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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
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For the Fiscal Year Ended December 31, 1996 Commission file number 0-25062
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ENVOY CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
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Tennessee 62-1575729
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
15 Century Boulevard, Suite 600
Nashville, Tennessee 37214
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(Address of Principal Executive Offices) (Zip Code)
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Registrant's Telephone Number, Including Area Code: (615) 885-3700
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
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(Title of Class)
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of March 18, 1997, was approximately $487,326,000. The
market value calculation was determined using the closing sale price of the
Registrant's common stock on March 18, 1997, as reported on The Nasdaq Stock
Market.
The number of shares outstanding of the Registrant's common stock as of
March 18, 1997 was 15,670,506.
DOCUMENTS INCORPORATED BY REFERENCE
Documents from which Portions are
Part of Form 10-K Incorporated by Reference
Part III Portions of the Proxy Statement relating to the
Annual Meeting of Shareholders to be held on June
19, 1997 are incorporated by reference into Items
10, 11, 12 and 13.
[The Exhibit Index is located
on page 58 of 91 total pages.]
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ENVOY CORPORATION
TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT
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PART I
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ITEM 1. Business....................................................................................1
ITEM 2. Properties.................................................................................10
ITEM 3. Legal Proceedings..........................................................................10
ITEM 4. Submission of Matters to a Vote of Security Holders........................................10
PART II
ITEM 5. Market for the Registrant's Common Equity and Related Shareholder Matters..................11
ITEM 6. Selected Financial Data....................................................................12
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................................................13
ITEM 8. Financial Statements and Supplementary Data................................................23
ITEM 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure...................................................................23
PART III
ITEM 10. Directors and Executive Officers of the Registrant.........................................23
ITEM 11. Executive Compensation.....................................................................23
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.............................23
ITEM 13. Certain Relationships and Related Transactions.............................................23
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...........................24
SIGNATURES..................................................................................................27
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ENVOY CORPORATION
PART I
ITEM 1. BUSINESS
GENERAL
ENVOY Corporation, a Tennessee corporation ("ENVOY" or the "Company"), is
a provider of electronic data interchange ("EDI") services to participants in
the health care market, including pharmacies, physicians, hospitals, dentists,
billing services, commercial insurance companies, managed care organizations,
state and federal governmental agencies and others. The Company provides health
care EDI services on a real-time and batch-processing basis by utilizing
proprietary computer and telecommunications software and microprocessor
technology. ENVOY is one of the largest processors of electronic real-time
pharmacy and commercial third-party payor batch transactions in the United
States based upon annual transaction volume. ENVOY's transaction network
consists of approximately 188,000 physicians, 44,000 pharmacies, 30,000
dentists, 3,700 hospitals and 600 payors, including approximately 46 Blue Cross
Blue Shield Plans, 50 Medicare Plans and 25 Medicaid Plans.
The Company was incorporated in Tennessee in August 1994 as a wholly-owned
subsidiary of ENVOY Corporation, a Delaware corporation which was formed in 1981
(the "Predecessor"). The Predecessor was formed to develop and market electronic
transaction processing services for the financial services and health care
markets. In June 1995, in order to facilitate the transfer of the financial
services business to First Data Corporation ("First Data"), the assets and
liabilities of the Predecessor associated with the health care business were
transferred to the Company. The Company was spun-off to shareholders through a
stock dividend distribution (the "Distribution") and the Predecessor was merged
into First Data.
As part of the ongoing effort to expand its health care EDI service and
product offerings, the Company completed several acquisitions during 1996. In
March 1996, the Company acquired all the outstanding stock of National
Electronic Information Corporation ("NEIC"), one of the nation's largest
clearinghouses of batch claims for commercial payors. The Company also completed
several other smaller acquisitions of health care information clearinghouses and
other companies with product or service offerings complementary to the Company's
business. See "- Recent Acquisitions".
INDUSTRY BACKGROUND
Throughout the 1980's, advances in computer software, telecommunications
and microprocessor technology enabled the development of on-line, real-time
systems that electronically capture and transmit information, replacing the
recording and processing of transaction information on paper. In addition to
offering greater convenience, these electronic systems reduce processing costs,
settlement delays and losses from fraudulent transactions. The earliest and most
significant advances in electronic transaction processing occurred in the
financial services market, particularly in the areas of credit card
authorization and settlement. The Company believes the evolution of electronic
transaction processing in the financial services market has created the
framework for automation of other markets, such as health care, still dominated
by paper-based processing.
There are many types of transactions, information exchanges and other
communications that occur between the various participants in the health care
industry, including patients, physicians, hospitals, pharmacies, dentists,
billing services and payors. While electronic transaction processing for certain
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portions of the health care market has increased over the past few years, the
majority of health care transactions continue to be paper-based and
manually-processed. Existing EDI services in this market primarily consist of:
(i) on-line verification of patient eligibility by pharmacies, health care
providers and third-party payors (both commercial and governmental) through
direct network communications; (ii) referral management for providers and
payors; and (iii) batch processing of health care reimbursement claims through a
central clearinghouse.
Health care providers initiate electronic transaction processing through
dedicated point-of-service terminals, stand alone software or software
integrated with the provider's management information system. Providers can
verify patient eligibility or obtain authorization for services at the time of
appointment or registration by transmitting patient data to the processor across
a telecommunication line. The processor then interfaces with the payor to obtain
an eligibility or authorization confirmation which is transmitted back to the
provider. The submission of claims occurs by providers aggregating claims
throughout the day and submitting them electronically to a clearinghouse in
batch. Claims are sorted, formatted and edited by the clearinghouse, and are
then forwarded electronically to the payor. The claim is processed by the payor
and the adjudicated response is communicated back to the provider. To the extent
required, the payor sends a check to the provider or, in certain circumstances,
initiates an electronic funds transfer to the provider's account.
The Company believes EDI transaction processing offers a number of
benefits to payors and providers. The elimination or reduction of paper-based
transactions significantly lowers claims processing costs of payors, and on-line
encounter and referral information provides more efficient medical cost
management for managed care organizations and networked providers. In addition,
payors are able to more easily detect fraud and screen for unusual utilization
trends. From the health care providers' standpoint, information pertaining to
eligibility, authorization and reimbursement can be more easily accessed and
transmitted. By processing claims electronically, providers also reduce overhead
costs and staff time and improve accounts receivable management.
The first major departure from paper-based claims processing in the health
care market occurred in the late 1980's in the pharmacy industry. Medicare and
Medicaid payment reforms and cost saving initiatives by third-party commercial
payors and large retail pharmacy chains led to a significant increase in
electronic processing of pharmacy third-party claims. The development and use by
pharmacies of practice management software products that include the capability
of connecting with an electronic claims processing network also facilitated the
movement to electronic claims processing.
According to the Health Data Directory, approximately 80% of the 1.3
billion and 83% of the 1.4 billion third-party pharmacy claims processed in 1995
and 1996, respectively, were processed electronically. The Company believes that
only a small percentage of nonclaim pharmacy transactions, such as the delivery
of prescriptions by the physician to the pharmacist or formulary inquiries to
pharmacy benefit managers, are delivered electronically through real-time
on-line systems. The Company believes that there are opportunities to expand
electronic processing to other areas in the pharmacy market. Also, as the
population continues to grow and more benefit plans include prescription
programs, the Company believes the demand for real-time processing of pharmacy
transactions will continue to increase.
In addition to pharmacies, other providers, including hospitals,
physicians and dentists, transmit third-party reimbursement claims
electronically, largely on a batch basis through claims clearinghouses.
According to the Health Data Directory, approximately 40% of the 2.3 billion
non-pharmacy health care claims processed in 1996 were processed electronically.
The recent growth of managed care and
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governmental health care cost containment efforts have increased the use of
real time transaction processing by hospitals and physicians. Certain state
Medicaid programs permit providers to electronically verify Medicaid
eligibility on a real-time basis, and certain managed care companies have
encouraged their provider networks to utilize real-time EDI for authorizations,
encounter reports and referrals. The Company believes that there are
significant opportunities for further expansion of EDI transactions to the
non-pharmacy sector of the health care market, both for claims processing as
well as for clinical and other purposes.
COMPANY SERVICES
ENVOY provides various EDI services for third-party payors, pharmacies,
physicians, hospitals, dentists, billing services and others through a real-time
network and batch clearinghouse. Through its transaction network, ENVOY provides
an electronic link, directly and indirectly through other clearinghouses or
vendors, to approximately 188,000 physicians, 44,000 pharmacies, 30,000
dentists, 3,700 hospitals and 600 payors, including approximately 46 Blue Cross
Blue Shield Plans, 50 Medicare Plans and 25 Medicaid Plans.
Real-time Transaction Processing. The Company provides real-time
transaction processing for pharmacy claim adjudication and managed care
transactions for health care providers and payors.
Pharmacy transactions constituted 78.3% of ENVOY's 611 million real-time
transactions processed in 1996. A standard pharmacy transaction is the inquiry
by the pharmacy, through a point-of-service terminal or personal computer
terminal, to determine whether the patient is covered by a benefit program.
After eligibility is confirmed, the claim is settled and the payor transmits to
the pharmacy the amount and timing of the pending payment. As of December 31,
1996, ENVOY's EDI network was linked to approximately 44,000 of the estimated
56,000 retail pharmacies in the United States, including 35 of the top 50 retail
pharmacy chains.
ENVOY's real-time managed care transactions accounted for 9.8 million of
ENVOY's total real-time transactions in 1996. These transactions between
providers and payors include (i) verification of the patient's enrollment in a
program; (ii) verification that the provider is eligible to treat the patient;
(iii) verification that the patient is eligible for a particular treatment; (iv)
filing of encounter data; (v) referral to a specialist; and (vi) other ancillary
transactions. These transactions are enabled by the Company's network
connections to various databases. The Company has access to managed care and
commercial insurer databases for Prudential, CIGNA, Aetna , Oxford Health Plans,
MetraHealth, U. S. Healthcare, Pacificare, Blue Cross of California, Empire Blue
Cross and Blue Shield, Blue Cross and Blue Shield for the National Capital Area,
QualMed, Access Med Plus and Health 123, and is a sponsored participant to the
Blue Cross and Blue Shield BluesNet network. For Medicaid eligibility
verification and related transactions, the Company has access to state databases
in California, Connecticut, Florida, Georgia, Kansas, Mississippi, Missouri, New
Jersey, New York, North Carolina, Ohio, Tennessee and Washington. In addition,
if the patient wishes to pay the deductible or co-payment amounts by credit
card, ENVOY's services provide the ability to obtain payment authorization and
verification at the provider's offices.
Batch Transaction Processing. With the acquisition of NEIC, ENVOY became
one of the nation's largest processors of commercial third-party payor claims
and enhanced its electronic network with connection to a significant number of
health care providers and payors across the United States. Batch transactions
are predominantly used to process reimbursement claims in traditional
fee-for-service commercial or government payor systems and to process encounter
data in capitated environments. These
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transactions are neither time-sensitive nor easily processed on a real-time
basis and, as a result are processed on a collective and delayed basis. To
submit claims, providers collect data throughout the day and then electronically
forward these claims in bulk to a clearinghouse. ENVOY's clearinghouse
electronically collects and verifies receipt of the claims and performs payor
specific reformatting required to conform to a particular payor's specifications
and editing, aggregates daily transactions by payor and transmits claims to
payors based upon each payor's chosen communications protocols. ENVOY processed
an aggregate of approximately 118 million commercial third-party payor claims in
1996. ENVOY's transaction network is connected with 600 of the third-party
payors, including all of the top 20 commercial payors (based upon the number of
members covered by such third-party payors).
EDI Products and Interfaces. The Company has developed a range of hardware
and software products and interfaces to facilitate the adoption of EDI by its
customers. In addition, ENVOY supports industry standards of the American
National Standards Institute, X12 Subcommittee and Healthcare Financing
Administration National Standards.
ENline(SM). The Company's ENline family of proprietary software
products performs all of the transactions of a stand alone
point-of-service terminal and has enhanced functionality to facilitate
both batch and real-time processing, as well as message based E-mail
transactions. The point-of-service terminal product, called ENline
Genesis, is designed to handle real-time transactions and allow the
Company to rapidly and cost effectively connect a significant number of
providers into the transaction network. The point-of-service terminals can
be accessed remotely to modify application software and communications
parameters, allowing the Company the flexibility to implement changes in
services relatively easily. Point-of-service terminals typically are
purchased by payors, who are sponsoring a managed care network, and
generally are offered to providers free of charge. In addition, providers
may purchase terminals from the Company for a nominal fee.
The Company also has developed certain ENline PC-based products with
enhanced functionability features and open Application Program Interfaces
("APIs"). The APIs are established at the operating system level and are
designed to enable the Company's software to run on a wide variety of
operating systems including DOS, UNIX and Windows. The ENline PC-based
products can either function as a stand alone data entry system or work in
conjunction with physician practice management software. The stand alone
version, ENline Companion, is offered directly to providers for a nominal
price. ENline Synergy is designed for integration into a practice
management software product. The Company, in conjunction with the practice
management vendor, integrates ENline Synergy into the practice management
system for distribution by the practice management vendor to the provider.
ENline Synergy also controls the editing and distribution of the
information from the practice management system to the Company's network.
Automatic Eligibility Vertification. During 1996, the Company
acquired technology for the automation of eligibility requests through the
acquisition of National Verification Systems, L.P ("NVS"). See "-Recent
Acquisitions." This technology interfaces with hospital and large practice
management information systems to automatically verify patient eligibility
at the time of admission or scheduling. Eligibility requests are obtained
from the Company's real-time medical switch. In addition to eligibility
verification, the Company's eligibility verification system provides
statistical reporting on patient demographics for hospitals and/or
physician practices.
Automatic Transaction Posting. Through the acquisition of Diverse
Software Solutions, Inc., the Company also recently acquired EDI
technology used for automatic posting of transactions into
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a hospital or practice management information system. See "-Recent
Acquisitions." This technology, which has been integrated to work in
tandem with NVS's automatic eligibility verification technology, uses
transactions obtained from the Company's real-time and batch processing
centers to perform automated remittance posting, accelerated secondary
billing and member update of eligibility information.
Customer Service. As an adjunct to its transaction processing services,
the Company maintains customer service facilities with help desks for real-time
and batch transaction customer inquiries. Client support employs a modern call
tracking and response system which is directly connected to the real-time and
batch processing centers. The customer service staff is available via a
toll-free telephone number. Customer support services are frequently included in
the contract price for transaction processing services, but also may be billed
separately, depending upon the specific contract terms. The Company also offers
other services, such as on-site and telephone product training, installation and
terminal repair and replacement.
SALES AND MARKETING
The Company develops and maintains payor, provider and vendor
relationships through its 80 sales and marketing personnel located in 11
geographic regions, which includes a 27 person direct sales force. The Company's
primary sales and marketing strategy focuses on selling its services to
organizations that have relationships with or access to a large number of
providers.
In the pharmacy segment, the Company has traditionally established
relationships with large retail pharmacy chains and pharmacy software vendors.
To market its batch claims processing services, the Company develops
relationships with third-party payors and large submitters of claims. In
addition, the Company works closely with practice management system vendors to
provide an integrated solution to providers. Real-time managed care EDI services
are offered to providers either directly by the Company's sales force or
indirectly through commercial managed care organizations.
CUSTOMERS
The Company's principal customers consist of health care providers,
such as pharmacies, physicians, hospitals, dentists and billing services, and
third-party payors, such as indemnity insurers, managed care organizations and
state and federal governmental agencies. No customer accounted for 10% or more
of the Company's revenues during 1996 or 1995.
The Company typically provides real-time services to customers under
contracts that are not exclusive and generally do not guarantee a specific
transaction volume or revenue stream. The pricing of ENVOY's services is set
under contracts typically having terms of one to three years, subject to a
variety of early cancellation arrangements.
ENVOY's batch transactions include contracts with both payors and claim
submitters, including providers, practice management system vendors,
clearinghouses, billing services and others. Submitter contracts with ENVOY
often contain exclusivity provisions whereby the submitter agrees to process the
claim through ENVOY's clearinghouse if ENVOY has network access to the payor.
Pursuant to such submitter contracts, ENVOY agrees to pay certain transaction
volume incentives to the submitter. In addition, certain submitters are assessed
annual participation fees.
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OPERATIONS
The Company delivers its real-time services through an integrated
electronic transaction processing system, which includes ENVOY-designed
software, host computer hardware, network management, switching services and the
ability to interact with customers' personal computers and a variety of
point-of- service devices, most of which were originally designed by the
Company.
ENVOY's real-time host computer system consists of Stratus and Data
General mini computers designed and configured to operate 24 hours a day, seven
days a week. These mini computers are configured to expand to meet increased
transaction volume. The Stratus systems are designed and manufactured to
accommodate a fault-tolerant, nonstop environment. A fault-tolerant environment
is provided for the Data General systems by maintaining on-line standby
computers. The real-time host computer system data center is protected by
automated fire suppression systems designed to extinguish fire with minimal
damage to the computer equipment. The data center is further protected by
uninterruptible power supply systems consisting of diesel generators and battery
backups. In case of loss of commercial power, these systems can supply power to
the data center to continue operations. The data center can only be entered by
accessing a password protected security lock. The software and related data
files are backed up nightly and stored off-site.
The Company's real-time communications network consists of dedicated
circuits, T-l facilities and dial modem ports, which facilitate electronic
real-time communication among payors, providers and other users of
time-sensitive health care information. This communications network is designed
to provide a low cost, multipath host access from a computer modem or point of
service device with minimal delays and a high degree of accuracy and integrity.
The Company manages multiple lease lines to pharmacies and third-party payors.
The Company uses a number of different nationwide public communications networks
to provide access to substantially all potential domestic customers.
To minimize the possibility that a customer might experience delay by a
failed or overloaded circuit, at least two potential communications paths are
provided for each transaction. Utilizing ENVOY's call tracking system,
transactions are rerouted under centralized control to receive the lowest
communications cost available and to bypass failed or overloaded communications
nodes.
A substantial portion of the Company's batch claim processing is
outsourced. Utilizing the Company's proprietary software, a third-party
processes batch transactions on an IBM 3090 mainframe computer coupled with a
RISC-based communications network server. The contractual arrangement between
the Company and the third-party processor requires the processor to maintain 24
hours a day, seven days a week processing capability and a "hot site" disaster
recovery system. The Company's contract with this third-party processor expires
December 31, 1997; however, at the Company's option, the agreement may be
extended for two consecutive renewal periods of six months each.
PROPRIETARY RIGHTS
ENVOY owns certain of the software and systems designs that it uses and
has a limited, perpetual, nonexclusive, royalty-free license to use other
software and systems designs, such as the point-of-service device designs which
were developed by the Predecessor. The Company also licenses certain other
software from third parties.
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The Company's success is dependent in part upon electronic transaction
processing technology developed by the Company. A combination of trade secrets,
service mark, copyrights, patents and contract protection is used to establish
and protect that technology. Pursuant to a license and transition services
agreement by and between ENVOY and First Data, the parties are obligated to take
appropriate measures to protect these proprietary rights. There can be no
assurance these legal protections and the precautions taken by the Company or
First Data will be adequate to prevent misappropriation of technology used by
ENVOY. In addition, the legal protections do not prevent independent third-party
development of competitive technology.
COMPETITION
The Company faces potential competition in the health care EDI market
not only from other companies that are similarly specialized, but also from
companies involved in other, more highly developed sectors of the electronic
transaction processing market. Such companies could enter into, or focus more
attention on, the health care transaction processing market as it develops. In
addition, the Company faces competition by selected providers bypassing the
Company's electronic network and going directly to the payor. Many of ENVOY's
existing and potential competitors have greater financial, marketing and
technological resources. There is no assurance that the Company can continue to
compete successfully with its existing and potential competitors in the health
care EDI market.
Factors influencing competition in the health care market include (i)
compatibility with the provider's software and inclusion in practice management
software products, (ii) in the case of the pharmacy market, relationships with
major retail pharmacy chains, and (iii) relationships with third-party payors
and managed care organizations. The Company believes that the breadth, price and
quality of its services are the most significant factors in developing and
maintaining relationships with pharmaceutical chains, third-party payors and
managed care organizations.
EMPLOYEES
As of March 19, 1997, ENVOY had approximately 561 employees, including
approximately 489 salaried and 72 hourly employees (including temporary
employees). None of these employees is represented by a union. ENVOY believes
its relationship with its employees is good.
