UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
Commission File Number: 0-25062
ENVOY CORPORATION
(Exact Name of Registrant as Specified in its Charter)
TENNESSEE
(State or Other Jurisdiction of Incorporation or Organization)
62-1575729
(I.R.S. Employer Identification Number)
TWO LAKEVIEW PLACE, 15 CENTURY BLVD.
SUITE 600, NASHVILLE, TN 37214
(Address of Principal Executive Offices)
(615) 885-3700
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
SHARES OUTSTANDING AS OF AUGUST 12, 1997:
16,512,715
CLASS:
COMMON STOCK, NO PAR VALUE PER SHARE
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ENVOY CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
------------- -----------------
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 36,410 $ 36,430
ACCOUNTS RECEIVABLE - NET 21,896 20,435
INVENTORIES 2,257 2,586
DEFERRED INCOME TAXES 1,478 1,018
OTHER 1,830 2,947
TOTAL CURRENT ASSETS 63,871 63,416
PROPERTY AND EQUIPMENT, NET 16,342 15,353
OTHER ASSETS 52,810 55,045
TOTAL ASSETS $ 133,023 $ 133,814
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER
CURRENT LIABILITIES $ 16,959 $ 14,899
CURRENT PORTION OF LONG-TERM DEBT 0 93
TOTAL CURRENT LIABILITIES 16,959 14,992
LONG-TERM DEBT, LESS CURRENT PORTION 122 8,412
DEFERRED INCOME TAXES 736 1,965
SHAREHOLDERS' EQUITY:
PREFERRED STOCK - No par value; authorized,
12,000,000 shares; issued 3,730,233 40,100 40,100
COMMON STOCK - No par value; authorized, 48,000,000 shares;
issued, 16,493,161 and 11,289,421 in 1997 and 1996, respectively 112,359 103,199
ADDITIONAL PAID-IN CAPITAL 7,155 7,155
RETAINED DEFICIT (44,408) (42,009)
TOTAL SHAREHOLDERS' EQUITY 115,206 108,445
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 133,023 $ 133,814
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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ENVOY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
REVENUES $ 26,416 $ 19,590 $ 52,508 $ 29,920
OPERATING COSTS AND EXPENSES:
COST OF REVENUES 12,932 9,748 25,798 15,051
SELLING, GENERAL AND ADMINISTRATIVE 5,890 4,906 11,814 7,903
DEPRECIATION AND AMORTIZATION 6,242 5,315 12,183 7,370
MERGER AND FACILITY INTEGRATION COSTS 0 282 0 2,166
WRITE OFF OF ACQUIRED IN PROCESS
TECHNOLOGY 0 0 3,000 30,700
EMC LOSSES 0 105 0 540
OPERATING INCOME (LOSS) 1,352 (766) (287) (33,810)
OTHER INCOME (EXPENSE)
INTEREST INCOME 485 69 937 167
INTEREST EXPENSE (164) (1,130) (488) (1,634)
321 (1,061) 449 (1,467)
INCOME (LOSS) BEFORE INCOME TAXES 1,673 (1,827) 162 (35,277)
INCOME TAX PROVISION (BENEFIT) 1,838 (410) 2,560 50
NET LOSS $ (165) $ (1,417) $ (2,398) $(35,327)
NET LOSS PER COMMON SHARE $ (0.01) $ (0.12) $ (0.15) $ (3.05)
WEIGHTED AVERAGE SHARES OUTSTANDING 16,168 11,720 15,824 11,568
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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ENVOY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------------------
1997 1996
------ ------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 8,857 $ 893
INVESTING ACTIVITIES:
NET DECREASE IN SHORT-TERM INVESTMENTS 0 5,370
PURCHASES OF PROPERTY AND EQUIPMENT (3,719) (2,383)
(INCREASE) DECREASE IN OTHER ASSETS (2,027) 1,065
PAYMENTS FOR BUSINESSES ACQUIRED, NET
OF $4,784 CASH ACQUIRED IN 1996 AND
INCLUDING OTHER CASH PAYMENTS
ASSOCIATED WITH THE ACQUISITIONS (4,000) (83,147)
NET CASH USED IN INVESTING ACTIVITIES (9,746) (79,095)
FINANCING ACTIVITIES:
PROCEEDS FROM ISSUANCE OF PREFERRED
STOCK 0 40,100
PROCEEDS FROM ISSUANCE OF COMMON
STOCK 945 5,132
PROCEEDS FROM LONG-TERM DEBT 0 43,900
PAYMENTS ON LONG-TERM DEBT (76) (8,045)
PAYMENT OF DEFERRED FINANCING COSTS 0 (1,200)
NET CASH PROVIDED BY FINANCING ACTIVITIES 869 79,887
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (20) 1,685
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 36,430 222
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 36,410 $ 1,907
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
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ENVOY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1997
A. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of ENVOY
Corporation (the "Company" or "ENVOY") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments consisting of normal recurring accruals
considered necessary for a fair presentation have been included. Operating
results for the three- and six-month periods ended June 30, 1997 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1997.
