stock--No par value; authorized,
12,000,000 shares; issued, 2,800,000 and
3,730,233 in 1998 and 1997, respectively 41,300 55,021
Common stock--No par value; authorized,
48,000,000 shares; issued, 21,587,895 and
20,075,822 in 1998 and 1997, respectively 141,259 114,652
Additional paid-in capital 8,485 7,208
Retained deficit (49,148) (51,799)
--------- ---------
Total shareholders' equity 141,896 125,082
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 183,519 $ 166,625
========= =========
</TABLE>
See accompanying notes.
8
<PAGE> 9
ENVOY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
Revenues $ 184,773 $ 137,605 $ 90,572
Operating costs and expenses:
Cost of revenues 82,327 64,247 43,500
Selling, general and administrative expenses 40,241 32,734 24,631
Research and development expenses 2,803 2,192 1,779
Depreciation and amortization expenses 36,156 34,432 25,497
Merger and facility integration costs -- -- 4,664
Write-off of acquired in-process technology -- 6,600 8,700
EMC losses -- -- 540
--------- --------- --------
Operating income (loss) 23,246 (2,600) (18,739)
Other income (expense):
Interest income 910 1,312 1,032
Interest expense (1,431) (1,577) (2,872)
--------- --------- --------
(521) (265) (1,840)
--------- --------- --------
Income (loss) before income taxes 22,725 (2,865) (20,579)
Provision for income taxes 18,481 6,333 1,717
--------- --------- --------
Net income (loss) 4,244 (9,198) (22,296)
Less preferred stock dividends -- -- (14,921)
--------- --------- --------
Net income (loss) applicable to common stock $ 4,244 $ (9,198) $(37,217)
========= ========= ========
Net income (loss) per common share:
Basic $ 0.20 $ (0.47) $ (2.25)
========= ========= ========
Diluted $ 0.17 $ (0.47) $ (2.25)
========= ========= ========
Weighted average shares outstanding:
Basic 21,179 19,686 16,519
========= ========= ========
Diluted 25,110 19,686 16,519
========= ========= ========
</TABLE>
(CONTINUED)
9
<PAGE> 10
ENVOY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1998 1997 1996
------- --------- --------
<S> <C> <C> <C>
Pro forma net income (loss) data (unaudited),
reflecting pro forma tax provision on income
of ExpressBill companies (see Notes 4 and 16):
Historical income (loss) applicable to common
stock $ 4,244 $ (9,198) $(37,217)
Pro forma adjustment to provision for income
taxes 259 1,032 165
------- --------- --------
Pro forma net income (loss) applicable to
common stock $ 3,985 $ (10,230) $(37,382)
======= ========= ========
Pro forma net income (loss) per common share:
======= ========= ========
Basic $ 0.19 $ (0.52) $ (2.26)
======= ========= ========
Diluted $ 0.16 $ (0.52) $ (2.26)
======= ========= ========
</TABLE>
See accompanying notes.
10
<PAGE> 11
ENVOY CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
-------------------- ---------------------
ADDITIONAL RETAINED
SHARES AMOUNT SHARES AMOUNT PAID-IN EARNINGS
CAPITAL (DEFICIT)
------ -------- ------ -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 14,789 $ 11,355 -- -- $7,183 $ (3,166)
Stock options exercised 163 510 -- -- -- --
Stock issued in connection with acquisitions 413 6,650 3,730 $ 40,100 -- --
Conversion of debt to common stock 170 1,786 -- -- -- --
Proceeds from issuance of stock 3,320 82,964 -- -- -- --
Capital distributions of ExpressBill -- -- -- -- -- (671)
Capital contributions of ExpressBill -- -- -- -- 10 --
Accretion of Series B preferred stock dividends -- -- -- 14,921 -- (14,921)
Net loss -- -- -- -- -- (22,296)
Other comprehensive income -- -- -- -- -- --
------ -------- ------ -------- ------ --------
Balance at December 31, 1996 18,855 103,265 3,730 55,021 7,193 (41,054)
Stock options exercised 437 1,844 -- -- -- --
Income tax benefit realized on exercise of
stock options -- 1,249 -- -- -- --
Conversion of debt to common stock 781 8,214 -- -- -- --
Proceeds from issuance of stock 3 80 -- -- -- --
Capital distributions of ExpressBill -- -- -- -- -- (1,547)
Capital contributions of ExpressBill -- -- -- -- 15 --
Net loss -- -- -- -- -- (9,198)
Other comprehensive income -- -- -- -- -- --
------ -------- ------ -------- ------ --------
Balance at December 31, 1997 20,076 114,652 3,730 55,021 7,208 (51,799)
Stock options exercised 567 2,393 -- -- -- --
Income tax benefit realized on exercise of
stock options -- 10,105 -- -- -- --
Proceeds from issuance of stock 15 388 -- -- -- --
Conversion of preferred stock 930 13,721 (930) (13,721) -- --
Capital distributions of ExpressBill -- -- -- -- -- (316)
Termination of ExpressBill S Corp election -- -- -- -- 1,277 (1,277)
Net income -- -- -- -- -- 4,244
Other comprehensive income -- -- -- -- -- --
------ -------- ------ -------- ------ --------
Balance at December 31, 1998 21,588 $141,259 2,800 $ 41,300 $8,485 $(49,148)
====== ======== ====== ======== ====== ========
<CAPTION>
ACCUMULATED TOTAL
COMPREHENSIVE SHAREHOLDERS'
INCOME EQUITY
------------- -------------
<S> <C> <C>
Balance at December 31, 1995 -- $ 15,372
Stock options exercised -- 510
Stock issued in connection with acquisitions -- 46,750
Conversion of debt to common stock -- 1,786
Proceeds from issuance of stock -- 82,964
Capital distributions of ExpressBill -- (671)
Capital contributions of ExpressBill -- 10
Accretion of Series B preferred stock dividends -- --
Net loss -- (22,296)
Other comprehensive income -- --
--------- ---------
Balance at December 31, 1996 -- 124,425
Stock options exercised -- 1,844
Income tax benefit realized on exercise of
stock options -- 1,249
Conversion of debt to common stock -- 8,214
Proceeds from issuance of stock -- 80
Capital distributions of ExpressBill -- (1,547)
Capital contributions of ExpressBill -- 15
Net loss -- (9,198)
Other comprehensive income -- --
--------- ---------
Balance at December 31, 1997 -- 125,082
Stock options exercised -- 2,393
Income tax benefit realized on exercise of
stock options -- 10,105
Proceeds from issuance of stock -- 388
Conversion of preferred stock -- --
Capital distributions of ExpressBill -- (316)
Capital contributions of ExpressBill -- --
Net income -- 4,244
Other comprehensive income -- --
--------- ---------
Balance at December 31, 1998 $ -- $ 141,896
========= =========
</TABLE>
See accompanying notes.