GOVERNMENT REGULATION
Governmental regulatory policies affect the charges for and the terms
of ENVOY's access to private line and public communications networks. ENVOY also
must obtain certification on the applicable communications network for design
innovations for POS devices. Any delays in obtaining necessary certifications
with respect to future products could delay their introduction. In addition, the
Federal Communications Commission requires ENVOY's products to comply with
certain rules and regulations governing performance. ENVOY believes its existing
products comply with all current rules and regulations. ENVOY can give no
assurance, however, that such rules and regulations regarding access to
communications networks will not change in the future. Changes in such rules,
regulations or policies that make it more costly to communicate on networks
could adversely affect the demand for or the cost of supplying electronic
transaction processing services.
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RECENT ACQUISITIONS
As part of its strategy to maintain and enhance its leadership position
in the health care transaction processing industry, the Company has completed
several acquisitions. A brief description of recent acquisitions follows:
National Electronic Information Corporation. In November 1995, ENVOY
entered into an Agreement and Plan of Merger with NEIC (the "Merger Agreement").
The transactions contemplated by the Merger Agreement were completed on March 6,
1996 following a special meeting of shareholders of ENVOY to approve the
transactions. Pursuant to the terms of the Merger Agreement, NEIC became a
wholly-owned subsidiary of ENVOY. NEIC, which is one of the nation's largest
clearinghouses of batch claims transactions for commercial payors, was founded
in 1981 by an insurance industry consortium including five of the nation's
largest health insurance companies to implement a claims processing system to
support the submission, editing and distribution of electronic claims for
hospital, medical and dental services to commercial insurance and Medicare
payors.
Teleclaims, Inc. In March 1996, ENVOY entered into a share purchase
agreement pursuant to which ENVOY acquired all of the outstanding capital stock
of Teleclaims, Inc. ("Teleclaims") in exchange for shares of ENVOY Common Stock.
Teleclaims is engaged in the business of providing data processing services to
physicians and other healthcare providers to electronically file medical
insurance claims with insurance carriers.
National Verification Systems, L.P. In September 1996, the Company
completed the acquisition of certain assets and liabilities of NVS, an Atlanta
based company whose principal business is the licensing of software for use in
hospitals and clinics to verify patient eligibility.
EMC* Express, Inc. In October 1996, ENVOY acquired the remaining 82.5%
interest in EMC* Express, Inc. ("EMC"), a Phoenix, Arizona based company that
transmits billing information from hospitals and doctors to third party payors.
In connection with this acquisition, the Company settled a related lawsuit
between ENVOY and the former shareholders of EMC.
Professional Office Systems, Inc. In October 1996, ENVOY acquired all
of the capital stock of Professional Office Systems, Inc., the wholly-owned EDI
clearinghouse for Blue Cross and Blue Shield of the National Capital Area. In
connection with the acquisition, the parties entered into an exclusive
three-year outsourcing services agreement for the processing of health care EDI
transactions.
Diverse Software Solutions, Inc. In March 1997, the Company completed
the acquisition of certain assets and liabilities of Diverse Software Solutions,
Inc. ("DSS"). DSS, located near Tampa, Florida, provides automated electronic
remittance advice posting, supplemental billing products and other advanced
software products and services to medical practices and hospitals.
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EXECUTIVE OFFICERS
The following table sets forth certain information concerning the
executive officers of the Company.
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Name Age Position
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Fred C. Goad, Jr. 56 Chairman of the Board and Co-Chief Executive
Officer
Jim D. Kever 44 President and Co-Chief Executive Officer
Kevin M. McNamara 41 Senior Vice President and Chief Financial Officer
Sheila H. Schweitzer 49 Senior Vice President of Operations
Richard P. Caliri 51 Senior Vice President of Marketing
Stephen C. Duggan 31 Vice President and Corporate Controller
Gregory T. Stevens 32 Vice President, General Counsel and Secretary
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Mr. Goad served as President and a Director of the Company from its
incorporation in August 1994 until August 1995. On August 3, 1995, Mr. Goad was
elected Chairman and Co-Chief Executive Officer and currently serves in such
capacity in addition to being a Director. From September 1985 to June 1995, Mr.
Goad served as Chief Executive Officer and a Director of the Predecessor. Mr.
Goad is also a director of Performance Food Group Company, a food service
distribution company, and Oacis Healthcare Systems, Inc., a clinical health care
software and services company.
Mr. Kever has served as President and Co-Chief Executive Officer of the
Company since August 1995. He served as Executive Vice President, Secretary and
General Counsel from incorporation in August 1994 until August 1995. He has
served as a Director since ENVOY's incorporation in August 1994. Prior to June
6, 1995, Mr. Kever had served as a Director and Secretary, Treasurer and General
Counsel of the Predecessor since 1981 and as Executive Vice President since
1984. Mr. Kever is also a director of Transaction Systems Architects, Inc., a
supplier of electronic payment software products and network integration
solutions, and 3D Systems Corporation, a manufacturer of technologically
advanced solid imaging systems and prototype models.
Mr. McNamara currently serves as Senior Vice President and Chief
Financial Officer of the Company. Before joining the Company in February 1996,
he served as President of NaBANCO Merchant Services Corporation, a wholly owned
subsidiary of National Bancard Corporation ("NaBANCO"), from October 1994 to
December 1995. Mr. McNamara served as Senior Executive Vice President and Chief
Financial Officer of NaBANCO from January 1992 through September 1994. Before
joining NaBANCO, Mr. McNamara held the position of Chief Financial Officer of
Child World, Inc., a national toy retailer.
Ms. Schweitzer currently serves as Senior Vice President of Operations.
Before joining the Company in August 1995, Ms. Schweitzer served from December
1991 to July 1995 as President and Chief Executive Officer of Medical Management
Resources, Inc., a health care EDI services company which is a wholly-owned
subsidiary of The Associated Group, Inc.
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Mr. Caliri currently serves as Senior Vice President of Marketing.
Before joining ENVOY in March 1996, Mr. Caliri served as President and Chief
Executive Officer of NEIC, from December 1993 until the completion of NEIC's
merger with ENVOY in March 1996. Prior to joining NEIC, Mr. Caliri was employed
by John Hancock Financial Services in Boston, Massachusetts for more than 25
years, serving most recently as Vice President of Group Operations.
Mr. Duggan currently serves as Vice President and Corporate Controller.
Before joining the Company in August 1996, Mr. Duggan was a certified public
accountant with Arthur Anderson LLP since 1987, serving most recently as an
audit manager.
Mr. Stevens currently serves as Vice President, General Counsel and
Secretary. Before joining the Company in September 1996, Mr. Stevens was an
attorney with the law firm of Bass, Berry & Sims PLC in Nashville, Tennessee
since 1990.
ITEM 2. PROPERTIES
ENVOY leases approximately 42,000 square feet of space in an office
building in Nashville, Tennessee under a lease expiring in August 2001. This
facility serves as the corporate headquarters of ENVOY. ENVOY also leases
approximately 27,500 square feet, which consists of a data center and an
operations and customer support center, in Nashville, Tennessee. Approximately
18,500 square feet under this lease expires in May 2005, and the remaining 9,000
square feet under this lease expires in January 2001. The Company's Nashville
data center handles the telecommunications network and computer systems for
real-time pharmacy and health care transactions. In addition, the Company leases
approximately 12,000 square feet of office space in Oklahoma City, Oklahoma, to
house its batch claims processing center pursuant to lease agreements which
expire in May 1999. ENVOY also has a small processing center in Phoenix, Arizona
pursuant to a lease which expires in March 1998.
ENVOY leases and occupies other offices and operations facilities at
various locations, but the aggregate rental obligations and physical
characteristics of these other facilities are not material to the Company's
business.
ITEM 3. LEGAL PROCEEDINGS
From time to time, ENVOY may be a party to legal proceedings incidental
to its business but believes that none of these proceedings is material to its
business at the present time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders during the fourth quarter of
1996.
10
<PAGE> 13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Common Stock of ENVOY (the "Common Stock") is traded through the
over-the-counter market and is reported on The Nasdaq Stock Market under the
symbol "ENVY". Prices listed below represent actual high and low sale prices.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, 1995 High Low
------------- -----------
<S> <C> <C>
Second quarter (beginning June 7, 1995)(1) $ 9.50 $ 7.25
Third Quarter..................................... 12.25 8.50
Fourth Quarter.................................... 18.75 9.75
FISCAL YEAR ENDED DECEMBER 31, 1996
First Quarter.................................... 24.25 17.13
Second Quarter................................... 32.75 23.25
Third Quarter.................................... 40.50 21.50
Fourth Quarter................................... 42.25 34.00
</TABLE>
- ----------
(1) Reflects first day of trading of the Common Stock following the
Distribution.
At March 18, 1997, there were approximately 4,800 holders of Common
Stock, including approximately 262 shareholders of record.
ENVOY has never declared or paid cash dividends on its Common Stock and
does not expect to pay cash dividends in the foreseeable future. Any declaration
and payment of cash dividends on the Common Stock will be determined by the
Board of Directors based on a number of factors, including but not limited to,
earnings, financial condition and requirements, restrictions in financing
agreements (if any) and other factors deemed relevant.
11
<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1996(1) 1995(2) 1994(2) 1993(2) 1992(2)
-------------------------------------------------------------------
(In thousands, except per share data)
STATEMENTS OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
REVENUES....................................... $ 76,584 $ 26,055 $ 20,950 $ 13,979 $ 8,431
OPERATING LOSS................................. (35,699) (91) (221) (1,356) (2,570)
LOSS FROM OPERATIONS BEFORE
INCOME TAXES AND LOSS IN
INVESTEE....................................... (37,323) (224) (192) (1,349) (2,463)
INCOME TAX (EXPENSE) BENEFIT................... (1,577) 0 73 514 936
LOSS IN INVESTEE............................... 0 (1,776) 0 0 0
---------- ----------- ---------- --------- ---------
LOSS FROM CONTINUING
OPERATIONS................................. $ (38,900) $ (2,000) $ (119) $ (835) $ (1,527)
========== =========== ========== ========= =========
LOSS PER COMMON SHARE FROM
CONTINUING OPERATIONS.......................... $ (2.99) $ (0.18) $ (0.01) $ (0.07) $ (0.13)
========== =========== ========== ========= =========
BALANCE SHEET DATA (AT PERIOD END):
Working Capital of Continuing Operations..... $ 48,424 $ 11,277 $ 7,523 $ 2,274 $ 3,836
Assets of Continuing Operations.............. 133,814 30,150 20,926 11,763 8,094
Total Assets................................. 133,814 30,150 56,995 49,701 41,430
Long-Term Debt and Deferred Taxes............ 10,377 10,300 737 508 0
Shareholders' Equity of Continuing
Operations.............................. 108,445 15,335 17,156 8,299 7,225
</TABLE>
The Company has never declared or paid cash dividends on its Common Stock
and does not expect to pay cash dividends in the foreseeable future. Payment of
cash dividends will be determined by the Company's Board of Directors based on a
number of factors, including but not limited to, earnings, financial condition
and requirements, restrictions in financing agreements (if any) and other
factors deemed relevant.
Notes: (1) The 1996 results include $35.4 million in merger and
facility integration costs. Of these costs, $30.7 million
relate to the write-off of acquired in-process technology
with the remaining $4.7 million relating to the
reorganization plan approved in conjunction with the NEIC
and Teleclaims acquisitions (See Note 5 to the
Consolidated Financial Statements).
(2) The above amounts reflect the impact of the Predecessor's
merger with First Data in June 1995. (See Notes 1 and 3 to
the Consolidated Financial Statements).
12
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurances that
the forward-looking statements included herein will prove to be accurate. In
light of the significant uncertainties inherent in the forward-looking
statements included herein, the inclusion of such information should not be
regarded as a representation by the Company that the objectives and plans of the
Company will be achieved. The following discussion and analysis should be read
in conjunction with, and is qualified in its entirety by, the Consolidated
Financial Statements, including the notes thereto.
OVERVIEW
The Company provides electronic processing services primarily for the
health care market. This includes submission for adjudication of insurance and
other third-party reimbursement claims for pharmacies, physicians, hospitals and
dentists and, since 1994, providing clearinghouse services for batch processing
of medical and dental reimbursement claims.
On June 6, 1995, the Company completed the sale through a merger of its
financial transaction processing business to First Data. For accounting
purposes, the health care transaction processing business is treated as
continuing operations, while the financial transaction processing business is
treated as discontinued operations.
During 1996, the Company made several acquisitions, the most significant
being NEIC (collectively, the "Acquired Businesses"). See "-Recent
Acquisitions." All acquisitions were accounted for under the purchase method of
accounting and, as a result, the Company has recorded the assets and liabilities
of the Acquired Businesses at their estimated fair values with the excess of the
purchase price over these amounts being recorded as goodwill. The financial
statements for the year ended 1996 reflect the operations of the Acquired
Businesses for the period after their respective dates of acquisition.
Revenues are derived principally from (i) transaction processing services
to the health care market which are generally paid for by the health care
providers and (ii) commercial claim processing services provided to third-party
payors which are usually paid for by the payors. Revenues are generally earned
on a per transaction basis and are generally based upon the number of
transactions processed rather than the transaction volume per customer. Less
than 7% and 12% of the Company's revenues in 1996 and 1995, respectively, are
derived from the sale and lease of point-of-service devices, customer support
and on-site training and installation.
13
<PAGE> 16
The table below shows transactions processed by the Company for the periods
presented:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Pharmacy 478,526 363,084 296,043
Non-pharmacy 132,724 15,308 5,956
---------------------------------
Total 611,250 378,392 301,999
=================================
</TABLE>
The total transactions reflected above include the transactions of the Acquired
Businesses from the date of the acquisitions through the year ended December 31,
1996.
In addition to growth by acquisition, the Company has experienced and
continues to experience internal growth through increased transaction volume in
on-line real-time transaction processing and batch claims processing. Based on
historical growth rates, present sales efforts and current year growth trends,
the Company believes its real-time and batch transaction volume will continue to
increase. However, it is expected that the rate of increase will decline as the
base of transactions increases.
The acquisition of NEIC was a major focal point for the Company's
management during 1996, requiring significant management time and focus. The
Company has pursued and continues actively to pursue the acquisition of health
care information businesses and other companies complementary to its business.
The Company's ability to successfully negotiate and close acquisitions will
materially impact the financial condition and operating results of the Company.
There can be no assurance that the Company will find attractive acquisition
candidates, be able to successfully finance and complete the acquisitions,
consolidate and integrate such businesses following the acquisition or
successfully operate them on a going forward basis.
14
<PAGE> 17
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the percentage
relationship certain statement of operations items bear to revenues.
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------------------------------
1996 1995 1994
-------------------------------------
<S> <C> <C> <C>
Revenues................................. 100.0% 100.0% 100.0%
Cost of revenues......................... 49.9 59.2 63.4
Selling, general and administrative
expenses............................ 24.7 31.6 28.2
Depreciation and amortization 25.0 9.5 9.5
Merger and facilities integration costs 46.2 0 0
EMC losses............................... 0.7 0 0
-------------------------------------
Operating loss........................... (46.6) .3 (1.1)
Interest income.......................... 1.3 1.5 0.1
Interest expense......................... (3.5) (2.0) 0
-------------------------------------
Loss from continuing operations before
income taxes and loss in investee (48.7) (0.9) (0.9)
Income tax (provision) benefit (2.1) 0 0.3
Loss in investee......................... 0 (6.8) 0
-------------------------------------
Loss from continuing operations (50.8)% (7.7)% (0.6)%
=====================================
</TABLE>
FISCAL YEAR 1996 AS COMPARED WITH 1995
Revenues. Revenues for the year ended December 31, 1996 were $76.6
million, an increase of $50.5 million or 193.5% over 1995. This increase is
primarily attributable to additional revenues generated from the Acquired
Businesses and a 31.8% increase in pharmacy transactions over 1995.
Cost of Revenues. Cost of revenues includes the cost of communications,
computer operations, product development and customer support as well as the
cost of hardware sales and rebates to third parties for transaction processing
volume. Cost of revenues in 1996 was $38.3 million compared to $15.4 million in
1995, an increase of 149%. The dollar increase is attributable to the inclusion
of the Acquired Businesses' results and increased transaction volume in the
Company's pre-acquisition business. As a percentage of revenues, cost of
revenues was 49.9% in 1996 compared to 59.2% in 1995. The improvement is
attributable to the inclusion of the Acquired Businesses' results which
historically have experienced higher gross profit margins than those of the
Company's pre-acquisition business.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include marketing, finance, accounting and
administrative costs. Selling, general and administrative expenses for 1996 were
$18.9 million compared to $8.2 million in 1995, an increase of 130.5%. These
expenses increased due to the inclusion of the Acquired Businesses' results and
the additional costs associated with the acquisitions. As a percentage of
revenues, selling, general and administrative expenses were 24.7% in 1996
compared to 31.6% in 1995. The improvement is attributable to a larger base of
15
<PAGE> 18
revenues as well as the elimination of certain duplicative costs realized in
connection with the Acquired Businesses.
Depreciation and Amortization. Depreciation and amortization expense
relates primarily to host computers, communications equipment, goodwill and
other identifiable intangible assets. Depreciation and amortization expense for
1996 was $19.2 million compared to $2.5 million for 1995. The increase is
primarily the result of the amortization of goodwill and other intangibles of
$14.6 million related to the Acquired Businesses. Depreciation and amortization
increased further as the result of the additional investment in host computer
systems to expand the Company's transaction processing capabilities. The Company
will amortize goodwill of $37.5 million associated with the Acquired Businesses
over the three year period following the acquisitions. In addition, ENVOY will
amortize identified intangibles of $29.7 million over two to nine year time
periods, as applicable.
Merger and Facility Integration Costs. The Company recognized merger
and facility integration costs in 1996 of $35.4 million related primarily to the
NEIC acquisition. These costs represent a one-time charge of acquired in-process
technology of $30.7 million and facility integration costs of $4.7 million.
EMC Losses. In January 1995, ENVOY acquired a 17.5% interest in
EMC*Express, Inc. ("EMC") and also entered into an agreement for the management
of EMC which required the Company to fund certain of EMC's operating costs in
the form of advances. The Company determined that it was probable an impairment
of its equity investment in EMC as of December 31, 1995 had occurred. As a
result, the Company recognized losses in 1996 of $540,000 relating to the
funding of EMC operating losses through the termination date of the management
agreement in March 1996. Based upon the Company's decision to terminate the
management agreement, the Company discontinued the equity method of accounting
for EMC and began accounting for the investment on a cost basis. Accordingly,
the loss related to EMC has been charged to operating expense. See Note 6 of
Notes to the Consolidated Financial Statements. Following the termination of the
management agreement, certain shareholders of EMC filed a lawsuit against the
Company asserting claims for breach of contract and negligent conduct. In
October 1996, the Company acquired the remaining 82.5% interest in EMC and
settled the related lawsuit. See "Business - Recent Acquisitions."
Net Interest Expense. The Company recorded net interest expense in 1996
of $1.6 million compared to $133,000 of net interest expense for 1995. The
increase in interest expense is the result of increased borrowings under the
Company's bank credit facilities and interest associated with the Company's 9%
convertible notes, which more than offset interest income on the Company's
available cash.
See "-Liquidity and Capital Resources."
Income Tax Provision. The Company's income tax provision in 1996 was
$1.6 million compared with no income tax expense in 1995. The income tax expense
recorded is based upon estimated taxable income. Amortization of certain
goodwill and identifiable intangibles are not deductible for income tax
purposes.
FISCAL YEAR 1995 AS COMPARED WITH 1994
Revenues. Revenues for the year ended December 31, 1995 were $26.1
million, an increase of 24.3% or $5.1 million over 1994. Processing services
revenue represented 89.6% of total revenues in 1995 compared to 90.5% in 1994.
The Company's primary source of transaction volume and processing service
revenue in 1995 was its pharmacy business.
16
<PAGE> 19
Cost of Revenues. Cost of revenues in 1995 was $15.4 million or 59.2%
of revenues compared to $13.3 million or 63.4% of revenues in 1994. The decrease
as a percentage of total revenues was principally attributable to the increase
in transaction volume and decreasing communication costs as a result of contract
negotiations with telecommunications carriers. A portion of the increase in the
cost of revenues was associated with an increase in the provision for doubtful
accounts of $577,000. This increase was implemented to maintain the reserve for
doubtful accounts at levels consistent with the Company's increasing revenues
and associated receivables.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for 1995 were $8.2 million compared to $5.9 million in
1994, an increase of 39.7%. As a percentage of revenues, selling, general and
administrative expenses were 31.6% in 1995 and 28.2% in 1994. The increase
compared to 1994 is primarily the result of personnel increases in anticipation
of growth of the Company's business, including temporary and outside services
used to assist in the implementation of the transition to an independent
company, and start-up costs associated with the marketing and outside sales
functions.
Depreciation and Amortization. Depreciation and amortization expense
for 1995 was $2.5 million compared to $2.0 million in 1994. The increase is
largely due to the addition of host computer systems in connection with the
expansion of the Company's transaction processing capabilities.