These financial statements, footnote disclosures and other information
should be read in conjunction with the audited financial statements and the
accompanying notes thereto in the Company's Annual Report on Form 10-K for the
year ended December 31, 1996.
Certain reclassifications have been made in the 1996 financial statements
to conform to the classifications in 1997.
B. NET LOSS PER COMMON SHARE
Net loss per common share has been computed by dividing net loss by the
weighted average common shares outstanding.
C. RECENT 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. 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 three- and six-month periods
ended June 30, 1997 and 1996 reflect the operations of the acquired businesses
for the periods after their respective dates of acquisition.
NATIONAL ELECTRONIC INFORMATION CORPORATION ("NEIC")
On March 6, 1996, the Company's shareholders approved the acquisition of
NEIC 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. The Company recorded $37,631,000 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. 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.
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 the Company's
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. Such amount was charged to expense in the three
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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.
NATIONAL VERIFICATION SYSTEMS, L. P. ("NVS")
On September 13, 1996, the Company completed the acquisition of NVS for
$2,150,000 in cash and the assumption of certain liabilities. 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.
DIVERSE SOFTWARE SOLUTIONS, INC. ("DSS")
On March 11, 1997, the Company completed the acquisition of certain assets
of DSS for $4,000,000 in cash, plus a contingent payout based upon the
attainment of certain revenue thresholds in future operating periods, and the
assumption of certain liabilities. The Company preliminarily recorded $3,000,000
for such contingent payment. Based on management's preliminary estimates, the
Company recorded $4,910,000 of goodwill and other identifiable intangible assets
related to the DSS acquisition. Also recorded as part of the DSS acquisition was
a one-time write-off of acquired in-process technology of $3,000,000. Such
amount was charged to expense in the three months ended March 31, 1997, because
this amount related to research and development that had not reached
technological feasibility and for which there was no alternative future use.
The following presents unaudited pro forma results of operations (excluding
all one-time write-offs of acquired in-process technology and merger and
facility integration costs) for the six-month period ended June 30, 1997 and
1996 assuming all acquisitions, including EMC*Express, Inc. ("EMC") (See Note
E), had been consummated at the beginning of the periods presented:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------------
1997 1996
------ ------
(in thousands,
except per share data)
------------------------
<S> <C> <C>
Revenues $ 53,109 $ 42,281
Net income (loss) $ (594) $ (4,764)
Net income (loss) per common share $ (0.03) $ (0.41)
</TABLE>
D. 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 are
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 was not part of the purchase price
allocation. The costs for the three- and six-month periods ended June 30, 1996
associated with this plan of $282,000 and
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$2,166,000, respectively, represented exit costs associated with lease
terminations, personnel costs, write downs of impaired assets and other related
costs that were incurred as a direct result of the plan and were classified as
merger and facility integration costs in the statement of operations. The
Company estimates that no future costs will be charged to merger and facility
integration costs related to NEIC and Teleclaims. The employee groups terminated
included accounting, marketing and certain areas of the systems and operations
departments. The number of employees terminated was approximately 120.
Adjustments made to the liability as of June 30, 1997 and 1996 were
approximately $1,816,000 and $615,000, respectively.