11
<PAGE> 12
ENVOY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996
-------- -------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 4,244 $ (9,198) $ (22,296)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 36,156 34,432 25,507
Provision for losses on accounts receivable 2,696 1,461 1,112
Deferred income tax provision (benefit) (118) (995) 339
Write-off of certain assets and investments -- 6,600 10,281
Changes in assets and liabilities, net of
acquired businesses:
Decrease (increase) in accounts receivable (8,346) (9,782) (8,709)
Decrease (increase) in inventories 399 388 (543)
Decrease (increase) in other current assets (1,294) 981 (1,887)
Increase (decrease) in accounts payable,
accrued expenses and other current
liabilities 10,311 (650) (621)
-------- -------- ---------
Net cash provided by operating activities 44,048 23,237 3,183
INVESTING ACTIVITIES
Net decrease in short-term investments -- -- 5,103
Purchases of property and equipment (6,185) (8,744) (5,356)
Decrease (increase) in other assets 517 (1,998) --
Payments for businesses acquired, net of cash
acquired of $750, $0 and $5,543 in 1998, 1997
and 1996, respectively (17,462) (40,412) (93,744)
-------- -------- ---------
Net cash used in investing activities (23,130) (51,154) (93,997)
FINANCING ACTIVITIES
Proceeds from issuance of preferred stock -- -- 40,100
Proceeds from issuance of common stock 2,781 1,924 88,474
Capital distributions of Express Bill (316) (1,391) (671)
Capital contributions of Express Bill -- 15 10
Proceeds from long-term debt -- -- 44,267
Payments on long-term debt (369) (304) (44,387)
Proceeds from (payments on) short-term debt (1,315) (466) 639
Payment of deferred financing costs -- -- (1,200)
-------- -------- ---------
Net cash provided by (used in) financing
activities 781 (222) 127,232
-------- -------- ---------
Net increase (decrease) in cash and cash
equivalents 21,699 (28,139) 36,418
Cash and cash equivalents at beginning of year 8,598 36,737 319
-------- -------- ---------
Cash and cash equivalents at end of year $ 30,297 $ 8,598 $ 36,737
======== ======== =========
</TABLE>
12
<PAGE> 13
ENVOY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1998 1997 1996
-------- -------- ---------
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOW
INFORMATION
Interest paid $ (141) $ (238) $ (2,357)
Interest received 910 1,250 1,024
Income taxes paid (5,906) (5,952) (371)
NONCASH TRANSACTIONS
Acquisitions
Working capital $ -- $ -- $ 302
Intangible assets -- -- 1,348
Common stock issued -- -- (1,650)
-------- -------- ---------
Cash transferred $ -- $ -- $ --
======== ======== =========
Conversion of debt to common stock $ -- $ 8,214 $ 1,786
======== ======== =========
Conversion of preferred stock to common stock $ 13,721 $ -- $ --
======== ======== =========
</TABLE>
See accompanying notes.
13
<PAGE> 14
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"). 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. 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 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.
14
<PAGE> 15
ENVOY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
CONCENTRATION OF CREDIT RISK
The Company has one customer that accounted for approximately 17% of the
Company's consolidated revenues for 1998 and 12% for 1997, and accounted for
approximately 14% and 16% of consolidated accounts receivable at December 31,
1998 and 1997, respectively. No single customer accounted for more than 10% of
consolidated revenues in 1996.
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 $7,067,000, $6,141,000
and $4,920,000 for 1998, 1997 and 1996, respectively.
OTHER ASSETS
Other assets consist primarily of goodwill and other intangible assets as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1998 1997 AMORTIZATION
PERIOD
--------- --------- -----------
<S> <C> <C> <C>
Goodwill $ 115,212 $ 105,059 3-15 years
Less accumulated amortization (61,703) (38,058)
--------- ---------
$ 53,509 $ 67,001
========= =========
Submitter and payor relationships $ 12,700 $ 12,700 9 years
Customer contracts 17,541 13,554 9-10 years
Developed technology 4,300 4,300 2 years
Covenants not to compete 6,237 4,081 2-5 years
Trademarks and tradenames 350 350 3-7 years
Assembled work force 3,710 3,140 3-7 years
--------- ---------
44,838 38,125
Less accumulated amortization (17,439) (10,741)
--------- ---------
$ 27,399 $ 27,384
========= =========
</TABLE>
Amortization expense related to such intangible assets for the years ended
December 31, 1998, 1997 and 1996 was $29,089,000, $28,292,000 and $20,578,000,
respectively. Amortization is provided using the straight line method
15
<PAGE> 16
ENVOY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
over periods ranging from two to fifteen years. 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, 1998, in the opinion of management, there has been
no such impairment.