Operating Loss. The Company incurred an operating loss for 1995 of
$91,000 compared to an operating loss for 1994 of $221,000. The loss was
primarily the result of increases in depreciation resulting from the addition of
the host computer systems, an increase in selling, general and administrative
expenses, the impact of lower revenue per transaction in the Company's pharmacy
business and, following the First Data merger, the absorption by the health care
business of all of the general and administrative overhead.
Net Interest Expense. The Company recorded net interest expense for the
year ended 1995 of $133,000 compared to net interest income of $29,000 for the
year ended 1994. The increase in interest expense represents interest on the
Company's 9% convertible notes issued in June 1995, which more than offset
interest income on the Company's available cash. See "-Liquidity and Capital
Resources."
Loss in Investee. As described above, the Company determined that it
was probable as of December 31, 1995 that an impairment to its investment in EMC
had occurred as a result of the Company's decision to terminate its management
agreement and other factors. The termination was based on the Company's
determination that the EMC investment was no longer justified, particularly
since similar products and technology would be available to the Company through
the acquisition of NEIC, EMC's poor operating performance and the belief that
operating losses would likely continue. Accordingly, the Company recorded a
fourth quarter adjustment in the amount of $1.6 million to recognize an
impairment in the carrying value of its investment, to write-off advances and
commitments to EMC and to record the net realizable value of its investment at
zero. During 1995, the Company recognized losses for its initial investment and
an option to purchase the remaining equity interests of EMC, advances and equity
losses, for a total loss in the EMC investment of approximately $1.8 million.
Loss from Discontinued Operations. The Company recorded a loss from
discontinued operations of $2.4 million in 1995, which was the result of
expenses related to the First Data merger. These expenses consisted primarily of
legal, accounting and financial advisor fees. The First Data transaction
expenses for the year ended 1994 totaled $708,000, net of taxes.
17
<PAGE> 20
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred operating losses since its health care
transaction processing business commenced operations in 1989. The operating
losses historically resulted from the Company's substantial investment in its
health care transaction processing business coupled with a disproportionate
amount of overhead and fixed costs. Prior to the First Data merger, health care
losses had been funded by earnings from the Company's more mature financial
business, which had a substantially higher transaction volume and revenue base.
On August 13, 1996, the Company completed an underwritten public
offering of 3,320,000 shares of Common Stock at $26.50 per share. Of the
approximately $83 million in net proceeds to the Company, $25 million was used
to retire the Company's outstanding term loan and approximately $12.9 million
was used to repay all amounts outstanding under the Company's $25 million
revolving credit facility. The remaining proceeds will be used for general
corporate purposes, including funding the increased working capital requirements
of the Company generated by the Company's growth and for possible strategic
acquisitions. As of March 25, 1997, the Company had approximately $30 million in
available cash and cash equivalents.
On November 8, 1996, the Company amended its revolving credit facility
to increase the amount of credit available thereunder to $50 million. The
Company currently has no amounts outstanding under the amended credit facility.
Any outstanding borrowings 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 total amount outstanding under the amended credit
facility is due and payable in full on June 30, 2000. The amended credit
facility contains financial covenants applicable to the Company and its
subsidiaries including ratios of debt to capital, annualized EDITDA to
annualized interest expense and certain other financial covenants customarily
included in a credit facility of this type. The Company and its subsidiaries
also are subject to certain restrictions relating to payment of dividends,
acquisitions, incurrence of debt and other restrictive provisions. The amended
credit facility is secured by substantially all of the assets of the Company and
its subsidiaries.
In June 1995, the Company issued $10 million in 9% Subordinated
Convertible Notes due in June 2000 (the "Convertible Notes"). The Convertible
Notes are convertible at the election of the holders into shares of Common Stock
at a current conversion price of $10.52 per share. 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 Notes under a Registration
Rights Agreement dated June 6, 1995. As of December 31, 1996, $1,786,000 in
principal amount of the Convertible Notes had been converted into 169,789 shares
of Common Stock and sold pursuant to the registration statement. The Company did
not receive any proceeds from the sale of the Common Stock offered thereunder.
Subsequent to year end, $500,000 in principal amount of the Convertible Notes
was converted into 47,528 shares of Common Stock. Accordingly, $7,714,000
principal amount of the Convertible Notes remains outstanding as of March 24,
1997.
The Company purchases additional computer hardware and software
products from time to time as required by the growth of its customer base. The
Company incurred capital expenditures of $4.8 million and $8.0 million in 1996
and 1995, respectively, primarily for computer hardware and software products
used for the expansion of the Company's business. The Company currently
estimates that total capital expenditures for 1997 will be approximately $5 to
$6 million.
18
<PAGE> 21
From time to time, the Company has engaged and will continue to engage
in acquisition discussions with other health care information businesses and
other companies complementary to its business. As part of the ongoing effort to
expand its EDI services and product offerings, the Company expended
approximately $98.8 million in aggregate consideration for the Acquired
Businesses during 1996, consisting of approximately $97 million in cash and
79,080 shares of Common Stock. In the event the Company engages in such
acquisitions in the future, its currently available capital resources may not be
sufficient for such purposes and the Company may be required to incur additional
indebtedness or issue additional capital stock, which could result in dilution
to existing investors.
Based on current operations, anticipated capital needs to fund known
expenditures and current acquisitions, the Company believes its available cash,
cash flow from operations and the amended $50 million revolving credit facility
will provide the capital resources necessary to meet its liquidity and cash flow
requirements over the next twelve months, including the Company's current
short-term obligations. The Company believes that present funding sources will
provide the ability to meet long-term obligations as they mature. The Company's
available cash is invested in interest bearing securities with maturities of up
to 30 days.
RISK FACTORS
ENVOY's business is subject to numerous risks and uncertainties which
may affect its results of operations in the future and may cause such future
results to differ materially and adversely from projections included in or
underlying any forward-looking statements made by or on behalf of the Company.
Among the factors that may adversely affect the Company's business are:
Limited Operating History; Substantial Net Loss. The electronic health
care transaction processing industry is relatively new, and the Company's
operating history is relatively limited. ENVOY has experienced substantial net
losses, including net losses of approximately $38.9 million for the year ended
December 31, 1996, and has an accumulated deficit of approximately $42.0 million
as of December 31, 1996. Historically, operating losses incurred in the
Company's health care transaction processing business were funded by earnings
from the Company's financial processing business, which was sold in 1995. In
order to achieve profitability, the Company must successfully implement its
business strategy and increase its revenues, while controlling expenses. There
can be no assurance as to when or if the Company will achieve profitability.
Recent Acquisitions. In March 1996, ENVOY completed the acquisition of
NEIC, a commercial clearinghouse for batch processing of health care claims. The
Company acquired NEIC for $94.3 million, including fees, expenses and other
costs associated with the acquisition. In connection with the acquisition, the
Company recognized a one-time write off of acquired in-process technology of
approximately $30.0 million. As a result of the NEIC acquisition, the Company is
amortizing $36.3 million of goodwill associated with the NEIC acquisition over a
three year period, and such amortization will adversely affect the Company's
results of operations through March 1999. The acquisition of NEIC, which had
1995 revenues of $37.4 million, created a significant expansion of ENVOY's
overall business. In addition, the Company completed several other smaller
acquisitions in 1996. See "- Recent Acquisitions". There can be no assurance
that the Company will be able to operate the Acquired Businesses on a profitable
basis, integrate the acquisitions with its existing business or achieve
operating synergies necessary to make the acquisitions successful.
19
<PAGE> 22
Development of Electronic Processing in the Health Care Industry.
ENVOY's strategy anticipates that electronic processing of health care
transactions, including transactions involving clinical as well as financial
information, will win market acceptance and that providers and third-party
payors increasingly will use electronic processing networks for the processing
and transmission of data. Electronic transmission of health care transactions is
still developing, and complexities in the nature and types of transactions which
must be processed has hindered to some degree the development and acceptance of
electronic processing in this market. In addition, while the multiplicity of
claims forms and formats used by the many different third-party payors has
fostered the development of electronic clearinghouses, the standardization of
these claims formats, whether due to consolidation in the industry or otherwise,
could reduce the use of clearinghouses, including electronic clearinghouses.
There can be no assurance that continued conversion from paper-based transaction
processing to electronic transaction processing in the health care market will
occur or that, to the extent it does occur, health care providers and payors
will use independent networks such as those being developed by the Company.
Acquisition Strategy; Impact on Operating Results; Need for Capital.
The Company's strategy includes acquisitions of related health care information
businesses and other companies complementary to its business. The success of any
such acquisition will depend on many factors, including the Company's ability to
identify suitable acquisition candidates, the purchase price, the availability
and terms of financing, and management's ability to integrate effectively the
acquired services, technologies or businesses into the Company's operations.
Significant competition for acquisition opportunities exists in the health care
industry, which may significantly increase the costs of and decrease the
opportunities for acquisitions. Although ENVOY is actively pursuing potential
acquisitions, there can be no assurance that any acquisition will be
consummated. Further, to the extent that the Company is able to consummate an
acquisition, no assurance can be given that the Company will be able to operate
any acquired business profitably or otherwise successfully implement its
expansion strategy. ENVOY may finance future acquisitions through borrowings or
the issuance of debt or equity securities. Although the Company historically has
obtained financing on reasonable terms, there can be no assurances that future
lenders will extend credit, or extend credit on favorable terms. Further, any
issuance of equity securities could have a dilutive effect on the holders of
Common Stock. Such acquisitions may result in the recognition by the Company of
significant goodwill and increases in the amount of depreciation and
amortization expense which could adversely affect the Company's operating
results in future periods.
Competition. ENVOY faces significant competition in the health care
sector of the electronic transaction processing market from companies that are
similarly specialized and also from companies that are involved in other, more
highly developed sectors of the electronic transaction processing market. The
Company also faces competition from other companies, such as vendors of provider
information management systems, which have added or may add their own
proprietary transaction processing systems to existing or future products. As a
result of such competition, the Company may be pressured to reduce per
transaction prices or eliminate per transaction prices altogether. If electronic
transaction processing becomes the standard for claims and information
processing, a number of larger and better capitalized entities may elect to
enter the industry and further increase competitive pricing pressures. Many of
the Company's existing and potential competitors are larger and have
significantly greater financial, marketing, technological and other resources
than the Company.
Availability of Direct Links. Certain third-party payors provide
electronic data transmission systems to health care providers that establish a
direct link between the provider and the payor, bypassing third-party processors
such as the Company. Any significant increase in the utilization of direct links
20
<PAGE> 23
between health care providers and payors would have a material adverse effect on
the Company's business, operating results and financial condition.
Uncertainty and Consolidation in the Health Care Industry. The health
care industry is subject to changing political, economic and regulatory
influences that may affect the procurement practices and operations of health
care industry participants. Federal and state legislatures periodically consider
programs to modify or amend the United States health care system at both the
federal and state level. These programs may contain proposals to increase
governmental involvement in health care, lower reimbursement rates or otherwise
change the environment in which health care industry participants operate.
Health care industry participants may react to these proposals and the
uncertainty surrounding such proposals by curtailing or deferring investments,
including investments in the Company's services and products. In addition, many
health care providers are consolidating to create larger health care delivery
organizations. This consolidation reduces the number of potential customers for
the Company's services, and the increased bargaining power of these
organizations could lead to reductions in the amounts paid for the Company's
services. Industry developments are increasing the amount of capitation-based
health care and reducing the need for providers to make claims of reimbursement
for products or services. Other health care information companies, such as
billing services and practice management vendors, which currently utilize the
Company's services, have developed or acquired transaction processing and
networking capabilities and may cease utilizing the Company's services in the
future. The impact of these developments in the health care industry is
difficult to predict and could have a material adverse effect on the Company's
business, operating results or financial condition.
Customer Concentration. No customer accounted for more than 10% of
ENVOY's revenues during 1996. However, the Company's ten largest customers
accounted for approximately 33% of the Company's revenues in 1996. Further
consolidation in the health care industry is likely to increase customer
concentration and may increase the Company's dependency on a limited number of
customers. In addition, a significant portion of NEIC's revenues has been
generated by five major insurance company payors who were shareholders of NEIC
before its acquisition by ENVOY. Although each of these carriers has continued
to use the Company's services after the acquisition of NEIC, they have no
minimum transaction commitment to the Company in the future and there can be no
assurance that the volume of business generated by these payors will not decline
or terminate. The loss of one or more significant customers could have a
material adverse effect on the Company's business, operating results or
financial condition.
Evolving Industry Standards and Rapid Technological Changes. The market
for the Company's services is characterized by rapidly changing technology,
evolving industry standards and frequent introduction of new and enhanced
services. ENVOY's success will depend upon its continued ability to enhance its
existing services, to introduce new services on a timely and cost-effective
basis to meet evolving customer requirements, to achieve market acceptance for
new services and to respond to emerging industry standards and other
technological changes. There can be no assurance that the Company will be able
to respond effectively to technological changes or new industry standards.
Moreover, there can be no assurance that competitive services will not be
developed, or that any such competitive services will not have an adverse effect
upon the Company's operating results.
Dependence on Technology; Risk of Infringement. ENVOY's ability to
compete effectively depends to a significant extent on its ability to protect
its proprietary information. The Company relies primarily on copyright, trade
secret and patent laws, confidentiality procedures and licensing arrangements to
protect its intellectual property rights. The Company generally enters into
confidentiality agreements
21
<PAGE> 24
with its consultants and employees and generally limits access to and
distribution of its technology, software and other proprietary information.
Although the Company intends to defend its intellectual property, there can be
no assurance that the steps taken by ENVOY to protect its proprietary
information will be adequate to prevent misappropriation of its technology or
that the Company's competitors will not independently develop technologies that
are substantially equivalent or superior to the Company's technology. ENVOY is
also subject to the risk of alleged infringement by ENVOY of the intellectual
property rights of others. Although the Company is not currently aware of any
pending or threatened infringement claims with respect to the Company's current
or future products, there can be no assurance that third parties will not assert
such claims. Any such claims could require the Company to enter into license
arrangements or could result in protracted and costly litigation, regardless of
the merits of such claims. No assurance can be given that any necessary licenses
will be available or that, if available, such licenses can be obtained on
commercially reasonable terms. Furthermore, litigation may be necessary to
enforce ENVOY's intellectual property rights, to protect the Company's trade
secrets, to determine the validity and scope of the proprietary rights of others
or to defend against claims of infringement. Such litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on the Company's business, operating results or financial condition.
Reliance on Data Centers. ENVOY's real-time electronic transaction
processing services depend on its host computer system which is contained in a
single data center facility. In addition, the Company's primary batch claims
processing capacity is outsourced to one vendor that processes claims through a
single computer center. The Company also operates a batch claims processing
center which is contained in a single data center facility in Oklahoma City,
Oklahoma for the processing of Blue Shield, Medicare and Medicaid claims.
Although ENVOY is currently evaluating certain disaster recovery alternatives,
neither the real-time host computer system nor the Oklahoma City batch claims
center have a remote backup data center. There can be no assurance that fire or
other disaster affecting such data centers would not disable the Company's
respective systems or otherwise have a material adverse effect on the Company's
business, financial condition or results of operations. In addition, a
disruption in service from the vendor providing batch claims processing services
to the Company could have a material adverse effect on the Company's business,
operating results or financial condition.
Proposed Health Care Data Confidentiality Legislation. Legislation
which imposes restrictions on the ability of third-party processors to transmit
certain patient data without specific patient consent has been introduced in the
U.S. Congress. Such legislation, if adopted, could adversely affect the ability
of third-party processors to transmit certain data, including treatment and
clinical data, and could materially adversely affect the Company's future
results.
SEASONALITY
ENVOY's business is to some extent seasonal, with more revenues being
generated from September through March as a result of a greater number of
pharmaceutical claims arising in those months, while operating expenses tend to
remain relatively constant over the course of the year.
IMPACT OF INFLATION
Inflation has not had a significant impact on ENVOY's results of
operations to date.
22
<PAGE> 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements required by Item 8 of Form 10-K are
located on pages F-1 through F-25 of this Annual Report on Form 10-K. In
addition, on pages S-1 and S-2 the supplemental financial schedules and report
of independent accountants as required by Item 8 are provided. See Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Proxy Statement in connection with the Annual Meeting of
Shareholders to be held on June 19, 1997 will contain under the caption
"Election of Directors" and "Compliance with Section 16(a) of the Securities
Exchange Act of 1934" information required by Item 10 of Form 10-K as to
directors and certain executive officers of the Company and is incorporated
herein by reference. Pursuant to General Instruction G(3), certain information
concerning executive officers of the Company is included in Part I of this Form
10-K, under the caption "Business - Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION
The Proxy Statement in connection with the Annual Meeting of
Shareholders to be held on June 19, 1997 will contain under the caption
"Executive Compensation" information required by Item 11 of Form 10-K and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Proxy Statement in connection with the Annual Meeting of
Shareholders to be held on June 19, 1997 will contain under the caption
"Security Ownership of Certain Beneficial Owners and Management" information
required by Item 12 of Form 10-K and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Proxy Statement in connection with the Annual Meeting of
Shareholders to be held on June 19, 1997 will contain under the caption "Certain
Relationships and Related Transactions" information required by Item 13 of Form
10-K and is incorporated herein by reference.
23
<PAGE> 26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
The following Financial Statements of ENVOY are filed as part of this
Report:
<TABLE>
<CAPTION>
Page Number
Description in Report
----------- ---------
<S> <C>
Reports of Independent Auditors F-1
Consolidated Balance Sheets, December 31, 1996 and December 31, 1995 F-3
Consolidated Statements of Operations for the years ended December 31,
1996, 1995 and 1994 F-5
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1996, 1995 and 1994 F-7
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994 F-8
Notes to Consolidated Financial Statements F-10
</TABLE>
2. Financial Statement Schedules:
The following Financial Statement Schedules are filed as part of this
Report and should be read in conjunction with the Financial Statements:
<TABLE>
<CAPTION>
Page Number
Description in Report
----------- ---------
<S> <C>
Independent Auditors Report S-1
Schedule II - Valuation of Qualifying Accounts S-2
</TABLE>
All schedules, except those set forth above, have been omitted since
the information required is included in the Consolidated Financial Statements or
Notes thereto, or they have been omitted as not applicable or not required
3. Exhibits:
See Item 14(c) below.
(b) Reports on Form 8-K.
During the fourth quarter of 1996, ENVOY did not file a Current Report
on Form 8-K with the Securities and Exchange Commission.
24
<PAGE> 27
(c) Exhibits:
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------------------------------------------------
<S> <C>
2.1 Agreement and Plan of Distribution dated September 2,
1994, as amended through December 16, 1994 (1)
2.2 Agreement and Plan of Merger dated November 30, 1995
by and among ENVOY, Envoy Acquisition Corporation
and NEIC (2)
3.1 Charter, as amended (4)
3.2 By-Laws (1)
4.1 Article IV of ENVOY's Charter, as amended (included in
Exhibit 3.1) (4)
4.2 Shareholder Rights Plan (1)
4.3 Series B Convertible Preferred Stock Purchase Agreement
among ENVOY, General Atlantic Partners 25, L.P., GAP
Coinvestment Partners, L.P. and First Union Capital
Partners, Inc. dated November 30, 1995 (2)
4.4 Registration Rights Agreement dated March 6, 1996 by and
among ENVOY, General Atlantic Partners 25, L.P., GAP
Coinvestment Partners, L.P. and First Union Capital
Partners, Inc. (3)
4.5 Securities Purchase Agreement dated March 6, 1996 by and
among ENVOY and the Purchasers set forth on the
signature pages thereto (3)
4.6 Registration Rights Agreement dated March 6, 1996 by and
among ENVOY and the Purchasers set forth on the
signature pages thereto (3)
10.1 Form of License and Transition Services Agreement by and
among ENVOY, the Predecessor and First Data (1)
10.2 Form of Management Services Agreement by and between
ENVOY and First Data (1)
10.3 Form of Human Resources Agreement between ENVOY
and First Data (1)
10.4 Form of Tax Disaffiliation Agreement between the
Predecessor and ENVOY (1)
10.5 Note Purchase Agreement dated June 6, 1995 by and
between ENVOY and First Data (4)
10.6 Amended and Restated Credit Agreement dated
November 8, 1996 among First Union National Bank of
North Carolina, as agent, various Lenders and ENVOY (5)
</TABLE>
25
<PAGE> 28
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- ----------------------------------------------------------
MANAGEMENT CONTRACT OR COMPENSATORY
PLAN
<S> <C>
10.7 Employment Agreement between ENVOY and Fred C.
Goad, Jr. (1)
10.8 Employment Agreement between ENVOY and Jim D.
Kever (1)
10.9 Employment Agreement between ENVOY and Kevin M.
McNamara (6)
10.10 Employment Agreement between ENVOY and Richard P.
Caliri (6)
10.11 Amended and Restated 1995 Employee Stock Incentive
Plan
10.12 Amended and Restated 1995 Stock Option Plan for Outside
Directors
10.13 1992 Incentive Plan (1)
10.14 1992 Non-Employee Directors Stock Option Plan (1)
10.15 1990 Officer and Employee Stock Option Plan (1)
10.16 1990 Director Stock Option Plan (1)
10.17 1987 Stock Option Plan (1)
10.18 Form of Indemnification Agreement (1)
21 Subsidiaries
23.1 Independent Auditors' Consent
23.2 Independent Auditors' Consent
27 Financial Data Schedule (for SEC use only).
</TABLE>
- ------------
(1) Incorporated by reference to the Registrant's Form 10, as amended No.