E. EMC LOSSES
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.
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 were charged to operating expense. The Company was
committed through March 31, 1996 to continue to fund certain operating costs of
EMC. The amount disbursed for the funding of these costs during the three- and
six-month periods ended June 30, 1996 was $105,000 and $540,000, respectively.
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. EMC's results of operations
are included in the Company's Consolidated Statement of Operations from the date
of acquisition.
F. TRANSACTION WITH FIRST DATA CORPORATION
On June 6, 1995, the Company completed a merger of its financial
transaction processing business with First Data Corporation (the "First Data
Merger"). Pursuant to a management services agreement entered into in connection
with the First Data Merger, the Company was entitled to receive a fee from First
Data Corporation ("First Data") of $1,500,000 per annum, payable in quarterly
installments of $375,000, during the first two years following the First Data
Merger. Management fees for the three-month periods ended June 30, 1997 and 1996
were $275,000 and $375,000, respectively, and $650,000 and $750,000 for the
six-month periods ended June 30, 1997 and 1996, respectively. These fees are
classified in revenues in the consolidated statements of operations. First
Data's obligation to pay management fees to the Company pursuant to the
management services agreement ended during the quarter ended June 30, 1997.
G. 9% SUBORDINATED CONVERTIBLE NOTES
In June 1995, the Company issued $10 million in 9% Subordinated Convertible
Notes due in May 2000 (the "Convertible Notes"). The Convertible Notes were
convertible at the election of the holders into shares of Common Stock at a
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. The registration statement was filed
pursuant to the demand of the then current holders of the Convertible Notes
under a Registration Rights Agreement dated June 6, 1995. The Company
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was advised by the holders of the Convertible Notes that they intended to
convert $3,380,000 principal amount of the Convertible Notes into 321,289 shares
of Common Stock to permit their sale pursuant to the registration statement.
Prior to the termination of the registration statement on May 19, 1997, an
aggregate of $2,286,000 in principal amount of the Convertible Notes was
converted into 217,317 shares of Common Stock and sold pursuant to the
registration statement. In a series of unrelated transactions, the remaining
$7,714,000 in principal amount of the Convertible Notes had been converted into
733,239 shares of Common Stock as of June 9, 1997. Accordingly, no Convertible
Notes remain outstanding. Had the conversion of the Convertible Notes into
Common Stock occurred as of January 1, 1997, weighted average shares outstanding
for the quarter and for the six months ended June 30, 1997 would have been
16,461,857 and 16,347,579, respectively, compared to reported weighted average
shares of 16,167,940 and 15,823,923, respectively. This change in weighted
average shares outstanding has no effect on net loss per common share.
H. CHANGE IN ACCOUNTING PRINCIPLE
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods. Statement
No. 128 is not expected to have any impact on the Company's computation of
primary earnings per share; however, the Company does expect to have to include
a computation of diluted earnings per share in future periods for the effect of
dilutive securities.
I. SUBSEQUENT EVENTS
On August 7, 1997, the Company completed the acquisition of Healthcare Data
Interchange Corporation ("HDIC"), the electronic data interchange ("EDI") health
care services subsidiary of Aetna U.S. Healthcare, Inc. ("AUSHC"), pursuant to a
Stock Purchase Agreement, dated June 14, 1997, by and between the Company and
Advent Investments, Inc. ("Advent"), a wholly-owned subsidiary of AUSHC. In
connection with the acquisition, AUSHC guaranteed the obligations of Advent. In
addition, the Company and AUSHC simultaneously entered into a long-term
agreement under which AUSHC has agreed to use the Company as its single source
clearinghouse and EDI network for all AUSHC electronic health care transactions.
The transaction will be accounted for under the purchase method of accounting,
applying the provisions of APB 16 and, as a result, the Company will record the
assets and liabilities of HDIC at their estimated fair values with the excess of
the purchase price over these amounts being recorded as goodwill. The purchase
price for the shares of HDIC was approximately $36.4 million in cash, with the
acquisition being funded through available cash.