REVENUE RECOGNITION
Processing services revenue is recognized as the transactions are processed.
Effective January 1, 1998, the Company adopted American Institute of Certified
Public Accountants ("AICPA") Statement of Position 97-2, "Software Revenue
Recognition" ("SOP 97-2"). Revenue from software product arrangements that
include customization or modification of the software is recognized in
accordance with SOP 97-2. Revenues from software product sales is recognized
provided the collection of the sales proceeds is deemed probable and no
significant vendor obligations remain. The application of SOP 97-2 did not have
a material impact on the Company's consolidated financial statements for the
year ended December 31, 1998. 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.
EARNINGS (LOSS) PER COMMON SHARE
Basic and diluted earnings per share are calculated in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share." Basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities.
RESEARCH AND DEVELOPMENT
Research and development expenses of $2,803,000 in 1998, $2,192,000 in 1997 and
$1,779,000 in 1996 were charged to expense as incurred until technological
feasibility had been established for the applicable 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.
16
<PAGE> 17
ENVOY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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, "Accounting for Stock Issued to
Employees" ("APB No. 25"), and, accordingly, recognizes no compensation expense.
RECLASSIFICATIONS
Certain reclassifications have been made in the 1997 and 1996 consolidated
financial statements to conform with the 1998 presentation.
SEGMENT DISCLOSURES
Effective January 1, 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 superseded SFAS
No. 14, "Financial Reporting for Segments of a Business Enterprise." SFAS No.
131 establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. SFAS No. 131 also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The Company operates in one industry segment and, accordingly, the adoption of
SFAS No. 131 had no significant effect on the Company.
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted SFAS 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. 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 1998 was the same as net income for the
Company.
3. PENDING MERGER WITH QUINTILES TRANSNATIONAL CORP. ("QUINTILES")
On December 15, 1998, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with Quintiles Transnational Corp. ("Quintiles")
pursuant to which the Company is anticipated to merge with and become a
wholly-owned subsidiary of Quintiles in a transaction expected to be accounted
for as a pooling of interests (the "Merger"). Under the terms of the Merger
Agreement, each issued and outstanding share of ENVOY Common Stock (the "Common
Stock"), and each issued and outstanding share of Series B Convertible Preferred
Stock (the "Series B Preferred Stock"), will be exchanged for 1.166 shares of
Quintiles common stock. In addition, Quintiles will convert any remaining
unexercised ENVOY stock options into Quintiles stock options on the same terms
and conditions, except that the number of shares and exercise price will be
adjusted for the effect of the exchange ratio. The Merger is subject to approval
by the Company's and Quintiles' shareholders and certain other conditions.
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 Common Stock.
Shareholders of XpiData, based in Scottsdale, Arizona, received 1,365,000 shares
and shareholders
17
<PAGE> 18
ENVOY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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
and 1996 have been restated to include the accounts and results of operations of
the ExpressBill Companies.
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 ("NEIC")
On March 6, 1996, the Company's shareholders approved the acquisition of NEIC.
The Company paid $88,354,000 to the NEIC stockholders and incurred certain
transaction and acquisition costs of $5,947,000, plus the assumption of certain
liabilities, summarized as follows (in thousands):
<TABLE>
<S> <C>
Purchase price and transaction costs $ 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
18
<PAGE> 19
ENVOY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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. Fair value of acquired in-process technology was determined based on
various factors, including estimates of after-tax cash flows, the stage of
completion of the in-process technology at the date of acquisition and estimates
of total project costs.
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.
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 resulting in a
purchase price of approximately $1,500,000, plus the assumption of certain
liabilities, 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.
Fair value of acquired in-process technology was determined based on various
factors, including estimates of after-tax cash flows, the stage of completion of
the in-process technology at the date of acquisition and estimates of total
project costs.
19
<PAGE> 20
ENVOY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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, plus 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.
PROFESSIONAL OFFICE SYSTEMS, INC. ("POSI")
On October 31, 1996, the Company acquired all the issued and outstanding capital
stock of POSI, the EDI clearinghouse for Blue Cross and Blue Shield of the
National Capital Area, for approximately $6,400,000 in cash, plus 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.
20
<PAGE> 21
ENVOY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
DIVERSE SOFTWARE SOLUTIONS, INC. ("DSS")
On March 11, 1997, the Company completed the acquisition of certain assets of
DSS for $4,000,000 in cash and payments of $2,325,000 based upon revenue earned
during a specified period following the acquisition, plus the assumption of
certain liabilities. During 1998, the Company reduced its preliminary estimate
of goodwill by $711,000 relating to a revised estimate of the payments based on
revenues. The final allocation of purchase price is summarized as follows (in
thousands):
<TABLE>
<S> <C>
Purchase price $ 4,000
Add liabilities assumed:
Current liabilities 3,979
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 $ 5,513
=======
</TABLE>
Goodwill of $5,513,000 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.
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 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. Fair value of acquired in-process
technology was determined based on various factors, including estimates of
after-tax cash flows, the stage of completion of the in-process technology at
the date of acquisition and estimates of total project costs.
21
<PAGE> 22
ENVOY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
HEALTHCARE DATA INTERCHANGE CORPORATION ("HDIC")
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, plus the assumption of
certain liabilities, summarized as follows (in thousands):
<TABLE>
<S> <C>
Purchase price $ 36,400
Add liabilities assumed:
Unfavorable contracts 14,570
Other liabilities 993
--------
15,563
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 $ 38,850
========
</TABLE>
Goodwill of $38,850,000 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 $14,570,000 relating to the assumption of unfavorable contracts.
