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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
For the Fiscal Year Ended December 31, 1997 Commission file number 0-25062
ENVOY CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
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)
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
----------------------------------------------------------
(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 February 27, 1998, was approximately $803,720,000. The
market value calculation was determined using the closing sale price of the
Registrant's common stock on February 27, 1998, as reported on The Nasdaq Stock
Market.
The number of shares outstanding of the Registrant's common stock as of
February 27, 1998 was 21,009,962.
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
4, 1998 are incorporated by reference into Items
10, 11, 12 and 13.
[The Exhibit Index is located
on page ___ of ___ total pages.]
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ENVOY CORPORATION
TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT
<TABLE>
<S> <C> <C>
PART I
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 ............................... 24
ITEM 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure .................................................. 24
PART III
ITEM 10. Directors and Executive Officers of the Registrant ........................ 25
ITEM 11. Executive Compensation .................................................... 25
ITEM 12. Security Ownership of Certain Beneficial Owners and Management............. 25
ITEM 13. Certain Relationships and Related Transactions ............................ 25
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .......... 26
SIGNATURES .............................................................................. 30
</TABLE>
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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 206,000 physicians, 34,000 pharmacies, 38,000
dentists, 4,400 hospitals and 784 payors, including approximately 46 Blue Cross
Blue Shield Plans, 50 Medicare Plans and 38 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 its strategy to maintain and enhance its leadership position in
the health care transaction processing industry, the Company has completed
several acquisitions, the most significant of which are the acquisition of
National Electronic Information Corporation ("NEIC") in March 1996 and the
acquisition of Healthcare Data Interchange Corporation ("HDIC") in August 1997.
See "Recent Acquisitions." In addition, on February 27, 1998, the Company
completed business combinations with the three companies operating the
ExpressBill(R) patient statement processing and printing services businesses for
an aggregate of 3,500,000 shares of ENVOY Common Stock. Shareholders of XpiData,
Inc. ("XpiData"), based in Scottsdale, Arizona, received 1,365,000 shares and
shareholders of Professional Office Services, Inc. ("POS") and its affiliated
company, Automated Revenue Management, Inc. ("ARM", and together with XpiData
and POS, sometimes collectively referred to herein as the "ExpressBill
Companies"), both of which are based in Toledo, Ohio, received an aggregate of
2,135,000 shares. The ExpressBill Companies' patient statement services include
electronic data transmission and formatting, statement printing and mailing
services for health care providers and practice management system vendors. It is
anticipated that the business combinations with the ExpressBill Companies will
be accounted for as poolings of interests.
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
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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.
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.
The Company believes EDI transaction processing offers a number of
benefits to health care 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.
There are many types of transactions, information exchanges and other
communications that occur between the various participants in the health care
industry, including patients, pharmacies, physicians, hospitals, dentists,
billing services, commercial insurance companies, managed care organizations,
state and federal government agencies and others. While electronic transaction
processing for certain 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) verification that the
provider is eligible to treat the patient; (iii) verification that the patient
is eligible for the treatment; (iv) filing of encounter data; (v) referral
management for providers and payors; and (vi) 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 generally 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.
According to the Health Data Directory, approximately 83% of the 1.4
billion and 86% of the 1.7 billion third-party pharmacy claims processed in 1996
and 1997, respectively, were processed
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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 should 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 42% of the 2.5 billion
non-pharmacy health care claims processed in 1997 were processed electronically.
The recent growth of managed care and governmental health care cost containment
efforts have increased the use of real time transaction processing by hospitals
and physicians by emphasizing not only lower costs, but improved operating
efficiencies and increasing accountability. 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 to participants in the health care
market through a real-time and batch clearinghouse network. Through its
transaction network, ENVOY provides an electronic link, directly and indirectly
through other clearinghouses or vendors, to approximately 206,000 physicians,
34,000 pharmacies, 38,000 dentists, 4,400 hospitals and 784 payors, including
approximately 46 Blue Cross Blue Shield Plans, 50 Medicare Plans and 38 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.
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, 1997, ENVOY's EDI network was linked
to approximately 34,000 of the estimated 51,000 retail pharmacies in the United
States, including 40 of the top 50 retail pharmacy chains.
ENVOY's real-time managed care 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 U.S. Healthcare, Oxford Health Plans, MetraHealth,
Pacificare, Blue Cross of California, Empire Blue Cross and Blue Shield, Blue
Cross and Blue Shield for the National Capital Area, Blue Cross and Blue Shield
of Arkansas, QualMed, Access Med Plus and Health 123, and is a sponsored
participant to the Blue
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Cross and Blue Shield BluesNet network. For Medicaid eligibility verification
and related transactions, the Company has access to state databases in Alabama,
Arkansas, California, Colorado, Connecticut, Florida, Georgia, Idaho, Illinois,
Indiana, Iowa, Kansas, Kentucky, Mississippi, Missouri, New Jersey, New Mexico,
New York, North Carolina, Ohio, Oklahoma, Pennsylvania, South Dakota, Tennessee,
Texas, Washington and Wyoming. 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 connections 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 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, health care 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 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's transaction network is connected with 650 of
the commercial 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, X12N Subcommittee and Healthcare Financing
Administration National Standards.
ENline(R). 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. 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 often are purchased
from the Company by payors, who are sponsoring a managed care network, and
offered by the payors to providers free of charge. In addition, providers
may purchase terminals from the Company for a fee.
The Company also has developed certain ENline PC-based products with
enhanced functionality 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. 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
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editing and distribution of the information from the practice management
system to the Company's network.
Automatic Eligibility Verification. During 1996, the Company acquired
technology for the automation of eligibility requests through the
acquisition of National Verification Systems, L.P. ("NVS"). 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. ("DSS") in March 1997, the Company acquired EDI
technology used for automatic posting of transactions into a hospital or
practice management information system. See "Recent Acquisitions-Diverse
Software Solutions, Inc." 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.
Patient Statements. Through the combinations with the ExpressBill
Companies, the Company is able to offer automated patient billing services to
the health care provider and hospital markets. These services include electronic
data transmission and formatting, statement printing and mailing services for
health care providers and practice management system vendors. See "Recent
Acquisitions-ExpressBill Companies."
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 primarily through its direct sales and marketing personnel located
throughout the United States. As of February 20, 1998, ENVOY employed
approximately 80 sales and marketing personnel. In addition, the ExpressBill
Companies collectively employ approximately 30 sales and marketing personnel.
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.
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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 commercial indemnity insurers, managed care
organizations and state and federal governmental agencies. Primarily as a result
of the HDIC acquisition, the Company has one customer, Aetna U.S. Healthcare,
Inc., that accounted for approximately 15% of the Company's revenues during
1997. See "Recent Acquisitions - Healthcare Data Interchange Corporation." Prior
to 1997, no customer accounted for more than 10% of the Company's revenues.
OPERATIONS
The Company delivers its 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,
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seven days a week processing capability and a "hot site" disaster recovery
system. The Company's current contract with this third-party processor expires
in December 1998.
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.
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. There can be no assurance these legal protections
and the precautions taken by the Company 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 can be 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 February 20, 1998, ENVOY had approximately 583 employees,
including approximately 517 salaried and 66 hourly employees (including
temporary employees). In addition, the ExpressBill Companies collectively employ
approximately 236 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 and proprietary software. Any delays in obtaining
necessary certifications with respect to future products and services could
delay their
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introduction. In addition, the Federal Communications Commission
requires ENVOY's products and services to comply with certain rules and
regulations governing performance. ENVOY believes its existing products and
services 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. In addition, legislation
has been proposed which would mandate standards and impose restrictions on the
Company's ability to transmit health care transaction data. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Risk
Factors - Health Care Data Legislation." Changes in such rules, regulations or
policies or the adoption of legislation that make it more costly to communicate
on networks could adversely affect the demand for or the cost of supplying
services in the health care EDI transaction processing business.
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 the acquisitions completed by the
Company since the beginning of 1997 follows:
Diverse Software Solutions, Inc. In March 1997, the Company completed
the acquisition of certain assets and liabilities of 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.
Healthcare Data Interchange Corporation. In August 1997, the Company
completed the acquisition of all the issued and outstanding capital stock of
HDIC, the EDI health care services subsidiary of Aetna U.S. Healthcare, Inc.
("AUSHC"). In addition, the Company and AUSHC simultaneously entered into a
long-term services agreement under which AUSHC has agreed to use the Company as
its single source clearinghouse and EDI network for all AUSHC electronic health
care transactions.
ExpressBill(R) Companies. On February 27, 1998, the Company completed
business combinations with the ExpressBill Companies pursuant to three separate
agreements and plans of merger. The aggregate consideration for the transactions
consisted of 3,500,000 shares of ENVOY Common Stock. Shareholders of XpiData
received 1,365,000 shares and shareholders of POS and its affiliated company,
ARM, received an aggregate of 2,135,000 shares. The ExpressBill Companies'
patient statement services include electronic data transmission and formatting,
statement printing and mailing services for health care providers and practice
management system vendors. It is anticipated that these combinations will be
accounted for as poolings of interests.
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EXECUTIVE OFFICERS
The following table sets forth certain information concerning the
executive officers of the Company.
<TABLE>
<CAPTION>
Name Age Position
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<S> <C> <C>
Fred C. Goad, Jr. 57 Chairman of the Board and Co-Chief Executive Officer
Jim D. Kever 45 President and Co-Chief Executive Officer
Kevin M. McNamara 42 Senior Vice President and Chief Financial Officer
Harlan F. Seymour 48 Senior Vice President of Corporate Strategy
and Development
Sheila H. Schweitzer 50 Senior Vice President of Operations
Gregory T. Stevens 33 Vice President, General Counsel and Secretary
</TABLE>
Mr. Goad has served as the Company's Chairman and Co-Chief Executive
Officer since August 1995, and served as President and a Director since the
Company's incorporation in August 1994. Mr. Goad served as Chief Executive
Officer and a Director of the Predecessor from September 1985 through June 6,
1995. Mr. Goad also is a Director of Performance Food Group Company, a food
distribution company, and is a Director of Oacis Healthcare Systems, Inc., a
clinical healthcare software and services company.
Mr. Kever has served as the Company's President and Co-Chief Executive
Officer since August 1995, and as a Director from incorporation in August 1994.
Prior to such time, he served as the Company's Executive Vice President,
Secretary and General Counsel. Mr. Kever served as a Director and Secretary,
Treasurer and General Counsel of the Predecessor since 1981 and as Executive
Vice President since 1984. Mr. Kever also is 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 has served as the Company's Senior Vice President and Chief
Financial Officer since February 1996, and as a Director since July 1997. Before
joining the Company, 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.
Mr. Seymour has served as the Company's Senior Vice President of Corporate
Strategy and Development since August 1997, and as a Director since October
1996. Before joining the Company as a full-time employee in August 1997, Mr.
Seymour was a partner in Jefferson Capital Partners, Ltd., an investment banking
firm, from September 1996 to June 1997. He served as Executive Vice President
and Chief Operating Officer, Business Development, of Trigon Blue Cross Blue
Shield, a leading health care insurance services company ("Trigon") from August
1994 to June 1996. Before joining Trigon, Mr. Seymour was with First Financial
Management Corporation ("FFMC") of Atlanta, Georgia, for 11 years,
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serving in a variety of senior corporate positions, where his last
responsibility was President and Chief Executive Officer of First Health
Services Corporation, a wholly-owned subsidiary of FFMC.
Ms. Schweitzer currently serves as the Company's 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.
Mr. Stevens currently serves as the Company's 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
space in Oklahoma City, Oklahoma, and Phoenix, Arizona for small processing
centers. The ExpressBill Companies operate their businesses in leased facilities
located in Toledo, Ohio and Scottsdale, Arizona. The ExpressBill Companies
Toledo facility's lease terminates in 2013 and consists of approximately 93,000
square feet. The ExpressBill Companies' Scottsdale facility is subleased
pursuant to a lease that terminates in 2006 and consists of approximately 50,000
square feet.
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
1997.
10
<PAGE> 13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Common Stock of ENVOY ("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 as
reported on The Nasdaq Stock Market.
<TABLE>
<CAPTION>
<S> <C> <C>
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
FISCAL YEAR ENDED DECEMBER 31, 1997
First Quarter. . . . . . . . . . . . . . . . . 38.25 21.88
Second Quarter . . . . . . . . . . . . . . . . 35.75 20.38
Third Quarter. . . . . . . . . . . . . . . . . 37.25 25.50
Fourth Quarter . . . . . . . . . . . . . . . . 32.75 22.38
</TABLE>
- ----------
At February 20, 1998, there were approximately 6,500 holders of Common
Stock, including approximately 235 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,
------------------------------------------------------------------
1997(1) 1996(2) 1995(3) 1994(3) 1993(3)
------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues ...................................... $ 113,693 $ 76,584 $ 26,055 $ 20,950 $ 13,979
Operating Loss ................................ (29,274) (35,699) (91) (221) (1,356)
Loss from Operations Before
Income Taxes and Loss in Investee .......... (29,328) (37,323) (224) (192) (1,349)
Income Tax (Expense) Benefit .................. 5,565 (1,577) 0 73 514
Loss in Investee............................... 0 0 (1,776) 0 0
------------------------------------------------------------------
Loss from Continuing
Operations ................................ $ (23,763) $ (38,900) $ (2,000) $ (119) $ (835)
==================================================================
Loss per Common Share from Continuing
Operations ................................ $ (1.47) $ (2.99) $ (0.18) $ (0.01) $ (0.07)
==================================================================
BALANCE SHEET DATA (AT PERIOD END):
Working Capital of Continuing Operations .. $ 18,202 $ 48,424 $ 11,277 $ 7,523 $ 2,274
Assets of Continuing Operations ........... 126,853 133,814 30,150 20,926 11,763
Total Assets .............................. 126,853 133,814 30,150 56,995 49,701
Long-Term Debt and Deferred Taxes ......... 9,277 10,377 10,300 737 508
Shareholders' Equity of Continuing
Operations ............................ 96,069 108,445 15,335 17,156 8,299
</TABLE>
Notes: (1) The 1997 results include expenses of $38.0 million for the
write-off of acquired in-process technology associated with the
DSS and HDIC acquisitions. (See Note 4 of Notes to the
Consolidated Financial Statements).
(2) The 1996 results include expenses of $30.7 million related to the
write-off of acquired in-process technology and $4.7 million
relating to the reorganization plan approved in conjunction with
the NEIC and Teleclaims, Inc. acquisitions (See Note 4 of Notes
to the Consolidated Financial Statements).
(3) The above amounts reflect the impact of the Predecessor's merger
with First Data in June 1995. (See Notes 1 and 3 of Notes 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. 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
Consolidated Financial Statements, including the notes thereto.
OVERVIEW
ENVOY Corporation (the "Company") is a leading provider of 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.
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.
The Company has made several acquisitions since the beginning of 1996
(collectively, the "Acquired Businesses"), the most significant being the
acquisitions of National Electronic Information Corporation ("NEIC") and
Healthcare Data Interchange Corporation ("HDIC"). See Notes 4 and 7 of Notes to
the Consolidated Financial Statements. All acquisitions completed during 1997
and 1996 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 1997
and 1996 reflect the operations of the Acquired Businesses for the periods after
their respective dates of acquisition.
The Company's revenues principally have been derived from transaction
processing services to the health care market which generally are paid for by
the health care providers or third-party payors. Revenues generally are earned
on a per transaction basis. In addition, total revenues include non-transaction
based revenues derived from some of the Acquired Businesses. This revenue
includes
13
<PAGE> 16
maintenance, licensing and support activities, as well as the sale of ancillary
software and hardware products.
The Company's revenues generally are composed of two basic transaction
types (i) pharmacy and (ii) medical and other. The table below shows the number
of transactions processed by the Company for the periods presented:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Pharmacy 597,609 478,526 363,084
Medical and other 215,437 132,724 15,308
-----------------------------------
Total 813,046 611,250 378,392
===================================
</TABLE>
The transactions reflected above include the transactions of the Acquired
Businesses from the date of acquisition.
While pharmacy currently represents a majority of the Company's total
transactions, the fee associated with these transactions is significantly less
than that received for a medical transaction and as such pharmacy revenue
constituted less than 25% of the Company's total revenues in 1997. The rate of
growth of the Company's pharmacy business has slowed recently. For 1997, the
pharmacy business grew at approximately half the rate experienced in the
Company's medical business. As a result of this trend, the Company expects its
pharmacy business as presently conducted to represent a decreasing portion of
the Company's total revenues in the future. As the mix of the Company's business
changes, a decline in the growth rates associated with the Company's medical
business could have a material impact on the financial condition and operating
results of the Company. There can be no assurance that the mix of the Company's
business or growth rates will continue at their current level.
The Company 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.
Recent Development. On February 27, 1998, the Company completed
business combinations with the three companies operating the ExpressBill patient
statement processing and printing services business (collectively, the
"ExpressBill Companies"), pursuant to separate agreements and plans of merger
for an aggregate of 3.5 million shares of ENVOY Common Stock. See Note 19 of
Notes to Consolidated Financial Statements. It is anticipated that these
combinations will be accounted for as poolings of interests. Because these
combinations were consummated after the date of the consolidated financial
statements included in this Form 10-K, the accounts and results of operations of
the ExpressBill Companies are not included in the Company's consolidated
financial statements for the year ended December 31, 1997, and are not included
in the comments following in this Management's Discussion and Analysis of
Financial Condition and Results of Operations.
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,
--------------------------------------
1997 1996 1995
------------ ------------- -----------
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Cost of revenues 48.4 50.0 59.2
Selling, general and administrative
expenses 21.4 24.7 31.6
Depreciation and amortization 22.6 25.0 9.5
Merger and facilities integration costs 0 6.1 0
Write-off of acquired in-process
technology 33.4 40.1 0
EMC losses 0 0.7 0
-------------------------------------
Operating loss (25.8) (46.6) (.3)
Interest income 1.2 1.3 1.5
Interest expense (1.2) (3.5) (2.0)
-------------------------------------
Loss from continuing operations before
income taxes and loss in investee (25.8) (48.7) (0.9)
Income tax provision (benefit) (4.9) 2.1 0
Loss in investee 0 0 (6.8)
-------------------------------------
Loss from continuing operations (20.9)% (50.8)% (7.7)%
=====================================
</TABLE>
FISCAL YEAR 1997 AS COMPARED WITH 1996
Revenues. Revenues for the year ended December 31, 1997 were $113.7
million compared to $76.6 million for the same period last year, an increase of
$37.1 million or 48.5%. The increase is attributable to internal transaction
revenue growth, an increase in non-transaction based sources of revenue, such as
software licenses, maintenance and support activities from certain of the
Acquired Businesses and additional revenues generated from the Acquired
Businesses.
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 1997 were $55.0 million compared to $38.3 million
for 1996, an increase of $16.7 million or 43.8%. The dollar increase is
attributable to the additional costs associated with the increased transaction
volume, the inclusion of the Acquired Businesses and increases in rebates paid
to third parties. The increase in rebates paid to third parties primarily
results from an increase in the mix of claims received from large third party
vendors and claim clearinghouses. Therefore, if mix shifts continue toward
larger vendors and clearinghouses, the Company expects rebates to represent an
increasing portion of its costs of sales. As a percentage of revenues, cost of
revenues improved to 48.4% in 1997 compared to 50.0% in 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include marketing, finance, accounting and
administrative costs. Selling, general and administrative
15
<PAGE> 18
expenses for 1997 were $24.3 million compared to $19.0 million in 1996, an
increase of 28.1%. The dollar increase is the 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 decreased to 21.4% for 1997 compared to 24.7% for 1996. The improvement
is attributable to a larger base of revenues and 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
1997 was $25.7 million compared to $19.2 million for 1996. The increase is
primarily the result of the amortization of $19.9 million in goodwill and other
intangibles related to the Acquired Businesses in 1997, compared with $14.6
million in 1996. Depreciation and amortization increased further as the result
of the additional investment in host computer systems and software to expand the
Company's transaction processing capabilities. At December 31, 1997, the Company
had goodwill of $32.7 million associated with the Acquired Businesses, remaining
to be amortized over periods of three to fifteen years following the
acquisitions. In addition, the Company had identified intangibles of $22.6
million, remaining to be amortized 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 $4.7 million related primarily to the
NEIC and Teleclaims, Inc. ("Teleclaims") acquisitions. These charges represent
costs incurred as a direct result of the plan to integrate NEIC and Teleclaims.
See Note 6 of Notes to the 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 recorded
write-offs of acquired in-process technology of $38.0 million and $30.7 million
in 1997 and 1996, respectively. The 1997 write-offs related to the HDIC and DSS
acquisitions and the 1996 write-offs related to the NEIC and Teleclaims
acquisitions. Such amounts were charged to expense because the amounts related
to research and development that had not reached technological feasibility and
for which there was no alternative future use. See Note 4 of Notes to the
Consolidated Financial Statements.