8
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Item 2. 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. There
are many factors that may cause actual results to differ materially from those
indicated by the forward-looking statements, including, among others,
competitive pressures, changes in pricing policies, delays in product
development, business conditions in the marketplace, general economic conditions
and the various risk factors set forth in the Company's periodic reports filed
with the Securities and Exchange Commission. 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 Unaudited Consolidated Financial Statements,
including the notes thereto.
OVERVIEW
ENVOY Corporation (the "Company") provides electronic processing services
primarily for the health care market. These services include submission for
adjudication of insurance and other third-party reimbursement claims for
pharmacies, physicians, hospitals, dentists and other participants in the health
care market and providing clearinghouse services for batch processing of medical
and dental reimbursement claims.
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 capital stock of the Company then was
distributed to shareholders through a stock dividend (the "Distribution") and
the Predecessor was merged into First Data.
Since the beginning of 1996, the Company has made several acquisitions, the
most significant being the acquisition of National Electronic Information
Corporation ("NEIC") (collectively, the "Acquired Businesses"). See Notes C and
E of Notes to the Unaudited Consolidated Financial Statements. 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 three- and
six-month periods ended June 30, 1997 and 1996 reflect the operations of the
Acquired Businesses for the periods after their respective dates of acquisition.
Revenues principally are derived from (i) transaction processing services
to the health care market which generally are 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 generally are earned
on a per transaction basis and are generally based upon the number of
transactions processed rather than the transaction volume per customer. In
addition, total revenues include non-transaction based revenues derived from
some of the Acquired Businesses. This revenue includes maintenance, licensing
and support activities, as well as the sale of ancillary software and hardware
products.
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The table below shows transactions processed by the Company for the periods
presented:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
----------------------------- ------------------------------
1997 1996 1997 1996
------ ------ ------ ------
(in thousands) (in thousands)
-------------- --------------
<S> <C> <C> <C> <C>
Pharmacy 139,841 111,753 286,502 219,354
Non-pharmacy 49,363 36,570 95,528 49,722
Total 189,204 148,323 382,030 269,076
</TABLE>
The transactions reflected above include the transactions of the Acquired
Businesses from the date of acquisition.
The Company continues to actively pursue the acquisition of health care
information businesses and other companies complementary to its business. The
Company's ability to successfully negotiate and close acquisitions will
materially impact the financial condition and operating results of the Company.
There can be no assurance that the Company will find attractive acquisition
candidates, be able to successfully finance and complete the acquisitions,
consolidate and integrate such businesses following the acquisition or
successfully operate them on a going forward basis.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1997 As Compared With Three Months Ended
June 30, 1996
Revenues. Revenues for the quarter ended June 30, 1997 were $26.4 million
compared to $19.6 million for the same period last year, an increase of $6.8
million. The majority of the increase is attributable to internal transaction
revenue growth over the same quarter last year. An increase in non-transaction
based sources of revenue, such as software licenses, maintenance and support
activities, from certain of the Acquired Businesses also contributed to the
increase.
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 the second quarter of 1997 were $12.9 million
compared to $9.7 million for the second quarter of 1996, an increase of $3.2
million or 33%. The dollar increase primarily is attributable to the additional
costs associated with the increased transaction volume in the Company's
business. As a percentage of revenues, cost of revenues improved to 49.0% in the
second quarter of 1997 compared to 49.8% in the second quarter of 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include marketing, finance, accounting and
administrative costs. Selling, general and administrative expenses for the three
months ended June 30, 1997 were $5.9 million compared to $4.9 million in the
same period in 1996, an increase of 20.4%. As a percentage of revenues, selling,
general and administrative expenses were 22.3% for the second quarter of 1997
compared to 25.0% for the second quarter of 1996. The improvement is
attributable to a larger base of 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
the second quarter of 1997 was $6.2 million compared to $5.3 million for the
comparable period in 1996. The increase is primarily the result of the
amortization of goodwill and other intangibles related to the Acquired
Businesses of $4.7 million in the second quarter of 1997 compared with $4.1
million in the second quarter of 1996. 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 $43.1 million associated with the Acquired
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Businesses over periods of three to fifteen years following the
acquisitions. In addition, the Company will amortize identified intangibles of
$30.3 million over two to nine year time periods, as applicable.