0-25062.
(2) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed December 7, 1995.
(3) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed March 21, 1996.
(4) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1995.
(5) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996.
(6) Incorporated by reference to the Registrant's Registration Statement on
Form S-3, as amended, No. 333-04433.
26
<PAGE> 29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
ENVOY CORPORATION
By: /s/ Fred C. Goad, Jr.
---------------------------------------
Fred C. Goad, Jr.
Chairman and Co-Chief Executive Officer
Pursuant to the requirements of Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Fred C. Goad, Jr. Chairman of the Board, Co- March 26, 1997
- ------------------------------ Chief Executive Officer and
Fred C. Goad, Jr. Director
/s/ Jim D. Kever Co-Chief Executive Officer, March 26, 1997
- ------------------------------ President and Director
Jim D. Kever
Senior Vice President and March 26, 1997
/s/ Kevin M. McNamara Chief Financial Officer
- ------------------------------ (Principal Financial and
Kevin M. McNamara Accounting Officer)
/s/ William E. Ford Director March 26, 1997
- ------------------------------
William E. Ford
/s/ W. Marvin Gresham Director March 26, 1997
- ------------------------------
W. Marvin Gresham
/s/ Laurence E. Hirsch Director March 26, 1997
- ------------------------------
Laurence E. Hirsch
/s/ G. Walter Loewenbaum II Director March 26, 1997
- ------------------------------
G. Walter Loewenbaum II
</TABLE>
27
<PAGE> 30
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Richard A. McStay Director March 26, 1997
- ------------------------------
Richard A. McStay
/s/ Harlan F. Seymour Director March 26, 1997
- ------------------------------
Harlan F. Seymour
</TABLE>
28
<PAGE> 31
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, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the years then ended. Our audits also included the financial statement schedule
listed in the Index at Item 14. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We 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 consolidated financial position of ENVOY Corporation
and subsidiaries at December 31, 1996 and 1995, and the consolidated results of
their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Ernst & Young LLP
Nashville, Tennessee
February 12, 1997,
except as to Note 16, as to which the date is
March 11, 1997
F-1
<PAGE> 32
INDEPENDENT AUDITORS' REPORT
BOARD OF DIRECTORS AND STOCKHOLDERS
ENVOY Corporation
Nashville, Tennessee
We have audited the accompanying statements of operations, shareholders' equity
and cash flows for the year ended December 31, 1994 of ENVOY Corporation. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the results of the Company's operations and its cash flows for the
year ended December 31, 1994 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Nashville, Tennessee
February 10, 1995
(June 6, 1995 as to Note 3)
F-2
<PAGE> 33
ENVOY Corporation
Consolidated Balance Sheets
(In thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
-----------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 36,430 $ 222
Short-term investments 0 5,103
Trade accounts receivable, less allowance for
doubtful accounts of $1,470 and $534 in 1996
and 1995, respectively 20,435 6,460
Inventories 2,586 2,092
Deferred income taxes 1,018 300
Other 2,947 1,615
--------------------- ---------------------
Total current assets 63,416 15,792
Property and equipment:
Equipment 24,627 16,474
Furniture and fixtures 3,004 704
Leasehold improvements 2,124 904
--------------------- ---------------------
29,755 18,082
Less accumulated depreciation and amortization (14,402) (5,314)
--------------------- ---------------------
15,353 12,768
Other assets:
Goodwill, net of amortization 26,981 499
Other intangibles, net of amortization 25,628 0
Other 2,436 1,091
--------------------- ---------------------
Total assets $ 133,814 $ 30,150
===================== =====================
</TABLE>
See accompanying notes.
F-3
<PAGE> 34
ENVOY CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
-----------------------------------------------
<S> <C> <C>
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 4,828 $ 388
Accrued expenses and other current liabilities 10,071 4,127
Current portion of long-term debt 93 0
--------------------- ---------------------
Total current liabilities 14,992 4,515
Long-term debt, less current portion 8,412 10,000
Deferred income taxes 1,965 300
Shareholders' equity:
Preferred stock--no par value; authorized,
12,000,000 shares in 1996 and 1995;
3,730,233 issued in 1996 40,100 0
Common stock--no par value in 1996 and 1995;
authorized, 48,000,000 shares;
issued, 15,354,531 and 11,289,421 in
1996 and 1995, respectively 103,199 11,289
Additional paid-in capital 7,155 7,155
Retained deficit (42,009) (3,109)
--------------------- ---------------------
Total shareholders' equity 108,445 15,335
--------------------- ---------------------
Total liabilities and shareholders' equity $ 133,814 $ 30,150
===================== =====================
</TABLE>
See accompanying notes.
F-4
<PAGE> 35
ENVOY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
---------- -------- --------
<S> <C> <C> <C>
Revenues $ 76,584 $ 26,055 $ 20,950
Operating costs and expenses:
Cost of revenues 38,252 15,435 13,280
Selling, general and administrative 18,950 8,243 5,901
Depreciation and amortization 19,177 2,468 1,990
Merger and facility integration costs 35,364 0 0
EMC losses 540 0 0
---------- -------- --------
Operating loss (35,699) (91) (221)
Other income (expense):
Interest income 1,032 380 29
Interest expense (2,656) (513) 0
---------- -------- --------
(1,624) (133) 29
---------- -------- --------
Loss from continuing operations
before income taxes and loss in investee (37,323) (224) (192)
Provision (benefit) for income taxes 1,577 0 (73)
Loss in investee 0 (1,776) 0
---------- -------- --------
Loss from continuing operations (38,900) (2,000) (119)
Income from discontinued operations, net of
income taxes 0 30 5,526
First data transaction expenses, including income taxes 0 (2,431) (708)
---------- -------- --------
(Loss) income from discontinued operations 0 (2,401) 4,818
---------- -------- --------
Net (loss) income $ (38,900) $ (4,401) $ 4,699
========== ======== ========
</TABLE>
(Continued)
F-5
<PAGE> 36
ENVOY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995 1994
------------------ ----------------- ------------------
<S> <C> <C> <C>
Earnings (loss) per common share:
Continuing operations $(2.99) $(0.18) $(0.01)
Discontinued operations 0 (0.21) 0.42
------------------ ---------------- -----------------
Net (loss) income $(2.99) $(0.39) $ 0.41
================== ================= ==================
Weighted average shares outstanding 13,019 11,241 11,510
================== ================= ==================
</TABLE>
See accompanying notes.
F-6
<PAGE> 37
ENVOY CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK ADDITIONAL RETAINED TOTAL
----------------------------------- PAID-IN EARNINGS DEFERRED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) COMPENSATION EQUITY
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 10,888 $ 10,888 $ 31,767 $ 3,582 $ 0 $ 46,237
Stock options exercised 130 130 855 0 0 985
Income tax benefit realized on
exercise of stock options 0 0 594 0 0 594
Stock option compensation charge 0 0 1,974 0 (1,264) 710
Net income 0 0 0 4,699 0 4,699
-----------------------------------------------------------------------------------
Balance at December 31, 1994 11,018 11,018 35,190 8,281 (1,264) 53,225
Stock options exercised 271 271 349 0 0 620
Income tax benefit realized on
exercise of stock options 0 0 46 0 0 46
FDC merger:
Stock option compensation charge 0 0 0 0 1,264 1,264
Equity transfer 0 0 (28,430) (6,989) 0 (35,419)
Net loss 0 0 0 (4,401) 0 (4,401)
-----------------------------------------------------------------------------------
Balance at December 31, 1995 11,289 11,289 7,155 (3,109) 0 15,335
Stock options exercised 163 510 0 0 0 510
Stock issued in connection with
acquisitions 413 6,650 3,730 $ 40,100 0 0 0 46,750
Conversion of debt to common stock 170 1,786 0 0 0 0 0 1,786
Proceeds from issuance of stock 3,320 82,964 0 0 0 0 0 82,964
Net loss 0 0 0 0 0 (38,900) 0 (38,900)
-----------------------------------------------------------------------------------
Balance at December 31, 1996 15,355 $103,199 3,730 $ 40,100 $ 7,155 $(42,009) $ 0 $ 108,445
===================================================================================
</TABLE>
See accompanying notes.
F-7
<PAGE> 38
ENVOY Corporation
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET (LOSS) INCOME $ (38,900) $ (4,401) $ 4,699
Adjustments to reconcile net (loss)
income to net cash provided by
operating activities:
Depreciation and amortization 19,187 3,550 4,941
Stock option compensation expense 0 1,264 710
Provision for losses on accounts receivable 1,017 359 0
Deferred income taxes 524 96 143
Write-off of certain assets and investments 32,281 820 0
Changes in assets and liabilities, net of
First Data transaction and acquired businesses:
Decrease (increase) in accounts receivable (6,931) 1,185 (2,146)
Increase in inventories (440) (1,568) (1,637)
Decrease (increase) in other current assets (1,851) (619) (49)
Increase (decrease) in accounts payable,
accrued expenses and other current
liabilities (2,619) 1,273 1,777
------------------------------------------------
Net cash provided by operating activities 2,268 1,959 8,438
INVESTING ACTIVITIES
Net (increase) decrease in short-term investments 5,103 (5,103) (394)
Purchases of property and equipment (4,784) (7,970) (7,684)
Payments received on notes receivable 400 1,639 400
Additions to notes receivable (66) 0 0
Increase in other assets (296) (580) (603)
Investment in investee 0 (750) 0
Payments for businesses acquired, net of $5,543
cash acquired (96,960) 0 0
------------------------------------------------
Net cash used in investing activities (91,125) (12,764) (8,281)
FINANCING ACTIVITIES
Proceeds from issuance of preferred stock 40,100 0 0
Proceeds from issuance of common stock 88,474 620 1,579
Proceeds from long-term debt 43,947 10,000 1,260
Payments on long-term debt (43,994) (1,120) (140)
Payment on deferred financing costs (1,200) 0 0
Redemption of preferred stock (2,262) 0 0
Cash transferred in First Data transaction 0 (2,743) 0
------------------------------------------------
Net cash provided by financing activities 125,065 6,757 2,699
------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 36,208 (4,048) 2,856
Cash and cash equivalents at beginning of year 222 4,270 1,414
------------------------------------------------
Cash and cash equivalents at end of year $ 36,430 $ 222 $ 4,270
================================================
</TABLE>
(Continued)
F-8
<PAGE> 39
ENVOY Corporation
Consolidated Statements of Cash Flows (continued)
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
------------------ ----------------- ------------------
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ (2,141) $ (513) $ 29
Interest received $ 1,024 $ 380 $ 814
Income taxes paid $ (141) $ (476) $ (2,056)
NONCASH TRANSACTIONS
First data transaction:
Book value of assets transferred, excluding cash $ 0 $ 36,083 $ 0
Liabilities transferred 0 $ (3,407) 0
Equity transferred 0 $ (35,419) 0
---------------- ----------------- -----------------
Cash transferred $ 0 $ (2,743) $ 0
================ ================= =================
ACQUISITIONS
Working capital $ 302 $ 0 $ 0
Intangible assets 1,348 0 0
Common stock issued (1,650) 0 0
---------------- ----------------- -----------------
Cash transferred $ 0 $ 0 $ 0
================ ================= =================
CONVERSION OF DEBT TO COMMON STOCK $ 1,786 $ $ 0
================ ================= =================
</TABLE>
See accompanying notes.
F-9
<PAGE> 40
ENVOY Corporation
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION
ENVOY Corporation, a Tennessee corporation (the "Company" or "New Envoy"), was
incorporated in August 1994 as a wholly-owned subsidiary of Envoy Corporation, a
Delaware corporation ("Old Envoy"), and through a stock dividend distribution by
Old Envoy of all of the outstanding shares of the common stock of New Envoy (the
"Distribution") the Company ceased to be a wholly-owned subsidiary of Old Envoy.
Immediately after the Distribution, Old Envoy was merged with and into First
Data Corporation ("First Data") (see Note 3). Old Envoy was formed in 1981 to
develop and market electronic transaction processing services to capture and
transmit time critical information for the financial services and health care
markets. In 1995, the assets and liabilities of Old Envoy associated with the
electronic transaction processing for the health care markets and governmental
benefits programs were transferred to New Envoy. For accounting purposes, the
Company's financial statements for 1995 and 1994 include financial information
for its predecessor, Old Envoy, with the financial services electronic
processing business (the "financial business") shown as discontinued operations.
For purposes of the notes to the consolidated financial statements, the
"Company" refers to Old Envoy and New Envoy for the period prior to June 6,
1995. The Company currently provides electronic data interchange services to
participants in the health care market, including pharmacies, physicians,
hospitals, dentists, billing services, commercial insurance companies, managed
care organizations, state and federal government agencies and others.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPALS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments with a maturity of three months
or less when purchased to be cash equivalents. The carrying amount approximates
fair value because of the short maturity of those instruments.
SHORT-TERM INVESTMENTS
Short-term investments include investments in fixed rate securities consisting
primarily of bonds and corporate notes. These investments have maturity dates of
one to five years from the date of purchase and are accounted for in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." It is the Company's
intent not to hold these investments to maturity.
The majority of short-term investments as of December 31, 1995 are U.S. Treasury
and U.S. Government agencies securities. The Company's proceeds, gross realized
gains and gross realized losses from the sale of available-for-sale securities
were $6,126,000, $1,911, and $39,138, respectively, in 1996; $9,470,000,
$288,000, and $9,000, respectively, in 1995; and $35,900,000, $146,000 and
$66,000, respectively, in 1994.
F-10
<PAGE> 41
ENVOY Corporation
Notes to Consolidated Financial Statements (continued)
INVENTORIES
Inventories which consist of point-of-service terminals and parts, are stated at
the lower of cost (first-in, first-out method) or market.
PROPERTY AND EQUIPMENT
Property and equipment is 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 $4,614,000, $2,418,000,
and $1,962,000 for 1996, 1995 and 1994, respectively.
OTHER ASSETS
Other assets, including goodwill, customer lists, covenants not to compete,
developed technology, assembled work force, and submitter/payor relationships,
are being amortized on a straight-line basis over two to nine year time periods,
as applicable. The Company periodically evaluates the recoverability of such
intangibles resulting from business acquisitions and measures the amount of
impairment, if any, by assessing current and future levels of income and cash
flows as well as other factors, such as business trends and prospects and market
and economic conditions. Amortization expense related to such intangible assets
for 1996, 1995 and 1994 was $14,563,000, $38,175 and $28,631, respectively. At
December 31, 1996 and 1995, accumulated amortization of intangible assets was
$14,563,000 and $66,806, respectively.
REVENUE RECOGNITION
Processing services revenue is recognized as the transactions are processed.
Receivables generally are due within 30 days and do not require collateral.
EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common share has been computed by dividing net income (loss)
by the weighted average common and dilutive common equivalent shares outstanding
using the treasury stock and modified treasury stock methods, as appropriate. In
June 1995, the Company issued a convertible subordinated note which is not
considered a common stock equivalent.
RESEARCH AND DEVELOPMENT
Research and development expenses of $1,654,000 in 1996, $1,419,000 in 1995, and
$1,047,000 in 1994 were charged to cost of revenue as incurred until
technological feasibility had been established for the product. Thereafter, all
software development costs are being capitalized until the product is available
for general use to customers. The Company has not capitalized any significant
software costs to date.
INCOME TAXES
Income taxes have been provided using the liability method in accordance with
SFAS No. 109, "Accounting for Income Taxes."
F-11
<PAGE> 42
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, directors and others with an exercise price which
approximates the fair value of the shares at the date of grant. The Company
accounts for stock option grants in accordance with Accounting Principles Board
("APB") Opinion No. 25, ("APB No. 25") "Accounting for Stock Issued to
Employees," and, accordingly, recognizes no compensation expense for the stock
option grants.
RECLASSIFICATIONS
Certain reclassifications have been made in the 1995 and 1994 financial
statements to conform with the 1996 presentation.
3. DISCONTINUED OPERATIONS--TRANSACTION WITH FIRST DATA CORPORATION
On June 6, 1995, the Company completed a merger of its financial transaction
processing business with First Data (the "First Data Merger"). Pursuant to a
management services agreement entered into in connection with the First Data
Merger, the Company is receiving a fee from First Data of $1,500,000 per annum,
payable in quarterly installments of $375,000, during the first two years
following the First Data Merger, after which period such fees are anticipated to
end. Management fees of $1,500,000 and $850,000 for the years ended 1996 and
1995 are classified in revenues in the consolidated statements of operations.
First Data has asserted certain indemnification claims against the Company in
connection with the First Data Merger. Pending resolution of these claims, First
Data has withheld certain payments due the Company under the management services
agreement. ENVOY and FDC have reached a preliminary understanding whereby FDC
has agreed to pay all amounts due under the Management Services Agreement,
subject to the execution of a definitive agreement. Accordingly, management
believes that the ultimate resolution of the First Data claims will not have a
material adverse effect on the results of operations or financial position of
the Company.
The net assets of the financial business were merged with and into First Data
and were accounted for as discontinued operations. The net assets of the
discontinued financial business were comprised of the following as of June 6,
1995 (in thousands):
<TABLE>
<S> <C>
Current assets $ 25,155
Noncurrent assets 13,671
Current liabilities (2,716)
Noncurrent liabilities (691)
-----------
$ 35,419
===========
</TABLE>
F-12
<PAGE> 43
ENVOY Corporation
Notes to Consolidated Financial Statements (continued)
Revenues of the financial business were $12,828,000 for the period January 1,
1995 through June 6, 1995 and $33,436,000 for the year ended December 31, 1994.
The Company incurred $1,997,000 in expense related to the Distribution and First
Data Merger for the year ended December 31, 1995. These expenses consisted
primarily of legal, accounting and financial advisor fees. As set forth in the
merger agreement, First Data paid 50% of the costs of the transactions up to a
maximum expense to First Data of $2,000,000. The $1,997,000 incurred by the
Company is net of the $2,000,000 paid by First Data. The costs associated with
the First Data Merger have been included in discontinued operations including
applicable income taxes of $434,000 for the year ended December 31, 1995 and
reflect the reversal of tax benefits previously recognized for such charges. The
First Data Merger costs for the year ended December 31, 1994 net of taxes
totaled $708,000.
4. ACQUISITIONS
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. All actual allocations of
goodwill and identifiable intangibles will be based upon further studies and may
change during the allocation period, generally one year following the date of
acquisition. The financial statements for the year ended 1996 reflect the
operations of the acquired businesses for the period after their respective
dates of acquisition.
NATIONAL ELECTRONIC INFORMATION CORPORATION ("NEIC")
On March 6, 1996, the Company's shareholders approved the acquisition of NEIC
for an aggregate purchase price of approximately $94,301,000, consisting of (i)
$86,154,000 paid to the NEIC stockholders, (ii) $2,200,000 paid to certain NEIC
stockholders on August 1, 1996 and (iii) certain other transaction and
acquisition costs of $5,947,000. Based upon management's preliminary estimates,
the Company recorded $36,318,000 in goodwill and $19,600,000 of identifiable
intangible assets related to the NEIC acquisition.
In connection with the NEIC acquisition, the Company incurred a one time
write-off of acquired in-process technology of $30,000,000 and such amount was
charged to expense in the three months ended March 31, 1996, because this amount
relates to research and development that had not reached technological
feasibility and for which there was no alternative future use. The $30,000,000
is classified as merger and facility integration costs in the consolidated
statement of operations.
The NEIC acquisition was financed through equity and debt financing. An
aggregate of 3,730,233 shares of the Company's Series B Convertible Preferred
Stock were issued to three investors for a total purchase price of $40,100,000.
Additionally, the Company issued 333,333 shares of the Company's common stock
(the "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 (See Note 9). 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.