Net Interest Expense. The Company recorded net interest expense of
$54,000 for 1997 compared to net interest expense of $1.6 million for 1996. The
Company incurred additional interest expense in 1997 resulting from the imputed
interest expense related to certain unfavorable contracts assumed as part of the
HDIC acquisition. See Note 4 of Notes to the Consolidated Financial Statements.
This additional interest expense was offset partially by interest income earned
on cash and cash equivalents. Net interest expense in 1996 resulted from
interest on outstanding borrowings under the Company's credit facilities and the
Company's $10.0 million in 9% convertible subordinated notes issued in June 1995
(the "Convertible Notes"). 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 1996 with a portion of the proceeds from the
Company's August 1996 public offering of 3,320,000 shares of Common Stock. See
Note 14 of Notes to Consolidated Financial Statements. In a series of
transactions during 1997 and 1996, the Convertible Notes were converted into an
aggregate of 950,556 shares of the Company's Common Stock. Accordingly, no
Convertible Notes remain outstanding.
16
<PAGE> 19
Income Tax Provision (Benefit). The Company's income tax benefit for
1997 was $5.6 million compared to a tax provision of $1.6 million in 1996. The
tax benefit recorded in 1997 reflects a deferred income tax benefit of $13.3
million associated with the $35.0 million charge for the write-off of acquired
in-process technology related to the HDIC acquisition. 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 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 following the date of acquisition and a 31.8% increase in pharmacy
transactions over 1995.
Cost of Revenues. 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 50.0% in 1996 compared to 59.2% in 1995. The
improvement is attributable to the inclusion of the Acquired Businesses' results
following the date of acquisition 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 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 following the date of acquisition and the
additional costs associated with 1996 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 revenues as
well as the elimination of certain duplicative costs realized in connection with
the Acquired Businesses.
Depreciation and Amortization. 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
during 1996 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 during 1996 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 completed in 1996. 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 $4.7 million related to the NEIC and
Teleclaims acquisitions.
Write-off of acquired in-process technology. The Company recorded a
charge of $30.7 million in 1996 related to the NEIC and Teleclaims acquisitions.
These amounts were charged to expense because the amounts related to research
and development that had not reached technological feasibility and for which
there was no alternative future use.
17
<PAGE> 20
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 7 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 Note 7 of Notes to Consolidated Financial
Statements.
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.
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.
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.
On August 7, 1997, the Company completed the acquisition of HDIC for
approximately $36.4 million and the assumption of certain liabilities. The HDIC
acquisition was financed through the Company's available cash. In addition, the
Company paid approximately $2.2 million to the former owners of DSS in February
1998 to satisfy a variable payment obligation in connection with that
acquisition. See Note 4 of Notes to the Consolidated Financial Statements.
Following these payments, the Company had available cash and cash equivalents of
approximately $7.7 million.
In February 1998, the Company issued 3.5 million shares of the
Company's Common Stock in connection with ExpressBill Companies' combinations.
See Note 19 of Notes to Consolidated Financial Statements. Also in February
1998, approximately 930,000 shares of the Company's Series B Preferred Stock
were converted into an equal number of shares of Common Stock. As a result of
18
<PAGE> 21
these transactions, the number of shares of Common Stock outstanding increased
by approximately 4.4 million shares, or 27%, to 21.0 million shares.
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. Any amounts
outstanding under the credit facility will be due and payable in full on June
30, 2000. The credit facility contains financial covenants applicable to the
Company and its subsidiaries including ratios of debt to capital, annualized
EBITDA to annualized interest expense and certain other financial covenants
customarily included in a credit facility of this type. The Company and its
subsidiaries also are subject to certain restrictions relating to payment of
dividends, 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.
The Company purchases additional computer hardware and software
products from time to time as required to support the Company's business. The
Company incurred capital expenditures of $7.7 million and $4.8 million for 1997
and 1996, respectively, primarily for computer hardware and software products.
The Company currently estimates that total capital expenditures for 1998 will be
approximately $8 to $9 million.
The Company is expensing all costs associated with system changes
related to its Year 2000 Compliance Project as the costs are incurred through
operating cash flows. The Company estimates that the total cost of the Year 2000
expenses will be approximately $4.0 million, of which approximately $2.5 million
will be expensed during 1998. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Risk Factors - Year 2000
Compliance."
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.
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:
19
<PAGE> 22
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 $23.8 million for the year ended
December 31, 1997, and has an accumulated deficit of approximately $65.8 million
as of December 31, 1997. 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.
Impact of 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, which have created a
significant expansion of ENVOY's overall business. The most significant
acquisitions of the Company include NEIC in March 1996, HDIC in August 1997 and
the business combinations with the ExpressBill Companies in February 1998. In
addition, the Company completed several other smaller acquisitions in 1997 and
1996. See Notes 4 and 19 of Notes to Consolidated Financial Statements. A brief
description of significant terms of certain of these acquisitions follows:
NEIC. 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 $37.6 million of goodwill over a three year period, and
such amortization will adversely affect the Company's results of
operations through March 1999.
HDIC. In August 1997, the Company completed the acquisition of
HDIC for approximately $36.4 million and the assumption of certain
liabilities. The HDIC acquisition was financed through the Company's
available cash. In addition, the Company and AUSHC simultaneously
entered into a long-term services agreement under which AUSHC agreed
to use the Company as its single source clearinghouse and EDI network
for all AUSHC electronic health care transactions. Based upon
management's preliminary estimates, the Company recorded approximately
$16.1 million of goodwill and other identifiable intangible assets
related to the HDIC acquisition. Also recorded as part of the HDIC
acquisition was a one-time write-off of acquired in-process technology
of $35.0 million.
ExpressBill Companies. On February 27, 1998, the Company
completed business combinations with the three companies operating the
ExpressBill patient statement processing and printing services
businesses, for an aggregate of 3.5 million shares of ENVOY Common
Stock. The ExpressBill patient statement services include electronic
data transmission and formatting, statement printing and mailing
services for health care providers and practice management system
vendors. It is anticipated that these combinations will be accounted
for as poolings of interests.
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.
20
<PAGE> 23
Customer Concentration. Primarily as a result of the HDIC acquisition,
the Company has one customer, Aetna U.S. Healthcare, Inc., that accounted for
approximately 15% of the Company's consolidated revenues for 1997. Prior to
1997, no customer accounted for more than 10% of the Company's revenues. 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.
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.
Year 2000 Compliance. The Year 2000 issue is primarily the result of
many computer programs and data structures' failure to include the century when
storing the representation for a year. During 1997, the Company developed and
began implementing a plan to ensure its computer systems will be Year 2000
compliant. An inventory of all relevant software and hardware was taken to
determine the state of compliance. Some systems require no changes because they
already conform to the 4-digit-year configuration which is the basis for the
Year 2000 issue. The remaining systems will be replaced or modified as needed to
properly display dates and perform date arithmetic. The Company anticipates
commencing testing with customers and other third parties in the second quarter
of 1998 with completion expected in June 1999. In addition to validating the
Company's internal program changes, this testing will determine the readiness of
the Company's customers to deal with the Year 2000 issue in their own systems.
Where warranted, the Company may assist customers in dealing with the changes
required to be compliant to ensure successful information processing for all
parties. Because of the nature of the Company's business, the success of the
Company's efforts may depend on the success of providers, payors and others in
dealing with the Year 2000 issue. Total cost of the Year 2000 projects is
estimated to be $4.0 million and is being funded through operating cash flows.
The Company is expensing all costs associated with these system changes as the
costs are
21
<PAGE> 24
incurred. The Company estimates that Year 2000 expense for 1998 will
be approximately $2.5 million. If the Company is unable to deal successfully
with the Year 2000 issue, such inability could have a material adverse effect on
the Company's business, results of operation 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 Cross, 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.
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.
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,
22
<PAGE> 25
bypassing third-party processors such as the Company. Any significant increase
in the utilization of direct links 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.
Health Care Data Legislation. Two pieces of legislation currently being
considered at the federal level could impact the manner in which the Company
conducts its business. The Health Insurance Portability and Accountability Act
of 1996 mandates the use of standard transactions, standard identifiers,
security and other provisions by the year 2000. The Act specifically names
clearinghouses as the compliance facilitators for providers and payors.
Clearinghouses are given the freedom to utilize non-standard transactions and
convert them to the mandated standards on behalf of their clients. The Company
is preparing to comply with the mandated standards within three to six months
after their publication; however, the success of the Company's compliance
efforts may be dependent on the success of providers, payors and others in
dealing with the standards.
Legislation which imposes restrictions on the ability of third-party
processors to transmit certain patient data without specific patient consent
also recently 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. The impact of the
foregoing or other legislation is difficult to predict and could materially
adversely affect the Company's business, operating results or financial
condition.
Evolving Industry Standards and Rapid Technological Changes. The market
for the Company's business is characterized by rapidly changing technology,
evolving industry standards and frequent introduction of new and enhanced
products and services. ENVOY's success will depend upon its continued ability to
enhance its existing products and services, to introduce new products and
services on a timely and cost-effective basis to meet evolving customer
requirements, to achieve market acceptance for new products and 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
23
<PAGE> 26
to technological changes or new industry standards. Moreover, there can be no
assurance that competitive products and services will not be developed, or that
any such competitive services will not have an adverse effect upon the Company's
business, operating results or financial condition.
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 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.
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 health
care transactions 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.
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-26 of this Annual Report on Form 10-K. In
addition, on page S-1 the supplemental financial schedules as required by Item 8
are provided. See Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
24
<PAGE> 27
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 4, 1998 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 4, 1998 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 4, 1998 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 4, 1998 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.
25
<PAGE> 28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
The following Consolidated Financial Statements are filed as part of
this Annual Report on Form 10-K:
<TABLE>
<CAPTION>
Page Number
Description in Report
----------- -----------
<S> <C>
Report of Independent Auditors F-1
Consolidated Balance Sheets, December 31, 1997 and December 31, 1996 F-2
Consolidated Statements of Operations for the years ended December 31, 1997,
1996 and 1995 F-4
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1997, 1996 and 1995 F-6
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995 F-7
Notes to Consolidated Financial Statements F-9
</TABLE>
2. Financial Statement Schedules:
The following Financial Statement Schedule is filed as part of this
Annual Report on Form 10-K and should be read in conjunction with the Financial
Statements:
<TABLE>
<CAPTION>
Page Number
Description in Report
----------- -----------
<S> <C>
Schedule II - Valuation and Qualifying Accounts S-1
</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 .
The Company filed a Current Report on Form 8-K/A on October 20, 1997
pursuant to Item 7(b) thereof with the Securities and Exchange Commission to
amend an earlier Form 8-K filed on August 22, 1997. The amendment was filed for
the purpose of including certain pro forma financial information relating to
the HDIC acquisition, which was omitted in the Form 8-K originally filed.
26
<PAGE> 29
(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)
2.3 Stock Purchase Agreement dated June 14, 1997 by and between
ENVOY Corporation and Advent Investments, Inc. (8)
2.4 Agreement and Plan of Merger dated as of February 23, 1998, by
and among ENVOY Corporation, Envoy Acquisition Corporation,
Professional Office Services, Inc. and Richard B. McIntyre (9)
2.5 Agreement and Plan of Merger dated as of February 23, 1998, by
and among ENVOY Corporation, Envoy Acquisition Corporation,
XpiData, Inc., Michael Marolf, Sr., Michael Marolf, Jr.,
Jeffrey Marolf and Lisa Marolf (9)
2.6 Agreement and Plan of Merger dated as of February 23, 1998,
by and among ENVOY Corporation, Envoy Acquisition Subsidiary,
Inc., Automated Revenue Management, Inc., Patrick J. McIntyre,
Terrence J. McIntyre and Michael S. McIntyre (9)
3.1 Charter, as amended (filed herewith is a Certificate of
Designations setting forth terms of Series B Convertible
Preferred Stock) (Charter as originally amended incorporated
by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1995)
3.2 By-Laws (1)
4.1 Article IV of ENVOY's Charter, as amended (included in
Exhibit 3.1)
4.2 Shareholder Rights Plan (1)
4.3 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)
</TABLE>
27
<PAGE> 30
<TABLE>
<CAPTION>
Exhibit No. Description
----------- ------------------------------------------------------------------
<S> <C>
4.4 Registration Rights Agreement dated March 6, 1996 by and among
ENVOY and the Purchasers set forth on the signature pages
thereto (3)
4.5 Registration Rights Agreement dated February 27, 1998, by and
between ENVOY and the Persons set forth on the signature pages
thereto.
10.1 Amended and Restated Credit Agreement dated November 8, 1996 among
First Union National Bank of North Carolina, as agent, various
Lenders and ENVOY (4)
MANAGEMENT CONTRACT OR COMPENSATORY PLAN
10.2 Employment Agreement between ENVOY and Fred C. Goad, Jr. (1)
10.3 Employment Agreement between ENVOY and Jim D. Kever (1)
10.4 Employment Agreement between ENVOY and Kevin M. McNamara (5)
10.5 Employment Agreement between ENVOY and Harlan F. Seymour
10.6 Amended and Restated 1995 Employee Stock Incentive Plan (6)
10.7 Amended and Restated 1995 Stock Option Plan for Outside
Directors (6)
10.8 ENVOY Corporation Employee Stock Purchase Plan (7)
10.9 1998 ExpressBill Stock Option Plan
10.10 1992 Incentive Plan (1)
10.11 1992 Non-Employee Directors Stock Option Plan (1)
10.12 1990 Officer and Employee Stock Option Plan (1)
10.13 1990 Director Stock Option Plan (1)
10.14 1987 Stock Option Plan (1)
10.15 Form of Indemnification Agreement (1)
</TABLE>
28
<PAGE> 31
<TABLE>
<CAPTION>
Exhibit No. Description
----------- ---------------------------------------------------------
<S> <C>
21 Subsidiaries
23 Consent of Independent Auditors
27 Financial Data Schedule
</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 Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996.
(5) Incorporated by reference to the Registrant's Registration Statement on
Form S-3, as amended, No. 333-04433.
(6) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1996.
(7) Incorporated by reference to the Registrant's Proxy Statement, dated April
30, 1997 for the Annual Meeting of Shareholders held June 19, 1997.
(8) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed June 23, 1997.
(9) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed February 25, 1998.
29
<PAGE> 32
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-Chief March 6, 1998
- -------------------------------- Executive Officer and Director
Fred C. Goad, Jr.
/s/ Jim D. Kever Co-Chief Executive Officer, March 6, 1998
- -------------------------------- President and Director
Jim D. Kever
Senior Vice President, Chief March 6, 1998
/s/ Kevin M. McNamara Financial Officer (Principal
- -------------------------------- Financial and Accounting Officer)
Kevin M. McNamara and Director
/s/ William E. Ford Director March 6, 1998
- --------------------------------
William E. Ford
/s/ W. Marvin Gresham Director March 6, 1998
- --------------------------------
W. Marvin Gresham
/s/ Laurence E. Hirsch Director March 6, 1998
- --------------------------------
Laurence E. Hirsch
</TABLE>
30
<PAGE> 33
<TABLE>
<S> <C> <C>
/s/ Richard A. McStay Director March 6, 1998
- --------------------------------
Richard A. McStay
/s/ Harlan F. Seymour Senior Vice President March 6, 1998
- -------------------------------- Corporate Strategy and
Harlan F. Seymour Development and Director
</TABLE>
31
<PAGE> 34
Report of Independent Auditors
Board of Directors and Shareholders
ENVOY Corporation
We have audited the accompanying consolidated balance sheets of ENVOY
Corporation and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. Our audits also
included the 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, 1997 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
Nashville, Tennessee
March 5, 1998
F-1
<PAGE> 35
ENVOY Corporation
Consolidated Balance Sheets
(In thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
----------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 8,386 $ 36,430
Trade accounts receivable, less allowance for
doubtful accounts of $3,312 and $1,969 in
1997 and 1996, respectively 26,192 20,435
Inventories 1,936 2,586
Deferred income taxes 1,501 1,018
Other 1,694 2,947
----------------------------------
Total current assets 39,709 63,416
Property and equipment:
Equipment 32,696 24,627
Furniture and fixtures 2,166 3,004
Leasehold improvements 2,734 2,124
----------------------------------
37,596 29,755
Less accumulated depreciation and amortization (20,121) (14,402)
----------------------------------
17,475 15,353
Other assets:
Goodwill, net of amortization 32,719 26,981
Other intangibles, net of amortization 22,564 25,628
Deferred income taxes 10,018 0
Other 4,368 2,436
----------------------------------
Total assets $ 126,853 $ 133,814
==================================
</TABLE>
See accompanying notes.
F-2
<PAGE> 36
ENVOY Corporation
Consolidated Balance Sheets (continued)
(In thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
--------------------------------
<S> <C> <C>
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 1,120 $ 4,828
Accrued expenses and other current liabilities 20,387 10,071
Current portion of long-term debt 0 93
--------------------------------
Total current liabilities 21,507 14,992
Long-term debt, less current portion 114 8,412
Deferred income taxes 0 1,965
Other non-current liabilities 9,163 0
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, 16,575,822 and 15,354,531 in
1997 and 1996, respectively 114,586 103,199
Additional paid-in capital 7,155 7,155
Retained deficit (65,772) (42,009)
--------------------------------
Total shareholders' equity 96,069 108,445
--------------------------------
Total liabilities and shareholders' equity $126,853 $ 133,814
================================
</TABLE>
See accompanying notes.
F-3
<PAGE> 37
ENVOY Corporation
Consolidated Statements of Operations
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
------------------------------------------------
<S> <C> <C> <C>
Revenues $ 113,693 $ 76,584 $ 26,055
Operating costs and expenses:
Cost of revenues 55,023 38,252 15,435
Selling, general and administrative 24,281 18,950 8,243
Depreciation and amortization 25,663 19,177 2,468
Merger and facility integration costs 0 4,664 0
Write-off of acquired in-process technology 38,000 30,700 0
EMC losses 0 540 0
------------------------------------------------
Operating loss (29,274) (35,699) (91)
Other income (expense):
Interest income 1,312 1,032 380
Interest expense (1,366) (2,656) (513)
------------------------------------------------
(54) (1,624) (133)
------------------------------------------------
Loss from continuing operations
before income taxes and loss in investee (29,328) (37,323) (224)
Provision (benefit) for income taxes (5,565) 1,577 0
Loss in investee 0 0 (1,776)
------------------------------------------------
Loss from continuing operations (23,763) (38,900) (2,000)
Income from discontinued operations, net of
income taxes 0 0 30
First Data transaction expenses, including income taxes 0 0 (2,431)
------------------------------------------------
Loss from discontinued operations 0 0 (2,401)
------------------------------------------------
Net loss $ (23,763) $ (38,900) $ (4,401)
================================================
</TABLE>
(Continued)
F-4
<PAGE> 38
ENVOY Corporation
Consolidated Statements of Operations (continued)
(In thousands, except per share data)
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996 1995
-----------------------------------------------
<S> <C> <C> <C>
Loss per common share:
Continuing operations $(1.47) $(2.99) $(0.18)
Discontinued operations 0 0 (0.21)
-----------------------------------------------
Net loss per common share $(1.47) $(2.99) $(0.39)
===============================================
Weighted average shares outstanding 16,186 13,019 11,241
===============================================
</TABLE>
See accompanying notes.
F-5
<PAGE> 39
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, 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 0 0 46 0 0 46
exercise of stock options
First Data 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
Stock options exercised 437 1,844 0 0 0 0 0 1,844
Income tax benefit realized on
exercise of stock options 0 1,249 0 0 0 0 0 1,249
Conversion of debt to common stock 781 8,214 0 0 0 0 0 8,214
Proceeds from issuance of stock 3 80 0 0 0 0 0 80
Net loss 0 0 0 0 0 (23,763) 0 (23,763)
--------------------------------------------------------------------------------------------
Balance at December 31, 1997 16,576 $114,586 3,730 $40,100 $ 7,155 $(65,772) $ 0 $ 96,069
============================================================================================
</TABLE>
See accompanying notes.