At December 31, 1998, the remaining liability for unfavorable contracts was
$10,297,000, with $7,402,000 classified as a non-current liability, and
$2,895,000 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. Fair value of acquired in-process technology was determined based on
various factors, including estimates of after-tax cash flows, the stage of
completion of the in-process technology at the date of acquisition and estimates
of total project costs.
22
<PAGE> 23
ENVOY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
SYNERGY HEALTH CARE, INC. ("SYNERGY")
On May 6, 1998, the Company acquired all the issued and outstanding capital
stock of Synergy for $10,200,000 in cash, including amounts paid to certain
selling stockholders for noncompete agreements, plus the assumption of certain
liabilities, summarized as follows (in thousands):
<TABLE>
<S> <C>
Purchase price $ 10,200
Add liabilities assumed: 441
Less assets acquired:
Cash (550)
Accounts receivable and other (917)
Property and equipment, net (281)
Identifiable intangibles:
Customer contracts (1,587)
Assembled work force (170)
Noncompete agreements (200)
------------
Goodwill (3,705)
------------
$ 6,936
============
</TABLE>
Goodwill of $6,936,000 is being amortized over a period of 15 years; customer
contracts are being amortized over nine years; assembled work force is being
amortized over seven years; and noncompete agreements are being amortized over
five years.
CONTROL-O-FAX CORPORATION
Effective as of October 1, 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") for $8,250,000 in cash, plus the assumption of certain
liabilities, summarized as follows (in thousands):
<TABLE>
<S> <C>
Purchase price $ 8,250
Add liabilities assumed: 1,468
Less assets acquired:
Cash (200)
Accounts receivable and other (2,589)
Property and equipment, net (401)
Identifiable intangibles:
Customer contracts (2,400)
Assembled work force (400)
Noncompete agreements (600)
------------
Goodwill (6,590)
------------
$ 3,128
============
</TABLE>
23
<PAGE> 24
ENVOY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Goodwill of $3,128,000 is being amortized over a period of 15 years; customer
contracts are being amortized over nine years; assembled work force is being
amortized over seven years; and noncompete agreements are being amortized over
three years.
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 and 1996
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):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996
--------- ---------
<S> <C> <C>
Revenues $144,099 $115,978
Net loss applicable to common stock (13,985) (45,744)
Net loss per common share (0.71) (2.72)
</TABLE>
Pro forma results of operations for 1998 acquisitions have not been presented
because the results of operations of Synergy and Control-O-Fax, the Company's
only business combinations accounted for as purchases that were completed during
1998, are not material to those of the Company.
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
24
<PAGE> 25
ENVOY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 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.
In March 1996, following the termination of the Management Agreement and the
Option, certain shareholders of EMC filed a lawsuit 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):
25
<PAGE> 26
ENVOY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1998 1997
------- -------
<S> <C> <C>
Current portion of liability for unfavorable contracts $ 2,895 $ 3,910
Liability to former owners of DSS -- 2,200
Unearned income 2,153 1,942
Accrued communication expense 3,710 1,982
Accrued income taxes 4,265 1,679
Accrued salaries and benefits 3,614 2,348
Accrued vendor incentives 4,097 1,808
Customer deposits 3,308 1,894
Other 6,553 7,599
------- -------
$30,595 $25,362
======= =======
</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. All borrowings under those lines of credit were repaid in
1998 and the lines were terminated.
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
26
<PAGE> 27
ENVOY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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,
1998, 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 at December 31, 1998 and 1997 consists primarily of capital lease
obligations payable through the year 2003, at interest rates ranging from 9.25%
to 22%. Annual long-term debt and capital lease obligations principal
requirements are $271,000 in 1999, $209,000 in 2000, $118,000 in 2001, $35,000
in 2002, and $4,000 in 2003, with none thereafter.
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,
1998, 1997 and 1996 was approximately $4,175,000, $2,207,000 and $1,955,000,
respectively.
Future minimum rental payments at December 31, 1998 under operating lease
arrangements are as follows (in thousands):
<TABLE>
<S> <C>
1999 $ 4,433
2000 3,759
2001 3,296
2002 2,680
2003 2,437
Thereafter 6,467
--------
Total minimum lease payments $ 23,072
========
</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" ("SFAS No. 123"), 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.
At December 31, 1998, the Company had reserved 6,649,640 shares of Common Stock
for issuance in connection with the stock option plans. Summaries of stock
options outstanding are as follows:
27
<PAGE> 28
ENVOY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
WEIGHTED-
OPTION AVERAGE
NUMBER OF PRICE PER EXERCISE
SHARES SHARE PRICE
---------- -------------- ----------
<S> <C> <C> <C>
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) 7.75-40.25 19.92
Outstanding, December 31, 1997 3,402,000 1.83-37.00 13.58
Granted 832,000 21.875-44.875 37.13
Exercised (567,000) 1.83-30.75 4.22
Canceled (225,000) 10.00-40.625 27.49
Outstanding, December 31, 1998 3,442,000 $ 3.50-$44.875 $ 19.90
</TABLE>
The number of stock options exercisable and the weighted average exercise price
of these options was 798,343 and $8.30 and 1,147,500 and $5.76 at December 31,
1998 and 1997, respectively. The weighted-average fair value of options granted
during 1998 and 1997 was $17.71 and $10.96, 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 to key employees and consultants of the Company
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, 1998, options for the purchase of 2,791,935
shares were outstanding under this plan. No further grants will be made 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, 1998,
options for the purchase of 30,000 shares were outstanding under this plan.