F-13
<PAGE> 44
ENVOY Corporation
Notes to Consolidated Financial Statements (continued)
TELECLAIMS, INC. ("TELECLAIMS")
On March 1, 1996, the Company acquired all the issued and outstanding capital
stock of Teleclaims in exchange for 73,242 shares of Common Stock yielding a
purchase price of approximately $1,500,000. Goodwill and identifiable
intangibles in the amount of $648,000 were recorded in connection with the
acquisition of Teleclaims. Also recorded as part of the Teleclaims acquisition
was a one time write-off of acquired in-process technology of $700,000 and such
amount was charged to expense in the three months ended March 31, 1996, because
this amount related to research and development that had not reached
technological feasibility and for which there was no alternative future use. The
$700,000 is classified as merger and facility integration costs in the
consolidated statement of operations. The allocation is based on management's
preliminary estimates.
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. Based on management's preliminary
estimates, the Company recorded $1,864,000 of goodwill and other identifiable
intangible assets related to the NVS acquisition.
PROFESSIONAL OFFICE SYSTEMS, INC. ("POSI")
On October 31, 1996, the Company acquired all the issued and outstanding capital
stock of POSI, the electronic data interchange clearinghouse for Blue Cross and
Blue Shield of the National Capital Area, for approximately $7,600,000 in cash.
Based upon management's preliminary estimates, goodwill and identifiable
intangibles in the amount of $6,742,000 were recorded in connection with the
acquisition of POSI.
The following presents unaudited pro forma results of operations (including the
one-time write-off of acquired in-process technology and all merger and facility
integration costs) for the year ended December 31, 1996 and 1995 assuming all
acquisitions, including EMC*Express, Inc. ("EMC") (See Note 6), had been
consummated at the beginning of the periods presented (in thousands, except per
share data):
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995
------------ ------------
<S> <C> <C>
Revenues $ 88,674 $ 70,037
Loss from continuing operations (29,729) (36,098)
Loss per common share:
Continuing operations $(2.23) $(3.10)
</TABLE>
F-14
<PAGE> 45
ENVOY Corporation
Notes to Consolidated Financial Statements (continued)
5. MERGER AND FACILITY INTEGRATION COSTS
As a result of the acquisitions of NEIC and Teleclaims in March 1996, the
Company approved a plan that reorganized certain of its operations, personnel
and facilities to gain the effects of potential cost savings and operating
synergies. The cost of this plan to integrate the acquired companies is being
recognized as incurred in accordance with the guidance set forth in Emerging
Issues Task Force Issue 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)" and are not part of the purchase price
allocation. The costs for the year ended December 31, 1996 associated with this
plan of $4,664,000 include exit costs associated with lease terminations,
personnel costs, writedowns of impaired assets and other related costs that were
incurred as a direct result of the plan and are classified as merger and
facility integration costs in the consolidated statement of operations. The
terminated employee groups include accounting, marketing and certain areas of
the systems and operations departments. The number of employees to be terminated
is approximately 120, of which 93 employees had been terminated as of December
31, 1996. Adjustments made to the liability as of December 31, 1996 were
approximately $1,434,000. The Company estimates that no future costs will be
charged to merger and facility integration costs related to NEIC and Teleclaims.
Merger and facility integration costs consist of the following for the year
ended December 31, 1996 (in thousands):
<TABLE>
<S> <C>
Write-off of acquired in-process technology $ 30,700
Facility integration costs 4,664
------------
Total merger and facility integration costs $ 35,364
============
</TABLE>
6. LOSS IN INVESTEE
On January 28, 1995, the Company purchased 17.5% of the capital stock of EMC for
approximately $570,000. In connection therewith, the Company paid $250,000 for
an option to purchase the remainder of the capital stock of EMC (the "Option"),
and also entered into a management agreement to provide management services to
EMC (the "Management Agreement"). Under the terms of the Management Agreement,
the Company agreed to fund certain operating costs of EMC in the form of
advances. The Management Agreement could be terminated by the Company at any
time on 60 days written notice, at which time the Option would be terminated.
The Company gave notice to terminate the Management Agreement on January 31,
1996. As a result of the termination notice and other facts and circumstances,
the Company determined that it was probable an impairment to its investment had
occurred. Accordingly, the Company recorded an adjustment in the fourth quarter
of 1995 in the amount of $1,637,000, to recognize an impairment in the carrying
value of its investment and cumulative advances. During 1995, the Company
recognized losses for its initial investment and option aggregating $820,000 and
advances and equity losses of $956,000 or 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. Accordingly, the funding of EMC's
operating costs in 1996 have been 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.
F-15
<PAGE> 46
ENVOY Corporation
Notes to Consolidated Financial Statements (continued)
Following the termination of the Management Agreement and the Option, certain
shareholders of EMC filed a lawsuit in March 1996 against the Company asserting
claims for breach of contract and negligent conduct. On October 18, 1996, the
Company settled this lawsuit for $300,000. Concurrent with the settlement of the
lawsuit, the Company completed the acquisition of the remaining 82.5% interest
in EMC for approximately $2,000,000 in cash. The EMC acquisition was accounted
for under the purchase method of accounting applying the provisions of APB No.
16 and, as a result, the Company recorded the assets and liabilities at their
estimated fair values. Based on management's preliminary estimates, the Company
recorded $1,954,000 of other identifiable intangible assets related to the EMC
acquisition. The actual allocation will be based on further studies and may
change during the allocation period, generally one year following the date of
acquisition. The operations of EMC are included in the consolidated statement of
operations from the date of acquisition.
7. ACCRUED EXPENSES
Accrued expenses and other current liabilities consists of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
--------------------------------
<S> <C> <C>
Accrued communication expense $ 2,259 $ 500
Accrued income taxes 1,789 49
Accrued salaries and benefits 1,454 693
Accrued vendor incentives 1,085 250
Other 3,484 2,635
-------------------------------
$ 10,071 $ 4,127
===============================
</TABLE>
8. 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 is convertible, at the option of the
holder, into fully paid and nonassessable shares of Common Stock. The conversion
price and conversion rights are 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. The current conversion price is at the rate of one share
of Common Stock for each $10.52 face amount. The Convertible Note is due in full
on May 6, 2000 and requires semiannual interest payments each April and October.
The Convertible Note may be prepaid at any time after June 6, 1997 subject to
prepayment penalties of 4% for prepayment before June 6, 1998 and 2% for
prepayment before June 6, 1999. The Convertible Note requires the Company to
maintain certain financial covenants and places certain limitations on the
incurrence of additional indebtedness, payment of dividends and sale of assets.
During 1996, First Data sold the Convertible Note to an unrelated third party
for $13,500,000. The terms and conditions of the Convertible Note remain
substantially the same.
F-16
<PAGE> 47
ENVOY Corporation
Notes to Consolidated Financial Statements (continued)
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. As of
December 31, 1996, $1,786,000 in principal amount of the Convertible Note had
been converted into 169,789 shares of Common Stock and sold pursuant to the
registration statement. Subsequent to December 31, 1996, $500,000 in principal
amount of the Convertible Note was converted into 47,528 shares of Common Stock.
In November 1996, the Company amended its revolving credit facility to increase
the amount of credit available thereunder to $50,000,000. The Company currently
has no amounts outstanding under the amended credit facility. Any outstanding
borrowings 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 is due and payable in full on 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 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.
9. 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,
1996, 1995, and 1994 was approximately $1,596,000, $1,095,000, and $1,631,000,
respectively.
Future minimum rental payments at December 31, 1996 under operating lease
arrangements are as follows (in thousands):
<TABLE>
<C> <C>
1997 $1,748
1998 1,039
1999 1,086
2000 1,057
2001 779
Thereafter 730
------
Total minimum lease payments $6,439
======
</TABLE>
10. STOCK OPTIONS
The Company has elected to follow APB No. 25 and related Interpretations in
accounting for its stock options because, as discussed below, the alternative
fair value accounting provided for under SFAS No. 123, "Accounting for
Stock-Based Compensation," requires use of option valuation models that were not
developed for use in valuing stock options. Under APB No. 25, because the
exercise price of the Company's stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
F-17
<PAGE> 48
ENVOY Corporation
Notes to Consolidated Financial Statements (continued)
At December 31, 1996, the Company had reserved 4,214,640 shares of Common Stock
for issuance in connection with the stock option plans. Summaries of stock
options outstanding are as follows:
<TABLE>
<CAPTION>
WEIGHTED-
NUMBER OF OPTION PRICE PER AVERAGE
SHARES SHARE EXERCISE PRICE
--------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding, December 31, 1993 1,598,000 $ 1.50 - $ 4.92
Granted 10,000 4.00 - 7.00
Exercised (130,000) 1.83 - 4.92
Canceled (1,000) 1.50 - 3.79
---------------------------------------------------
Outstanding, December 31, 1994 1,477,000 1.83 - 7.00 $ 2.61
Granted 1,829,000 2.19 - 18.00 9.54
Exercised (271,000) 1.83 - 3.79 2.28
---------------------------------------------------
Outstanding, December 31, 1995 3,035,000 1.83 - 18.00 6.81
Granted 625,000 20.25 - 40.25 24.53
Exercised (163,000) 1.83 - 7.75 3.12
Canceled (268,000) 7.75 - 10.00 9.02
---------------------------------------------------
Outstanding, December 31, 1996 3,229,000 $ 1.83 - $ 40.25 $ 10.25
===================================================
</TABLE>
The number of stock options exercisable and the weighted average exercise price
of these options was 1,254,000 and $3.47 and 1,215,000 and $2.72 at December 31,
1996 and 1995, respectively. The weighted-average fair value of options granted
during 1996 and 1995 was $13.93 and $4.00, respectively. The weighted-average
remaining contractual life of those options is 5 years.
The Company's 1995 Employee Stock Incentive Plan, as amended, has authorized the
grant of options for up to 3,000,000 shares of Common Stock. All options granted
have 10 year terms from the grant date and vest over periods from one to five
years from the date of grant. At December 31, 1996, 2,151,000 shares were
outstanding under this plan.
The Company's 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, 1996, 14,000
options were outstanding under this plan.
Prior to the First Data Merger, Old Envoy had outstanding non-qualified stock
options for 1,214,640 shares of common stock. The grants were made under the
1987 Stock Option Plan, the 1990 Director Stock Option Plan, the 1990 Officer
and Employee Stock Option Plan, the 1992 Non-Employee Directors' Plan and the
1992 Incentive Plan. Because all of these grants were made prior to the First
Data Merger, no further grants may be made under these plans. All options
granted thereunder have 10 year terms from the grant date. In connection with
the Distribution and First Data Merger, each holder of an outstanding option to
F-18
<PAGE> 49
ENVOY Corporation
Notes to Consolidated Financial Statements (continued)
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 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, 1996,
1,064,000 shares were outstanding and fully exercisable under these plans.
The Compensation Committee of the Board of Directors amended the 1992 Incentive
Plan in August 1994 to provide that all options thereunder would vest
immediately preceding the expiration of such option grant or earlier upon the
attainment of certain performance criteria. This amendment resulted in the
recording of deferred compensation and additional paid-in capital of
approximately $1,974,000. The deferred compensation was recognized as an expense
over the vesting period. Based on the attainment of certain of the performance
criteria during the year ended December 31, 1994, one-third of the options
vested effective January 31, 1995, and as a result, $710,000 of the deferred
compensation expense was recognized during 1994. As a result of the First Data
Merger (see Note 3), the vesting of all outstanding options was accelerated and
all options became fully vested as of the effective time of the First Data
Merger. Accordingly, during the year ended December 31, 1995, the remaining
deferred compensation expense of $1,264,000 was recognized.
Pro forma information regarding net loss and loss per share is required by SFAS
No. 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method. The fair value for these options
was estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted-average assumptions for 1995 and 1996, respectively:
risk-free interest rates ranging from 5.51% to 6.24% and 5.36% to 6.69%; no
dividend yield; volatility factors of the expected market price of Common Stock
ranging from .386 to .388 and .385 to .419; 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.
F-19
<PAGE> 50
ENVOY Corporation
Notes to Consolidated Financial Statements (continued)
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands except for loss per share information):
<TABLE>
<CAPTION>
1996 1995
----------------------------------
<S> <C> <C>
Pro forma net loss $ (40,640) $ (4,838)
Pro forma loss per common share $ (3.12) $ (.43)
</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.
11. SHAREHOLDER RIGHTS PLAN
In connection with the First Data Merger, the Board of Directors adopted a
shareholder rights plan for the Company. The purpose of the shareholder rights
plan is to protect the interests of the Company's shareholders if the Company is
confronted with coercive or potentially unfair takeover tactics by encouraging
third parties interested in acquiring the Company to negotiate with the Board of
Directors.
The shareholder rights plan is a plan by which the Company has distributed
rights ("Rights") to purchase (at the rate of one Right per share of Common
Stock) one-tenth of one share of Series A Preferred Stock at an exercise price
of $60 per tenth of a share. The Rights are attached to the Common Stock and may
be exercised only if a person or group (excluding certain share acquisitions as
described in the plan) acquires 20% of the outstanding Common Stock or initiates
a tender or exchange offer that would result in such person or group acquiring
10% or more of the outstanding Common Stock. Upon such an event, the Rights
"flip-in" and each holder of a Right will thereafter have the right to receive,
upon exercise, 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.
12. SECONDARY PUBLIC OFFERING
In August 1996, the Company completed an underwritten public offering of
3,320,000 shares of Common Stock at $26.50 per share. Of the approximately
$83,000,000 in net proceeds to the Company, the $25,000,000 outstanding under
the Company's term loan was retired and approximately $12,900,000 was used to
repay all amounts outstanding under the $25,000,000 revolving credit facility.
The remaining proceeds will be used for general corporate purposes, including
funding the increased working capital requirements of the Company generated by
the Company's growth and for possible strategic acquisitions.
F-20
<PAGE> 51
ENVOY Corporation
Notes to Consolidated Financial Statements (continued)
13. INCOME TAXES
The provision for income taxes was comprised of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995 1994
----------------------------------------------------------------
Current:
<S> <C> <C> <C>
Federal $ 0 $ 331 $ 2,198
State 1,053 49 419
----------------------------------------------------------------
Total current 1,053 380 2,617
Deferred:
Federal 1,294 86 178
State (770) 10 34
----------------------------------------------------------------
Total deferred 524 96 212
----------------------------------------------------------------
Provision for income taxes $ 1,577 $ 476 $ 2,829
================================================================
</TABLE>
The reconciliation of income tax computed by applying the U.S. federal statutory
rate to the actual income tax expense follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995 1994
--------------------------------------------------------------
<S> <C> <C> <C>
Income tax (benefit) expense at U.S. federal
statutory rate $ (12,690) $ (1,335) $ 2,560
Nondeductible merger costs 10,459 679 0
Nondeductible goodwill amortization 3,411 0 0
State income taxes, net of federal
benefit 187 39 298
Change in valuation allowance,
federal only 163 1,130 0
Other, net 47 (37) (29)
--------------------------------------------------------------
Income tax expense $ 1,577 $ 476 $ 2,829
==============================================================
</TABLE>
F-21
<PAGE> 52
ENVOY Corporation
Notes to Consolidated Financial Statements (continued)
The classification of the provision for income taxes in the consolidated
statements of operations is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995 1994
--------------------------------------------------------------
<S> <C> <C> <C>
Income tax expense attributable to
continuing operations $ 1,577 $ 0 $ (73)
Discontinued operations:
Income from operations 0 42 3,336
First Data transaction expense
(benefit) 0 434 (434)
--------------------------------------------------------------
Total expense from discontinued
operations 0 476 2,902
--------------------------------------------------------------
Total income tax expense $ 1,577 $ 476 $ 2,829
==============================================================
</TABLE>
F-22
<PAGE> 53
ENVOY Corporation
Notes to Consolidated Financial Statements (continued)
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,
1996 1995
--------------------------------
<S> <C> <C>
Deferred tax liability:
Difference between book and tax depreciation
and amortization $ (8,346) $ (1,800)
Deferred tax assets:
Difference between book and tax treatment
of leased assets 516 604
Reserves not currently deductible 1,012 337
Net operating loss 4,629 836
Difference between book and tax treatment
for investment 880 674
Difference between book and tax treatment
of compensation expense 529 612
Tax credits 503 0
Other 117 0
---------------------- ----------------------
Total deferred tax assets 8,186 3,063
Valuation allowance for deferred tax assets (787) (1,263)
---------------------- ----------------------
Net deferred tax assets 7,399 1,800
---------------------- ----------------------
Net deferred tax liability $ (947) $ 0
====================== ======================
</TABLE>
At December 31, 1996, the Company had net operating loss carryforwards of
approximately $18,500,000. Approximately $6,300,000 of the net operating losses
relate to the exercise of employee stock options and the tax benefit will be
allocated to equity when realized on the Company's tax returns. These losses
begin to expire in 2003. Of the $18,500,000 net operating losses, $15,700,000
are attributable to pre-acquisition years of NEIC and their use is limited by
the Internal Revenue Code to $4,700,000 per year.
The valuation allowance at December 31, 1995 relates to various deferred tax
assets under SFAS No. 109. The valuation allowance at December 31, 1996 relates
to the loss on the investment in EMC. The allowance was reduced in 1996 because
the Company anticipates that the deferred tax assets, other than the deferred
tax asset related to EMC, will eventually be realized on the consolidated income
tax returns that will include NEIC.
F-23
<PAGE> 54
ENVOY Corporation
Notes to Consolidated Financial Statements (continued)
14. PROFIT-SHARING PLAN
The Company sponsors 401(k) profit-sharing plans covering all employees who have
completed at least six months of service and are at least 20 and one-half years
of age. Eligible employees may elect to reduce their current compensation and
contribute to the 401(k) plan through salary deferral contributions.
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1996
----------------------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------------- ------------------------------------ -----------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
REVENUES $ 10,330 $ 19,590 $ 21,502 $ 25,162
Gross profit $ 5,027 $ 9,842 $ 10,729 $ 12,734
Loss from continuing operations $ (33,910)(a) $ (1,417) $ (1,963)(b) $ (1,610)
Net loss $ (33,910)(a) $ (1,417) $ (1,963)(b) $ (1,610)
Loss per common share:
Continuing operations $ (2.97)(a) $ (0.12) $ (0.14)(b) $ (0.11)
Net loss $ (2.97)(a) $ (0.12) $ (0.14)(b) $ (0.11)
</TABLE>
<TABLE>
<CAPTION>
1995
----------------------------------------------------------------------
1ST QUARTER 2nd Quarter 3rd Quarter 4th Quarter
----------------- ------------------------------------ -----------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues $ 6,923 $ 6,051 $ 5,946 $ 6,285
Gross profit $ 2,654 $ 2,503 $ 2,219 $ 2,394
Loss from continuing operations $ (267) $ (170) $ (329) $ (1,234)(c)
Net loss $ (98) $ (2,613) $ (329) $ (1,361)(c)
Loss per common share:
Continuing operations $ (0.02) $ (0.02) $ (0.03) $ (0.11)(c)
Net loss $ (0.01) $ (0.24) $ (0.03) $ (0.12)(c)
</TABLE>
F-24
<PAGE> 55
ENVOY Corporation
Notes to Consolidated Financial Statements (continued)
(a) The Company recorded a $30,700,000 write-off of acquired in-process
technology related to the NEIC and Teleclaims acquisitions (see Note 4).
(b) The Company recorded a $300,000 charge related to the settlement of the
EMC lawsuit (see Note 6).
(c) The Company recorded a fourth quarter adjustment in 1995 of $820,000
resulting from the loss recognized on the EMC investment and option (see
Note 6).
16. SUBSEQUENT EVENTS
On March 11, 1997, the Company acquired certain assets and liabilities of
Diverse Software Systems, Inc. ("DSS") for approximately $4,000,000 in cash plus
additional contingent payments based upon attainment of certain revenue
thresholds in future operating periods. The DSS acquisition will be accounted
for under the purchase method of accounting applying the provisions of APB No.
16 and, as a result, the Company will record the assets and liabilities at their
estimated fair values with the excess of the purchase price over these amounts
being recorded as goodwill. The actual allocation will be based upon further
studies and may change during the allocation period, generally one year
following the date of acquisition.