F-6
<PAGE> 40
ENVOY Corporation
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
----------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (23,763) $ (38,900) $ (4,401)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 25,663 19,187 3,550
Stock option compensation expense 0 0 1,264
Provision for losses on accounts receivable 1,448 1,017 359
Deferred income tax provision (benefit) (12,466) 524 96
Write-off of certain assets and investments 38,000 32,281 820
Changes in assets and liabilities, net of First
Data transaction and acquired businesses:
Decrease (increase) in accounts receivable (6,507) (6,931) 1,185
Decrease (increase) in inventories 650 (440) (1,568)
Decrease (increase) in other current assets 1,053 (1,851) (619)
Increase (decrease) in accounts payable, accrued
expenses and other current liabilities (5,125) (2,619) 1,273
----------------------------------------------------
Net cash provided by operating activities 18,953 2,268 1,959
INVESTING ACTIVITIES
Net (increase) decrease in short-term investments 0 5,103 (5,103)
Purchases of property and equipment (7,677) (4,784) (7,970)
Decrease (increase) in other assets (1,998) 38 1,059
Investment in investee 0 0 (750)
Payments for businesses acquired, net of cash acquired of
$5,543 in 1996 (40,412) (93,744) 0
----------------------------------------------------
Net cash used in investing activities (50,087) (93,387) (12,764)
FINANCING ACTIVITIES
Proceeds from issuance of preferred stock 0 40,100 0
Proceeds from issuance of common stock 3,174 88,474 620
Proceeds from long-term debt 0 43,947 10,000
Payments on long-term debt (84) (43,994) (1,120)
Payment of deferred financing costs 0 (1,200) 0
Cash transferred in First Data transaction 0 0 (2,743)
----------------------------------------------------
Net cash provided by financing activities 3,090 127,327 6,757
----------------------------------------------------
Net increase (decrease) in cash and cash equivalents (28,044) 36,208 (4,048)
Cash and cash equivalents at beginning of year 36,430 222 4,270
----------------------------------------------------
Cash and cash equivalents at end of year $ 8,386 $ 36,430 $ 222
====================================================
</TABLE>
F-7
<PAGE> 41
ENVOY Corporation
Consolidated Statements of Cash Flows (continued)
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
------------------------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ (27) $ (2,141) $ (513)
Interest received $ 1,250 $ 1,024 $ 380
Income taxes paid $ (5,827) $ (141) $ (476)
NONCASH TRANSACTIONS
First Data Transaction:
Book Value of Assets Transferred, excluding cash $ 0 $ 0 $36,083
Liabilities transferred 0 0 (3,407)
Equity transferred 0 0 (35,419)
-----------------------------------------------
Cash transferred $ 0 $ 0 $(2,743)
===============================================
ACQUISITIONS
Working capital $ 0 $ 302 $ 0
Intangible assets 0 1,348 0
Common stock issued 0 (1,650) 0
-----------------------------------------------
Cash transferred $ 0 $ 0 $ 0
================================================
CONVERSION OF DEBT TO COMMON STOCK $ 8,214 $ 1,786 $ 0
=================================================
</TABLE>
See accompanying notes.
F-8
<PAGE> 42
ENVOY Corporation
Notes to Consolidated Financial Statements
1. ORGANIZATION
ENVOY Corporation, a Tennessee corporation (the "Company" or "New Envoy"), was
incorporated in August 1994 as a wholly-owned subsidiary of Envoy Corporation,
a Delaware corporation ("Old Envoy"), and through a stock dividend distribution
by Old Envoy of all of the outstanding shares of the common stock of New Envoy
(the "Distribution") the Company ceased to be a wholly-owned subsidiary of Old
Envoy. Immediately after the Distribution, Old Envoy was merged with and into
First Data Corporation ("First Data") (see Note 3). Old Envoy was formed in 1981
to develop and market electronic transaction processing services to capture and
transmit time critical information for the financial services and health care
markets. In 1995, the assets and liabilities of Old Envoy associated with the
electronic transaction processing for the health care markets and governmental
benefits programs were transferred to New Envoy. For accounting purposes, the
Company's financial statements for 1995 include financial information for its
predecessor, Old Envoy, with the financial services electronic processing
business (the "financial business") shown as discontinued operations. For
purposes of the notes to the consolidated financial statements, the "Company"
refers to Old Envoy and New Envoy for the period prior to June 6, 1995. The
Company currently provides electronic data interchange 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 throughout the
United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments with a maturity of three months
or less when purchased to be cash equivalents. The carrying amount approximates
fair value because of the short maturity of those instruments.
SHORT-TERM INVESTMENTS
Short-term investments include investments in fixed rate securities consisting
primarily of bonds and corporate notes. These investments have maturity dates of
one to five years from the date of purchase and are accounted for in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." All short-term
investments were sold prior to December 31, 1996.
Proceeds, gross realized gains and gross realized losses from the sale of
available-for-sale securities were $6,126,000, $1,911, and $39,138,
respectively, in 1996 and $9,470,000, $288,000, and $9,000, respectively, in
1995. The cost of securities sold is based on the specific identification
method.
F-9
<PAGE> 43
ENVOY Corporation
Notes to Consolidated Financial Statements
CONCENTRATION OF CREDIT RISK
The Company has one customer that accounted for approximately 15% of the
Company's consolidated revenues for 1997 and accounted for approximately 21% of
consolidated accounts receivable. No single customer accounted for more than 10%
of consolidated revenues in 1996 or 1995.
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 $5,734,000, $4,614,000
and $2,418,000 for 1997, 1996 and 1995, 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 fifteen 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 1997, 1996 and 1995 was $19,929,000, $14,563,000 and $38,000, respectively.
At December 31, 1997 and 1996, accumulated amortization of intangible assets was
$34,420,000 and $14,563,000, 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.
LOSS PER COMMON SHARE
In 1997, the Company adopted the provisions of SFAS No. 128, Earnings per Share.
SFAS 128 replaced the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. The adoption of SFAS No. 128 has not had a
significant impact on the Company's computation of earnings per share for the
current or prior periods.
F-10
<PAGE> 44
ENVOY Corporation
Notes to Consolidated Financial Statements
RESEARCH AND DEVELOPMENT
Research and development expenses of $1,931,000 in 1997, $1,654,000 in 1996 and
$1,419,000 in 1995 were charged to cost of revenue as incurred until
technological feasibility had been established for the product. Thereafter, all
software development costs are capitalized until the products are available for
general use by customers. The Company has not capitalized any significant
software costs to date.
INCOME TAXES
Income taxes have been provided using the liability method in accordance with
SFAS No. 109, "Accounting for Income Taxes."
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
STOCK BASED COMPENSATION
Under various benefit plans, the Company grants stock options for a fixed number
of shares to employees and directors with an exercise price which approximates
the fair value of the shares at the date of grant. The Company 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 1996 and 1995 consolidated
financial statements to conform with the 1997 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 was entitled to receive a fee from First Data of $1,500,000
per annum, payable in quarterly installments of $375,000, during the first two
years following the First Data Merger. Management fees of $650,000, $1,500,000
and $850,000 for the years ended December 31, 1997, 1996 and 1995 are classified
in revenues in the consolidated statements of operations.
The net assets of the financial business were merged with and into First Data
and were accounted for as discontinued operations.
Revenues of the financial business were $12,828,000 for the period January 1,
1995 through June 6, 1995.
F-11
<PAGE> 45
ENVOY Corporation
Notes to Consolidated Financial Statements
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.
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. 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 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
$88,354,000 paid to the NEIC stockholders and 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 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 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
("Common Stock") to various investors for an aggregate purchase price of
$5,000,000. The Company also entered into a credit agreement, whereby the
Company obtained $50,000,000 in bank financing in the form of a $25,000,000
revolving credit facility and a $25,000,000 term loan. An additional 840 shares
of NEIC cumulative redeemable preferred stock were redeemed by the Company on
August 1, 1996 at a redemption price of approximately $2,200,000.
TELECLAIMS, INC. ("TELECLAIMS")
On March 1, 1996, the Company acquired all the issued and outstanding capital
stock of Teleclaims in exchange for 73,242 shares of Common Stock 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
F-12
<PAGE> 46
ENVOY Corporation
Notes to Consolidated Financial Statements
one time write-off of acquired in-process technology of $700,000. Such
amount was charged to expense in 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 certain assets
and liabilities of NVS for $2,150,000 in cash and the assumption of certain
liabilities. Goodwill and other identifiable intangible assets in the amount of
$1,864,000 were recorded in connection with 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 $6,400,000 in cash
and the assumption of certain liabilities. 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 variable payout based upon revenue earned
during a specified period following the acquisition, and the assumption of
certain liabilities. At December 31, 1997, the Company has recorded a liability
of $2,200,000 related to the variable payments, which were paid in February
1998. This obligation is included in accrued expenses at December 31, 1997.
Based on management's preliminary estimates, the Company recorded $5,164,000 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 1997 because this amount related to research and
development that had not reached technological feasibility and for which there
was no alternative future use.
HEALTHCARE DATA INTERCHANGE CORPORATION ("HDIC")
On August 7, 1997, the Company acquired all the issued and outstanding capital
stock of HDIC, the electronic data interchange ("EDI") health care services
subsidiary of Aetna U.S. Healthcare, Inc. ("AUSHC"), for approximately
$36,400,000 in cash and the assumption of approximately $14,800,000 in
liabilities including approximately $13,800,000 relating to the assumption of
unfavorable contracts. At December 31, 1997, the remaining liability for
unfavorable contracts was $13,073,000, with $9,163,000 classified as a
non-current liability, and $3,910,000 classified as a current liability in
accrued expenses and other current liabilities. In addition, the Company and
AUSHC simultaneously entered into a long-term services agreement under which
AUSHC has agreed to use the Company as its single source clearinghouse and EDI
network for all AUSHC electronic health care transactions. Based upon
management's preliminary estimates, the Company recorded approximately
$16,100,000 for goodwill and other identifiable intangible assets related to the
HDIC acquisition. Also recorded as part of the HDIC acquisition was a one-time
write-off of acquired in-process technology of $35,000,000. Such amount was
charged to expense in 1997 because this amount related to research and
development that had not reached technological feasibility and for which there
was no alternative future use.
F-13
<PAGE> 47
ENVOY Corporation
Notes to Consolidated Financial Statements
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 years ended December 31, 1997, 1996 and 1995 assuming
all acquisitions, including EMC*Express, Inc. ("EMC") (see Note 7), had been
consummated at the beginning of the periods presented (in thousands, except per
share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
----------------------------------------------
<S> <C> <C> <C>
Revenues $ 120,187 $ 101,990 $ 78,962
Net loss (27,847) (46,535) (40,309)
Net loss per common share (1.72) (3.50) (3.46)
</TABLE>
5. SALE OF THE GOVERNMENT SERVICES BUSINESS
On September 16, 1997, the Company completed the sale of substantially all of
the assets related to the Company's hunting and fishing licenses and electronic
benefit transfer business (collectively "the Government Services Business") for
(i) $500,000 payable in the form of a promissory note due and payable in full on
August 31, 1999 and (ii) certain contingent payment amounts based upon the
achievement of specified future operating results of the Government Services
Business. The Company recorded a gain of $500,000 related to the sale of the
Government Services Business in 1997. The results of operations of the
Government Services Business are included in the Company's consolidated
statements of operations through the date of disposition.
F-14
<PAGE> 48
ENVOY Corporation
Notes to Consolidated Financial Statements
6. MERGER AND FACILITY INTEGRATION COSTS
As a result of the acquisitions of NEIC and Teleclaims in March 1996, the
Company approved a plan that reorganized certain of its operations, personnel
and facilities to gain the effects of potential cost savings and operating
synergies. The cost of this plan to integrate the acquired companies was
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 year ended December 31, 1996 associated with this
plan of $4,664,000 represent 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 were classified as merger and
facility integration costs in the consolidated statements of operations. The
employee groups terminated include accounting, marketing and certain areas of
the systems and operations departments. The number of employees terminated was
approximately 120. Amounts charged against the liability for 1997 and 1996 were
approximately $385,000 and $1,434,000, respectively.
7. LOSS IN INVESTEE
On January 28, 1995, the Company purchased 17.5% of the capital stock of EMC for
approximately $570,000. In connection therewith, the Company paid $250,000 for
an option to purchase the remainder of the capital stock of EMC (the "Option"),
and also entered into a management agreement to provide management services to
EMC (the "Management Agreement"). Under the terms of the Management Agreement,
the Company agreed to fund certain operating costs of EMC in the form of
advances. The Management Agreement could be terminated by the Company at any
time on 60 days written notice, at which time the Option would be terminated.
The Company gave notice to terminate the Management Agreement on January 31,
1996. As a result of the termination notice and other facts and circumstances,
the Company determined that it was probable an impairment to its investment had
occurred. Accordingly, the Company recorded an adjustment in the fourth quarter
of 1995 in the amount of $1,637,000 to recognize an impairment in the carrying
value of its investment and cumulative advances. During 1995, the Company
recognized losses for its initial investment and option aggregating $820,000,
advances of $817,000 and equity losses of $139,000 for a total loss in the EMC
investment of $1,776,000.
Based on the Company's decision to terminate the Management Agreement, the
Company discontinued the equity method of accounting for EMC and began
accounting for the investment on a cost basis during the fourth quarter of 1995.
Accordingly, the funding of EMC's operating costs in 1996 were charged to
operating expenses. The Company was committed through March 31, 1996 to continue
to fund certain operating costs of EMC. The amounts disbursed for the funding of
these costs during the first two quarters of 1996 were $540,000.
Following the termination of the Management Agreement and the Option, certain
shareholders of EMC filed a lawsuit in March 1996 against the Company asserting
claims for breach of contract and negligent conduct. On October 18, 1996, the
Company settled this lawsuit for $300,000. Concurrent with the settlement of the
lawsuit, the Company completed the acquisition of the remaining 82.5% interest
in EMC for approximately $2,000,000 in cash. The EMC acquisition was accounted
for under the purchase method of accounting applying the provisions of APB No.
16 and, as a result, the Company recorded the assets and liabilities at their
estimated fair values. The Company recorded $1,954,000 of other identifiable
intangible assets related to the EMC acquisition. The operations of EMC are
included in the consolidated statements of operations from the date of
acquisition.
F-15
<PAGE> 49
ENVOY Corporation
Notes to Consolidated Financial Statements
8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consists of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
-------------------------------
<S> <C> <C>
Current portion of liability for unfavorable contracts $ 3,910 $ 0
Liability to former owners of DSS 2,200 0
Unearned income 1,942 0
Accrued communication expense 1,982 2,259
Accrued income taxes 1,208 1,789
Accrued salaries and benefits 1,931 1,454
Accrued vendor incentives 1,731 1,085
Other 5,483 3,484
-------------------------------
$ 20,387 $ 10,071
===============================
</TABLE>
The liability to former owners of DSS is related to the DSS acquisition, and the
liability for unfavorable contracts is related to the HDIC acquisition (see
Note 4).
9. LONG-TERM DEBT
In connection with the Distribution and First Data Merger, the Company entered
into a $10,000,000 note agreement with First Data on June 6, 1995 (the
"Convertible Note"). The Convertible Note was convertible, at the option of the
holder, into fully paid and nonassessable shares of Common Stock, on terms
subject to adjustment for stock dividends, subdivision, and combinations,
subsequent issuances of Common Stock, issuances of certain rights, stock
purchase rights or convertible securities and certain issuer tender offers.
During 1996, First Data sold the Convertible Note to an unrelated third party
for $13,500,000.
On November 7, 1996, the Company filed a registration statement with the
Securities and Exchange Commission covering the offering of 321,289 shares of
Common Stock pursuant to the demand of the current holders of the Convertible
Note under a Registration Rights Agreement dated June 6, 1995. The Company was
advised by the holders of the Convertible Notes that they intended to convert
$3,380,000 principal amount of the Convertible Notes into 321,289 shares of
Common Stock to permit their sale pursuant to the registration statement. Prior
to the termination of the registration statement on May 19, 1997, an aggregate
of $2,245,000 in principal amount of the convertible Notes was converted into
213,389 shares of Common Stock and sold pursuant to the registration statement.
In a series of unrelated transactions, the remaining $7,755,000 in principal
amount of the Convertible Notes was converted into 737,167 shares of Common
Stock through June 1997. Accordingly, no Convertible Notes remain outstanding.
F-16
<PAGE> 50
ENVOY Corporation
Notes to Consolidated Financial Statements
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 expires June 30, 2000. The amended credit
facility contains financial covenants applicable to the Company including ratios
of debt to capital, annualized EBITDA to annualized interest expense,
restrictions on payment of dividends, and certain other financial covenants
customarily included in a credit facility of this type. The Company and its
subsidiaries also are subject to certain restrictions relating to payment of
dividends, acquisitions, incurrence of debt and other restrictive provisions.
The amended credit facility is secured by substantially all of the assets of the
Company and its subsidiaries.
10. LEASES AND COMMITMENTS
The Company leases certain equipment and office space under operating leases.
Rental expense incurred under the leases during the years ended December 31,
1997, 1996 and 1995 was approximately $1,499,000, $1,596,000 and $1,095,000,
respectively.
Future minimum rental payments at December 31, 1997 under operating lease
arrangements are as follows (in thousands):
1998 $ 1,574
1999 1,476
2000 1,195
2001 766
2002 203
Thereafter 453
==============
Total minimum lease payments $ 5,667
==============
11. STOCK INCENTIVE PLANS
The Company has elected to follow APB No. 25 and related Interpretations in
accounting for its stock options because, as discussed below, the alternative
fair value accounting provided for under SFAS No. 123, "Accounting for
Stock-Based Compensation," requires use of option valuation models that were not
developed for use in valuing stock options. Under APB No. 25, because the
exercise price of the Company's stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
F-17
<PAGE> 51
ENVOY Corporation
Notes to Consolidated Financial Statements
At December 31, 1997, the Company had reserved 4,214,640 shares of Common Stock
for issuance in connection with the stock option plans. Summaries of stock
options outstanding are as follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
NUMBER OF SHARES OPTION PRICE PER SHARE EXERCISE PRICE
---------------------------------------------------------------
<S> <C> <C> <C>
Outstanding, December 31, 1994 1,477,000 $ 1.83 - $ 7.00 $ 2.61
Granted 1,829,000 2.19 - 18.00 9.54
Exercised (271,000) 1.83 - 3.79 2.28
---------------------------------------------------------------
Outstanding, December 31, 1995 3,035,000 1.83 - 18.00 6.81
Granted 625,000 20.25 - 40.25 24.53
Exercised (163,000) 1.83 - 7.75 3.12
Canceled (268,000) 7.75 - 10.00 9.02
---------------------------------------------------------------
Outstanding, December 31, 1996 3,229,000 1.83 - 40.25 10.25
Granted 834,000 21.25 - 36.75 23.22
Exercised (437,000) 1.83 - 20.75 4.25
Canceled (224,000) 7.75 - 30.00 19.92
---------------------------------------------------------------
Outstanding, December 31, 1997 3,402,000 $ 1.83 - $37.00 $ 13.58
===============================================================
</TABLE>
The number of stock options exercisable and the weighted average exercise price
of these options was 1,147,500 and $5.76 and 1,254,000 and $3.47 at December 31,
1997 and 1996, respectively. The weighted-average fair value of options granted
during 1997 and 1996 was $10.96 and $13.93, respectively. The weighted-average
remaining contractual life of those options is 5 years.
The Company's Amended and Restated 1995 Employee Stock Incentive Plan has
authorized the grant of options for up to 3,000,000 shares of Common Stock. All
options granted have 10 year terms from the grant date and vest over periods
from one to five years from the date of grant. At December 31, 1997, options for
the purchase of 2,691,000 shares were outstanding under this plan.
The Company's Amended and Restated 1995 Stock Option Plan for Outside Directors
has authorized the grant of options to the Company's non-employee directors for
up to 60,000 shares of Common Stock. All options granted have 10 year terms and
become fully exercisable one year from the date of grant. At December 31, 1997,
options for the purchase of 24,000 shares were outstanding under this plan.
Prior to the First Data Merger, Old Envoy had outstanding non-qualified stock
options for the purchase of 1,214,640 shares of Common Stock. The grants were
made under the 1987 Stock Option Plan, the 1990 Director Stock Option Plan, the
1990 Officer and Employee Stock Option Plan, the 1992 Non-Employee Directors'
Plan and the 1992 Incentive Plan. Because all of these grants
F-18
<PAGE> 52
ENVOY Corporation
Notes to Consolidated Financial Statements
were made prior to the First Data Merger, no further grants may be made under
these plans. All options granted thereunder have 10 year terms from the grant
date. In connection with the Distribution and First Data Merger, each holder of
an outstanding option to purchase shares of Old Envoy common stock (an "Old
Envoy Option") received an option to purchase an equal number of shares of
Common Stock (a "New Envoy Option"). The exercise price of the New Envoy Option
is equal to a percentage (the "distribution percentage") of the exercise price
of the Old Envoy Option. The distribution percentage was established based upon
the market prices of Common Stock and Old Envoy Common Stock as determined by
the ratio of (i) the average of the closing prices of Common Stock on the three
trading days immediately following the First Data Merger to (ii) the closing
price of Old Envoy Common Stock immediately prior to the First Data Merger. The
distribution percentage was 33.33% and resulted in a retroactive correspondingly
downward adjustment of each New Envoy Option. The distribution percentage
adjustment was designed to place the holder of an Old Envoy Option in the same
economic position after the First Data Merger as before the First Data Merger.
At December 31, 1997, options for the purchase of 687,000 shares were
outstanding and fully exercisable under these plans.