The Company's 1998 Stock Incentive Plan has authorized the grant of options to
key employees, consultants and non-employee directors of the Company for up to
2,000,000 shares of Common Stock. All options granted have 10-year terms from
the grant date and vest over periods from two to four years from the date of
grant. At December 31, 1998, options for the purchase of 113,000 shares were
outstanding under this plan.
The Company's 1998 ExpressBill Stock Option Plan has authorized the grant of
options to key employees of the ExpressBill Companies for up to 300,000 shares
of Common Stock. All options granted have 10-year terms from the grant date and
vest over periods from two to five years from the date of grant. At December 31,
1998, options for the purchase of 257,000 shares were outstanding under this
plan. No further grants will be made under this plan.
28
<PAGE> 29
ENVOY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company's 1998 Synergy Stock Option Plan has authorized the grant of options
to key employees of Synergy for up to 75,000 shares of Common Stock. All options
granted have 10-year terms from the grant date and vest over periods from two to
five years from the date of grant. At December 31, 1998, options for the
purchase of 75,000 shares were outstanding under this plan. No further grants
will be made 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. 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 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, 1998, options for the purchase of 175,341 shares were outstanding
and fully exercisable under these plans.
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 1998, 1997 and 1996,
respectively: risk-free interest rates of 4.53% and 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 .433 to .500 and .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):
29
<PAGE> 30
ENVOY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Pro forma net loss applicable to common stock $ (794) $ (12,435) $ (38,957)
Pro forma net loss per common share:
Basic $ (0.04) $ (0.63) $ (2.36)
Diluted $ (0.04) $ (0.63) $ (2.36)
</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 Stock for issuance under the
ESPP. Shares issued under the ESPP totaled approximately 15,000 and 3,000 in
1998 and 1997, respectively.
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 Note 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. The difference
between the issuance price of $40,100,000, or $10.75 per share, and the fair
value of the underlying shares on the date of the related Stock Purchase
Agreement has been presented in the consolidated financial statements as a
dividend of Series B Preferred Stock for the year ended December 31, 1996. 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 June 1995, 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.
30
<PAGE> 31
ENVOY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 the Company's 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.
In connection with the Company's pending merger with Quintiles (see Note 3), the
Company amended the shareholder rights plan to exclude the Merger and related
transactions from triggering an event allowing exercise of the Rights and from
certain other restrictions under the shareholder rights plan.
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.
16. INCOME TAXES
The provision for income taxes was comprised of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Current:
Federal $ 15,121 $ 4,957 $ 271
State 3,478 2,429 1,107
-------- ------- -------
Total current 18,599 7,386 1,378
Deferred:
Federal (105) 421 1,139
State (13) (1,474) (800)
-------- ------- -------
Total deferred (118) (1,053) 339
-------- ------- -------
Provision for income taxes $ 18,481 $ 6,333 $ 1,717
======== ======= =======
</TABLE>
31
<PAGE> 32
ENVOY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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,
------------------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Income tax provision (benefit) at U.S. federal
statutory rate $ 7,954 $(1,003) $(6,997)
Nondeductible merger costs 315 -- 2,979
Nondeductible goodwill amortization 7,242 7,066 5,447
State income taxes, net of federal benefit 2,252 630 203
Change in valuation allowance -- 238 163
Other, net 718 (598) (78)
------- ------- -------
Income tax provision $18,481 $ 6,333 $ 1,717
======= ======= =======
</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):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1998 1997
------- -------
<S> <C> <C>
Deferred tax liability:
Difference between book and tax depreciation and amortization
related to property and equipment $(2,178) $(2,348)
Difference between book and tax amortization related to goodwill
and other intangibles (1,554) (3,517)
Difference between book and tax treatment of unfavorable contracts (1,371) 0
------- -------
Total deferred tax liabilities (5,103) (5,865)
------- -------
Deferred tax assets:
Difference between book and tax amortization related to write-off of
acquired in-process technology 2,028 2,432
Difference between book and tax treatment of leased assets 795 585
Reserves and accruals not currently deductible 2,003 1,683
Net operating loss carryforward 469 398
Difference between book and tax treatment of investments 915 900
Difference between book and tax treatment of compensation expense 144 408
Tax credits 0 583
Other 0 119
------- -------
Total deferred tax assets 6,354 7,108
Valuation allowance for deferred tax assets (915) (1,025)
------- -------
Net deferred tax assets 5,439 6,083
------- -------
Net deferred tax assets (liability) $ 336 $ 218
======= =======
</TABLE>
32
<PAGE> 33
ENVOY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
At December 31, 1998, the Company had state net operating loss carryforwards of
approximately $11,600,000. These losses begin to expire in 2010.
The Company evaluates the amounts recorded for the valuation allowance for
deferred tax assets each year. The valuation allowance relates to the loss on
the investment in EMC and to certain tax credits that existed at December 31,
1997. The change in the valuation allowance at December 31, 1998 is due
primarily to tax credits which expired in 1998. In evaluating the requirement
for the valuation allowance, the Company considered its deferred tax
liabilities, which were $5,103,000 and $5,865,000 at December 31, 1998 and 1997,
respectively, as a possible source of taxable income. Management believes that
it is more likely than not that the deferred tax assets in excess of the
valuation reserves will be realized.
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 1998, 1997 and 1996, pro forma income
tax expense in the consolidated financial statements under the provisions of
SFAS No. 109 would have been $18,740,000, $7,365,000 and $1,882,000,
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, and may make
additional discretionary contributions. The amount of expense for the Company
contribution for all plans was approximately $674,000, $613,000 and $583,000 for
the years ended December 31, 1998, 1997 and 1996, 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.