F-25
<PAGE> 56
INDEPENDENT AUDITORS' REPORT
BOARD OF DIRECTORS
ENVOY Corporation
Nashville, Tennessee
We have audited the financial statements of ENVOY Corporation as of December 31,
1994 and for the year then ended and have issued our report thereon dated
February 10, 1995 (June 6, 1995 as to Note 3); such report is included elsewhere
in this Form 10-K. Our audit also included the financial statement schedule of
ENVOY Corporation, listed in Item 14. This financial statement schedule is the
responsibility of the Corporation's management. Our responsibility is to express
an opinion based on our audit. In our opinion, such financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE LLP
Nashville, Tennessee
February 10, 1995
S-1
<PAGE> 57
Schedule II
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
December, 31, 1994
Balance at Charged to
Beginning Charged to Other Accounts-
Description of Period Costs & Expenses Describe
- ------------------------------------ ----------------- -------------------- -------------------------
<S> <C> <C> <C>
Allowance for Doubtful Accounts $ 425,000
----------------- -------------------- -------------------------
425,000 0 0
================= ==================== =========================
December 31, 1995
<CAPTION>
Balance at Charged to
Beginning Charged to Other Accounts-
Description of Period Costs & Expenses Describe
- ------------------------------------ ----------------- -------------------- -------------------------
<S> <C> <C> <C>
Allowance for Doubtful Accounts $ 425,000 577,000
----------------- -------------------- -------------------------
425,000 577,000 0
================= ==================== =========================
December 31, 1996
<CAPTION>
Balance at Charged to
Beginning Charged to Other Accounts-
Description of Period Costs & Expenses Describe
- ------------------------------------ ----------------- -------------------- -------------------------
<S> <C> <C> <C>
Allowance for Doubtful Accounts $ 537,769 1,017,000
----------------- -------------------- -------------------------
537,769 1,017,000
================= ==================== =========================
</TABLE>
<TABLE>
<CAPTION>
December, 31, 1994
Balance
Deductions End of
Description Describe Period
- ------------------------------------ ---------------- -------------------
<S> <C> <C>
Allowance for Doubtful Accounts $ 425,000
---------------- -------------------
0 $ 425,000
================ ===================
December 31, 1995
<CAPTION>
Balance
Deductions End of
Description Describe Period
- ------------------------------------ ---------------- -------------------
<S> <C> <C>
Allowance for Doubtful Accounts a 464,231 $ 537,769
---------------- -------------------
464,231 $ 537,769
================ ===================
December 31, 1996
<CAPTION>
Balance
Deductions End of
Description Describe Period
- ------------------------------------ ---------------- -------------------
<S> <C> <C>
Allowance for Doubtful Accounts b 84,719 $ 1,470,050
---------------- -------------------
84,719 $ 1,470,050
================ ===================
</TABLE>
a Of this amount $264,231 represents allowance for doubtful accounts
associated with the spin-off of the Financial Business which was transferred
to First Data Corporation. The remaining $200,000 represents a write-off of
known uncollectible receivables against the allowance account.
b This amount represents a write-off of known uncollectible receivables
against the allowance account.
S-2
<PAGE> 58
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
- ---------- ---------------------------------------------------------
<S> <C>
2.1 Agreement and Plan of Distribution dated September 2,
1994, as amended through December 16, 1994 (1)
2.2 Agreement and Plan of Merger dated November 30, 1995
by and among ENVOY, Envoy Acquisition Corporation
and NEIC (2)
3.1 Charter, as amended (4)
3.2 By-Laws (1)
4.1 Article IV of ENVOY's Charter, as amended (included in
Exhibit 3.1) (4)
4.2 Shareholder Rights Plan (1)
4.3 Series B Convertible Preferred Stock Purchase Agreement
among ENVOY, General Atlantic Partners 25, L.P., GAP
Coinvestment Partners, L.P. and First Union Capital
Partners, Inc. dated November 30, 1995 (2)
4.4 Registration Rights Agreement dated March 6, 1996 by and
among ENVOY, General Atlantic Partners 25, L.P., GAP
Coinvestment Partners, L.P. and First Union Capital
Partners, Inc. (3)
4.5 Securities Purchase Agreement dated March 6, 1996 by and
among ENVOY and the Purchasers set forth on the
signature pages thereto (3)
4.6 Registration Rights Agreement dated March 6, 1996 by and
among ENVOY and the Purchasers set forth on the
signature pages thereto (3)
10.1 Form of License and Transition Services Agreement by and
among ENVOY, the Predecessor and First Data (1)
10.2 Form of Management Services Agreement by and between
ENVOY and First Data (1)
10.3 Form of Human Resources Agreement between ENVOY
and First Data (1)
10.4 Form of Tax Disaffiliation Agreement between the
Predecessor and ENVOY (1)
10.5 Note Purchase Agreement dated June 6, 1995 by and
between ENVOY and First Data (4)
10.6 Amended and Restated Credit Agreement dated
November 8, 1996 among First Union National Bank of
North Carolina, as agent, various Lenders and ENVOY (5)
</TABLE>
<PAGE> 59
<TABLE>
<CAPTION>
Exhibit No. Description
- ---------- --------------------------------------------------------
<S> <C>
MANAGEMENT CONTRACT OR COMPENSATORY
PLAN
10.7 Employment Agreement between ENVOY and Fred C.
Goad, Jr. (1)
10.8 Employment Agreement between ENVOY and Jim D.
Kever (1)
10.9 Employment Agreement between ENVOY and Kevin M.
McNamara (6)
10.10 Employment Agreement between ENVOY and Richard P.
Caliri (6)
10.11 Amended and Restated 1995 Employee Stock Incentive
Plan
10.12 Amended and Restated 1995 Stock Option Plan for Outside
Directors
10.13 1992 Incentive Plan (1)
10.14 1992 Non-Employee Directors Stock Option Plan (1)
10.15 1990 Officer and Employee Stock Option Plan (1)
10.16 1990 Director Stock Option Plan (1)
10.17 1987 Stock Option Plan (1)
10.18 Form of Indemnification Agreement (1)
21 Subsidiaries
23.1 Independent Auditors' Consent
23.2 Independent Auditors' Consent
27 Financial Data Schedule (for SEC use only).
</TABLE>
- ------------
(1) Incorporated by reference to the Registrant's Form 10, as amended No.
0-25062.
(2) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed December 7, 1995.
(3) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed March 21, 1996.
(4) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1995.
(5) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996.
(6) Incorporated by reference to the Registrant's Registration Statement on
Form S-3, as amended, No. 333-04433.
<PAGE> 1
EXHIBIT 10.11
DATE: FEBRUARY 21, 1997
AMENDED AND RESTATED ENVOY CORPORATION
1995 EMPLOYEE STOCK INCENTIVE PLAN
SECTION 1. PURPOSE; DEFINITIONS.
(a) PURPOSE. The purpose of the Plan is to enable the Corporation to
attract, retain and reward officers and key employees of and consultants to the
Corporation and its Subsidiaries and Affiliates, and strengthen the mutuality of
interests between such individuals and the Corporation's shareholders, by
offering such officers, key employees and consultants Options or other rights
with respect to shares of Common Stock of the Corporation. The creation of the
Plan shall not diminish or prejudice other compensation programs approved from
time to time by the Board.
(b) DEFINITIONS. For purposes of the Plan, the following terms are
defined as set forth below:
(i) "Affiliate" means any entity other than the Corporation and
its Subsidiaries that is designated by the Board as a participating employer
under the Plan, provided that the Corporation directly or indirectly owns at
least 20% of the combined voting power of all classes of stock of such entity
or at least 20% of the ownership interests in such entity.
(ii) "Board" means the Board of Directors of the Corporation.
(iii) "Capital Transaction" has the meaning provided in Section
3(b) of the Plan.
(iv) "Cause" has the meaning provided in Section 5(b)(x) of the
Plan.
(v) "Change in Control" has the meaning provided in Section 9(b)
of the Plan.
(vi) "Change in Control Price" has the meaning provided in Section
9(d) of the Plan.
(vii) "Common Stock" means the Corporation's Common Stock, without
par value, together with the associated rights under the Corporation's
Shareholders' Rights Plan.
(viii) "Code" means the Internal Revenue Code of 1986, as amended
from time to time, and any successor thereto.
(ix) "Commission" means the Securities and Exchange Commission.
(x) "Committee" means the Committee referred to in Section 2 of
the Plan.
<PAGE> 2
(xi) "Corporation" means Envoy Corporation, a corporation
organized under the laws of the State of Tennessee, or any successor
corporation.
(xii) "Disability" means disability as determined under the
Corporation's long-term disability insurance policy or, if there is no such
definition, as reasonably determined by the Committee.
(xiii) "Disinterested Person" has the meaning set forth in Rule
16b-3(c)(2)(i) as promulgated by the Commission under the Exchange Act, or any
successor definition adopted by the Commission.
(xiv) "Early Retirement" means retirement, for purposes of this Plan
with the express consent of the Corporation at or before the time of such
retirement, from active employment with the Corporation and any Subsidiary or
Affiliate prior to age 65, in accordance with any applicable early retirement
policy of the Corporation then in effect.
(xv) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, and any successor thereto.
(xvi) "Fair Market Value" means the reported closing price of the
Common Stock on The Nasdaq Stock Market's National Market on the relevant date
or, if no shares of Common Stock are traded on that date, the reported closing
price on the next preceding date on which shares were traded. In the event that
trading in the shares of Common Stock is no longer reported on The Nasdaq Stock
Market's National Market, Fair Market Value shall be determined by such other
method as the Committee in good faith deems appropriate without regard to any
restriction other than a restriction which, by its terms, will never lapse.
(xvii) "Incentive Stock Option" means any Option intended to be and
designated as an "Incentive Stock Option" within the meaning of Section 422 of
the Code.
(xviii)"Non-Qualified Stock Option" means any Option that is not an
Incentive Stock Option.
(xix) "Normal Retirement" means retirement from active employment with
the Corporation and any Subsidiary or Affiliate on or after age 65.
(xx) "Option" means any option to purchase shares of Common Stock
granted pursuant to Section 5 below.
(xxi) "Other Stock-Based Award" means an award under Section 8 below
that is valued in whole or in part by reference to, or is otherwise based on,
Common Stock.
2
<PAGE> 3
(xxii) "Plan" means this Envoy Corporation 1995 Employee Stock
Incentive Plan, as amended from time to time in accordance herewith.
(xxiii)"Restriction Period" has the meaning provided in
Section 7(c)(i) of the Plan.
(xxiv) "Restricted Stock" means an award of shares of Common Stock that
is subject to restrictions under Section 7 of the Plan.
(xxv) "Retirement" means Normal Retirement or Early Retirement.
(xxvi) "Stock Appreciation Right" means the right granted under Section
6 of the Plan.
(xxvii) "Subsidiary" means any corporation (other than the Corporation)
in an unbroken chain of corporations beginning with the Corporation if each of
the corporations (other than the last corporation in the unbroken chain) owns
stock possessing 50% or more of the total combined voting power of all classes
of stock in one of the other corporations in the chain.
SECTION 2. ADMINISTRATION.
(a) THE COMMITTEE. The Plan shall be administered by a Committee of not
less than two Disinterested Persons, who shall be appointed by the Board and who
shall serve at the pleasure of the Board. The functions of the Committee
specified in the Plan may be exercised by an existing Committee of the Board
composed exclusively of Disinterested Persons. The initial Committee shall be
the Compensation Committee of the Board.
(b) AUTHORITY OF THE COMMITTEE. The Committee shall have authority to
grant, pursuant to the terms of the Plan, to officers, other key employees and
consultants eligible under Section 4 hereof: Options, Stock Appreciation Rights,
Restricted Stock and Other Stock-Based Awards.
In particular, the Committee shall have the authority, consistent with
the terms of the Plan:
(i) to select the officers and other key employees of and
consultants to the Corporation and its Subsidiaries and Affiliates to
whom Options, Stock Appreciation Rights, Restricted Stock or Other
Stock-Based Awards may from time to time be granted hereunder;
(ii) to determine whether and to what extent Incentive Stock
Options, Non- Qualified Stock Options, Stock Appreciation Rights,
Restricted Stock or Other Stock- Based Awards, or any combination
thereof, are to be granted hereunder to one or more eligible employees;
3
<PAGE> 4
(iii) to determine the number of shares to be covered by each
such award granted hereunder;
(iv) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder (including,
but not limited to, the share price and any restriction or limitation,
or any vesting, acceleration of vesting or waiver of forfeiture
restrictions regarding any Option or other award or the shares of
Common Stock relating thereto, based in each case on such factors as
the Committee shall determine, in its sole discretion) and to amend or
waive any such terms and conditions to the extent permitted by Section
10 hereof;
(v) to determine whether and under what circumstances an
Option or Stock Appreciation Right may be settled in cash or Restricted
Stock under Section 5(b)(xiii) hereof, instead of shares of Common
Stock;
(vi) to determine whether, to what extent and under what
circumstances Option grants or other awards under the Plan are to be
made, and operate, on a tandem basis vis-a-vis other awards under the
Plan, or on an additive basis;
(vii) to determine whether, to what extent and under what
circumstances shares of Common Stock and other amounts payable with
respect to an award under this Plan shall be deferred either
automatically or at the election of the participant (including
providing for and determining the amount (if any) of any deemed
earnings on any deferred amount during any deferral period); and
(viii)to determine whether to require payment of any
withholding requirements in shares of Common Stock.
The Committee shall have the authority to adopt, alter and repeal such
rules, guidelines and practices governing the Plan as it shall, from time to
time, deem advisable; to interpret the terms and provisions of the Plan and any
award issued under the Plan (and any agreements relating thereto); and to
otherwise supervise the administration of the Plan.
All decisions made by the Committee pursuant to the provisions of the
Plan shall be made in the Committee's sole discretion and shall be final and
binding on all persons, including the Corporation and Plan participants.
4
<PAGE> 5
SECTION 3. SHARES OF COMMON STOCK SUBJECT TO PLAN.
(a) SHARES OF COMMON STOCK RESERVED UNDER PLAN. The aggregate number of
shares of Common Stock reserved and available for distribution under the Plan
shall be 3,000,000 shares. Such shares of Common Stock may consist, in whole or
in part, of authorized and unissued shares or treasury shares. The aggregate
number of shares of Common Stock that may be granted to any individual pursuant
to any award under the Plan or with respect to which any awards are made shall
be 500,000, or up to 500,000 in any one year.
If any Option or Stock Appreciation Right expires or is forfeited
without exercise, or if any shares of Common Stock that are subject to any
Restricted Stock or Other Stock-Based Award granted hereunder are forfeited
prior to the payment of any dividends, if applicable, with respect to such
shares of Common Stock, such shares shall again be available for distribution in
connection with future awards under the Plan. If dividends have been paid to the
grantee with respect to the shares of Common Stock subject to such forfeited
award, such shares shall not be available for distribution in connection with
future awards under the Plan.
(b) ADJUSTMENT IN CERTAIN EVENTS. In the event of any merger,
reorganization, consolidation, recapitalization, extraordinary cash dividend,
stock dividend, stock split or other change in corporate structure affecting the
Common Stock (a "Capital Transaction"), a substitution or adjustment will be
made in the aggregate number of shares reserved for issuance under the Plan, the
number that may be granted to any individual in any year or over the life of the
Plan and the number and price (if applicable) of shares subject to outstanding
awards granted under the Plan, so as to provide each holder of an award under
this Plan with the same rights on exercise or distribution of the benefits of
such award that such holder would have received if such holder had exercised or
received a distribution of the benefits of such award immediately prior to the
occurrence of such Capital Transaction; provided, however, that the number of
shares subject to any award shall always be a whole number. In the event of any
dispute as to any substitution or adjustment made under this Section 3(b), the
decision of the Committee shall be final and binding on all persons, including
the Corporation and Plan participants.
SECTION 4. ELIGIBILITY.
Officers and other key employees of and consultants to the Corporation
and its Subsidiaries and Affiliates (but excluding members of the Committee and
any person who serves only as a director) who are responsible for or contribute
to the management, growth or profitability of the business of the Corporation
and its Subsidiaries and Affiliates are eligible to be granted awards under the
Plan. Incentive Stock Options may only be granted to persons who are employees
of the Corporation or a Subsidiary of the Corporation.
5
<PAGE> 6
SECTION 5. OPTIONS.
(a) ADMINISTRATION. Options may be granted alone, in addition to or in
tandem with other awards granted under the Plan. Any Option granted under the
Plan shall be in such form as the Committee may from time to time approve.
Options granted under the Plan may be of two types: (i) Incentive
Stock Options and (ii) Non-Qualified Stock Options. Incentive Stock Options may
be granted only to individuals who are employees of the Corporation or any
Subsidiary of the Corporation.
The Committee shall have the authority to grant to any optionee
(subject to the limitation set forth in the paragraph above) Incentive Stock
Options, Non-Qualified Stock Options, or both types of Options (in each case
with or without Stock Appreciation Rights).
(b) TERMS AND CONDITIONS. Options granted under the Plan shall be
subject to the following terms and conditions and shall contain such additional
terms and conditions, not inconsistent with the terms of the Plan, as the
Committee shall deem desirable.
(i) Option Price. The option price per share of Common Stock
purchasable under an Option shall be determined by the Committee at the
time of grant but shall be not less than 100% (or, in the case of any
employee who owns stock possessing more than 10% of the total combined
voting power of all classes of stock of the Corporation or of any of
its subsidiary or parent corporations, not less than 110%) of the Fair
Market Value of the Common Stock at grant, in the case of Incentive
Stock Options, and not less than 50% of the Fair Market Value of the
Common Stock at grant, in the case of Non-Qualified Stock Options.
(ii) Option Term. The term of each Option shall be fixed by
the Committee, but no Incentive Stock Option shall be exercisable more
than ten years (or, in the case of an employee who owns stock
possessing more than 10% of the total combined voting power of all
classes of stock of the Corporation or any of its subsidiary or parent
corporations, more than five years) after the date the Option is
granted.
(iii) Exercisability. Options shall be exercisable at such
time or times and subject to such terms and conditions as shall be
determined by the Committee at or after grant; provided, however, that
except as provided in Section 5(b)(vii), (viii) and (ix) hereof and
Section 9 hereof, unless otherwise determined by the Committee at or
after grant, no Option shall be exercisable prior to the first
anniversary date of the granting of the Option. The Committee may
provide that an Option shall vest over a period of future service at a
rate specified at the time of grant, or that the Option is exercisable
only in installments. If the Committee provides, in its sole
discretion, that any Option is exercisable only in installments, the
Committee may waive such installment exercise provisions at any time at
or after grant in whole or in part, based on such factors as the
6
<PAGE> 7
Committee shall determine, in its sole discretion. The Committee may
establish performance conditions or other conditions to the
exercisability of any Options, as determined by the Committee in its
sole discretion, which conditions may be waived by the Committee in its
sole discretion.
(iv) Method of Exercise. Subject to whatever installment or
other exercise restrictions apply under Section 5(b)(iii) hereof,
Options may be exercised in whole or in part at any time during the
option period, by giving written notice of exercise to the Corporation
specifying the number of shares to be purchased.
Such notice shall be accompanied by payment in full of the
purchase price, either by check, note or such other instrument as the
Committee may accept. As determined by the Committee, in its sole
discretion, at or (except in the case of an Incentive Stock Option)
after grant, payment in full or in part may also be made in the form of
unrestricted shares of Common Stock already owned by the optionee or,
in the case of the exercise of a Non-Qualified Stock Option, Common
Stock or Restricted Stock subject to an award hereunder (based in each
case, on the Fair Market Value of the Common Stock on the date the
option is exercised, as determined by the Committee). If payment of the
exercise price is made in part or in full with shares of Common Stock,
the Committee may (subject to the availability of additional shares
reserved for issuance under Section 3 above) award to the optionee a
new Option to replace the shares of Common Stock which were
surrendered.
If payment of the option exercise price of a Non-Qualified
Stock Option is made in whole or in part in the form of Restricted
Stock, the Common Stock received upon exercise shall be restricted in
accordance with the original terms of the Restricted Stock award in
question, and any additional shares of Common Stock received upon the
exercise shall be subject to the same forfeiture restrictions, unless
otherwise determined by the Committee, in its sole discretion, at or
after grant.
No shares of Common Stock shall be issued until full payment
therefor has been made. An optionee shall generally have the rights to
dividends or other rights of a shareholder with respect to shares
subject to the Option when the optionee has given written notice of
exercise, has paid in full for such shares, and, if requested, has
given the representation described in Section 12(a) hereof.
(v) Non-Transferability of Incentive Stock Options.
Notwithstanding any other provision of this Plan, no Incentive Stock
Option shall be transferable by the optionee otherwise than by will or
by the laws of descent and distribution, and all Incentive Stock
Options shall be exercisable, during the optionee's lifetime, only by
the optionee.
7
<PAGE> 8
(vi) Bonus for Taxes. In the case of a Non-Qualified Stock
Option, the Committee in its discretion may award at the time of grant
or thereafter the right to receive upon exercise of such Option a cash
bonus calculated to pay part or all of the federal and state, if any,
income tax incurred by the optionee upon such exercise.