The Compensation Committee of the Board of Directors amended the 1992 Incentive
Plan in August 1994 to provide that all options thereunder would vest
immediately preceding the expiration of such option grant or earlier upon the
attainment of certain performance criteria. This amendment resulted in the
recording of deferred compensation and additional paid-in capital of
approximately $1,974,000. The deferred compensation was recognized as an expense
over the vesting period. As a result of the First Data Merger (see Note 3), the
vesting of all outstanding options was accelerated and all options became fully
vested as of the effective date of the First Data Merger. Accordingly, during
the year ended December 31, 1995, the remaining deferred compensation expense of
$1,264,000 was recognized.
Pro forma information regarding net loss and loss per share is required by SFAS
No. 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method. The fair value for these options
was estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted-average assumptions for 1997 and 1996, respectively:
risk-free interest rates of 5.77% and ranging from 5.36% to 6.69%; no dividend
yield; volatility factors of the expected market price of Common Stock ranging
from .436 to .455 and .385 to .419, respectively; and a weighted-average
expected life of the option of 5 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its stock options.
F-19
<PAGE> 53
ENVOY Corporation
Notes to Consolidated Financial Statements
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands, except for loss per share information):
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------------
<S> <C> <C> <C>
Pro forma net loss $ (27,000) $ (40,640) $ (4,838)
Pro forma loss per common share (1.67) (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.
The Company implemented the ENVOY Corporation Employee Stock Purchase Plan (the
"ESPP") effective July 1, 1997, at which time participating employees became
entitled to purchase Common Stock at a discounted price through accumulated
payroll deductions. Under the terms of the ESPP, the purchase price of the
Common Stock for participating employees will be the lesser of (i) 85% of the
closing market price of the Common Stock on the last trading day of each
quarterly enrollment period or (ii) 85% of the closing market price of the
Common Stock on the first trading day of each quarterly enrollment period. The
Company has reserved 1,000,000 shares of Common Stock for issuance under the
ESPP. As of December 31, 1997, approximately 3,000 shares had been issued under
the ESPP.
12. PREFERRED STOCK
In March 1996, the Company issued 3,730,233 shares of Series B Preferred Stock
("Preferred Stock") in connection with the NEIC acquisition (see Note 4). The
Preferred Stock is recorded in the accompanying consolidated balance sheet at
its liquidation preference of $10.75 per share, or $40,100,000 in the aggregate.
Each share of Preferred Stock is convertible into 1 share of Common Stock at any
time. Each share of Preferred Stock shall be entitled to vote on all matters
that the holders of Common Stock are entitled to vote upon, on an
as-if-converted basis, and shall be entitled to vote as a class with respect to
actions adverse to any rights of the Preferred Stock and the creation of any
other class of preferred stock senior to or pari passu with the Preferred Stock.
The Preferred Stock shall be entitled to dividends only to the extent cash
dividends are declared and paid on the Common Stock on an as if converted basis.
From and after January 1, 1999, the Company shall have an optional right to
redeem all of the outstanding Preferred Stock at a redemption price of $10.75
per share, provided that the average sale price of Common Stock for 60 trading
days prior to the notice of redemption is not less than $21.50 per share. In
February 1998, 930,233 shares of Preferred Stock were converted into an equal
number of shares of Common Stock.
13. 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.
F-20
<PAGE> 54
ENVOY Corporation
Notes to Consolidated Financial Statements
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.
14. COMMON STOCK OFFERING
In August 1996, the Company completed an underwritten public offering of
3,320,000 shares of Common Stock at $26.50 per share. Net proceeds from this
offering were approximately $83,000,000, and were used to retire indebtedness of
$25,000,000 outstanding under a term loan agreement and indebtedness of
approximately $12,900,000 outstanding under a $25,000,000 revolving credit
facility. The remaining proceeds were used for general corporate purposes,
including funding working capital requirements and acquisitions.
15. INCOME TAXES
The provision (benefit) for income taxes was comprised of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996 1995
---------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 4,545 $ 0 $331
State 2,356 1,053 49
------------------------------------
Total current 6,901 1,053 380
Deferred:
Federal (9,974) 1,294 86
State (2,492) (770) 10
------------------------------------
Total deferred (12,466) 524 96
------------------------------------
Provision (benefit) for income taxes $(5,565) $1,577 $476
====================================
</TABLE>
F-21
<PAGE> 55
ENVOY Corporation
Notes to Consolidated Financial Statements
The reconciliation of income tax computed by applying the U.S. federal statutory
rate to the actual income tax provision (benefit) follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996 1995
---------------------------------------
<S> <C> <C> <C>
Income tax benefit at U.S. federal
statutory rate $(10,247) $(12,690) $(1,335)
Nondeductible merger costs 0 10,459 679
Nondeductible goodwill amortization 4,499 3,411 0
State income taxes, net of federal
benefit (88) 187 39
Change in valuation allowance 238 163 1,130
Other, net 33 47 (37)
----------------------------------------
Income tax provision (benefit) $ (5,565) $ 1,577 $ 476
========================================
</TABLE>
The classification of the provision (benefit) for income taxes in the
consolidated statements of operations is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996 1995
---------------------------------------
<S> <C> <C> <C>
Income tax provision attributable to
continuing operations $(5,565) $1,577 $ 0
Discontinued operations:
Income from operations 0 0 42
First Data transaction expense 0 0 434
--------------------------------------
Total provision from discontinued
operations 0 0 476
--------------------------------------
Total income tax provision $(5,565) $1,577 $476
======================================
</TABLE>
F-22
<PAGE> 56
ENVOY Corporation
Notes to Consolidated Financial Statements
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,
1997 1996
-----------------------
<S> <C> <C>
Deferred tax liability:
Difference between book and tax depreciation
and amortization related to property and equipment $(2,302) $(2,188)
Difference between book and tax amortization
related to goodwill and other intangibles (3,545) (6,158)
------------------------
Total deferred tax liabilities (5,847) (8,346)
------------------------
Deferred tax assets:
Difference between book and tax amortization related to
write-off of acquired in-process technology 14,018 0
Difference between book and tax treatment
of leased assets 585 516
Reserves and accruals not currently deductible 1,443 1,012
Net operating loss 398 4,629
Difference between book and tax treatment
of investments 900 880
Difference between book and tax treatment
of compensation expense 346 529
Tax credits 583 503
Other 118 117
-----------------------
Total deferred tax assets 18,391 8,186
Valuation allowance for deferred tax assets (1,025) (787)
------------------------
Net deferred tax assets 17,366 7,399
------------------------
Net deferred tax assets (liability) $11,519 $ (947)
=========================
</TABLE>
At December 31, 1997, the Company had federal and state net operating loss
carryforwards of approximately $12,400,000 and $17,800,000, respectively. All of
the federal and approximately $7,400,000 of the state net operating losses
relate to the exercise of employee stock options and the tax benefit will be
allocated to equity when realized on the Company's tax returns. These losses
begin to expire in 2003.
Of the $12,400,000 federal net operating losses, $10,800,000 are attributable to
pre-acquisition years of NEIC and their use is limited by the Internal Revenue
Code to approximately $4,700,000 per year. The remaining $1,600,000 of federal
net operating
F-23
<PAGE> 57
ENVOY Corporation
Notes to Consolidated Financial Statements
losses are attributable to pre-acquisition years of EMC Express and their use is
limited by the Internal Revenue Code to approximately $141,000 per year.
The valuation allowance at December 31, 1996 relates to the loss on the
investment in EMC Express. The valuation allowance at December 31, 1997 relates
to the loss on the investment in EMC Express plus certain tax credits that
expire in 1997 and might not be realized on the Company's 1997 tax returns. The
allowance was increased in 1997 to include these credits.
16. 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. The Company
matches employee contributions, up to 25% of the first 6% of compensation
deferred by the employee. The amount of expense for the Company contribution was
approximately $279,000, $314,000 and $20,000 for the years ended December 31,
1997, 1996 and 1995, respectively.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheet for cash and
cash equivalents, accounts receivable, and accounts payable approximate fair
value. The carrying amount reported in the balance sheet for long-term debt also
approximates fair value. The fair value of the Company's long-term debt is
estimated using discounted cash flows and the Company's current incremental
borrowing rate for similar types of borrowing arrangements.
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1997
---------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
---------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues $ 26,092 $ 26,416 $ 28,590 $32,595
Gross profit 13,226 13,484 14,779 17,181
Net loss (2,233)(a) (165) (21,210)(b) (155)
Net loss per common share (0.14)(a) (0.01) (1.28)(b) (0.01)
</TABLE>
F-24
<PAGE> 58
ENVOY Corporation
Notes to Consolidated Financial Statements
<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
Net loss (33,910)(c) (1,417) (1,963)(d) (1,610)
Net loss per common share (2.97)(c) (0.12) (0.14)(d) (0.11)
</TABLE>
(a) The Company recorded a $3,000,000 (or $0.19 per share) write-off of
acquired in-process technology related to the DSS acquisition (see
Note 4).
(b) The Company recorded a $35,000,000 (or $2.12 per share) write-off of
acquired in-process technology related to the HDIC acquisition, less a
related deferred income tax benefit of $13,300,000 (or $0.81 per share)
(see Note 4).
(c) The Company recorded a $30,700,000 (or $2.69 per share) write-off of
acquired in-process technology related to the NEIC and Teleclaims
acquisitions (see Note 4).
(d) The Company recorded a $300,000 (or $0.02 per share) charge related to the
settlement of the EMC lawsuit (see Note 7).
19. SUBSEQUENT EVENTS
On February 27, 1998, the Company completed business combinations with the three
companies operating the ExpressBill patient statement processing and printing
services businesses, for an aggregate of 3,500,000 shares of ENVOY Common Stock.
Shareholders of XpiData, Inc. ("XpiData"), based in Scottsdale, Arizona,
received 1,365,000 shares and shareholders of Professional Office Services, Inc.
("POS") and its affiliated company, Automated Revenue Management, Inc. (together
with XpiData and POS, sometimes collectively referred to as the "ExpressBill
Companies"), both of which are based in Toledo, Ohio, received an aggregate of
2,135,000 shares. The ExpressBill patient statement services include electronic
data transmission and formatting, statement printing and mailing services for
health care providers and practice management system vendors. It is anticipated
that these transactions will be accounted for as poolings of interest.
Accordingly, the Company's historical consolidated financial statements
presented in future reports will be restated to include the accounts and results
of operations of the ExpressBill Companies.
The following unaudited pro forma data summarizes the combined results of
operations of the Company and the ExpressBill Companies as if the combination
had been consummated on December 31, 1997 (in thousands, except per share data):
F-25
<PAGE> 59
ENVOY Corporation
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995
--------- -------- -------
<S> <C> <C> <C>
Revenues $ 137,605 $ 90,572 $34,197
Net loss from continuing operations (21,672) (38,443) (2,121)
Net loss from continuing operations, per
common share (1.10) (2.33) (0.14)
</TABLE>
Adjustments to the historical financial statements include $980,000, $147,000
and $0 in 1997, 1996 and 1995, respectively, to record income tax provisions for
those entities comprising the ExpressBill Companies that were organized as
S Corporations.
F-26
<PAGE> 60
Schedule II
Valuation and Qualifying Accounts
December 31, 1995
<TABLE>
<CAPTION>
Balance at Charged to Balance
Beginning Charged to Other Accounts- Deductions End of
Description of Period Costs & Expenses Describe Describe Period
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts $ 425,000 577,000 a 464,231 $ 537,769
------------------------------------------------------------------------------------------
$ 425,000 577,000 0 464,231 $ 537,769
==========================================================================================
December 31, 1996
Balance at Charged to Balance
Beginning Charged to Other Accounts- Deductions End of
Description of Period Costs & Expenses Describe Describe Period
- --------------------------------------------------------------------------------------------------------------------------------
Allowance for Doubtful Accounts $ 537,769 1,017,000 c 499,014 b 84,719 $ 1,969,064
------------------------------------------------------------------------------------------
$ 537,769 1,017,000 499,014 84,719 $ 1,969,064
==========================================================================================
December 31, 1997
Balance at Charged to Balance
Beginning Charged to Other Accounts- Deductions End of
Description of Period Costs & Expenses Describe Describe Period
- --------------------------------------------------------------------------------------------------------------------------------
Allowance for Doubtful Accounts $ 1,969,064 1,447,500 c 600,000 b 705,036 $ 3,311,528
------------------------------------------------------------------------------------------
$ 1,969,064 1,447,500 600,000 705,036 $ 3,311,528
==========================================================================================
</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.
c These amounts represent amounts recorded in connection with the opening
balances of the Acquired Businesses. See Notes 4 and 7 of Notes to
Consolidated Financial Statements.
S-1
<PAGE> 61
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)
2.3 Stock Purchase Agreement dated June 14, 1997 by and between ENVOY
Corporation and Advent Investments, Inc. (8)
2.4 Agreement and Plan of Merger dated as of February 23, 1998, by and
among ENVOY Corporation, Envoy Acquisition Corporation,
Professional Office Services, Inc. and Richard B. McIntyre (9)
2.5 Agreement and Plan of Merger dated as of February 23, 1998, by and
among ENVOY Corporation, Envoy Acquisition Corporation, XpiData,
Inc., Michael Marolf, Sr., Michael Marolf, Jr., Jeffrey Marolf and
Lisa Marolf (9)
2.6 Agreement and Plan of Merger dated as of February 23, 1998, by and
among ENVOY Corporation, Envoy Acquisition Subsidiary, Inc.,
Automated Revenue Management, Inc., Patrick J. McIntyre, Terrence
J. McIntyre and Michael S. McIntyre (9)
3.1 Charter, as amended (filed herewith is a Certificate of
Designations setting forth terms of Series B Convertible Preferred
Stock) (Charter as originally amended incorporated by reference to
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995)
3.2 By-Laws (1)
4.1 Article IV of ENVOY's Charter, as amended (included in Exhibit
3.1)
4.2 Shareholder Rights Plan (1)
4.3 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)
</TABLE>
<PAGE> 62
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- --------------------------------------------------------------
<S> <C>
4.4 Registration Rights Agreement dated March 6, 1996 by and among
ENVOY and the Purchasers set forth on the signature pages
thereto (3)
4.5 Registration Rights Agreement dated February 27, 1998, by and
between ENVOY and the Persons set forth on the signature pages
thereto.
10.1 Amended and Restated Credit Agreement dated November 8, 1996 among
First Union National Bank of North Carolina, as agent, various
Lenders and ENVOY (4)
MANAGEMENT CONTRACT OR COMPENSATORY PLAN
10.2 Employment Agreement between ENVOY and Fred C. Goad, Jr. (1)
10.3 Employment Agreement between ENVOY and Jim D. Kever (1)
10.4 Employment Agreement between ENVOY and Kevin M. McNamara (5)
10.5 Employment Agreement between ENVOY and Harlan F. Seymour
10.6 Amended and Restated 1995 Employee Stock Incentive Plan (6)
10.7 Amended and Restated 1995 Stock Option Plan for Outside
Directors (6)
10.8 ENVOY Corporation Employee Stock Purchase Plan (7)
10.9 1998 ExpressBill Stock Option Plan
10.10 1992 Incentive Plan (1)
10.11 1992 Non-Employee Directors Stock Option Plan (1)
10.12 1990 Officer and Employee Stock Option Plan (1)
10.13 1990 Director Stock Option Plan (1)
10.14 1987 Stock Option Plan (1)
10.15 Form of Indemnification Agreement (1)
</TABLE>
<PAGE> 63
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- --------------------------------------------------------------
<S> <C>
21 Subsidiaries
23 Consent of Independent Auditors
27 Financial Data Schedule
</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 Quarterly Report on Form
10-Q for the quarter ended September 30, 1996.
(5) Incorporated by reference to the Registrant's Registration Statement on
Form S-3, as amended, No. 333-04433.
(6) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1996.
(7) Incorporated by reference to the Registrant's Proxy Statement, dated April
30, 1997 for the Annual Meeting of Shareholders held June 19, 1997.
(8) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed June 23, 1997.
(9) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed February 25, 1998.
<PAGE> 1
EXHIBIT 3.1
ARTICLES OF AMENDMENT
OF
ENVOY CORPORATION
To the Secretary of State of the State of Tennessee:
Pursuant to the provisions of Section 48-16-102 of the Tennessee Business
Corporation Act and the powers expressly delegated to the Board of Directors by
Article 5 of the undersigned corporation's Amended and Restated Charter, as
amended (the "Charter"), the undersigned corporation submits these Articles of
Amendment to its Charter for the purposes of establishing and designating a
series of shares out of the 12,000,000 authorized shares of Preferred Stock, no
par value (the "Preferred Stock"), and fixing and determining the relative
rights and preferences thereof.
FIRST. The name of the corporation is Envoy Corporation (the
"Corporation").
SECOND. Article 5 of the Charter is hereby amended by deleting the first
paragraph of such Article in its entirety, and replacing it with the paragraph
set forth below, by designating current Paragraph 2 of Article 5, Section A as
Paragraph 3 and by adding the new Paragraph 2 of Article 5, Section A, which
shall read in its entirety as set forth below:
"5. The Corporation is authorized to issue two classes of stock in the
following number of shares: (i) 48,000,000 shares of Common Stock, no par value
(the "Common Stock") and (ii) 12,000,00 shares of Preferred Stock, no par value
(the "Preferred Stock") of which 4,800,000 shares are designated as Series A
Preferred Stock and 3,730,233 shares are designated as Series B Convertible
Preferred Stock.
***
A. Preferred Stock
***
2. Series B Preferred Stock.
(a) Designation. There shall be a series of Preferred Stock to be known and
designated as Series B Convertible Preferred Stock (the "Series B Convertible
Preferred Stock") and the number of shares constituting such series shall be
3,730,233.
(b) Voting Rights.
(i) Each share of Series B Convertible Preferred Stock shall entitle the
holder thereof to (x) vote together with the holders of the shares of Common
Stock of the
1
<PAGE> 2
Corporation on all matters submitted to a vote of the holders of the shares of
Common Stock of the Corporation and (y) have the number of votes per share as
such holder would have upon conversion of the Series B Convertible Preferred
Stock to Common Stock as provided in paragraph (A)(2)(e)(iv) hereof.
(ii) The Corporation shall not, without the affirmative vote or consent of
the holders of at least a majority of the number of shares of Series B
Convertible Preferred Stock at the time outstanding, voting or consenting (as
the case may be) separately as a class, given in person or by proxy:
(x) create, issue or authorize the creation or issuance of any additional
class or series of stock ranking senior to or on parity with the Series B
Convertible Preferred Stock as to the distribution of assets on the liquidation,
dissolution or winding up of the Corporation, or increase the authorized amount
of Series B Convertible Preferred Stock or the authorized amount of any
additional class or series of shares of stock unless the same ranks junior to
the Series B Preferred Stock as to the distribution of assets on the
liquidation, dissolution or winding up on the Corporation, or create, issue or
authorize the creation or issuance of any obligation or security convertible
into shares of Series B Convertible Preferred Stock or into shares of any other
class or series of stock unless the same ranks junior to the Series B Preferred
Stock as to the distribution of assets on the liquidation, dissolution or
winding up of the Corporation, whether any such creation, issuance,
authorization or increase shall be by means of amendment to the Corporation's
Amended and Restated Charter or by merger, consolidation or otherwise; or
(y) alter or change any of the provisions hereof so as adversely to affect
the preferences, special rights or powers given to the Series B Convertible
Preferred Stock.
(iii) If General Atlantic Partners 25, L.P., GAP Coinvestment Partners,
L.P. and any affiliate (as defined in Rule 12b-2 under the Securities Exchange
Act of 1934) thereof own in the aggregate (a) at least a majority of the
outstanding shares of Series B Convertible Preferred Stock and (b) shares of
Common Stock and/or Series B Convertible Preferred Stock or other securities of
the Company convertible into or exchangeable for shares of voting capital stock
of the Company that represent (after giving effect to any adjustments) at least
5% of the total number of shares of Common Stock outstanding on an as converted
basis, the holders of the Series B Convertible Preferred Stock, voting as a
separate series, shall be entitled to elect one director of the Corporation,
which directorship shall be apportioned among the classes of board of directors
by the Board of Directors of the Corporation. The Series B Convertible Preferred
Stock shall vote together with all other classes and series of stock of the
Corporation as a single class with respect to the election of all of the other
directors of the Corporation; provided, however, that if the conditions
specified in the first sentence of this
2
<PAGE> 3
paragraph (A)(2)(b)(iii) necessary for the holders of the Series B Convertible
Preferred Stock to have a separate series vote for one director are not
satisfied, the Series B Convertible Preferred Stock shall vote together with all
other classes and series of stock of the Corporation as a single class with
respect to the election of all of the directors of the Corporation. At any
meeting (or in a written consent in lieu thereof) held for the purpose of
electing directors, the presence in person or by proxy (or the written consent)
of the holders of a majority of the shares of Series B Convertible Preferred
Stock then outstanding shall constitute a quorum of the Series B Convertible
Preferred Stock for the election of the director to be elected solely by the
holders of the Series B Convertible Preferred Stock. A vacancy in the
directorship elected by the holders of the Series B Convertible Preferred Stock
shall be filled only by vote or written consent of the holders of the Series B
Convertible Preferred Stock.