Merger and Facility Integration Costs. The Company recognized merger and
facility integration costs in the second quarter of 1996 of $282,000 related
primarily to the NEIC acquisition. These charges represent costs incurred as a
direct result of the plan to integrate NEIC and Teleclaims, Inc. ("Teleclaims").
See Note D of Notes to the Unaudited Consolidated Financial Statements. The
Company estimates that no future costs will be charged to merger and facility
integration costs related to NEIC and Teleclaims.
EMC Losses. In January 1995, the Company 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 the second quarter of 1996 of $105,000
relating to the funding of EMC operating losses through the termination date of
the management agreement in March 1996. Based upon the Company's decision to
terminate the management agreement, the Company discontinued the equity method
of accounting for EMC and began accounting for the investment on a cost basis.
Accordingly, the loss related to EMC has been charged to operating expense.
Following the termination of the management agreement, certain shareholders of
EMC filed a lawsuit against the Company asserting claims for breach of contract
and negligent conduct. In October 1996, the Company acquired the remaining 82.5%
interest in EMC and settled the related lawsuit. See Note E of Notes to the
Unaudited Consolidated Financial Statements. EMC's results of operations are
included in the Company's Consolidated Statement of Operations from the date of
acquisition.
Net Interest Income (Expense). The Company recorded net interest income of
$321,000 for the three months ended June 30, 1997 compared to net interest
expense of $1.1 million for the second quarter of 1996. Net interest income in
the second quarter of 1997 resulted from the elimination of borrowings under the
Company's credit facilities which were outstanding in the corresponding prior
year period, and interest earned on the Company's cash and cash equivalents
which more than offset interest expense on the Company's 9% convertible
subordinated notes issued in June 1995. See "--Liquidity and Capital Resources."
The borrowings, which consisted of a $25 million term loan and approximately
$12.9 million outstanding under the Company's revolving credit facility, were
repaid in the third quarter of 1996 with a portion of the proceeds from the
Company's August 1996 public offering of 3,320,000 shares of Common Stock.
Income Tax Provision. The Company's income tax provision for the second
quarter of 1997 was $1.8 million compared to a tax benefit of $410,000 in the
comparable period in 1996. The tax benefit recorded in the second quarter of
1996 was a change in the annual estimated tax rate and a reversal of the
provision previously booked. 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.
Six Months Ended June 30, 1997 As Compared With Six Months Ended June 30, 1996
Revenues. Revenues for the six-month period ended June 30, 1997 were $52.5
million compared to $29.9 million for the same period in the prior year, an
increase of $22.6 million or 75.6%. The increase is attributable to internal
transaction revenue growth, an increase in non-transaction based sources of
revenue, such as maintenance and support activities, from the Acquired
Businesses and the additional revenues generated from the Acquired Businesses.
Cost of Revenues. Cost of revenues for the six-month period ended June 30,
1997 was $25.8 million compared to $15.1 million for the six-month period ended
June 30, 1996. This increase of $10.7 million or 70.9% is attributable to
additional costs associated with increased transaction volume in the Company's
business and the inclusion of the Acquired Businesses. As a percentage of
revenues, cost of revenues improved to 49.1% for the six-month period ended June
30, 1997 compared to 50.3% in the same period last year.
11
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the six- month period ended June 30, 1997 were $11.8
million compared with $7.9 million for the same period last year, an increase of
$3.9 million or 49.4%. The dollar increase is a result of the inclusion of the
Acquired Businesses and the required infrastructure to support the larger base
of revenues. As a percentage of revenues, selling, general and administrative
expenses were 22.5% for the six-month period ended June 30, 1997 compared with
26.4% in the same period last year. The improvement as a percentage of revenues
is a result of a larger revenue base to support these expenses, as well as the
elimination of certain duplicative costs realized in connection with the
Acquired Businesses.
Depreciation and Amortization. Depreciation and amortization expense for
the six-month period ended June 30, 1997 was $12.2 million compared to $7.4
million for the comparable period last year. The increase is primarily the
result of the amortization of goodwill and other intangibles related to the
Acquired Businesses of $9.3 million in 1997 compared with $5.3 million in 1996.