(vii) Termination by Death. Subject to Section 5(b)(xi)
hereof, if an optionee's employment by the Corporation and any
Subsidiary or (except in the case of an Incentive Stock Option)
Affiliate terminates by reason of death, any Option held by such
optionee may thereafter be exercised, to the extent such Option was
exercisable at the time of death or (except in the case of an Incentive
Stock Option) on such accelerated basis as the Committee may determine
at or after grant (or except in the case of an Incentive Stock Option,
as may be determined in accordance with procedures established by the
Committee) by the legal representative of the estate or by the legatee
of the optionee under the will of the optionee, for a period of one
year (or such shorter period as the Committee may specify at grant)
from the date of such death or until the expiration of the stated term
of such Option, whichever period is the shorter.
(viii) Termination by Reason of Disability. Subject to Section
5(b)(xi) hereof, if an optionee's employment by the Corporation and any
Subsidiary or (except in the case of an Incentive Stock Option)
Affiliate terminates by reason of Disability, any Option held by such
optionee may thereafter be exercised by the optionee, to the extent it
was exercisable at the time of termination or (except in the case of an
Incentive Stock Option) on such accelerated basis as the Committee may
determine at or after grant (or, except in the case of an Incentive
Stock Option, as may be determined in accordance with procedures
established by the Committee), for a period of (A) three years (or such
shorter period as the Committee may specify at grant) from the date of
such termination of employment or until the expiration of the stated
term of such Option, whichever period is the shorter, in the case of a
Non-Qualified Stock Option and (B) one year from the date of
termination of employment or until the expiration of the stated term of
such Option, whichever period is shorter, in the case of an Incentive
Stock Option; provided, however, that, if the optionee dies within the
period specified in clause (A) above (or such other period as the
Committee shall specify at grant), any unexercised Non-Qualified Stock
Option held by such optionee shall thereafter be exercisable to the
extent to which it was exercisable at the time of death for a period of
twelve months from the date of such death or until the expiration of
the stated term of such Option, whichever period is the shorter. In the
event of termination of employment by reason of Disability, if an
Incentive Stock Option is exercised after the expiration of the
exercise period applicable to Incentive Stock Options, but before the
expiration of any period that would apply if such Stock Option were a
Non-Qualified Stock Option, such Stock Option will thereafter be
treated as a Non- Qualified Stock Option.
(ix) Termination by Reason of Retirement. Subject to
Section 5(b)(xi) hereof, if an optionee's employment by the Corporation
and any Subsidiary or (except in
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the case of an Incentive Stock Option) Affiliate terminates by reason
of Normal or Early Retirement, any Option held by such optionee may
thereafter be exercised by the optionee, to the extent it was
exercisable at the time of such Retirement or (except in the case of an
Incentive Stock Option) on such accelerated basis as the Committee may
determine at or after grant (or, except in the case of an Incentive
Stock Option, as may be determined in accordance with procedures
established by the Committee), for a period of (A) three years (or such
shorter period as the Committee may specify at grant) from the date of
such termination of employment or the expiration of the stated term of
such Option, whichever period is the shorter, in the case of a
Non-Qualified Stock Option and (B) three months from the date of such
termination of employment or the expiration of the stated term of such
Option, whichever period is the shorter, in the event of an Incentive
Stock Option; provided, however, that, if the optionee dies within the
period specified in clause (A) above (or such shorter period as the
Committee may specify at grant), any unexercised Non-Qualified Stock
Option held by such optionee shall thereafter be exercisable, to the
extent to which it was exercisable at the time of death, for a period
of 12 months from the date of such death or until the expiration of the
stated term of such Option, whichever period is the shorter. In the
event of termination of employment by reason of Retirement, if an
Incentive Stock Option is exercised after the expiration of the
exercise period applicable to Incentive Stock Options, but before the
expiration of the period that would apply if such Stock Option were a
Non-Qualified Stock Option, the option will thereafter be treated as a
Non-Qualified Stock Option.
(x) Other Termination. Unless otherwise determined by the
Committee (or pursuant to procedures established by the Committee) at
or (except in the case of an Incentive Stock Option) after grant, if an
optionee's employment by the Corporation and any Subsidiary or (except
in the case of an Incentive Stock Option) Affiliate is involuntarily
terminated for any reason other than death, Disability or Normal or
Early Retirement, the Option shall thereupon terminate, except that
such Option may be exercised, to the extent otherwise then exercisable,
for the lesser of three months or the balance of such Option's term if
the involuntary termination is without Cause. For purposes of this
Plan, "Cause" means (A) a felony conviction of a participant or the
failure of a participant to contest prosecution for a felony, or (B) a
participant's willful misconduct or dishonesty, which is directly and
materially harmful to the business or reputation of the Corporation or
any Subsidiary or Affiliate. If an optionee voluntarily terminates
employment with the Corporation and any Subsidiary or (except in the
case of an Incentive Stock Option) Affiliate (except for Disability,
Normal or Early Retirement), the Option shall thereupon terminate;
provided, however, that the Committee at grant or (except in the case
of an Incentive Stock Option) thereafter may extend the exercise period
in this situation for the lesser of three months or the balance of such
Option's term.
(xi)Incentive Stock Options. Anything in the Plan to the
contrary notwithstanding, no term of this Plan relating to Incentive
Stock Options shall be interpreted, amended or altered, nor shall any
discretion or authority granted under the
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Plan be so exercised, so as to disqualify the Plan under Section 422 of
the Code, or, without the consent of the optionee(s) affected, to
disqualify any Incentive Stock Option under such Section 422.
No Incentive Stock Option shall be granted to any participant
under the Plan if such grant would cause the aggregate Fair Market
Value (as of the date the Incentive Stock Option is granted) of the
shares of Common Stock with respect to which all Incentive Stock
Options are exercisable for the first time by such optionee during any
calendar year (under all such plans of the Corporation and any
Subsidiary) to exceed $100,000.
To the extent permitted under Section 422 of the Code or the
applicable regulations thereunder or any applicable Internal Revenue
Service pronouncement:
a. if the exercise of an Incentive Stock Option
is accelerated by reason of a Change in Control, any portion
of such option that is not exercisable as an "incentive stock
option" under Section 422 of the Code by reason of the
$100,000 limitation contained in Section 422(d) of the Code
shall be treated as a Non- Qualified Stock Option;
b. if for any other reason the portion of any
Incentive Stock Option that is otherwise exercisable without
regard to the $100,000 limitation contained in Section 422(d)
of the Code, is greater than the portion of such option that
is immediately exercisable as an "incentive stock option"
under Section 422 of the Code, such excess shall be treated as
a Non-Qualified Stock Option; and
c. the Committee shall have the right, with the
consent of the optionee, to treat an Incentive Stock Option
that cannot be exercised, for any other reason, as an
"incentive stock option" under Section 422 of the Code as a
Non-Qualified Stock Option.
(xii) Performance and Other Conditions. The Committee
may condition the exercise of any Option upon the attainment of
specified performance goals or other factors as the Committee may
determine, in its sole discretion. Unless specifically provided in the
option agreement, any such conditional Option shall vest immediately
prior to its expiration if the conditions to exercise have not
theretofore been satisfied. The shares of Common Stock acquired
pursuant to any conditional Option shall not be transferable by an
optionee subject to Section 16(a) of the Exchange Act within six
months of the date such Option first becomes exercisable.
(xiii) Settlement Provisions. If the option agreement
so provides at grant or (except in the case of an Incentive Stock
Option) is amended after grant and prior to exercise to so provide
(with the optionee's consent), the Committee may require that all
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or part of the shares to be issued with respect to the spread value of
an exercised Option take the form of Restricted Stock, which shall be
valued on the date of exercise on the basis of the Fair Market Value
(as determined by the Committee) of such Restricted Stock determined
without regards to the forfeiture restrictions involved.
SECTION 6. STOCK APPRECIATION RIGHTS.
(a) GRANT AND EXERCISE. Stock Appreciation Rights may be granted alone
or in conjunction with all or part of any Option granted under the Plan. In the
case of a Non-Qualified Stock Option, such rights may be granted either at or
after the time of the grant of such Option. In the case of an Incentive Stock
Option, such rights may be granted only at the time of the grant of such Option.
A Stock Appreciation Right or applicable portion thereof granted with
respect to a given Option shall terminate and no longer be exercisable upon the
termination or exercise of the related Option, subject to such provisions as the
Committee may specify at grant where a Stock Appreciation Right is granted with
respect to less than the full number of shares covered by a related Option.
A Stock Appreciation Right may be exercised by the grantee, subject to
Section 6(b) hereof, in accordance with the procedures established by the
Committee for such purpose. Upon such exercise, the grantee shall be entitled to
receive an amount determined in the manner prescribed in Section 6(b) hereof.
Options relating to exercised Stock Appreciation Rights shall no longer be
exercisable to the extent that the related Stock Appreciation Rights have been
exercised.
(b) TERMS AND CONDITIONS. Stock Appreciation Rights shall be subject to
such terms and conditions, not inconsistent with the provisions of the Plan, as
shall be determined from time to time by the Committee, including the following:
(i) Exercise Provisions for Tandem Grants. A Stock
Appreciation Right granted in conjunction with all or part of any
Option shall be exercisable only at such time or times and to the
extent that the Option to which it relates shall be exercisable in
accordance with the provisions of Section 5 and this Section 6 of the
Plan; provided, however, that any Stock Appreciation Right granted to a
grantee subject to Section 16(a) of the Exchange Act shall be subject
to the further limitations set forth in Section 6(b)(v) and, if
applicable, Section 6(b)(vi) below.
(ii) Payment on Exercise. Upon the exercise of a Stock
Appreciation Right, a grantee shall be entitled to receive an amount in
cash or shares of Common Stock (or a combination of cash and shares of
Common Stock) equal in value to the excess of the Fair Market Value of
one share of Common Stock over the price per share specified in the
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Stock Appreciation Right or related Option multiplied by the number of
shares in respect of which the Stock Appreciation Right shall have been
exercised, with the Committee having the right to determine the form of
payment.
(iii) Use of Authorized Shares. Upon the exercise of a Stock
Appreciation Right, any shares of Common Stock issued thereunder or
with respect to which a cash payment was made shall be deemed to have
been issued for the purpose of the limitation set forth in Section 3 of
the Plan on the number of shares of Common Stock to be issued under the
Plan.
(iv) Payment based on Change in Control Price. Unless
otherwise determined by the Committee at grant, in the event of a
Change in Control or a Potential Change in Control, the amount to be
paid upon the exercise of a Stock Appreciation Right shall be based on
the Change in Control Price, subject to such terms and conditions as
the Committee may specify at grant.
(v) Restrictions on Exercise by Persons Subject to Section
16(a). The exercise of Stock Appreciation Rights held by grantees who
are subject to Section 16(a) of the Exchange Act shall comply with Rule
16b-3(e) thereunder. In particular, such Stock Appreciation Rights
shall be exercisable only pursuant an irrevocable election made at
least six months prior to the date of exercise or within the applicable
ten business day "window" periods specified in Rule 16b-3(e)(3). Stock
Appreciation Rights held by grantees who are subject to Section 16(a)
of the Exchange Act shall not be exercisable for the first six months
after the date of grant.
(vi) Performance and Other Conditions. The Committee may
condition the exercise of any Stock Appreciation Right upon the
attainment of specified performance goals or other factors as the
Committee may determine, in its sole discretion. Unless specifically
provided in the applicable award agreement, any such conditional Stock
Appreciation Right shall vest immediately prior to its expiration, if
the conditions to exercise have not theretofore been satisfied. A
conditional Stock Appreciation Right held by a grantee subject to
Section 16(a) of the Exchange Act shall not be exercisable until the
expiration of six months following the satisfaction of the condition
giving rise to such Stock Appreciation Right.
SECTION 7. RESTRICTED STOCK.
(a) ADMINISTRATION. Shares of Restricted Stock may be issued either
alone, in addition to or in tandem with other awards granted under the Plan. The
Committee shall determine the eligible persons to whom, and the time or times at
which, grants of Restricted Stock will be made, the number of shares of
Restricted Stock to be awarded to any person, the price (if any) to be paid by
the recipient of Restricted Stock (subject to Section 7(b) hereof), the time or
times within
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which such awards may be subject to forfeiture, and the other terms,
restrictions and conditions of the awards in addition to those set forth in
Section 7(c) hereof.
The Committee may condition the grant or vesting of Restricted Stock
upon the attainment of specified performance goals or other factors as the
Committee may determine, in its sole discretion.
(b) AWARDS AND CERTIFICATES. The prospective recipient of a Restricted
Stock award shall not have any rights with respect to such award, unless and
until such recipient has executed an agreement evidencing the award and has
delivered a fully executed copy thereof to the Corporation, and has otherwise
complied with the applicable terms and conditions of such award.
(i) Purchase Price. The purchase price for shares of
Restricted Stock shall be established by the Committee and may be zero.
(ii) Acceptance of Awards. Awards of Restricted Stock must be
accepted within a period of 60 days (or such shorter period as the
Committee may specify at grant) after the award date, by executing a
Restricted Stock award agreement and paying whatever price (if any) is
required under Section 7(b)(i) hereof.
(iii) Stock Certificates. Each participant receiving a
Restricted Stock award shall be issued a stock certificate in respect
of such shares of Restricted Stock. Such certificate shall be
registered in the name of such participant, and shall bear an
appropriate legend referring to the terms, conditions, and restrictions
applicable to such award.
(iv) Custody of Stock Certificates. The Committee shall
require that the stock certificates evidencing such shares be held in
custody by the Corporation until the restrictions thereon shall have
lapsed, and that, as a condition of any Restricted Stock award, the
participant shall have delivered a stock power, endorsed in blank,
relating to the shares of Common Stock covered by such award.
(c) RESTRICTIONS AND CONDITIONS. The shares of Restricted Stock
awarded pursuant to this Section 7 shall be subject to the following
restrictions and conditions:
(i) Restriction Period. Subject to the provisions of this Plan
and the award agreement, during a period set by the Committee
commencing with the date of such award (the "Restriction Period"), the
participant shall not be permitted to sell, transfer, pledge, assign or
otherwise encumber shares of Restricted Stock awarded under the Plan.
Within these limits, the Committee, in its sole discretion, may provide
for the lapse of such restrictions in installments and may accelerate
or waive such restrictions in whole or in part, based on service,
performance or other factors or criteria as the Committee may
determine, in its sole discretion.
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(ii) Dividends. Except as provided in this paragraph (ii),
Section 7(c)(i) hereof and the award agreement, the participant shall
have, with respect to the shares of Restricted Stock, all of the rights
of a shareholder of the Corporation, including the right to vote the
shares, and the right to receive any cash dividends. The Committee, in
its sole discretion, as determined at the time of award, may permit or
require the payment of cash dividends to be deferred and, if the
Committee so determines, reinvested, subject to Section 12(e) hereof,
in additional Restricted Stock to the extent shares are available under
Section 3 hereof, or otherwise reinvested. Pursuant to Section 3
hereof, stock dividends issued with respect to Restricted Stock shall
be treated as additional shares of Restricted Stock that are subject to
the same restrictions and other terms and conditions that apply to the
shares of Restricted Stock with respect to which such dividends are
issued.
(iii) Vesting and Forfeiture. Subject to the applicable
provisions of the award agreement and this Section 7, upon termination
of a participant's employment with the Corporation and any Subsidiary
or Affiliate for any reason during the Restriction Period, all shares
still subject to restriction will vest, or be forfeited, in accordance
with the terms and conditions established by the Committee at or after
grant.
(iv) Delivery of Shares on Termination of Restriction Period.
If and when the Restriction Period expires without a prior forfeiture
of the Restricted Stock subject to such Restriction Period,
certificates for an appropriate number of unrestricted shares shall be
delivered to the participant promptly.
SECTION 8. OTHER STOCK-BASED AWARDS.
(a) ADMINISTRATION. Other Stock-Based Awards valued by reference to
shares of Common Stock may be granted either alone or in addition to or in
tandem with Options, Stock Appreciation Rights or Restricted Stock granted under
the Plan; provided that no such Other Stock-Based Awards may be granted in
tandem with Incentive Stock Options if that would cause such Incentive Stock
Options not to qualify as "incentive stock options" pursuant to Section 422 of
the Code.
Subject to the provisions of the Plan, the Committee shall have
authority to determine the persons to whom and the time or times at which such
awards shall be made, the number of shares of Common Stock to be awarded
pursuant to such awards, and all other conditions of the awards. The Committee
may also provide for the grant of shares of Common Stock upon the completion of
a specified performance period.
The provisions of Other Stock-Based Awards need not be the same with
respect to each recipient.
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(b) TERMS AND CONDITIONS. Other Stock-Based Awards made pursuant
to this Section 8 shall be subject to the following terms and conditions:
(i) Restriction on Transfer. Subject to the provisions of this
Plan and the award agreement referred to in Section 8(b)(v) below,
shares subject to awards under this Section 8 may not be sold,
assigned, transferred, pledged or otherwise encumbered prior to the
date on which the shares are issued, or, if later, the date on which
any applicable restriction, performance or deferral period lapses.
(ii) Dividends and Interest. Subject to the provisions of this
Plan and the award agreement and unless otherwise determined by the
Committee at grant, the recipient of an award under this Section 8
shall be entitled to receive, currently or on a deferred basis,
interest or dividends or interest or dividend equivalents with respect
to the number of shares covered by the award, as determined at the time
of the award by the Committee, in its sole discretion, and the
Committee may provide that such amounts (if any) shall be deemed to
have been reinvested in additional shares of Common Stock or otherwise
reinvested.
(iii) Vesting and Forfeiture. Any award under this Section 8
and any shares of Common Stock covered by any such award shall vest or
be forfeited to the extent so provided in the award agreement, as
determined by the Committee, in its sole discretion.
(iv) Waiver of Vesting or Forfeiture Provisions. In the event
of the participant's Retirement, Disability or death, or in cases of
special circumstances, the Committee may, in its sole discretion, waive
in whole or in part any or all of the remaining limitations imposed
hereunder (if any) with respect to any or all of an award under this
Section 8.
(v) Awards Agreements. Each award under this Section 8
shall be confirmed by, and subject to the terms of, an agreement
between the Corporation and the participant.
(vi) Purchase Price. Shares of Common Stock (including
securities convertible into shares of Common Stock) issued on a bonus
basis under this Section 8 may be issued for no cash consideration. The
purchase price of shares of Common Stock (including securities
convertible into shares of Common Stock) purchased pursuant to a
purchase right awarded under this Section 8 shall be determined by the
Committee in its sole discretion on the date of grant.
SECTION 9. CHANGE IN CONTROL PROVISIONS.
(a) IMPACT OF EVENT. In the event of a Change in Control or Potential
Change in Control, the following acceleration and valuation provisions shall
apply if so determined by the Committee in its sole discretion:
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(i) Acceleration of Vesting. Any Stock Appreciation Rights and
any Option awarded under the Plan not previously exercisable and vested
shall become fully exercisable and vested; provided, however, that
Stock Appreciation Rights held by persons subject to Section 16(a)
under the Exchange Act shall not become exercisable until six months
after the date of grant.
(ii) Lapse of Other Restrictions. The restrictions and
deferral limitations applicable to any Restricted Stock and Other
Stock-Based Awards, in each case to the extent not already vested under
the Plan, shall lapse and such shares and awards shall be deemed fully
vested.
(iii) Cash-Out Provisions. Except as otherwise provided in
Section 9(a)(iv) below, the value of all outstanding Options, Stock
Appreciation Rights, Restricted Stock and Other Stock-Based Awards
shall, unless otherwise determined by the Committee in its sole
discretion at or (except in the case of an Incentive Stock Option)
after grant but prior to any Change in Control, be cashed out on the
basis of the Change in Control Price as of the date such Change in
Control or such Potential Change in Control is determined to have
occurred or such other date as the Committee may determine prior to the
Change in Control.
(iv) Cash-Out Provisions for Statutory Insiders. In the case
of any Options, Stock Appreciation Rights, Restricted Stock and Other
Stock-Based Awards held by any person subject to Section 16(a) of the
Exchange Act, the value of all such Options, Stock Appreciation Rights,
Restricted Stock or Other Stock-Based Awards, in each case to the
extent that they have been held for at least six months, shall be
cashed out on the basis of the Change in Control Price as of the date
of such Change in Control or such Potential Change in Control is
determined to have occurred. The Committee shall have the right (A) to
cause any right to receive the Change in Control Price to be canceled
with respect to all or any grantee(s) who are subject to Section 16(a)
of the Exchange Act if payment of the Change in Control Price to such
grantee(s) would cause liability under Section 16 of the Exchange Act,
and (B) to determine whether the change in Control Price shall be paid
in cash or in shares of capital stock (including the capital stock of
any acquiring corporation) to grantees who are subject to Section 16(a)
of the Exchange Act.