(c) Dividends. The holders of Series B Convertible Preferred Stock shall be
entitled to receive cash dividends out of funds legally available therefor, if,
when and as cash dividends are declared by the Board of Directors and paid out
of funds legally available therefor with respect to the Common Stock, equal to
an amount per share that would be received per share of Common Stock, as if the
shares of the Series B Convertible Preferred Stock held by the holder were
converted to Common Stock as provided in paragraph (A)(2)(e)(iv) hereof, on the
record date for such dividend.
(d) Liquidation.
(i) In the event of the voluntary or involuntary liquidation, dissolution
or winding-up of the Corporation, before any distribution or payment is made to
the holders of stock ranking on liquidation junior to the Series B Convertible
Preferred Stock, and after payment in full of all amounts due and owing to
creditors and holders of superior rights of any series or class of preferred
stock, if any, the holders of Series B Convertible Preferred Stock shall first
be entitled, before any distribution is made upon any shares of Common Stock of
the Corporation, to receive a preferential payment from the assets of the
Corporation of cash of property to the extent of funds legally available
therefor) equal to $10.75 per share (the "Series B Preference Amount") of Series
B Convertible Preferred Stock plus, in the case of each share, an amount equal
to any dividends declared but unpaid thereon (such amount payable with respect
to one share of Series B Convertible Preferred Stock being sometimes referred to
as the "Series B Liquidation Payment" and with respect to all shares of Series B
Convertible Preferred Stock being sometimes referred to as the "Series B
Liquidation Payments"). If upon such liquidation, dissolution or winding-up of
the Corporation, whether voluntary or involuntary, the assets to be distributed
among the holders of Series B Convertible Preferred Stock shall be insufficient
to permit payment to the holders of Series B Convertible Preferred Stock of the
Series B Liquidation Payments, then the entire assets of the Corporation to be
so distributed shall be distributed ratably among the holders of Series B
Convertible Preferred Stock.
(ii) Upon any such liquidation, dissolution or winding-up of the
Corporation, after the holders of Series B Convertible Preferred Stock shall
have been paid the
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Series B Liquidation Payments in full and the payment of any other distribution
that may be required with respect to any series of Preferred Stock that may from
time to time come into existence ranking on a parity with or senior to the
Series B Convertible Preferred Stock, the remaining net assets of the
Corporation shall be distributed to the holders of stock ranking on liquidation
junior to the Series B Convertible Preferred Stock. For purposes hereof, the
Common Stock shall rank on liquidation junior to the Series B Convertible
Preferred Stock. Written notice of such liquidation, dissolution or winding-up,
stating a payment date and, to the extent known, the amount of the Series B
Liquidation Payments and the place where said Series B Liquidation Payments
shall be payable, shall be given by first class mail (postage prepaid), by
telecopy, by overnight courier, or by telex, not less than ten (10) calendar
days prior to the payment date stated therein, to the holders of record of the
Series B Convertible Preferred Stock, such notice to be addressed to each such
holder at the address shown on the stock transfer records of the Corporation.
(iii) For the purposes of this paragraph (A)(2)9d), (x) the voluntary sale,
conveyance, exchange or transfer (for cash, shares of stock, securities or other
consideration) of all or substantially all of the property or assets of the
Corporation or (y)(A) the merger or consolidation of the Corporation into or
with any other corporation or (B) the merger of any other corporation into or
with the Corporation, in each case if the stockholders of the Corporation prior
to such merger or consolidation do not retain at least a majority of the voting
power of the surviving corporation, shall be deemed to be a liquidation,
dissolution or winding- up, voluntary or involuntary, of the affairs of the
Corporation. The Corporation will give not less than thirty (30) days' prior
written notice of the expected effective date of any such sale, conveyance,
exchange, transfer, merger or consolidation to the holders of Series B
Convertible Preferred Stock.
(iv) In case outstanding shares of Series B Convertible Preferred Stock
shall be subdivided (by stock split, stock dividend or otherwise) into a greater
number of shares of Series B Convertible Preferred Stock, the relevant Series B
Preferred Stock, the relevant Series B Preference Amount in effect immediately
prior to each such combination, shall, simultaneously with the effectiveness of
such combination, be proportionately increased.
(v) Whenever the distribution provided for in this Paragraph (d) shall be
payable in property other than cash, the value of such distribution shall be the
fair market value of such property as determined in good faith by the Board of
Directors of the Corporation.
(e) Conversion.
(i) At any time from the date of issuance of the shares of Series B
Convertible Preferred Stock (the "Initial Issuance Date"), shares of Series B
Convertible Preferred Stock may be converted, at the option of the holder
thereof, into shares of fully paid and nonassessable Common Stock at the
Conversion Rate (as hereinafter defined). The option to convert shares of the
Series B Convertible Preferred Stock may be exercised by surrendering to
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the Corporation or any transfer agent for the Series B Convertible Preferred
Stock the certificate or certificates for the shares of the Series B Convertible
Preferred Stock so to be converted, with the notice of conversion on such
certificate duly completed and executed. Shares of Series B Convertible
Preferred Stock shall be deemed to have been converted immediately prior to the
close of business on the day of surrender of such shares in the manner herein
prescribed for conversion and the person entitled to receive the Common Stock
issuable upon such conversion shall be treated for all purposes as the record
holder of such Common Stock as of such date.
(ii) Upon the transfer by an original holder of the Series B Convertible
Preferred Stock to any person other than an affiliate thereof, such shares of
Series B convertible Preferred Stock shall be converted automatically into the
number of fully paid and nonassessable shares of Common Stock into which such
shares of Series B Convertible Preferred Stock are then convertible pursuant to
paragraph (A)(2)(e)(iv) on the date of such transfer without any further action
by the holder or transferee of such shares of Series B Convertible Preferred
Stock and whether or not the certificates representing such shares are
surrendered to the Corporation or its transfer agent for the Series B
Convertible Preferred Stock. In order to receive a Common Stock certificate, the
transferee of the shares of Series B Convertible Stock shall surrender to the
Corporation or its transfer agent for the Series B Convertible Preferred Stock
the certificate or certificates representing such shares properly endorsed or
accompanied by proper instruments of assignment, duly executed by or on behalf
of the record holder of such certificate or certificates. Certificates
representing the shares of Common Stock into which such shares of Series B
Convertible Preferred Stock were so converted will be issued promptly after the
surrender of such certificate or certificates.
(iii) To the extent permitted by law, when shares of Series B Preferred
Stock are converted, all dividends declared and unpaid on the shares of Series B
Preferred Stock so converted to the date of conversion shall be immediately due
and payable and must accompany the shares of Common Stock issued upon such
conversion.
(iv) At any time from the Initial Issuance Date, any shares (or fractions
thereof) of Series B Convertible Preferred Stock may be converted at the option
of the holder thereof into such number of fully paid and nonassessable shares of
Common Stock as is equal to the product of the number of shares of Series B
Convertible Preferred Stock being so converted multiplied by the quotient of (x)
the Series B Preference Amount divided by (y) the conversion price of $10.75 per
share, subject to adjustment as provided in this paragraph (A)(2)(e) (the
"Conversion Rate"). However, if the Corporation shall at any time after the
issuance of the Series B Convertible Preferred Stock subdivide or combine the
outstanding shares of Common Stock or pay a dividend or distribution on the
outstanding shares of Common Stock payable in equity securities of the
Corporation, the Conversion Rule in effect immediately prior to the subdivision,
combination or record date for such dividend shall forthwith be proportionately
increased, in the case of combination, or proportionately decreased, in the case
of a subdivision or dividend payable in equity securities of the Corporation, so
that the holder of any share of Series B Convertible Preferred Stock thereafter
surrendered for conversion shall be entitled to
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receive the number of shares of Common Stock or other securities of the
Corporation that such holder would have owned or would have been entitled to
receive upon or by reason of any of the events described above, had such share
of Series B Convertible Preferred Stock been converted immediately prior to the
occurrence of such event.
(v) If there shall occur any merger, consolidation, capital reorganization
or any reclassification of the capital stock of the Corporation (other than a
merger or consolidation which is deemed to be a liquidation, dissolution or
winding up of the Corporation pursuant to paragraph (A)(2)(d)(iii)), then, as a
condition of such reorganization or reclassification, each holder of Series B
Convertible Preferred Stock shall thereafter have the right to receive upon
conversion, in lieu of the shares of Common Stock immediately heretofore
receivable upon the conversion of Series B Convertible Preferred Stock, the
number of shares of stock, other securities or assets as may be issued or
payable with respect to or in exchange for the number of shares of Common Stock
immediately theretofore receivable upon the conversion of Series B Convertible
Preferred Stock had such reorganization or reclassification not taken place;
and, in any such case, appropriate adjustment (as determined by the Board of
Directors) shall be made in the application of the provisions herein set forth
with respect to the rights and interest thereafter of the holders of the Series
B Convertible Preferred Stock, to the extent that the provisions set forth
herein (including provisions with respect to changes in and other adjustments of
the Conversion Rate) shall thereafter be applicable, as nearly as reasonably may
be, in relation to any stock, other securities or assets thereafter issuable or
payable upon the conversion of the Series B Convertible Preferred Stock.
(vi) No fractional shares of Common Stock are to be issued upon a
conversion of Series B Convertible Preferred Stock into shares of Common Stock,
but in lieu of delivering a fractional share, the Corporation shall pay to the
holder surrendering the Series B Preferred Stock for conversion a cash
adjustment in respect of any fraction of a share which would otherwise be
issuable in an amount equal to the same fraction of the per share market price
of the Common Stock on the date of exercise as determined in good faith by the
Corporation. If the number of shares of Series B Convertible Preferred Stock
represented by the certificate or certificates surrendered pursuant to paragraph
(A)(2)(e)(i) hereof exceeds the number of shares converted, the Corporation
shall, upon such conversion, execute and deliver to the holder, at the expense
of the Corporation, a new certificate or certificates for the number of shares
(or fraction thereof) of Series B Convertible Preferred Stock represented by the
certificate or certificates surrendered which are not to be converted.
(vii) The Corporation shall at all times reserve and keep available out of
its authorized Common Stock, solely for the purpose of issuance upon conversion
of the Series B Convertible Preferred Stock as herein provided, such number of
shares of Common Stock as shall then be issuable upon the conversion of all
outstanding Series B Convertible Preferred Stock, and shall take all action
required to increase the authorized number of shares of Common Stock if at any
time there shall be insufficient authorized but unissued shares of Common Stock
to permit such reservation or to permit conversion of all outstanding shares of
Series B
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Convertible Preferred Stock. All shares of Common Stock which shall be so
issuable shall be duly authorized and, when issued upon conversion of the Series
B Convertible Preferred Stock, shall be validly issued, fully paid and
nonassessable.
(viii) The issuance of certificates for shares of Common Stock upon the
conversion of any shares of the Series B Convertible Preferred Stock shall be
made without charge to the converting holder of the Series B Convertible
Preferred Stock for any issuance tax in respect thereof, and such certificates
shall be issued in the name of, or in such names as may be directed by, the
holder of the Series B Convertible Preferred Stock; provided, however, that the
Corporation shall not be required to pay any taxes or other governmental charges
which may be payable in respect of any transfer involved in the issuance and
delivery of any such certificate in a name other than that of the record holder
of the Series B Convertible Preferred Stock, and the Corporation shall not be
required to issue or deliver such certificates unless or until the person or
persons requesting the issuance thereof shall have paid to the Corporation the
amount of such tax or other governmental charge or shall have established to the
satisfaction of the Corporation that such tax or other governmental charge has
been paid or provided for.
(ix) Shares of Series B Convertible Preferred Stock which are converted
into shares of Common Stock as provided herein shall be retired and canceled
promptly after the acquisition thereof. All such shares shall, upon their
cancellation, become authorized but unissued shares of Preferred Stock and may
be reissued as part of a new series of Preferred Stock to be created by
resolution or resolutions of the Board of Directors, subject to the conditions
and restrictions on issuance set forth herein.
(x) Upon any adjustment of the Conversion Rate, the Corporation shall
deliver to each registered holder of Series B Convertible Preferred Stock at
least ten days prior to effecting such adjustment a certificate, signed by the
President or a Vice President and by the Treasurer or an Assistant Treasurer or
the Secretary or an Assistant Secretary of the Corporation, setting forth the
event requiring such adjustment, the method upon which such adjustment was
calculated and the increased or decreased Conversion Rate then in effect
following such adjustment. Any notice pursuant to this paragraph (A)(2)(e)(x)
shall be given by personal delivery, overnight mail, certified or registered
mail, return receipt requested, or telecopier, addressed to each holder of
shares of Series B Convertible Preferred Stock at the address of such holder as
shown on the books of the Corporation.
(xi) In case at any time or from time to time:
(w) the Corporation shall declare a dividend (or any other distribution) on
its shares of Common Stock payable in cash or securities;
(x) the Corporation shall authorize the granting to the holders of its
Common Stock of rights or warrants to subscribe for or purchase any shares of
stock of any class or of any other rights or warrants;
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(y) there shall be any capital reorganization or reclassification of the
capital stock of the Corporation, or any consolidation or merger to which the
Corporation is a party and for which approval of any stockholders of the
Corporation is required, or any sale or other disposition of all or
substantially all of the assets of the Corporation; or
(z) there shall be a voluntary or involuntary dissolution, liquidation or
winding up of the Corporation;
then, in each case, the Corporation shall mail to each holder of shares of
Series B Convertible Preferred Stock at such holder's address as it appears on
the transfer books of the Corporation, as promptly as possible but in any event
at least ten (10) days prior to the applicable date hereinafter specified, a
notice stating (A) the date on which a record is to be taken for the purpose of
such dividend, distribution or rights or warrants or, if a record is not to be
taken, the date as of which the holders of Common Stock of record to be entitled
to such dividend, distribution or rights are to be determined, or (B) the date
on which such capital reorganization, reclassification, consolidation, merger,
sale, conveyance, dissolution, liquidation or winding up is expected to become
effective. Such notice also shall specify the date as of which it is expected
that holders of Common Stock of record shall be entitled to exchange their
Common Stock for shares of stock, other securities, assets, or cash deliverable
upon such reorganization, reclassification, consolidation, merger, sale,
conveyance, dissolution, liquidation or winding up, as the case may be.
(f) Redemption The shares of Series B Convertible Preferred Stock shall not
be redeemable by the Corporation or otherwise prior to January 1, 1999.
Thereafter, upon thirty (30) days' prior written notice to the holder(s) of
Series B Convertible Preferred Stock, if the average of the closing or the
average of the closing prices and asked price of the Common Stock as reported on
The Nasdaq National Market or such other exchange or market on which the
Corporation's Common Stock is then traded for the sixty (60) consecutive trading
days immediately preceding the date upon which such written notice is give to
the holder(s) of the Series B Convertible Preferred Stock is not less than
$21.50 per share (as appropriately adjusted to reflect the occurrence of any
event specified in paragraph (A)(2)(e)(iv)), the Corporation shall have the
option to call the shares of Series B Convertible Preferred Stock and the
holders thereof shall be obligated to sell the shares to the Corporation upon
the exercise of such call option at a price per share of Series B Convertible
Preferred Stock equal to $10.75; provided, however, that notwithstanding the
foregoing, the holders of the Series B Convertible Preferred Stock shall, prior
to the expiration of the fifth day before termination of the 30-day notice
period, have the right to covert the Series B Convertible Preferred Stock
pursuant to paragraph (e) hereof.
(g) Stock Purchase Rights. If any stock purchase rights have been or are
hereafter issued to the holders of shares of Common Stock pursuant to the
stockholders rights agreement, dated June 1, 1995, of the Corporation, or any
successor plan, the holders of record of shares of Series B Convertible
Preferred Stock shall be entitled to receive such stock purchase rights as if
the shares of Series B Convertible Preferred Stock held by the holder thereof
had been
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converted (subject to any adjustments provided in paragraph (A)(2)(e)(iv)) into
Common Stock as provided in paragraph (A)(2)(e)(iv) hereof, and the Corporation
shall promptly amend or supplement such rights agreement so that such rights
agreement applies to the Series B Convertible Preferred Stock as required by the
preceding sentence.
THIRD. This amendment was duly adopted on November 30, 1995 by the Board of
Directors without shareholder approval as such was not required.
FOURTH. This amendment, which will constitute an amendment to the Charter,
is to be effective when filed with the Secretary of State.
Dated: March 6, 1996.
ENVOY CORPORATION
By: /s/ Jim D. Kever
-------------------------------------------
Title: President and Co-Chief Executive Officer
----------------------------------------
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EXHIBIT 4.5
REGISTRATION RIGHTS AGREEMENT
by and between
ENVOY CORPORATION
and
THE PERSONS OR ENTITIES SET FORTH
ON THE SIGNATURE PAGES HEREOF
----------------------------------
Dated: February 27, 1998
----------------------------------
<PAGE> 2
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT, dated February 27, 1998 (this "Agreement"),
among ENVOY Corporation, a Tennessee corporation (the "Company"), and the
persons or entities set forth on the signature pages hereof as the holders of
the common stock of the Company issued pursuant to the terms and conditions of
the Merger Agreements (defined below) attached hereto (each, a "Shareholder"
and, collectively the "Shareholders").
This Agreement is made in connection with the Agreements and Plans of
Merger, dated February 23, 1998 by and between (i) the Company, ENVOY
Acquisition Corporation, Professional Office Systems, Inc. and Richard McIntyre
and (ii) the Company, ENVOY Acquisition Corporation, XpiData, Inc., Michael F.
Marolf, Sr., Michael F. Marolf, Jr., Jeffrey B. Marolf, and Lisa A. Marolf (the
"Merger Agreements"), pursuant to which the Company has agreed to issue to the
Shareholders an aggregate of 3,500,000 shares, no par value per share, of common
stock of the Company as consideration for the transactions contemplated by the
Merger Agreements (the "Common Stock"). See Schedule I attached hereto setting
forth the number of shares acquired by each Shareholder. In order to induce the
Shareholders to enter into the respective Merger Agreements, the Company has
agreed to grant registration rights with respect to the Registrable Securities
(as hereinafter defined) as set forth in this Agreement.
The parties hereby agree as follows:
1. Definitions. As used in this Agreement the following terms have the
meanings indicated:
"Act" means the Securities Act of 1933, as amended.
"Affiliate" shall mean any Person who is an "affiliate" as defined in Rule
12b-2 of the General Rules and Regulations under the Exchange Act.
"Approved Underwriter" has the meaning assigned such term in Section 3(e).
"Common Stock" means the Common Stock, no par value per share, of the
Company or any other equity securities of the Company into which such securities
are converted, reclassified, reconstituted or exchanged.
"Company Underwriter" has the meaning assigned such term in Section 4(a).
"Demand Registration" has the meaning assigned such term in Section 3(a).
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"Designated Holder" means each of the Shareholders and any transferee of
any of them to whom Registrable Securities have been transferred in accordance
with the provisions of this Agreement, other than a transferee to whom such
securities have been transferred pursuant to a registration statement under the
Securities Act or Rule 144 or Regulation S under the Securities Act.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder.
"Existing Rightholders" means Persons who have obtained registration rights
pursuant to (i) the First Data Registration Rights Agreement, which has been
transferred to affiliates of Robert Fleming, Inc. and (ii) the Registration
Rights Agreement dated March 6, 1996 among the Company, General Atlantic
Partners 25, L.P., GAP Coinvestment Partners, L.P. and First Union Capital
Partners, Inc. (the "Series B Registration Rights Agreement").
"First Data Registration Rights Agreement" means the Registration Rights
Agreement, dated as of June 6, 1995, between the Company and First Data
Corporation.
"Inspector" has the meaning assigned such term in Section 6(a)(viii).
"NASD" has the meaning assigned such term in Section 6(a)(xiv).
"Person" means any individual, firm, corporation, partnership, limited
liability company, trust, incorporated or unincorporated association, joint
venture, joint stock company, limited liability company, government (or an
agency or political subdivision thereof) or other entity of any kind, and shall
include any successor (by merger or otherwise) of such entity.
"Registrable Securities" means each of the following: (a) the shares of
Common Stock owned by the Designated Holders and (b) any shares of Common Stock
issued or issuable to any or all of the Designated Holders with respect to
shares of Common Stock by way of stock dividend or stock split or in connection
with a combination of shares, recapitalization, merger, consolidation or other
reorganization or otherwise and shares of Common Stock issuable upon conversion,
exercise or exchange thereof.
"Registration Expenses" has the meaning set forth in Section 6(d).
"SEC" means the Securities and Exchange Commission or any similar agency
then having jurisdiction to enforce the Securities Act.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
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2. General; Securities Subject to this Agreement.
(a) Grant of Rights. The Company hereby grants certain registration rights
to the Shareholders upon the terms and conditions set forth in this Agreement.