33
<PAGE> 34
ENVOY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
19. NET INCOME (LOSS) PER COMMON SHARE
The following table sets forth the computation of net income (loss) per common
share (in thousands, except per share data):
<TABLE>
<CAPTION>
1998 1997 1996
------- -------- ---------
<S> <C> <C> <C>
Numerator for basic and diluted
earnings per share:
Net income (loss) $ 4,244 $ (9,198) $(22,296)
Less preferred stock dividends -- -- (14,921)
------- -------- --------
Net income (loss) applicable to
common shares $ 4,244 $ (9,198) $(37,217)
======= ======== ========
Denominator:
Denominator for basic earnings per
share - weighted average shares 21,179 19,686 16,519
Effect of dilutive securities:
Employee stock options 1,131 --(1) --(1)
Convertible preferred stock 2,800 --(1) --(1)
------- -------- --------
Denominator for diluted earnings per
share - adjusted weighted average
shares 25,110 19,686 16,519
======= ======== ========
Basic net income (loss) per common
share $ 0.20 $ (0.47) $ (2.25)
======= ======== ========
Diluted net income (loss) per
common share $ 0.17 $ (0.47) $ (2.25)
======= ======== ========
</TABLE>
(1) Stock options to purchase 3,402,000 and 3,229,000 shares of Common
Stock in 1997 and 1996, 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 629,281 shares of Common
Stock in 1996) 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.
34
<PAGE> 35
ENVOY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
20. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1998
----------------------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues $42,524 $42,949 $47,290 $52,010
Gross profit $23,127 $23,141 $27,621 $28,557
Net income $ 74 $ 614 $ 2,273 $ 1,283
Net income per common share
Basic $ 0.00 $ 0.03 $ 0.11 $ 0.06
Diluted $ 0.00 $ 0.02 $ 0.09 $ 0.05
<CAPTION>
1997
---------------------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
------- ------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues $30,763 $32,169 $34,693 $39,980
Gross profit $16,257 $17,144 $18,372 $21,585
Net loss $(2,315)(a) $ (938) $(4,635)(b) $(1,310)
Net loss per common share, basic $ (0.12)(a) $ (0.05) $ (0.23)(b) $ (0.07)
and diluted
</TABLE>
(a) The Company recorded a $600,000 write-off of acquired in-process
technology related to the DSS acquisition (see Note 4).
(b) 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 4).
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. The
related lease extends through February 2013, with annual rentals of $457,500
through February 2003, $503,250 through February 2008 and $553,575 through
February 2013. Rentals paid were approximately $397,000 in 1998 and $92,000 in
each of 1997 and 1996.
22. LITIGATION
Class action complaints were filed on each of August 20, 1998, August 21, 1998
and September 15, 1998, in the United States District Court, Middle District of
Tennessee, Nashville Division, against the Company and certain of its executive
officers. On December 28, 1998, the plaintiffs filed, pursuant to the Court's
instructions, a Consolidated Class Action Complaint (the "Complaint"),
consolidating the three cases into a single action. The Complaint alleges, 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, and also
35
<PAGE> 36
asserts additional claims under Tennessee common law for fraud and negligent
misrepresentation. 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. Plaintiffs
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. Neither the likelihood of an unfavorable outcome nor the
amount of the ultimate liability, if any, with respect to these claims can be
determined at this time.
The Company also is a party in certain other pending litigation arising in the
course of its business. While the final outcome of such litigation cannot be
predicted with certainty, it is the opinion of the Company's management that the
outcome of these matters would not materially affect the consolidated financial
position or results of operations of the Company.
36
<PAGE> 37
FINANCIAL STATEMENTS
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue............................... $ 7,516 $ 21,573 $ 18,386 $ 41,666
Production costs...................... (3,422) (11,141) (7,112) (21,980)
Selling, general and administrative
expenses............................ (3,227) (7,809) (14,140) (16,091)
In-process research and development
write off........................... -- (12,046) -- (12,046)
Amortization of intangible assets..... (201) (342) (471) (684)
Impairment of assets held for sale.... -- (1,735) -- (14,735)
Income (loss) from assets held for
sale................................ -- 410 -- (188)
Transaction costs..................... (800) -- (800) --
-------- -------- -------- --------
Operating income (loss)............... (134) (24,090) (4,137) (24,058)
Gain on sale of operations............ -- 33,608 52,844 36,239
Interest and other income............. 1,967 1,091 9,671 1,962
Interest expense...................... (916) (1,164) (1,868) (2,330)
-------- -------- -------- --------
Income before income taxes and
extraordinary item.................. 917 9,445 56,510 11,813
Income tax provision.................. (574) (9,254) (7,591) (9,149)
-------- -------- -------- --------
Net income before extraordinary
item................................ 343 191 48,919 2,664
Extraordinary gain on redemption of
debt, net of tax of $1,009.......... -- -- 1,154 --
-------- -------- -------- --------
Net income..................... $ 343 $ 191 $ 50,073 $ 2,664
======== ======== ======== ========
Earnings per share:
Basic --
Income before extraordinary
item........................... $ 0.03 $ 0.01 $ 3.94 $ 0.20
Extraordinary item............... -- -- 0.09 --
-------- -------- -------- --------
Net income..................... $ 0.03 $ 0.01 $ 4.03 $ 0.20
======== ======== ======== ========
Diluted --
Income before extraordinary
item........................... $ 0.03 $ 0.01 $ 3.16 $ 0.20
Extraordinary item............... -- -- 0.09 --
-------- -------- -------- --------
Net income..................... $ 0.03 $ 0.01 $ 3.25 $ 0.20
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
37
<PAGE> 38
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SIX MONTHS
DECEMBER 31 ENDED DECEMBER 31
------------- ------------------
1998 1997 1998 1997
---- ------ -------- -------
<S> <C> <C> <C> <C>
Net income........................................... $343 $ 191 $50,073 $2,664
---- ------ ------- ------
Other comprehensive income, net of tax:
Foreign currency translation adjustment, net of tax
of $20, $353, $20 and $960, respectively........ 29 (509) 29 (1,381)
Unrealized gains on investments:
Unrealized holding (losses) gains arising during
period net of tax of $27, $1,508, $3,294 and
$1,458, respectively.......................... (38) 2,171 (4,739) 2,171
Less: reclassification adjustment for gains
included in net income, net of tax of $28, $0,
$2,467 and $0, respectively................... 41 -- 3,550 --
---- ------ ------- ------
Other comprehensive income (loss).................... 32 1,662 (1,160) 790
---- ------ ------- ------