Merger and Facility Integration Costs. The Company recognized merger and
facility integration costs in the six-month period ended June 30, 1996 of $2.2
million related primarily to the NEIC acquisition. These charges represent costs
incurred as a direct result of the plan to integrate NEIC and Teleclaims. See
Note D of Notes to the Unaudited Consolidated Financial Statements. The Company
estimates that no future costs will be charged to merger and facility
integration costs related to NEIC and Teleclaims.
Write off of Acquired In Process Technology. The Company incurred a one
time write-off of acquired in process technology in connection with the
acquisition of certain of the Acquired Businesses. See Note C of Notes to the
Unaudited Consolidated Financial Statements. The Company recognized charges of
$3.0 million for the six months ended June 30, 1997, related to the write-off of
certain acquired research and development in connection with the March 1997
acquisition of certain assets of Diverse Software Solutions, Inc., and $30.7
million for the same period in 1996, related to the NEIC and Teleclaims
acquisitions.
EMC Losses. The Company recognized a loss of $540,000 for funding of
certain of EMC operations for the six-month period ended June 30, 1996. This
loss was recorded as an operating expense. EMC's results of operations are
included in the Company's Consolidated Statement of Operations from the date of
acquisition.
Net Interest Income (Expense). The Company recorded net interest income of
$449,000 for the six-month period ended June 30, 1997 compared to net interest
expense of $1.5 million in the comparable period in 1996. Net interest income
for the first six months of 1997 resulted from the elimination of borrowings
under the Company's credit facilities which were outstanding in the
corresponding prior year period, and interest earned on the Company's cash and
cash equivalents which more than offset interest expense on the Company's 9%
convertible subordinated notes issued in June 1995. See "--Liquidity and Capital
Resources." The borrowings, which consisted of a $25 million term loan and
approximately $12.9 million outstanding under the Company's revolving credit
facility, were repaid in the third quarter of 1996 with a portion of the
proceeds from the Company's August 1996 public offering of 3,320,000 shares of
Common Stock.
Income Tax Provision. The Company's income tax provision for the six-month
period ended June 30, 1997 was $2.6 million compared to $50,000 in the
comparable period in 1996. 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company generally 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, and, more recently, from charges to merger
and facility integration costs and write off of acquired in process technology
related to the Acquired Businesses. Prior to the sale of the financial
processing business in 1995, 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.
12
<PAGE>
As of June 30, 1997, the Company had available cash and cash equivalents of
approximately $36.4 million. On August 7, 1997, however, the Company completed
the acquisition of Healthcare Data Interchange Corporation ("HDIC"), the
electronic data interchange health care services subsidiary of Aetna U.S.
Healthcare, Inc., for approximately $36.4 million. The HDIC acquisition was
financed through the Company's available cash. See Note I of Notes to the
Unaudited Consolidated Financial Statements.
The Company currently has no amounts outstanding under the Company's $50
million revolving credit facility. Any outstanding borrowings made against the
credit facility would bear interest at a rate equal to the Base Rate (as defined
in the credit facility) or an index tied to LIBOR. The total amount outstanding
under the credit facility is due and payable in full on June 30, 2000. The
credit facility contains financial covenants applicable to the Company and its
subsidiaries including ratios of debt to capital, annualized EBITDA to
annualized interest expense and certain other financial covenants customarily
included in a credit facility of this type. The Company and its subsidiaries
also are subject to certain restrictions relating to payment of dividends,
acquisitions, incurrence of debt and other restrictive provisions. The credit
facility is secured by substantially all of the assets of the Company and its
subsidiaries.