(b) Registrable Securities. For the purposes of this Agreement, Registrable
Securities will cease to be Registrable Securities when (i) a registration
statement cover ing such Registrable Securities has been declared effective
under the Securities Act by the SEC and such Registrable Securities have been
disposed of pursuant to such effective registration statement, (ii) the date
that such Registrable Securities are eligible for sale pursuant to Rule 144(k)
(or any successor provision then in effect) under the Securities Act, or (iii)
the Registrable Securities are proposed to be sold or distributed by a Person
not entitled to the registration rights granted by this Agreement.
(c) Holders of Registrable Securities. A Person is deemed to be a holder of
Registrable Securities whenever such Person owns of record Registrable
Securities, or holds an option to purchase, or a security directly or indirectly
convertible into or exercisable or exchangeable for, Registrable Securities
whether or not such acquisition or conversion has actually been effected and
disregarding any legal restrictions upon the exercise of such rights. If the
Company receives conflicting instructions, notices or elections from two or more
Persons with respect to the same Registrable Securities, the Company may act
upon the basis of the instructions, notice or election received from the
registered owner of such Registrable Securities. Registrable Securities issuable
upon exercise of an option or upon conversion of another security shall be
deemed outstanding for the purposes of this Agreement.
(d) The Registrable Securities shall not be sold or transferred unless
either (i) such Registrable Securities first shall have been registered under
the Securities Act or (ii) the Company first shall have been furnished with an
opinion of legal counsel, reasonably satisfactory to the Company, to the effect
that such sale or transfer is exempt from the registration requirements of the
Securities Act, except that no such opinion shall be required for routine sales
under Rule 144.
(e) Each certificate representing the Registrable Securities shall bear a
legend to the following effect:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE
SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT AND APPLICABLE STATE
SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION FROM
THE REGISTRATION REQUIREMENTS OF THE ACT AND SUCH LAWS OR
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PURSUANT TO A WRITTEN OPINION OF COUNSEL FOR THE COMPANY THAT
SUCH REGISTRATION IS NOT REQUIRED.
The foregoing legend shall be removed from a certificate representing
Registrable Securities, at the request of the holder thereof, provided, that
such holder shall first have provided the Company with an opinion of legal
counsel reasonably satisfactory to the Company that such legend lawfully be
removed, except that no such opinion shall be required for routine sales under
Rule 144.
3. Demand Registration.
(a) Request for Demand Registration. At any time during an Exercise Period
(as defined below) (except that such period shall be extended for a period of
time equal to the period during which any request to register Registrable
Securities has been delayed as set forth below), the Shareholders holding more
than twenty-five percent (25%) of the Registrable Securities then held by all of
the Shareholders (and/or their transferees) pursuant to the Merger Agreements
may make a written request for registration (such Designated Holders making such
request being deemed to be "Initiating Holders") of up to 1,000,000 shares of
Registrable Securities under the Securities Act and under the securities or
"blue sky" laws of any jurisdiction designated by such holder or holders (a
"Demand Registration"). If more than 1,000,000 shares are, pursuant to the
request of the Initiating Holders and the approval of the Company in its sole
discretion, included in a Demand Registration during an Exercise Period (as
defined below), the number of Registrable Securities for which the Designated
Holders may request a Demand Registration in subsequent Exercise Periods shall
be reduced by the number of shares registered in excess of 1,000,000, divided by
the number of Exercise Periods remaining. The Shareholders shall be entitled to
one Demand Registration during each Exercise Period. An Exercise Period shall
mean any of the following, except as set forth below: (a) from the date hereof
through December 31, 1998; (b) from January 1, 1999 to December 31, 1999; or (c)
from January 1, 2000 to the second anniversary of the date of this Agreement or
such later date that such Registrable Securities become eligible for sale
pursuant to Rule 144(k), but in no event later than December 31, 2000. If at the
time of any request to register Registrable Securities pursuant to this Section
3(a), the Company is engaged in, or has fixed plans to engage in within ninety
(90) days of the time of such request, a registered public offering or is
engaged in any other activity which, in the good faith determination of the
Board of Directors of the Company, would be adversely affected by the requested
registration to the material detriment of the Company, then the Company may at
its option direct that such request be delayed for a reasonable period not in
excess of four (4) months from the effective date of such offering or the date
of completion of such other material activity, as the case may be, such right to
delay a request to be exercised by the Company not more than once in any
Exercise Period. In addition, the Company shall not be required to effect any
registration within 90 days after the effective date of any other Registration
Statement of the Company. Each such request for a Demand Registration by the
Initiating Holders shall state the amount of the Registrable Securities proposed
to be sold, the intended method of disposition thereof and the jurisdictions in
which registration is desired. Upon a request for a Demand Registration, the
Company shall promptly take such steps as are necessary
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<PAGE> 6
or appropriate to prepare for the registration of the Registrable Securities to
be registered. Subject to Section 3(d), the Company and, at the Company's
election, any other holders of shares of Common Stock with contractual
registration rights, may include in the Demand Registration requested pursuant
to this Section 3 any shares of Common Stock which it or they shall determine so
to include and the consent of Initiating Holders shall not be required with
respect thereto.
(b) Effective Demand Registration. The Company shall use its best efforts
(subject to the limitations set forth in subparagraph (a) above) to cause such
Demand Registration to become effective not later than ninety (90) days after it
receives a request under Section 3(a) hereof. A registration shall not
constitute a Demand Registration until it has become effective and remains
continuously effective for the lesser of (i) the period during which all
Registrable Securities registered in the Demand Registration are sold or (ii)
sixty (60) days; provided, however, that a registration shall not constitute a
Demand Registration if (x) after such Demand Registration has become effective,
such registration or the related offer, sale or distribution of Registrable
Securities thereunder is interfered with by any stop order, injunction or other
order or requirement of the SEC or other governmental agency or court for any
reason not attributable to the Initiating Holders and such interference is not
thereafter eliminated or (y) the conditions to closing specified in the
underwriting agreement, if any, entered into in connection with such Demand
Registration are not satisfied or waived, other than by reason of a failure by
the Initiating Holders; and provided further, that if the Initiating Holders
request the Company to withdraw such registration (other than as a result of
information concerning the business, operations or financial condition of the
Company that is learned by the Initiating Holders after the date of the request
for a Demand Registration), it shall constitute a Demand Registration unless the
Initiating Holders promptly pay all of the Company's costs and expenses incurred
in connection with such registration, pro rata in accordance with the number of
Registrable Securities included in such registration.
(c) Expenses. For allocation of the Registration Expenses incurred in
connection with a Demand Registration, see Section 6(d) hereof.
(d) Underwriting Procedures. If the Initiating Holders holding a majority
of the Registrable Securities held by all of the Initiating Holders to which the
requested Demand Registration relates so elect, the offering of such Registrable
Securities pursuant to such Demand Registration shall be in the form of a firm
commitment underwritten offering and the managing underwriter or underwriters
selected for such offering shall be the Approved Underwriter (as hereinafter
defined) selected in accordance with Section 3(e). In such event, if the
Approved Underwriter advises the Company and the Initiating Holders in writing
that in its opinion the aggregate amount of securities requested to be included
in such offering (whether by the Initiating Holders or otherwise) exceeds the
amount of securities which can be sold in such offering within a price range
acceptable to the Initiating Holders, then the Company shall include in such
registration, to the extent of the amount of securities that may be sold within
such price range, first, the Registrable Securities of the Initiating Holders
included in the request for Demand Registration, second, the Registrable
Securities of the Designated Holders other than the Initiating Holders included
in such registration pursuant to the exercise by such Designated Holders of
"incidental"
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registration rights under Section 4(a) and third, the number of securities of
the Company and any stockholders who are not Initiating Holders, if any, pro
rata based on the number of such securities to be included in such registration.
(e) Selection of Underwriters. In the case of any registration effected
pursuant to this Section 3 of the Agreement that is in the form of an
underwritten offering, the Initiating Holders shall have the right to designate
an investment banking firm of national reputation, selected from a list of
investment banking firms provided by the Company, to act as the managing
underwriter(s) in any underwritten offering (the "Approved Underwriter");
provided, however, that the final selection of the Approved Underwriter shall,
in any case, be acceptable to the Company in its reasonable judgment. In
addition, to the extent the Company and/or the Initiating Holders reasonably
desire to include one or more co-managing underwriters in an underwritten
offering pursuant to this Section 3, selected from the list referenced above,
the Company shall have the right to designate such co-managers, subject to the
approval of the Initiating Holders in their reasonable judgment.
4. Piggy-Back Registration.
(a) Piggy-Back Rights. If the Company proposes to file a registration
statement under the Securities Act with respect to an offering by the Company
for its own account (including, the account of Existing Rightholders) or for the
account of an Initiating Holder pursuant to Section 3 of any class of security
(other than a registration statement on Form S-4 or S-8 or any successor
thereto), then the Company shall give written notice of such proposed filing to
each of the Designated Holders of Registrable Securities (other than any
Initiating Holders) at least thirty (30) days before the anticipated filing
date, and such notice shall describe in detail the proposed registration and
distribution and offer such Designated Holders (other than any Initiating
Holders) the opportunity to register the number of Registrable Securities as
each such holder may request. The Company shall, and shall use its best efforts
(within ten (10) days of the notice provided for in the preceding sentence) to
cause the managing underwriter or underwriters of a proposed under written
offering (the "Company Underwriter") to, permit the Designated Holders of
Registrable Securities who have requested in writing to participate in the
registration for such offering to include such Registrable Securities in such
offering on the same terms and conditions as the securities of the Company
included therein. In connection with any offering under this Section 4(a)
involving an underwriting, the Company shall not be required to include any
Registrable Securities in such underwriting unless the Designated Holders accept
the terms of the underwriting as agreed upon between the Company and the
underwriters selected by it, and then only in such quantity as will not, in the
opinion of the underwriters, jeopardize the success of the offering by the
Company.
(b) In the event that a registration statement under the Securities Act is
filed pursuant to Section 4(a) with respect to an offering by the Company for
its own account or the account of the Existing Rightholders, if in the good
faith written opinion of (i) the Company Underwriter or (ii) if the "incidental"
registration pursuant to this Section 4(a) was requested by an Existing
Rightholder pursuant to the exercise by such Existing Rightholder of a "demand"
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<PAGE> 8
registration right granted to such Existing Rightholder by the First Data
Registration Rights Agreement or the Series B Registration Rights Agreement,
then the Existing Rightsholders holding a majority of the securities of the
Company held by all Existing Rightsholders included in such registration, and
the registration of all or part of the Registrable Securities which the
Designated Holders have requested to be included would adversely affect such
public offering (including, the price range or timing of such registration),
then the Company shall be required to include in the underwriting, to the extent
of the amount that the Company Underwriter and such Existing Rightholders, if
applicable, believe in good faith may be sold without causing such adverse
effect, first, all of the securities to be offered for the account of the
Company or the Existing Rightholders (if an Existing Rightholder initiated the
registration pursuant to this Section 4(a) by exercising a "demand" registration
right granted to such Existing Rightholder), as the case may be; second, the
Registrable Securities to be offered for the account of the Designated Holders
pursuant to this Section 4 and the securities to be offered for the account of
Persons (other than the Designated Holders) that have contractual "incidental"
registration rights (including, without limitation, the Existing Rightholders if
the registration pursuant to this Section 4(a) was not initiated by an Existing
Rightholder exercising a "demand" registration right), pro rata; and third, any
other securities requested to be included in such underwriting.
(c) In the event that a registration statement under the Securities Act is
filed pursuant to Section 4(a) with respect to an offering for the account of an
Initiating Holder pursuant to Section 3, if in the good faith written opinion of
the Company Underwriter, the registration of all or part of the Registrable
Securities which the Designated Holders have requested to be included would
adversely affect such registration (including, the price range or timing of such
registration), then the Company shall be required to include in such
underwriting, to the extent of the amount that the Company Underwriter believes
in good faith may be sold without causing such adverse effect, first, all of the
Registrable Securities to be offered for the account of the Initiating Holder,
second, all of the Registrable Securities to be offered for the account of the
Designated Holders pursuant to this Section 4 and third, any other securities
requested to be included in such registration.
(d) Expenses. For allocation of the Registration Expenses incurred in
connection with a registration pursuant to this Section 4, see Section 6(d)
hereof.
5. Holdback Agreements.
(a) Restrictions on Public Sale by Designated Holders. Each Designated
Holder of Registrable Securities agrees (i) not to effect any public sale or
distribution of any Registrable Securities or of any securities convertible into
or exchangeable or exercisable for such Registrable Securities, including a sale
pursuant to Rule 144 under the Securities Act, during the five (5) business days
prior to, and during the ninety (90) day period beginning on, the effective date
of a registration statement (except as part of such registration) filed pursuant
to a "demand" registration or an "incidental" registration, and (ii) not to
effect any public sale or distribution of any Registrable Securities being
registered in a registration statement or of any securities convertible into or
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<PAGE> 9
exchangeable or exercisable for such Registrable Securities, including a sale
pursuant to Rule 144 under the Securities Act, during the five (5) business days
prior to, and during the ninety (90) day period beginning on the effective date
of such registration statement (except as part of such registra tion), if and to
the extent requested by the Company in the case of a non-underwritten public
offering or such period as may be required by the Company Underwriter in the
case of an underwritten public offering.
(b) Restrictions on Public Sale by the Company. The Company agrees not to
effect any public sale or distribution of any of its securities, or any
securities convertible into or exchangeable or exercisable for such securities
(except pursuant to registrations on Form S-4 or S-8 or any successor thereto),
during the period beginning on the effective date of any registration statement
in which the Designated Holders of Registrable Securities are participating and
ending on the earlier of (i) the date on which all Registrable Securities
registered on such registration statement are sold and (ii) the date sixty (60)
days after the effective date of such registration statement.
6. Registration Procedures.
(a) Obligations of the Company. Whenever registration of Registrable
Securities has been requested pursuant to Section 3 or 4 of this Agreement, the
Company shall use its best efforts to effect the registration and sale of such
Registrable Securities in accordance with the intended method of distribution
thereof as quickly as practicable, and in connection with any such request, the
Company shall, as expeditiously as possible:
(i) use its best efforts to prepare and file with the SEC a registration
statement on any form for which the Company then qualifies or which counsel for
the Company shall deem appropriate and which form shall be available for the
sale of such Registrable Securities in accordance with the intended method of
distribution thereof, and use its best efforts to cause such registration
statement to become effective; provided, however, that (x) before filing a
registration statement or prospectus or any amendments or supplements thereto,
the Company shall provide counsel selected by the Designated Holders holding a
majority of the Registrable Securities being registered in such registration
("Holders' Counsel") and any other Inspector (as hereinafter defined) with an
adequate and appropriate opportunity to participate in the preparation of such
registration statement and each prospectus included therein (and each amendment
or supplement thereto) to be filed with the SEC, which documents shall be
subject to the review of Holders' Counsel, and (y) the Company shall notify the
Holders' Counsel and each seller of Registrable Securities of any stop order
issued or threatened by the SEC and take all reasonable action required to
prevent the entry of such stop order or to remove it if entered;
(ii) prepare and file with the SEC such amendments and supplements to such
registration statement and the prospectus used in connection therewith as may be
necessary to keep such registration statement effective for the lesser of (x)
ninety (90) days and (y) such shorter period which will terminate when all
Registrable Securities covered by such registration statement have been sold,
and comply with the provisions of the Securities Act with
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<PAGE> 10
respect to the disposition of all securities covered by such registration
statement during such period in accordance with the intended methods of
disposition by the sellers thereof set forth in such registration statement;
(iii) as soon as reasonably possible, furnish to each seller of Registrable
Securities, prior to filing a registration statement, copies of such
registration statement as is proposed to be filed, and thereafter such number of
copies of such registration statement, each amendment and supplement thereto (in
each case including all exhibits thereto), the prospectus included in such
registration statement (including each preliminary prospectus) and such other
documents as each such seller may reasonably request in order to facilitate the
disposition of the Registrable Securities owned by such seller;
(iv) use its best efforts to register or qualify such Registrable
Securities under such other securities or "blue sky" laws of such jurisdictions
as any seller of Registrable Securities may request, and to continue such
qualification in effect in such jurisdiction for the lesser of (x) ninety (90)
days and (y) such shorter period which will terminate when all Registrable
Securities covered by such qualification have been sold, and do any and all
other acts and things which may be reasonably necessary or advisable to enable
any such seller to consummate the disposition in such jurisdictions of the
Registrable Securities owned by such seller; provided, however, that the Company
shall not be required to (x) qualify generally to do business in any
jurisdiction where it would not otherwise be required to qualify but for this
Section 6(a)(iv), (y) subject itself to taxation in any such jurisdiction or (z)
consent to general service of process in any such jurisdiction;
(v) use its best efforts to cause the Registrable Securities covered by
such registration statement to be registered with or approved by such other
governmental agencies or authorities as may be necessary by virtue of the
business and operations of the Company to enable the seller or sellers of
Registrable Securities to consummate the disposition of such Registrable
Securities;
(vi) notify each seller of Registrable Securities at any time when a
prospectus relating thereto is required to be delivered under the Securities
Act, upon discovery that, or upon the happening of any event as a result of
which, the prospectus included in such registration statement contains an untrue
statement of a material fact or omits to state any material fact required to be
stated therein or necessary to make the statements therein not misleading in
light of the circumstances under which they were made, and the Company shall
promptly prepare a supplement or amendment to such prospectus and furnish to
each seller a reasonable number of copies of a supplement to or an amendment of
such prospectus as may be necessary so that, after delivery to the Shareholders
of such Registrable Securities, such prospectus shall not contain an untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading in
light of the circumstances under which they were made;
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<PAGE> 11
(vii) enter into and perform customary agreements (including an
underwriting agreement in customary form with the Approved Underwriter or
Company Underwriter, if any, selected as provided in Section 3 or 4) and take
such other actions as are prudent and reasonably required in order to expedite
or facilitate the disposition of such Registrable Securities;
(viii) make available for inspection by any seller of Registrable
Securities, any managing underwriter participating in any disposition pursuant
to such registration statement, Holders' Counsel and any attorney, accountant or
other agent retained by any such seller or any managing underwriter (each, an
"Inspector" and collectively, the "Inspectors"), all financial and other
records, pertinent corporate documents and properties of the Company and its
subsidiaries (collectively, the "Records") as shall be reasonably necessary to
enable them to exercise their due diligence responsibility, and cause the
Company's and its subsidiaries' officers, directors and employees, and the
independent public accountants of the Company, to supply all information
reasonably requested by any such Inspector in connection with such registration
statement. Records that the Company determines, in good faith, to be
confidential and which it notifies the Inspectors are confidential shall not be
disclosed by the Inspectors unless (x) the disclosure of such Records is
necessary to avoid or correct a misstatement or omission in the registration
statement, (y) the release of such Records is ordered pursuant to a subpoena or
other order from a court of competent jurisdiction or (z) the information in
such Records was known to the Inspectors on a non-confidential basis prior to
its disclosure by the Company or has been made generally available to the
public. Each seller of Registrable Securities agrees that it shall, upon
learning that disclosure of such Records is sought in a court of competent
jurisdiction, give notice to the Company and allow the Company, at the Company's
expense, to undertake appropriate action to prevent disclosure of the Records
deemed confidential;
(ix) if such sale is pursuant to a firm commitment underwritten offering,
use its best efforts to obtain a "cold comfort" letter from the Company's
independent public accountants in customary form and covering such matters of
the type customarily covered by "cold comfort" letters as Holders' Counsel or
the managing underwriter reasonably request;
(x) use its reasonable efforts to furnish, at the request of any seller of
Registrable Securities on the date such securities are delivered to the
underwriters for sale pursuant to such registration or, if such securities are
not being sold through underwriters, on the date the registration statement with
respect to such securities becomes effective, an opinion, dated such date, of
counsel representing the Company for the purposes of such registration,
addressed to the underwriters, if any, and to the seller making such request,
covering such legal matters with respect to the registration in respect of which
such opinion is being given as such seller may reasonably request and are
customarily included in such opinions;
(xi) otherwise use its best efforts to comply with all applicable rules and
regulations of the SEC, and make available to its security holders, as soon as
reasonably practicable but no later than fifteen (15) months after the effective
date of the registration statement,
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an earnings statement covering a period of twelve (12) months beginning after
the effective date of the registration statement, to the extent required by law
and in a manner which satisfies the provisions of Section 11(a) of the
Securities Act and Rule 158 thereunder;
(xii) cause all such Registrable Securities to be listed on each securities
exchange on which similar securities issued by the Company are then listed,
provided, that the applicable listing requirements are satisfied;
(xiii) keep Holders' Counsel advised as to the initiation and progress of
any registration under Section 3 or 4 hereunder;
(xiv) cooperate with each seller of Registrable Securities and each
underwriter participating in the disposition of such Registrable Securities and
their respective counsel in connection with any filings required to be made with
the National Association of Securities Dealers, Inc. (the "NASD"); and
(xv) use best efforts to take all other steps necessary to effect the
registration of the Registrable Securities contemplated hereby.