(b) DEFINITION OF CHANGE IN CONTROL. A "Change in Control" means
the happening of any of the following:
(i) any person or entity, including a "group" as defined in
Section 13(d)(3) of the Exchange Act, other than the Corporation or a
wholly-owned subsidiary thereof or any employee benefit plan of the
Corporation or any of its Subsidiaries, becomes the beneficial owner of
the Corporation's securities having 20% or more of the combined voting
power of the then outstanding securities of the Corporation that may be
cast for the election of
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directors of the Corporation (other than as a result of an issuance of
securities initiated by the Corporation in the ordinary course of
business); or
(ii) as the result of, or in connection with, any cash tender
or exchange offer, merger or other business combination, sale of assets
or contested election, or any combination of the foregoing
transactions, less than a majority of the combined voting power of the
then outstanding securities of the Corporation or any successor
corporation or entity entitled to vote generally in the election of the
directors of the Corporation or such other corporation or entity after
such transaction are held in the aggregate by the holders of the
Corporation's securities entitled to vote generally in the election of
directors of the Corporation immediately prior to such transaction; or
(iii) during any period of two consecutive years, individuals
who at the beginning of such period constitute the Board cease for any
reason to constitute at least a majority thereof, unless the election,
or the nomination for election by the Corporation's shareholders, of
each director of the Corporation first elected during such period was
approved by a vote of at least two-thirds of the directors of the
Corporation then still in office who were directors of the Corporation
at the beginning of such period.
(c) DEFINITION OF POTENTIAL CHANGE IN CONTROL. A "Potential
Change in Control" means the happening of any one of the following:
(i) The approval by shareholders of an agreement by the
Corporation, the consummation of which would result in a Change in
Control of the Corporation; or
(ii) The acquisition of beneficial ownership, directly or
indirectly, by any entity, person or group (other than the Corporation
or a Subsidiary or any Corporation employee benefit plan (including any
trustee of such plan acting as such trustee)) of securities of the
Corporation representing 10% or more of the combined voting power of
the Corporation's outstanding securities and the adoption by the
Committee of a resolution to the effect that a Potential Change in
Control of the Corporation has occurred for purposes of this Plan.
(d) CHANGE IN CONTROL PRICE. The "Change in Control Price" means the
highest price per share paid in any transaction reported on The Nasdaq Stock
Market's National Market or such other exchange or market as is the principal
trading market for the Common Stock, or paid or offered in any bona fide
transaction related to a Change in Control or Potential Change in Control of the
Corporation at any time during the 60 day period immediately preceding the
occurrence of the Change in Control (or, where applicable, the occurrence of the
Potential Change in Control event), in each case as determined by the Committee
except that, in the case of Incentive Stock Options and Stock Appreciation
Rights relating to Incentive Stock Options, such price shall be based only on
transactions reported for the date on which the optionee exercises such
Incentive
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Stock Option or Stock Appreciation Rights or, where applicable, the date on
which a cash out occurs under Section 9(a)(iii) or (iv) hereof.
SECTION 10. AMENDMENTS AND TERMINATION.
The Board may amend, alter, or discontinue the Plan, but no amendment,
alteration, or discontinuation shall be made which would impair the rights of an
optionee or participant under an Option, Stock Appreciation Right, Restricted
Stock award or Other Stock-Based Award theretofore granted, without the
optionee's or participant's consent. In addition, no amendment or alteration
shall be made without the approval of the Corporation's shareholders, if such
amendment or alteration would:
(a) except as provided in Section 3(b) of the Plan, increase the
total number of shares of Common Stock reserved for the purpose of the
Plan;
(b) materially increase the benefits accruing to participants
under the Plan; or
(c) materially modify the requirements as to eligibility for
participation in the Plan.
The Committee may amend the terms of any Option or other award
theretofore granted, prospectively or retroactively, but, subject to Section
3(b) above, no such amendment shall impair the rights of any holder without the
holder's consent. The Committee may also substitute new Options for previously
granted Options (on a one for one or other basis), including previously granted
Options having higher option exercise prices.
Subject to the above provisions, the Board shall have broad authority
to amend the Plan to take into account changes in applicable securities and tax
laws and accounting rules, as well as other developments.
SECTION 11. UNFUNDED STATUS OF PLAN.
The Plan is intended to constitute an "unfunded" plan for incentive and
deferred compensation. With respect to any payments not yet made to a
participant or optionee by the Corporation, nothing contained herein shall give
any such participant or optionee any rights that are greater than those of a
general creditor of the Corporation. In its sole discretion, the Committee may
authorize the creation of trusts or other arrangements to meet the obligations
created under the Plan to deliver shares of Common Stock or payments in lieu of
or with respect to awards hereunder; provided, however, that, unless the
Committee otherwise determines with
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the consent of the affected participant, the existence of such trusts or other
arrangements is consistent with the "unfunded" status of the Plan.
SECTION 12. GENERAL PROVISIONS.
(a) SECURITIES LAW RESTRICTIONS. The Committee may require each person
purchasing shares of Common Stock pursuant to an Option or other award under the
Plan to represent to and agree with the Corporation in writing that the optionee
or participant is acquiring the shares without a view to distribution thereof.
The certificates for such shares may include any legend which the Committee
deems appropriate to reflect any restrictions on transfer.
All certificates for shares of Common Stock or other securities
delivered under the Plan shall be subject to such stock-transfer orders and
other restrictions as the Committee may deem advisable under the rules,
regulations, and other requirements of the Commission, any stock exchange upon
which the Common Stock is then listed, and any applicable Federal or state
securities law, and the Committee may cause a legend or legends to be put on any
such certificates to make appropriate reference to such restrictions.
(b) OTHER COMPENSATION ARRANGEMENTS. Nothing contained in this Plan
shall prevent the Board from adopting other or additional compensation
arrangements, subject to shareholder approval if such approval is required; and
such arrangements may be either generally applicable or applicable only in
specific cases.
(c) NO RIGHT TO CONTINUED EMPLOYMENT. The adoption of the Plan shall
not confer upon any employee of the Corporation or any Subsidiary or Affiliate
any right to continued employment with the Corporation or a Subsidiary or
Affiliate, as the case may be, nor shall it interfere in any way with the right
of the Corporation or a Subsidiary or Affiliate to terminate the employment of
any of its employees at any time.
(d) WITHHOLDING. No later than the date as of which an amount first
becomes includible in the gross income of the participant for Federal income tax
purposes with respect to any award under the Plan, the participant shall pay to
the Corporation, or make arrangements satisfactory to the Committee regarding
the payment of, any Federal, state, or local taxes of any kind required by law
to be withheld with respect to such amount. The Committee may require
withholding obligations to be settled with shares of Common Stock, including
shares of Common Stock that are part of the award that gives rise to the
withholding requirement. The obligations of the Corporation under the Plan shall
be conditional on such payment or arrangements and the Corporation and its
Subsidiaries or Affiliates shall, to the extent permitted by law, have the right
to deduct any such taxes from any payment of any kind otherwise due to the
participant.
(e) DIVIDENDS. The actual or deemed reinvestment of dividends or
dividend equivalents in additional Restricted Stock (or other types of Plan
awards) at the time of any
19
<PAGE> 20
dividend payment shall only be permissible if sufficient shares of Common Stock
are available under Section 3 hereof for such reinvestment (taking into account
then outstanding Options and other Plan awards).
(f) RESTRICTIONS ON TRANSFER. Unless determined otherwise by the
Committee, in addition to any other restrictions on transfer that may be
applicable under the terms of this Plan or the applicable award agreement, no
Option, Stock Appreciation Right, Restricted Stock award, or Other Stock-Based
Award or other right issued under this Plan is transferable by the participant
other than by will or the laws of descent and distribution or pursuant to a
domestic relations order as defined under the Code or Title I of the Employee
Retirement Income Security Act of 1974, as amended. The designation of a
beneficiary will not constitute a transfer. If the Committee makes a
Non-Qualified Stock Option (including any currently outstanding Non-Qualified
Stock Option) transferable, such Non-Qualified Stock Option shall contain such
additional terms and conditions as the Committee deems appropriate.
(g) GOVERNING LAW. The Plan and all awards made and actions taken
thereunder shall be governed by and construed in accordance with the laws of
the State of Tennessee, without regard to the principles of conflicts of law
thereof.
(h) BUYOUT PROVISIONS. The Committee may at any time offer to buy out
for a payment in cash, shares of Common Stock, or Restricted Stock an Option
previously granted, based on such terms and conditions as the Committee shall
establish and communicate to the optionee at the time that such offer is made.
(i) AWARD PROVISIONS MAY DIFFER. The provisions of awards need not
be the same with respect to each recipient.
(j) LIABILITY AND INDEMNIFICATION OF BOARD AND COMMITTEE MEMBERS. The
members of the Committee and the Board shall not be liable to any employee or
other person with respect to any determination made hereunder in a manner that
is not inconsistent with their legal obligations as members of the Board. In
addition to such other rights of indemnification a they may have as directors or
as members of the Committee, the members of the Committee shall be indemnified
by the Corporation against the reasonable expenses, including attorneys' fees
actually and necessarily incurred in connection with the defense of any action,
suit or proceeding, or in connection with any appeal therein, to which they or
any of them may be a party by reason of any action taken or failure to act under
or in connection with the Plan or any option granted thereunder, and against all
amounts paid by them in settlement thereof (provided such settlement is approved
by independent legal counsel selected by the Corporation) or paid by them in
satisfaction of a judgment in any such action, suit or proceeding, except in
relation to matters as to which it shall be adjudged in such action, suit or
proceeding that such Committee member is liable for negligence or misconduct in
the performance of his duties; provided that within 60 days after institution of
any such action, suit or proceeding, the Committee member shall in writing offer
the Corporation the opportunity, at its own expense, to handle and defend the
same.
20
<PAGE> 21
SECTION 13. EFFECTIVE DATE OF PLAN.
The Plan was adopted by the Board and approved by the sole shareholder
of the Corporation on February 2, 1995. The Plan was subsequently amended as of
March 6, 1996 by the Company's shareholders and by the Board of Directors on
February 21, 1997. The Plan became effective June 7, 1995.
SECTION 14. TERM OF PLAN.
No Stock Option, Stock Appreciation Right, Restricted Stock award or
Other Stock-Based Award shall be granted pursuant to the Plan on or after the
tenth anniversary of the date of adoption of the Plan by the Board, but awards
granted prior to such tenth anniversary may be extended beyond that date.
21
<PAGE> 1
EXHIBIT 10.12
DATE: FEBRUARY 21, 1997
AMENDED AND RESTATED ENVOY CORPORATION
1995 STOCK OPTION PLAN FOR OUTSIDE DIRECTORS
1. PURPOSE
The purposes of the Plan are to advance the interests of the Company
and its shareholders by attracting and retaining the highest quality of
experienced persons as Outside Directors and to align the interests of the
Outside Directors more closely with the interests of the Company's shareholders.
2. DEFINITIONS
For purposes of the Plan, the following terms shall have the meanings
indicated below:
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time, and any successor thereto.
(c) "Company" shall mean Envoy Corporation, a corporation
organized under the laws of the State of Tennessee, or any
successor corporation.
(d) "Disability" means permanent and total disability within the
meaning of Section 22(e)(3) of the Code, as determined by the
Board.
(e) "Exercise Date" shall mean the date on which the Company
receives the notice of exercise of an Option from an Optionee
as set forth in Section 7(d).
(f) "Fair Market Value" shall mean, as of a given date, (i) the
average bid and asked prices for the Stock on The Nasdaq Stock
Market's National Market for the last preceding date on which
there was a sale of the Stock, or (ii) if the Stock is not
traded on The Nasdaq Stock Market's National Market, the fair
market value of a share of Stock as determined by the Board in
good faith.
(g) "Option" shall mean an option granted to an Outside Director
pursuant to the Plan.
(h) "Optionee" shall mean an Outside Director who has been
granted an Option pursuant to the Plan.
<PAGE> 2
(i) "Outside Director" shall mean any member of the Board who has
not served as an employee of the Company or ENVOY Corporation,
a Delaware corporation, at any time during the two-year period
preceding the date on which an Option is granted to such
Optionee.
(j) "Plan" shall mean the 1995 Stock Option Plan for Outside
Directors, as amended and restated.
(k) "Stock" shall mean the Common Stock, without par value, of
the Company.
3. ADMINISTRATION
The Plan shall be administered by the Board. The Board is authorized to
interpret the Plan and may from time to time adopt such rules and regulations,
not inconsistent with the provisions of the Plan, as it may deem advisable to
carry out the Plan; provided, however, that the Board shall have no discretion
with respect to designating the recipient of an Option, the number of shares of
Stock that are subject to an Option or the per share exercise price for an
Option. All decisions made by the Board in construing the provisions of the Plan
shall be final.
4. ELIGIBILITY
Each Outside Director shall be eligible to participate under the Plan.
5. STOCK SUBJECT TO THE PLAN
Subject to adjustment as provided in Paragraph 9, not more than 60,000
shares of Stock may be issued with respect to the Options granted under the
Plan. Such shares that are reserved for issuance under the Plan are authorized
but unissued shares of Stock. Shares of Stock subject to an Option shall, upon
the expiration or termination of any such Option to the extent unexercised,
again be available for grant under the Plan.
6. GRANT OF OPTIONS
Options will be awarded under this Plan pursuant to the following
formula: Each Outside Director shall receive on the date of the annual meeting
of the Company's shareholders, commencing with the 1996 annual meeting of
shareholders, an option grant for the purchase of 2,000 shares of Stock (subject
to adjustment as provided in Paragraph 9). In addition, an initial option grant
for the purchase of 2,000 shares of Stock shall be made to each Outside Director
then serving on the later of April 1, 1995, or completion of the distribution
2
<PAGE> 3
of the Company's stock by ENVOY Corporation (subject to adjustment as provided
in Paragraph 9). The exercise price of each Option granted under this Plan shall
be the Fair Market Value on the date of grant.
7. TERMS AND CONDITIONS OF OPTIONS
(a) Term
Options shall vest on the first anniversary of the date of
grant and shall be exercisable in whole or part at any time
upon fulfillment of the vesting period.
In no event may an Option be exercisable:
(i) Until the Optionee shall have completed at
least one year of continued service as a director of the
Company after the date such Option is granted; or
(ii) For more than ten years from the date of
grant.
Whether an authorized leave of absence shall constitute
termination of service as a director shall be determined by
the Board. In the event of the death or Disability of an
Optionee during his service as a director, all his unexercised
Options shall immediately become exercisable and may be
exercised (by his personal representative in the event of such
death) for a period of three years following the date of such
death or one year following the date of such Disability, but
in no event after the respective expiration dates of such
Options. In the event of the termination of an Optionee's
service as a director for cause, any Options held by him under
the Plan not theretofore exercised shall terminate immediately
upon such termination of service as a director and may not be
exercised thereafter. The Board in its sole discretion may
determine that an Optionee's service as a director was
terminated for cause, if it finds that the Optionee willfully
violated any of the Company's policies on ethical business
conduct or engaged in any activity or conduct during his
service as a director which was inimical to the best interests
of the Company. If an Optionee's service as a director is
terminated for any reason other than by his death or
Disability or by the Company for cause, his Options, to the
extent then exercisable, may be exercised within one year
immediately following the date of termination, but in no event
after the respective expiration dates of such Options.
(b) Exercise of Options
An Option shall be exercised by delivering to the Corporate
Secretary of the Company a written notice of exercise in the
form prescribed by the Corporate
3
<PAGE> 4
Secretary for use from time to time. Such notice of exercise
shall indicate the number of shares for which the Option is to
be exercised and shall be accompanied by the full exercise
price for the portion of the Option to be exercised.
(c) Form of Payment
The exercise price may be paid in cash (including certified or
cashier's check, bank draft or money order), Stock which is
free and clear of all liens, claims or other encumbrances by
third parties, or a combination of Stock and cash. The Stock
so delivered shall be valued at the Fair Market Value as of
the Exercise Date. No shares of Stock shall be issued or
delivered until full payment therefor has been made.
(d) Non-Transferability
Unless determined otherwise by the Board, no Option shall be
assignable or transferable by the Optionee, except by will or
pursuant to applicable laws of descent and distribution and,
during the life of an Optionee, an Option shall be exercisable
only by such Optionee or such Optionee's legal representative.
If the Board makes an Option (including any currently
outstanding Option) transferable, such Option shall contain
such additional terms and conditions as the Board deems
appropriate.
(e) No Rights as Shareholders
Neither an Optionee nor an Optionee's legal representative
shall have any rights as shareholders of the Stock unless and
until certificates for shares of Stock are registered in his
or her name in satisfaction of a duly exercised Option.
8. WITHHOLDING TAXES
Whenever the Company grants, issues or transfers shares of Stock under
the Plan, the Company shall have the right to require the Optionee to remit to
the Company an amount sufficient to satisfy any federal, state and local
withholding tax requirements prior to the delivery of any certificate for such
shares. The Company shall have the right to retain sufficient shares of Stock to
cover the amount of any tax required by any government to be withheld or
otherwise deducted or paid with respect to the exercise of the Options. The
Stock so retained shall be valued at the Fair Market Value as of the date of
such retention.
4
<PAGE> 5
9. CAPITAL ADJUSTMENTS AND CORPORATE REORGANIZATIONS
In the event of any change in the outstanding shares of Stock by reason
of a stock dividend, split or combination, or recapitalization or
reclassification, or reorganization, merger or consolidation, in which the
Company is the surviving corporation or other similar change affecting the
Stock, the number of shares then subject to Options and for which Options may
thereafter be granted and the price per share of Stock payable upon exercise or
surrender of such Options shall be appropriately adjusted by the Board to
reflect such change. No fractional shares shall be issued as a result of such
adjustment. In the event of a dissolution of the Company or a reorganization,
merger or consolidation in which the Company is not the surviving corporation,
the Company by action of its Board shall either (i) terminate outstanding and
unexercised Options as of the effective date of such dissolution, merger or
consolidation by giving notice to each Optionee of its intention to do so and
permitting the exercise, during the period prior to such effective date to be
specified by the Board, of all outstanding and unexercised Options or portions
thereof; provided, however, that no Option shall become exercisable hereunder
either after the expiration date thereof or prior to six (6) months from the
date of grant thereof, or (ii) in the case of such reorganization, merger or
consolidation, arrange for an appropriate substitution of shares or other
securities of the corporation with which the Company is reorganized, merged or
consolidated in lieu of the shares which are subject to any outstanding and
unexercised Options.
10. EFFECTIVE DATE AND TERM OF THE PLAN
The Plan was effective as of February 2, 1995. Subject to Section 11
hereof, the Board in its discretion may terminate the Plan at any time with
respect to any shares for which Options have not theretofore been granted.
Except with respect to Options then outstanding, if not sooner forfeited or
terminated, the Plan shall terminate upon, and no further Options shall be
granted after, February 2, 2005.
11. AMENDMENTS
The Board shall have the right to alter or amend the Plan or any part
thereof from time to time provided that:
(a) no change in any Option theretofore granted may be made which
would impair the rights of an Optionee without the consent of
such Optionee;
(b) Plan provisions may not be amended more than once every (6)
six months, other than to comport with changes in the Code,
the Employee Retirement Income Security Act, or the rules
thereunder; and
(c) the Board may not make any alteration or amendment which
would materially increase the benefits accruing to
participants under the Plan, increase the
5
<PAGE> 6
aggregate number of shares of Stock which may be issued
pursuant to provisions of the Plan or extend the terms of the
Plan, without the approval of the shareholders of the Company.
6
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES
1. Teleclaims, Inc.
2. National Electronic Information Corporation
3. Medical Electronic Data Exchange, Inc. (indirect subsidiary)
4. Medical Electronic Data Index, Inc. (indirect subsidiary)
5. NVS Acquisition Corp.
6. EMC* Express, Inc.
7. Professional Office Systems, Inc.
<PAGE> 1
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33- 93542 and 333-2824) pertaining to the 1995 Employee Stock
Incentive Plan and 1995 Stock Option Plan for Outside Directors of ENVOY
Corporation and the Registration Statement (Form S-3 No. 333-15747) of ENVOY
Corporation and in the related Prospectus of our report dated February 12, 1997,
except as to Note 16, as to which the date is March 11, 1997, with respect to
the consolidated financial statements and schedule of ENVOY Corporation included
in the Annual Report (Form 10-K) for the year ended December 31, 1996.
ERNST & YOUNG LLP
Nashville, Tennessee
March 24, 1997
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements Nos.
333-15747 on Form S-3 and 33-93542 and 333-2824 of ENVOY Corporation on Form S-8
of our report dated February 10, 1995 (June 6, 1995 as to Note 3), appearing in
this Annual Report on Form 10-K of ENVOY Corporation for the year ended December
31, 1996.
DELOITTE & TOUCHE LLP
Nashville, Tennessee
March 24, 1997
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
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<CASH> 36,430
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