In June 1995, the Company issued $10 million in 9% subordinated convertible
notes due in May 2000 (the "Convertible Notes"). The Convertible Notes were
convertible at the election of the holders into shares of Common Stock at a
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. The registration statement was filed
pursuant to the demand of the then current holders of the Convertible Notes
under a Registration Rights Agreement dated June 6, 1995. The Company was
advised by the holders of the Convertible Notes that they intended to convert
$3,380,000 principal amount of the Convertible Notes into 321,289 shares of
Common Stock to permit their sale pursuant to the registration statement. Prior
to the termination of the registration statement on May 19, 1997, an aggregate
of $2,286,000 in principal amount of the Convertible Notes was converted into
217,317 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. In a series of unrelated transactions, the remaining
$7,714,000 in principal amount of the Convertible Notes had been converted into
733,239 shares of Common Stock as of June 9, 1997. Accordingly, no Convertible
Notes remain outstanding.
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 $2.2 million and $3.7 million for the quarter
and the six-month period ended June 30, 1997, 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 $7 to $8 million.
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. 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 $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.
13
<PAGE>
CHANGE IN ACCOUNTING PRINCIPLE
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods. Statement
No. 128 is not expected to have any impact on the Company's computation of
primary earnings per share; however, the Company does expect to include a
computation of diluted earnings per share in future periods for the effect of
dilutive securities.
SEASONALITY
The Company's business is to some extent seasonal, with more revenues being
generated from September through March as a result of a greater number of
pharmaceutical claims arise in those months, while operating expenses tend to
remain relatively constant over the course of the year.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, the Company 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 Matter to a Vote of Security Holders.
The Company held its Annual Meeting of Shareholders on June 19, 1997 (the
"Annual Meeting"). The shareholders of the Company voted as follows on the three
agenda items considered at the Annual Meeting:
(a) to elect three (3) Class II Directors, W. Marvin Gresham, Richard A.
McStay and Harlan F. Seymour, for three-year terms or until their successors are
duly elected and qualified. The following table sets forth the number of votes
cast for, against and abstained with respect to each of the nominees.
<TABLE>
<CAPTION>
Nominee For Against Abstained
--------- ----- --------- -----------
<S> <C> <C> <C>
W. Marvin Gresham 13,189,396 0 23,797
Richard A. McStay 13,164,896 0 48,297
Harlan F. Seymour 13,167,196 0 45,997
</TABLE>
(b) to ratify, confirm and approve the ENVOY Corporation Employee Stock
Purchase Plan. There were 11,005,836 votes cast for such proposal, 99,061 votes
cast against such proposal and 17,507 abstaining with respect to such proposal.
(c) to ratify the appointment of Ernst & Young LLP as the independent
public accountants for the Company in 1997. There were 13,188,296 votes cast for
such proposal, 13,030 votes cast against such proposal and 11,867 abstaining
with respect to such proposal.
14
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27 Financial Data Schedule
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K on June 23, 1997 pursuant to
Item 5 thereof with the Securities and Exchange Commission to announce the
execution of that certain Stock Purchase Agreement dated June 14, 1997, by and
between the Company and Advent Investments, Inc. relating to the acquisition of
HDIC.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENVOY CORPORATION
Date: August 12, 1997 By: /s/ Fred C. Goad, Jr.
---------------------
Fred C. Goad, Jr.
Chairman and Co-Chief
Executive Officer
Date: August 12, 1997 By: /s/ Kevin M. McNamara
---------------------
Kevin M. McNamara
Senior Vice President and
Chief Financial Officer
16
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 36,410
<SECURITIES> 0
<RECEIVABLES> 24,528
<ALLOWANCES> 2,632
<INVENTORY> 2,257
<CURRENT-ASSETS> 63,871
<PP&E> 33,542
<DEPRECIATION> 17,200
<TOTAL-ASSETS> 133,023
<CURRENT-LIABILITIES> 16,959
<BONDS> 122
0
40,100
<COMMON> 112,359
<OTHER-SE> (44,408)
<TOTAL-LIABILITY-AND-EQUITY> 133,023
<SALES> 0
<TOTAL-REVENUES> 52,508
<CGS> 0
<TOTAL-COSTS> 25,798
<OTHER-EXPENSES> 26,997
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<INTEREST-EXPENSE> 488
<INCOME-PRETAX> 162
<INCOME-TAX> 2,560
<INCOME-CONTINUING> (2,398)
<DISCONTINUED> 0
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<NET-INCOME> (2,398)
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