(b) Seller Information. The Company may require each seller of Registrable
Securities as to which any registration is being effected to furnish to the
Company such information regarding the distribution of such securities as the
Company may from time to time reasonably request in writing.
(c) Notice to Discontinue. Each Designated Holder of Registrable Securities
agrees that, upon receipt of any notice from the Company of the happening of any
event of the kind described in Section 6(a)(vi), such Designated Holder shall
forthwith discontinue disposition of Registrable Securities pursuant to the
registration statement covering such Registrable Securities until such
Designated Holder's receipt of the copies of the supplemented or amended
prospectus contemplated by Section 6(a)(vi) and, if so directed by the Company,
such Designated Holder shall deliver to the Company (at the Company's expense)
all copies, other than permanent file copies then in such Designated Holder's
possession, of the prospectus covering such Registrable Securities which is
current at the time of receipt of such notice. If the Company shall give any
such notice, the Company shall extend the period during which such registration
statement shall be maintained effective pursuant to this Agreement (including,
without limitation, the period referred to in Section 6(a)(ii)) by the number of
days during the period from and including the date of the giving of such notice
pursuant to Section 6(a)(vi) to and including the date when the Designated
Holder shall have received the copies of the supplemented or amended prospectus
contemplated by and meeting the requirements of Section 6(a)(vi).
(d) Registration Expenses. In a Demand Registration pursuant to Section 3
hereof, Designated Holders participating in the registration shall pay, pro rata
in proportion to each Designated Holder's number of shares being registered in a
registration pursuant to the terms of this
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Agreement, the following expenses (not to exceed an aggregate of $150,000 per
Demand Registration) arising from or incident to the performance of, or
compliance with, this Agreement, including, without limitation, (i) SEC, stock
exchange and NASD registration and filing fees, (ii) all fees and expenses
incurred in complying with securities or "blue sky" laws (including reasonable
fees, charges and disbursements of counsel in connection with "blue sky"
qualifications of the Registrable Securities), and (iii) all printing, messenger
and delivery expenses. In addition, the participating Designated Holders shall
pay (i) the fees, charges and disbursements of counsel to the Designated
Holders, and (ii) underwriting discounts and commissions. The Company shall pay
(i) the fees, charges and disbursements of counsel to the Company and of its
independent public accountants and any other accounting and legal fees, charges
and expenses incurred by the Company (including, without limitation, any
expenses arising from any special audits incident to or required by any
registration or qualification) and (ii) any liability insurance or other
premiums for insurance obtained in connection with any Demand Registration or
any piggy-back registration pursuant to the terms of this Agreement, regardless
of whether such registration statement is declared effective. The Company shall
bear all Registration Expenses (other than underwriting discounts and
commissions and the costs of legal counsel for the Shareholders) in connection
with any registration pursuant to Section 4; provided, however, if the
registration is initiated pursuant to Section 3 the participating Shareholders
shall pay such Registration Expenses as set forth in the first two sentences of
this subparagraph (d). All of the expenses described in this Section 6(d) are
referred to herein as "Registration Expenses."
7. Indemnification; Contribution.
(a) Indemnification by the Company. The Company agrees to indemnify and
hold harmless, to the fullest extent permitted by law, each Designated Holder,
its officers, directors, trustees, partners, employees, advisors and agents and
each Person who controls (within the meaning of the Securities Act or the
Exchange Act) such Designated Holder from and against any and all losses,
claims, damages, liabilities and expenses (including reasonable costs of
investigation and reasonable attorneys fees and expenses, including such fees
and expenses incurred in the enforcement hereof) arising out of or based upon
any untrue, or allegedly untrue, statement of a material fact contained in any
registration statement, prospectus or preliminary prospectus or notification or
offering circular (as amended or supplemented if the Company shall have
furnished any amendments or supplements thereto) or arising out of or based upon
any omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading,
except insofar as the same are caused by or contained in any information
concerning such Designated Holder furnished in writing to the Company by such
Designated Holder expressly for use therein. The Company shall also provide
customary indemnities to any underwriters of the Registrable Securities, their
officers, directors and employees and each Person who controls such underwriters
(within the meaning of the Securities Act and the Exchange Act) to the same
extent as provided above with respect to the indemnification of the Designated
Holders of Registrable Securities.
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(b) Indemnification by Designated Holders. In connection with any
registration statement in which a Designated Holder is participating pursuant to
Section 3 or 4 hereof, each such Designated Holder shall furnish to the Company
in writing such information with respect to such Designated Holder as the
Company may reasonably request or as may be required by law for use in
connection with any such registration statement or prospectus and each
Designated Holder agrees to indemnify and hold harmless, to the fullest extent
permitted by law, the Company, any underwriter retained by the Company and their
respective directors, officers, employees and each Person who controls the
Company or such underwriter (within the meaning of the Securities Act and the
Exchange Act) to the same extent as the foregoing indemnity from the Company to
the Designated Holders, but only with respect to any such information with
respect to such Designated Holder furnished in writing to the Company by such
Designated Holder expressly for use therein; provided, however, that the total
amount to be indemnified by such Designated Holder pursuant to this Section 8(b)
shall be limited to the net proceeds received by such Designated Holder in the
offering to which the registration statement or prospectus relates.
(c) Conduct of Indemnification Proceedings. Any Person entitled to
indemnification hereunder (the "Indemnified Party") agrees to give prompt
written notice to the indemnifying party (the "Indemnifying Party") after the
receipt by the Indemnified Party of any written notice of the commencement of
any action, suit, proceeding or investigation or threat thereof made in writing
for which the Indemnified Party intends to claim indemnification or contribution
pursuant to this Agreement; provided, however, that the failure so to notify the
Indemnifying Party shall not relieve the Indemnifying Party of any liability
that it may have to the Indemnified Party hereunder. If notice of commencement
of any such action is given to the Indemnifying Party as above provided, the
Indemnifying Party shall be entitled to participate in and, to the extent it may
wish, jointly with any other Indemnifying Party similarly notified, to assume
the defense of such action at its own expense, with counsel chosen by it and
satisfactory to such Indemnified Party. The Indemnified Party shall have the
right to employ separate counsel in any such action and participate in the
defense thereof, but the fees and expenses of such counsel (other than
reasonable costs of investigation) shall be paid by the Indemnified Party unless
(i) the Indemnifying Party agrees to pay the same, (ii) the Indemnifying Party
fails to assume the defense of such action with counsel satisfactory to the
Indemnified Party in its reasonable judgment or (iii) the named parties to any
such action (including any impleaded parties) have been advised by such counsel
that either (x) representation of such Indemnified Party and the Indemnifying
Party by the same counsel would be inappropriate under applicable standards of
professional conduct or (y) there may be one or more legal defenses available to
it which are different from or additional to those available to the Indemnifying
Party. In either of such cases, the Indemnifying Party shall not have the right
to assume the defense of such action on behalf of such Indemnified Party. No
Indemnifying Party shall be liable for any settlement entered into without its
written consent, which consent shall not be unreasonably withheld.
(d) Contribution. If the indemnification provided for in this Section 8
from the Indemnifying Party is unavailable to an Indemnified Party hereunder in
respect of any losses, claims, damages, liabilities or expenses referred to
therein, then the Indemnifying Party, in
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lieu of indemnifying such Indemnified Party, shall contribute to the amount paid
or payable by such Indemnified Party as a result of such losses, claims,
damages, liabilities or expenses in such proportion as is appropriate to reflect
the relative fault of the Indemnifying Party and Indemnified Party in connection
with the actions which resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The relative
faults of such Indemnifying Party and Indemnified Party shall be determined by
reference to, among other things, whether any action in question, including any
untrue or alleged untrue statement of a material fact or omission or alleged
omission to state a material fact, has been made by, or relates to information
supplied by, such Indemnifying Party or Indemnified Party, and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such action. The amount paid or payable by a party as a result of the
losses, claims, damages, liabilities and expenses referred to above shall be
deemed to include, subject to the limitations set forth in Sections 7(a), 7(b)
and 7(c), any legal or other fees, charges or expenses reasonably incurred by
such party in connection with any investigation or proceeding; provided that the
total amount to be indemnified by such Designated Holder shall be limited to the
net proceeds received by such Designated Holder in the offering.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 8(d) were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in the immediately preceding paragraph.
No person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person.
8. Rule 144. The Company covenants that it shall use its best efforts to
file any reports required to be filed by it under the Exchange Act; and that it
shall use its best efforts to take such further action as each Designated Holder
of Registrable Securities may reasonably request (including providing any
information necessary to comply with Rules 144 and 144A under the Securities
Act), all to the extent required from time to time to enable such Designated
Holder to sell Registrable Securities without registration under the Securities
Act within the limitation of the exemptions provided by (a) Rule 144 under the
Securities Act, as such rules may be amended from time to time, or (b) any
similar rules or regulations hereafter adopted by the SEC. The Company shall,
upon the request of any Designated Holder of Registrable Securities, deliver to
such Designated Holder a written statement as to whether it has complied with
such requirements.
9. Miscellaneous.
(a) Recapitalization, Exchanges, etc. The provisions of this Agreement
shall apply, to the full extent set forth herein with respect to (i) the shares
of Common Stock and (ii) to any and all equity securities of the Company or any
successor or assign of the Company (whether by merger, consolidation, sale of
assets or otherwise) which may be issued in respect of, in conversion of, in
exchange for or in substitution of, the shares of Common Stock and shall be
appropriately adjusted for any stock dividends, splits, reverse splits,
combinations, recapitalization and the like occurring after the date hereof.
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(b) Remedies. The Designated Holders, in addition to being entitled to
exercise all rights granted by law, including recovery of damages, shall be
entitled to specific performance of their rights under this Agreement. The
Company agrees that monetary damages would not be adequate compensation for any
loss incurred by reason of a breach by it of the provisions of this Agreement
and hereby agrees to waive in any action for specific performance the defense
that a remedy at law would be adequate.
(c) Amendments and Waivers. Except as otherwise provided herein, the
provisions of this Agreement may not be amended, modified or supplemented, and
waivers or consents to departures from the provisions hereof may not be given
unless consented to in writing by all of the parties hereto.
(d) Notices. All notices, demands and other communications provided for or
permitted hereunder shall be made in writing and shall be made by registered or
certified first-class mail, return receipt requested, telecopier, overnight
courier service or personal delivery:
(i) if to the Company:
Envoy Corporation
Two Lakeview Place
15 Century Boulevard, Suite 600
Nashville, Tennessee 37214
Attention: President
Telecopy: (615) 231-4994
with a copy to:
Bass, Berry & Sims PLC
2500 First American Center
Nashville, Tennessee 37238
Attention: Bob F. Thompson, Esq.
Howard H. Lamar III, Esq.
Telecopy: (615) 742-6298
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(ii) if to the Shareholders: at such address as
it appears on the transfer books of the Company.
with a copy to:
Graham & James LLP
One Maritime Plaza, Ste. 300
San Francisco, CA 94111-3492
Attn: Nicholas Unkovic, Esq.
Joe Sorenson, Esq.
All such notices and communications shall be deemed to have been duly given
when delivered by hand, if personally delivered; when delivered by courier, if
delivered by commercial courier service; five (5) Business Days after being
deposited in the mail, postage prepaid, if mailed; and when receipt is
acknowledged, if telecopied.
(e) Successors and Assigns; Third Party Beneficiaries. This Agreement shall
inure to the benefit of and be binding upon the successors and assigns of each
of the parties hereto. The registration rights with respect to any Registrable
Securities and the other rights of the Designated Holders contained in this
Agreement shall be transferred by the Designated Holders only with the consent
of the Company. All of the obligations of the Company hereunder shall survive
any such transfer. No Person other than the parties hereto and their respective
successors and permitted assigns is intended to be a beneficiary of any of the
rights granted hereunder.
(f) Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(g) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(h) Governing Law. THIS AGREEMENT 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.
(i) Severability. If any one or more of the provisions contained herein, or
the application thereof in any circumstances, is held invalid, illegal or
unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions hereof shall not be in any way impaired, it being intended that all
of the rights and privileges of the Designated Holders shall be enforceable to
the fullest extent permitted by law.
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(j) Entire Agreement. This Agreement is intended by the parties as a final
expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter contained herein. There are no restrictions, promises,
warranties or undertakings, other than those set forth or referred to herein and
in the Merger Agreements. This Agreement supersedes all prior agreements and
understandings between the parties with respect to such subject matter.
(k) Further Assurances. Each of the parties shall execute such documents
and perform such further acts as may be reasonably required or desirable to
carry out or to perform the provisions of this Agreement.
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IN WITNESS WHEREOF, the undersigned have executed, or have caused to be
executed, this Agreement on the date first written above.
ENVOY CORPORATION
/s/ Harlan F. Seymour
------------------------------------------
By: Harlan F. Seymour
------------------------------------------
Title: Senior Vice President, Corporate
Strategy & Development
------------------------------------------
THE SHAREHOLDERS
/s/ Richard B. McIntyre
-------------------------------------------
Richard B. McIntyre
/s/ Michael F. Marolf, Sr.
-------------------------------------------
Michael F. Marolf, Sr.
/s/ Michael F. Marolf, Jr.
-------------------------------------------
Michael F. Marolf, Jr.
/s/ Jeffrey B. Marolf
-------------------------------------------
Jeffrey B. Marolf
/s/ Lisa A. Marolf
-------------------------------------------
Lisa A. Marolf
/s/ Michael S. McIntyre
-------------------------------------------
Michael S. McIntyre
/s/ Terrence J. McIntyre
------------------------------------------
Terrence J. McIntyre
/s/ Patrick J. McIntyre
------------------------------------------
Patrick J. McIntyre
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<PAGE> 1
EXHIBIT 10.5
EMPLOYMENT AGREEMENT
OF
HARLAN F. SEYMOUR
THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into between ENVOY
Corporation, a Tennessee corporation ("Company"), and Harlan F. Seymour, a
resident of Richmond, Virginia ("Executive"), effective as of August 1, 1997.
The Company and the Executive are sometimes referred to herein as the "Parties".
1. Introduction: The Company believes that the assurance of the Executive's
continued employment by the Company and the benefit of his business experience
are of material importance. Therefore, the Company and the Executive intend by
this Agreement to rescind any existing employment agreement and to specify the
terms and conditions of the Executive's continuing employment relationship with
the Company.
2. Employment: The Company hereby employs the Executive and the Executive
hereby accepts continuing employment with the Company upon terms and conditions
set forth herein.
3. Duties and Responsibilities:
3.1 Extent of Service: The Executive shall, during the term of this
Agreement, devote such of his entire time, attention, energies and business
efforts to his duties as an executive of the Company as are reasonably necessary
to carry out his duties specified in Paragraph 3.2 below. The Executive shall
not, during the term of this Agreement, engage in any other business activity
(whether or not such business activity is pursued for gain, profit or other
pecuniary advantage) if such business activity would impair the Executive's
ability to carry out his duties hereunder. This Paragraph 3.1, however, shall
not be construed to prohibit Executive from normal and customary service as a
director on outside boards of directors or prevent the Executive from investing
his personal assets as a passive investor.
3.2 Position and Duties: Subject to the power of the Board of Directors of
the Company to elect and remove officers and the power of the shareholders to
remove directors, the Executive shall serve the Company as Senior Vice President
of Strategic Development; and shall perform faithfully and diligently, the
services and functions relating to such office or otherwise reasonably incident
to such office as may be designated from time to time by the Board of Directors
of the Company; provided that all such services and functions shall be
reasonable and within the Executive's area of expertise; and provided further
that the Executive shall be physically capable of performing the same.
3.3 Place of Employment: During the term of this Agreement, the Executive's
primary place of employment shall be in Richmond, Virginia, unless otherwise
mutually agreed by the Company and Executive. During the term of this Agreement,
the Company will provide the Executive with a private office and other customary
staff support services, all as are commensurate with the services and functions
to be performed by him hereunder.
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4. Salary and Other Benefits: Subject to the terms and conditions of this
Agreement;
4.1 Salary: As compensation for his services under and during the term of
his employment under this Agreement, the Executive shall be paid an annual
salary of not less than $175,000 payable in accordance with the then current
payroll policies of the Company. Such salary shall be subject to increase by the
Board of Directors of the Company (or the appropriate committee thereof) from
time to time. The annual salary payable from time to time by the Company to
Executive pursuant to this Paragraph 4.1 is herein sometimes referred to as his
"Base Salary".
4.2 Other Benefits: As long as the Executive is employed by the Company,
the Executive shall be entitled to receive the following benefits in addition to
his Base Salary:
(a) The Executive shall have the right to participate in all group benefit
plans of the Company (including without limitation, disability, accident,
medical, life insurance, hospitalization and pension) and incentive plans
(including without limitation stock option, stock appreciation or other similar
stock based plans), all in accordance with the Company's regular practices with
respect to its officers.
(b) The Executive shall be entitled to reimbursement from the Company for
reasonable out-of-pocket expenses incurred by him in the course of the
performance of his duties hereunder.
(c) In addition, the Company shall pay Executive an annual bonus of up to
50% of his Base Salary subject to performance criteria established by the
Chairman and the President of the Company (the "Bonus").
(d) The Executive shall be entitled to such vacation, holidays and other
paid or unpaid leaves of absence as are consistent with the Company's other
officers.
5. Term: The term of this Agreement shall be for an initial period ending
on August 30, 2000, and shall thereafter be extended for an additional period of
one year on a yearly basis, unless on or before June 1, 2000 or June 1 of any
subsequent year, either the Executive or the Company gives the other party
notice that the term of this Agreement will not be so extended, in which case
the term of this Agreement will end on the end of the year designated in the
notice. Notwithstanding the foregoing, the indemnification provisions of this
Agreement contained in Paragraph 10 shall survive until the expiration of the
statute of limitations for assessment of any excise tax under Section 4999 of
the Internal Revenue Code of 1986, as amended (the "Code"), with regard to an
Excess Parachute Payment (as defined in Paragraph 9 below) on account of the
Change in Control (as defined in Section 7.4(c) below).
6. Termination and Resignation: The Company shall have the right to
terminate the Executive's employment hereunder at any time and for any reason,
and upon any such termination the Executive shall be entitled to receive from
the Company prompt payment of the amount determined pursuant to the applicable
subparagraph of Paragraph 7 below. The Executive shall
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have the right to terminate his employment hereunder at any time by resignation,
and he shall thereupon be entitled to receive from the Company prompt payment of
the amount determined pursuant to the applicable subparagraph of Paragraph 7
below.
7. Payments Upon Termination and Resignation:
7.1 Pro Rata Payments: If the Company at any time terminates the
Executive's employment for Cause (as defined below), then the Executive shall be
entitled to receive only his Base Salary on a pro rata basis to the date of
termination plus reimbursement of expenses through the date of termination in
accordance with Paragraph 4.2(b). If the Executive at any time dies or becomes
disabled (being the inability of the Executive to perform his normal employment
duties for the remainder of the term of this Agreement because of either
physical or mental incapacity), the Executive shall be entitled to receive only
his Base Salary plus Bonus on a pro rata basis to the date of termination or
resignation. For purposes of this Paragraph 7.1, "pro rata" shall mean the
product of the Executive's annual Base Salary and Bonus that would have been
payable had the Executive's employment not terminated multiplied by a fraction
the denominator of which is 365 and the numerator of which is the number of days
during the calendar year, that have passed through the date of the termination
of the Executive's employment.
7.2 Payments Prior to Change in Control: If prior to the occurrence of an
Initial Change in Control Event (as defined below), the Company terminates the
Executive's employment for any reason other than for Cause, then the Executive
shall be entitled to receive a lump sum payment equal to his Base Salary and
Average Bonus (as defined below) and, if the appropriate election is made by the
Executive, the Company shall pay the premium for the continued participation by
Executive and his qualified beneficiaries under the Company's group medical
plans as provided in Section 4980B(f) of the Code ("COBRA Premium") for a period
of one year following such termination (collectively, the "Severance Package").
If prior to the occurrence of a Change in Control of the Company, the Executive
voluntarily resigns for any reason (other than his death or disability), then
the Executive shall be entitled to receive his Base Salary paid over the 12
month period following termination in accordance with the Company's regular
payroll practices and, if the appropriate election is made by the Executive, the
Company shall pay the COBRA Premium for a period of one year following such
resignation.
7.3 Change in Control Payments: If after the occurrence of an Initial
Change in Control Event of the Company, the Company terminates the Executive's
employment hereunder for any reason other than for Cause, then the Company will
pay to the Executive the Severance Package. If after the occurrence of a Change
in Control of the Company, the Executive voluntarily resigns his employment
hereunder for any reason (other than his death or disability), then the Company
will pay to the Executive the Severance Package.