Comprehensive income................................. $375 $1,853 $48,913 $3,454
==== ====== ======= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
38
<PAGE> 39
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
ASSETS:
Current assets:
Cash and cash equivalents................................. $ 77,562
Marketable securities..................................... 115,073
Accounts receivable, principally trade.................... 7,272
Work-in-process........................................... 740
Prepaid expenses and other current assets................. 265
--------
Total current assets................................... 200,912
Marketable securities....................................... 35,630
Property and equipment, net................................. 1,350
Goodwill, net............................................... 9,013
Other assets, net........................................... 6,803
--------
Total assets........................................... $253,708
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...................... $ 49,355
Note payable.............................................. 73,026
Accounts payable.......................................... 389
Accrued liabilities....................................... 10,397
Unearned income........................................... 9,632
--------
Total current liabilities.............................. 142,799
Long-term debt.............................................. --
Other liabilities........................................... --
--------
Total liabilities...................................... 142,799
--------
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value, 25,000,000 shares
authorized, and 13,337,175 and 13,314,975 shares
issued,
respectively........................................... 133
Paid-in capital........................................... 88,452
Treasury stock at cost -- 918,254 shares.................. (8,494)
Retained earnings (accumulated deficit)................... 29,741
Cumulative translation adjustment......................... 49
Unrealized gain on investments, net of income tax charge
of $716 and $4,010, respectively....................... 1,028
--------
Total stockholders' equity............................. 110,909
--------
Total liabilities and stockholders' equity............. $253,708
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
39
<PAGE> 40
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
------------------
1998 1997
------- --------
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income................................................ $50,073 $ 2,664
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization............................. 923 1,710
Profit on disposal of database and US businesses, net..... -- (36,239)
Profit on disposal of non-US businesses, net.............. (52,844) --
Gain on redemption of debentures.......................... (2,163) --
Profit on sale of marketable securities................... (6,017) --
In-process research and development writeoff.............. -- 12,046
Impairment of assets held for sale........................ -- 14,735
Change in operating assets and liabilities, net of effect of
acquisitions and disposals:
Accounts receivable....................................... 1,338 (2,484)
Work-in-process........................................... 37 1,028
Prepaid expenses and other assets......................... 519 904
Accounts payable and accrued liabilities.................. (1,901) 10,942
Unearned income........................................... 221 466
Other liabilities......................................... (40) (19)
------- --------
Total adjustments...................................... (59,927) 3,089
------- --------
Net cash provided by (used in) operating activities......... (9,854) 5,753
------- --------
Cash flows provided by (used in) investing activities:
Capital expenditures...................................... (116) (1,031)
Proceeds from businesses disposed, net of associated
selling expenses....................................... (1,831) 12,546
Cash consideration advanced to Source Europe under a line
of credit.............................................. -- (6,433)
Sale (purchase) of marketable securities, net............. (8,609) (1,075)
Acquisition and contingent purchase price payments........ -- (2,159)
Cash received on acquisition of Source Europe............. -- 9,942
------- --------
Net cash provided by (used in) investing activities......... (10,556) 11,790
------- --------
Cash flows provided by (used in) financing activities:
Net proceeds from options exercised....................... 253 515
Repayments of long-term debt and capital lease
obligations............................................ (17,226) (210)
Note payable.............................................. 73,026 --
------- --------
Net cash provided by (used in) financing activities......... 56,053 305
------- --------
Effect of assets held for sale.............................. -- 3,385
Effect of exchange rate movements........................... (396) (869)
------- --------
Net increase in cash and cash equivalents................... 35,247 20,364
Cash and cash equivalents at beginning of period............ 42,315 32,414
------- --------
Cash and cash equivalents at end of period.................. $77,562 $ 52,778
======= ========
</TABLE>
40
<PAGE> 41
PHARMACEUTICAL MARKETING SERVICES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- Continued
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
------------------
1998 1997
------- --------
<S> <C> <C>
Supplemental disclosure of non-cash investing and financing
activities:
IMS Health Incorporated shares received................... $71,279 $ --
Cost of assets sold or disposed for consideration other
than cash.............................................. 13,806 --
Fair value of assets acquired............................. -- 19,104
PMSI shares received...................................... -- 8,494
In-process research and development....................... -- 12,046
Completed technology acquired............................. -- 1,363
Cancellation of amounts due from Source Europe under a
line of credit......................................... -- (6,433)
National Data Corporation shares received................. -- 35,328
</TABLE>
The accompanying notes are an integral part of these financial statements.
41
<PAGE> 42
1. INTERIM UNAUDITED FINANCIAL INFORMATION
The accompanying statements of operations for the three and six months
ended December 31, 1998 and 1997, the statements of cash flows for the six
months ended December 31, 1998 and 1997, the balance sheet as of December 31,
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 proposed merger, 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 and six months ended December 31, 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
PMSI's audited consolidated financial statements and related notes thereto, as
of June 30, 1997 and 1998 and for each of the three years in the period ended
June 30, 1998 included elsewhere herein.
2. COMPREHENSIVE INCOME
Effective July 1, 1998, PMSI adopted the provisions of Statement of
Financial Accounting Standard No. 130, "Reporting Comprehensive Income."
Comprehensive income represents the change in net assets of a company as a
result of non-owner transactions. Comprehensive income for the three months
ended September 30, 1998 (which is not included herein) has been adjusted by
$7.1 million to reflect realized gains included in net income.
3. INCOME PER SHARE
PMSI has adopted the Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (SFAS 128). In accordance with 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
42
<PAGE> 43
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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding:
Shares used in computing basic
earnings per share.................. 12,409,653 13,106,463 12,408,040 13,163,206
Assumed exercise of in the money stock
options............................. 1,472,900 1,196,900 1,472,900 1,196,900
Less assumed buy-back under the
treasury stock method............... (1,204,920) (1,010,169) (975,847) (965,075)
Assumed conversion of debentures...... 2,466,250 3,450,000 2,828,668 3,450,000
---------- ---------- ---------- ----------
Shares used in computing diluted
earnings per share if the result is
dilutive............................ 15,143,883 16,743,194 15,733,761 16,845,031
========== ========== ========== ==========
</TABLE>
Options to purchase 323,100 shares of Common Stock at prices ranging from
$11.13 to $22.00 were outstanding at December 31, 1998 but were not included in
the computation of diluted earnings per share for the three and six months ended
December 31, 1998 because the options exercise price was greater than the
average market price of the common shares.
Reduced interest expense for the assumed conversion of 6 1/4% Debentures
would have had a favorable impact on net income of $470,129 and $1,015,469 for
the three months and six months ended December 31, 1998, respectively. Such
amounts for the three and six months ended December 31, 1997 would have been
$647,000 and $1,294,000, respectively. In computing diluted per share amounts
for the three months ended December 31, 1998 and 1997, and the six months ended
December 31, 1997, the assumed conversion of the 6 1/4% Debentures was excluded
because the effect was anti-dilutive.
4. INCOME TAXES
The effective income tax rates for the quarters ended December 31, 1998 and
1997 were 63% and 98%, respectively. The 1998 rate was negatively impacted by
non-deductible operating losses incurred in countries where a benefit could not
be taken. The 1997 effective tax rate was negatively impacted by the
non-deductible write off of in-process research and development costs.
The effective income tax rates for the six months ended December 31, 1998
and 1997 were 13% and 77%, respectively. The effective income tax rates for the
six months ended December 31, 1998 and 1997 were also affected by the items
noted above plus the release in 1998 of a $1.9 million state tax provision,
which is no longer required, and the gain on the sale of operations of $52.8
million which had an associated tax charge of $7.0 million.
43
<PAGE> 44
5. EXTRAORDINARY ITEM
During the period ended September 30, 1998, PMSI redeemed $19.7 million of
the 6 1/4% Debentures at an aggregate cost of $17.2 million. As a result of the
early redemption, PMSI recognized an after-tax extraordinary gain of $1.2
million.
6. GOODWILL
PMSI assesses the recovery of its goodwill 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.
7. 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.
The resulting pre-tax profit from this transaction totaled $52.8 million which
is included in the statement of operations for the quarter ended September 30,
1998. The transaction is more fully described in PMSI's Form 8-K filed August
18, 1998, as amended. IMS Health exercised its option to acquire the PMSI
Belgian subsidiary and the Source Belgian subsidiary was disposed of during the
period ended December 31, 1998.
8. OTHER EVENTS DURING THE QUARTER
On October 14, 1998, PMSI entered into a forward sale arrangement with CIBC
Oppenheimer ("CIBC") pursuant to which PMSI transferred all of the IMS Health
common stock received in the transaction in exchange for a note payable of $73.0
million. The 1,197,963 shares of IMS Health common stock are being held by CIBC
as collateral against PMSI's delivery obligation on August 12, 1999.
ON December 14, 1998, PMSI and Quintiles Transnational Corp. ("Quintiles")
(NASDAQ:QTRN) announced jointly that they had signed a definitive merger
agreement whereby PMSI would be merged into Quintiles and stockholders of PMSI
would receive shares of Quintiles common stock, $0.01 par value, in exchange for
their shares of common stock, $0.01 par value, of PMSI valued at $15.40 per
share. The transaction has been approved by PMSI's board of directors and
remains subject to approval by PMSI's stockholders and clearance by the SEC of
PMSI's Proxy Statement.
The 6 1/4% Debentures were redeemed for face value on February 1, 1999.
44
<PAGE> 45
Item 7. Financial Statements and Exhibits.
(c) Exhibits.
Exhibit Number Description of Exhibit
-------------- ----------------------
23.01 Consent of Ernst & Young LLP (Envoy)
23.02 Consent of Arthur Andersen LLP (Envoy)
45
<PAGE> 46
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
QUINTILES TRANSNATIONAL CORP.
By: /s/ Rachel R. Selisker
------------------------------------------
Dated: February 17, 1999 Rachel R. Selisker
Chief Financial Officer and Executive Vice
President Finance
46
<PAGE> 47
EXHIBIT INDEX
Exhibit Number Description of Exhibit
- -------------- ----------------------
23.01 Consent of Ernst & Young LLP (Envoy)
23.02 Consent of Arthur Andersen LLP (Envoy)
<PAGE> 1
EXHIBIT 23.1
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 January 29, 1999, 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
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 for each of the
two 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 for each of the two years in the period ended
December 31, 1997 included in this Current Report on Form 8-K 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