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<PAGE> 4
7.4 Certain Definitions:
(a) "Average Bonus" shall mean that result obtained by dividing the sum of
the Bonuses, if any, paid to the Executive pursuant to Paragraph 4.2(c) above in
respect of the two years next preceding the year in which the termination or
resignation occurs by the number of years during such two-year period in which
the Executive was entitled to receive a Bonus pursuant to Paragraph 4.2(c)
above. Notwithstanding the foregoing, in the event a termination or resignation
occurs prior to the first period in which Executive was entitled to receive a
Bonus pursuant to Paragraph 4.2(c) above, the "Average Bonus" shall be equal to
the Bonus.
(b) Termination by the Company of the Executive's employment for "Cause"
shall mean termination upon the willful misappropriation of funds or properties
of the Company or the willful contravention of the standards referred to in the
last sentence of Paragraph 11 below. For purposes of this definition, no act, or
failure to act, on the Executive's part shall be considered "willful" unless
done, or omitted to be done, by the Executive not in good faith and without
reasonable belief that the Executive's action or omission was in the best
interest of the Company. The Executive shall not be deemed to have been
terminated for Cause unless and until there shall have been delivered to the
Executive a copy of a resolution duly adopted by the affirmative vote of not
less than three-quarters of the entire membership of the Board of Directors of
the Company at a meeting of the Board duly called and held (after reasonable
notice to the Executive and an opportunity for the Executive, together with his
counsel, to be heard before the Board) finding that in the good faith opinion of
the Board the Executive was guilty of the conduct set forth above and specifying
the particulars thereof in detail. Notwithstanding the foregoing, a finding by
the Board of Directors that Executive shall be terminated for Cause shall not
preclude the pursuit of other remedies available hereunder, at law or in equity.
(c) A "Change in Control" shall be conclusively deemed to have occurred if
(and only if) any of the following shall have taken place: (i) a change in
control is reported by the Company in response to either Item 6(e) of Schedule
14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as
amended ("Exchange Act"), or Item 1 of Form 8-K promulgated under the Exchange
Act; (ii) any person (as such term is used in Section 13(d) and 14(d)(2) of the
Exchange Act) is or becomes the beneficial owner (as defined in Rule 13d-3 under
the Exchange Act) directly or indirectly, of securities of the Company
representing forty percent or more of the combined voting power of the Company's
then outstanding securities; or (iii) following the election or removal of
directors, a majority of the Board consists of individuals who were not members
of the Board two years before such election or removal, unless the election of
each director who was not a director at the beginning of such two-year period
has been approved in advance by directors representing at least a majority of
the directors then in office who were directors at the beginning of the two-year
period.
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<PAGE> 5
(d) An "Initial Change in Control Event" shall be conclusively deemed to
have occurred when any individual, group, partnership, corporation, trust or
other entity ("Person") initiates a course of action or conduct that, in the
good faith judgment of the Board of Directors of the Company, might reasonably
be expected to lead to a Change in Control of the Company. For example and
without limiting the scope of the foregoing, an Initial Change in Control Event
would include the public announcement or other disclosure by a Person of its
intention (i) to acquire by private or open market purchase, tender offer,
exchange offer, or otherwise forty percent or more of the combined voting power
of the Company's outstanding securities, or (ii) to solicit proxies or consents
for the removal of at least three incumbent directors or the election of at
least three persons to serve as directors of the Company in opposition to
nominees proposed by the Board of Directors of the Company.
8. Acceleration of Options: Contemporaneously with the occurrence of a
Change in Control of the Company, the Board of Directors of the Company (or the
appropriate committee thereof) will either (a) accelerate all outstanding
options previously granted to the Executive under any then existing Company
stock option, stock appreciation or other employee incentive plan to the extent
allowable under such plan that are not otherwise exercisable by the Executive at
the time the Change in Control of the Company occurs, or (b) in the alternative,
authorize the Company to pay Executive an amount in cash equal to the excess of
the fair market value of the shares on the date the Change in Control occurs
over the exercise price per share as specified in the relevant stock option
agreement(s) multiplied by the number of shares in respect of the relevant
option grant(s).
9. Tax Reimbursement Payment.
9.1 Notwithstanding anything to the contrary contained in this Agreement,
in any plan of the Company, or in any other agreement or understanding, the
Company will pay to the Executive, at the times herein specified, an amount (the
"Additional Amount") equal to the excise tax under Section 4999 of the Code, if
any, incurred or to be incurred by the Executive by reason of the payments under
this Agreement, acceleration of vesting of stock options, stock appreciation
rights or restricted stock granted under the Company's various stock option,
stock appreciation or other employee incentive plans, or payments under any
other plan, agreement or understanding between the Executive and the Company,
constituting Excess Parachute Payments (as defined below), plus all excise taxes
and federal, state and local income taxes incurred or to be incurred by the
Executive with respect to receipt of the Additional Amount. For purposes of this
Agreement, the term "Excess Parachute Payment" shall mean any payment or any
portion thereof which would be an "excess parachute payment" within the meaning
of Section 280G(b) of the Code, and which would result in the imposition of an
excise tax on the Executive under Section 4999 of the Code. Attached hereto as
Exhibit A is an example illustrating the computation of the Additional Amount.
9.2 All determinations required to be made regarding the Additional Amount,
including whether payment of any Additional Amount is required and the amount of
any
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Additional Amount, shall be made by the independent accounting firm which is
advising the Company (the "Accounting Firm"), which shall provide detailed
support calculations to the Company and the Executive on or before the last day
of the calendar year during which occurs the Change of Control (the "Change of
Control Year"). In computing taxes, the Accounting Firm shall use the highest
marginal federal, state and local income tax rates applicable to single
taxpayers for the year in which the Additional Amount is to be paid (unless,
within 30 days after the occurrence of the Change in Control the Executive
specifies in writing to the Company his marginal tax rate) and shall assume the
full deductibility of state and local income taxes for purposes of computing
federal income tax liability. The portion of the Additional Amount based on the
excise tax as determined by the Accounting Firm to be due for the Change of
Control Year shall be paid to the Executive no later than March 1 immediately
following the end of the Change of Control Year. The portion of the Additional
Amount based on the excise tax as determined by the Accounting Firm to be due
for each calendar year following the Change of Control Year shall be paid to the
Executive on or before March 1 immediately following the end of each such
calendar year. If the Company determines that the excise tax for any year will
be different from the amount originally calculated in the report of the
Accounting Firm delivered at the end of the Change of Control Year, then the
Company shall provide to the Executive detailed support calculations by the
Accounting Firm specifying the basis for the change in the Additional Amount.
10. Indemnification.
10.1 If the Executive shall have to institute litigation or arbitration
brought in good faith to enforce any of his rights under the Agreement, the
Company shall indemnify the Executive for his reasonable attorney's fees and
disbursements incurred in any such litigation.
10.2 In the event that an excise tax is ever assessed by the Internal
Revenue Service against the Executive (or if the Company and the Executive
mutually agree that an excise tax is payable) by reason of the payment under
this Agreement, acceleration of vesting of stock options, stock appreciation
rights or restricted stock granted under the Company's stock option, stock
appreciation or other employee incentive plans, or payments under any other
plan, agreement or understanding between the Executive and the Company,
constituting Excess Parachute Payments, and if such excise tax was not included
in the determination by the Accounting Firm of the Additional Amount that has
been actually paid to the Executive, the Company agrees to indemnify the
Executive by paying to the Executive the amount of such excise tax, together
with any interest incurred by the Executive, attributable to the failure to pay
such excise tax by the date it was originally due, plus all federal, state and
local income taxes incurred with respect to payment of the excise tax calculated
in a manner analogous to Exhibit A. Upon Executive's receipt from the Internal
Revenue Service ("IRS") of any deficiency notice, notice of assessment or any
other written communication relating to the excise tax on Excess Parachute
Payment, Executive shall give notice thereof to the Company within ten business
days of receipt thereof. In the event of any dispute concerning the potential
excise tax (including any administrative proceedings within the IRS or court
proceedings),
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the Company, as the indemnifying party, shall be entitled to assume the defense
of such a dispute or proceeding, no compromise or settlement of such claim may
be effected without the Company's and Executive's mutual consent (which consents
shall not be unreasonably withheld) and the Company shall have no liability with
respect to any compromise or settlement of such claims effected without its
consent. In addition, in the event the Company assumes defense of any
proceeding, the Executive shall not be entitled to indemnification for outside
legal fees and expenses independently incurred by Executive. This
indemnification obligation shall survive the termination of the Agreement and
shall apply to all such excise taxes on Excess Parachute Payments, whether due
before or after termination of employment.
10.3 If the excise tax for any year which is actually imposed on the
Executive is finally determined to be less than the amount taken into account in
the calculation of the Additional Amount that was paid to the Executive pursuant
to Paragraph 9, then the Executive shall repay to the Company, at the time that
the amount of such reduction in excise tax is finally determined, the portion of
the Additional Amount attributable to such reduction (including the portion of
the Additional Amount attributable to the excise tax and federal and state
income taxes imposed on the Additional Amount being repaid by the Executive, to
the extent that such repayment results in a reduction in such excise tax,
federal or state income tax), plus interest on the amount of such repayment at
the rate provided in section 1274(b)(2)(B) of the Code.
11. Preservation of Business; Fiduciary Responsibility: The Executive shall
act in his good faith business judgement to preserve the business and
organization of the Company, to keep available to the Company the services of
present employees and to preserve the business relations of the Company with
suppliers, distributors, customers and others. The Executive shall not commit
any act, or in any way willfully assist others to commit any act, which could
reasonably be expected to injure the Company in any material respect. So long as
the Executive is employed by the Company, the Executive shall observe and
fulfill proper standards of fiduciary responsibility attendant upon his service
and office.
12. Restrictive Covenants:
12.1 Covenants Against Competition: Executive acknowledges that (a) the
business of the Company and its affiliates is as described in the Company's
annual report on Form 10-K as filed with the Securities and Exchange Commission
for its fiscal year ended December 31, 1996, and thereafter as described in each
successive annual report on Form 10-K filed by the Company (the "Company
Business"); and (b) Executive's work for the Company will bring him into close
contact with many confidential matters not readily available to the public.
12.2 Non-Compete: During the term of this Agreement (including any renewal
periods as provided in Paragraph 5) and for a period of 12 months following the
termination of Executive's employment with the Company, whether Executive's
employment terminates pursuant to the provisions of Paragraph 6 of this
Agreement or otherwise (collectively, the "Restricted Period"), Executive
covenants and agrees that he
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will not, without the express approval of the Board of Directors, directly or
indirectly anywhere in the continental United States engage in any business
directly or indirectly, as an individual, partner, shareholder, officer,
director, principal, agent, employee, trustee, consultant or in any other
relationship or capacity, if such business is competitive with the Company
Business and substantially injurious to the Company's financial interests;
provided, however, that Executive may own, directly or indirectly, solely as an
investment, securities of any entity if Executive (a) is not a controlling
person with respect to such entity and (b) does not, directly or indirectly, own
five percent or more of any class of the securities of such entity.
12.3 Trade Secrets; Confidential Information: Executive covenants and
agrees that at all times during and after the Restricted Period, he shall keep
secret and not disclose to others or appropriate to his own use or the use of
others any trade secrets, or secret or confidential information or knowledge
pertaining to the Company Business or the affairs of the Company or any of its
affiliates including without limitation trade know-how, trade secrets,
consultant contracts, customer lists, pricing policies, operational methods,
marketing plans or strategies, product development techniques or plans, business
acquisition plans, new personnel acquisition plans, technical processes, designs
and design projects, inventions and research projects; provided, however, that
the following shall not constitute a breach or violation of this Paragraph: any
disclosure made by the Executive in the course of his employment by the Company
as provided in this Agreement, or any disclosure reasonably believed by
Executive to be compelled by law or legal process. Information shall not be
deemed confidential or secret for purposes of this Agreement if it is generally
known in the industry.
12.4 Employees of the Company: During the Restricted Period, Executive
shall not directly or indirectly hire away or solicit to hire away from the
Company or any of its affiliates any employee of the Company or its affiliates.
12.5 Property of the Company: All memoranda, notes, lists, records and
other documents (and all copies thereof) made or compiled by Executive or made
available to Executive during his employment by the Company concerning the
business or affairs of the Company or any of its affiliates, other than any of
such which may also pertain personally to Executive, shall be the exclusive
property of the Company and shall be delivered to the Company promptly upon the
termination of Executive's employment with the Company or at any other time on
request by the Board of Directors of the Company or such affiliates.
12.6 Rights and Remedies Upon Breach: If Executive breaches, or threatens
to commit a breach of, any of the provisions of Paragraph 12.2 through 12.5 of
this Agreement (collectively, the "Restrictive Covenants"), the Company shall
have the following rights and remedies, each of which shall be independent of
the other and severally enforceable, and all of which shall be in addition to,
and not in lieu of, any other rights and remedies available to the Company: (a)
the right and remedy to have any of the Restrictive Covenants specifically
enforced by any court having jurisdiction and in Tennessee by an arbitration
panel as provided in Paragraph 15 of this Agreement, it being
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hereby acknowledged and agreed by Executive that any such breach or threatened
breach will cause irreparable injury to the Company and that money damages will
not provide an adequate remedy to the Company; and (b) the right and remedy to
require Executive to account for and pay over to the Company all compensation,
profits, monies, accruals, increments or other benefits received by Executive as
a result of any transactions constituting a breach of any of the Restrictive
Covenants, and Executive shall account for and pay over such benefits to the
Company.
12.7 Severability of Covenants: If it is determined that any of the
Restrictive Covenants, or any part thereof, is invalid or unenforceable, the
remainder of the Restrictive Covenants shall not thereby be affected and shall
be given full effect, without regard to the invalid portions. If it is
determined that any of the Restrictive Covenants, or any part thereof, is
unenforceable because of the duration of such provision, the geographical area
covered thereby, or any other determination of unreasonableness of the
provision, the arbitration panel making such determination shall have the power
to reduce the duration, area or scope of such provision and, in its reduced
form, such provision shall then be enforceable and shall be enforced.
13. Notice: all notices, requests, demands and other communications given
under or by reason of this Agreement shall be in writing and shall be deemed
given when delivered in person or when mailed, by certified mail (return receipt
requested), postage prepaid, addressed as follows (or to such other address as a
party may specify by notice pursuant to this provision):
(a) To the Company:
ENVOY Corporation
15 Century Boulevard
Suite 600
Two Lakeview Place
Nashville, TN 37214
Attention: Gregory T. Stevens
Vice President and General Counsel
(b) To Executive:
Harlan F. Seymour
12106 Country Hills Court
Glen Allen, VA 23060
14. Controlling Law and Performability: The execution, validity,
interpretation and performance of this Agreement shall be governed by the law of
the State of Tennessee.
15. Arbitration: Any dispute or controversy arising under or in connection
with this Agreement shall be settled by arbitration in Nashville, Tennessee. In
the proceeding the Executive shall select one arbitrator, the Company shall
select one arbitrator and the two arbitrators so selected shall select a third
arbitrator. The decision of a majority of the arbitrators
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shall be binding on the Executive and the Company. Should one party fail to
select an arbitrator within five days after notice of the appointment of an
arbitrator by the other party or should the two arbitrators selected by the
Executive and the Company fail to select an arbitrator within ten days after the
date of the appointment of the last of such two arbitrators, any person sitting
as a Judge of the United States District Court for the Middle District of
Tennessee, Nashville Division, upon application of the Executive or the Company,
shall appoint an arbitrator to fill such space with the same force and effect as
though such arbitrator had been appointed in accordance with the first sentence
of this Paragraph 15. Any arbitration proceeding pursuant to this Paragraph 15
shall be conducted in accordance with the rules of the American Arbitration
Association. Judgment may be entered on the arbitrators' award in any court
having jurisdiction.
16. Expenses: The Company will pay or reimburse the Executive for all costs
and expenses (including arbitration and court costs and attorneys fees) incurred
by the Executive as a result of any claim, action or proceeding arising out of,
or challenging the validity, advisability or enforceability of this Agreement or
any provision thereof.
17. No Obligation to Mitigate: The Executive shall not be required to
mitigate the amount of any payment provided for in Paragraph 7 by seeking other
employment or otherwise, nor shall the amount of any payment provided for in
Paragraph 7 be reduced by any compensation earned by the Executive as a result
of employment by another employer or otherwise.
18. Additional Instruments: The Parties shall execute and deliver any and
all additional instruments and agreements that may be necessary or proper to
carry out the purposes of this Agreement.
19. Entire Agreement and Amendments: This Agreement contains the entire
agreement of the Parties relating to the matters contained herein and supersedes
all prior agreements and understandings, oral or written, between the parties
with respect to the subject matter hereof; provided, however, that nothing
herein shall affect in any respect the rights and obligations of the Company and
the Executive under any incentive agreements implemented prior to the date of
this Agreement and not expressly referred to herein. This Agreement may be
changed only by an agreement in writing signed by the party against whom
enforcement of any waiver, change, modification, extension or discharge is
sought.
20. Severability: If any provision of the Agreement is rendered or declared
illegal or unenforceable by reason of any existing or subsequently enacted
legislation or by the decision of any arbitrator or by decree of a court of last
resort, the Parties shall promptly meet and negotiate substitute provisions for
those rendered or declared illegal or unenforceable to preserve the original
intent of this Agreement to the extent legally possible, but all other
provisions of this Agreement shall remain in full force and effect.
21. Assignments: The Company may assign (whether by operation of law or
otherwise) this Agreement only with the written consent of the Executive, which
consent shall not be withheld unreasonably, and in the event of an assignment of
this Agreement, all covenants, conditions and provisions hereunder shall inure
to the benefit of and be enforceable against the Company's successors and
assigns. The rights and obligations of Executive under this Agreement
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are personal to him, and no such rights, benefits or obligations shall be
subject to voluntary or involuntary alienation, assignment or transfer.
22. Effect of Agreement: Subject to the provisions of Paragraph 21 with
respect to assignments, this Agreement shall be binding upon the Executive and
his heirs, executors, administrators, legal representatives and assigns and upon
the Company and respective successors and assigns.
23. Execution: This Agreement may be executed in multiple counterparts each
of which shall be deemed an original and all of which shall constitute one and
the same instrument.
24. Waiver of Breach: The waiver by either Party of a breach of any
provision of the Agreement by the other Party shall not operate or be construed
as a waiver by such Party of any subsequent breach by such other Party.
IN WITNESS WHEREOF, the Parties have executed this Agreement on this 28th
day of November, 1997.
ENVOY CORPORATION
By: /s/ W. Marvin Gresham
-----------------------------------------------
Name: W. Marvin Gresham
Title: Chairman of the Compensation Committee
EXECUTIVE
/s/ Harlan F. Seymour
-----------------------------------------------
Harlan F. Seymour
Ex. 10.10 for 10-K Empl. Agmt Seymour
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EXHIBIT 10.9
ENVOY CORPORATION
1998 EXPRESSBILL STOCK OPTION PLAN
SECTION 1. Purpose; Definitions.
The purpose of the Envoy Corporation 1998 ExpressBill Stock Option Plan
(the "Plan") is to enable Envoy Corporation (the "Corporation") to attract,
retain and reward employees of the Corporation and its Subsidiaries and
Affiliates, and to strengthen the mutuality of interests between such employees
by awarding such employees performance-based stock options in the Corporation.
The creation and implementation of the Plan will not diminish or prejudice other
compensation plans or programs approved from time to time by the Board.
For purposes of the Plan, the following terms shall be defined as set forth
below:
A. "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.
B. "Board" means the Board of Directors of the Corporation.
C. "Cause" has the meaning provided in Section 5(j) of the Plan.
D. "Change in Control" has the meaning provided in Section 6(b) of the
Plan.
E. "Change in Control Price" has the meaning provided in Section 6(d) of
the Plan.
F. "Common Stock" means the Corporation's Common Stock, no par value per
share.
G. "Code" means the Internal Revenue Code of 1986, as amended from time to
time, and any successor thereto.
H. "Committee" means the Committee referred to in Section 2 of the Plan.
I. "Corporation" means Envoy Corporation, a corporation organized under the
laws of the State of Tennessee, or any successor corporation.
J. "Disability" means disability as determined under the Corporation's
Group Long Term Disability Insurance Plan.
K. "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 or as may be approved by the Committee.
L. "Effective Date" has the meaning provided in Section 10 of the Plan.
M. "Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, and any successor thereto.
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N. "Fair Market Value" means with respect to the Common Stock, as of any
given date or dates, unless otherwise determined by the Committee in good faith,
the reported closing price of a share of Common Stock on Nasdaq or such other
market or exchange as is the principal trading market for the Common Stock, or,
if no such sale of a share of Common Stock is reported on Nasdaq or other
exchange or principal trading market on such date, the fair market value of a
share of Common Stock as determined by the Committee in good faith.
O. "Incentive Stock Option" means any Stock Option intended to be and
designated as an "Incentive Stock Option" within the meaning of Section 422 of
the Code.
P. "Immediate Family" means any child, stepchild, grandchild, parent,
stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law,
son-in-law, daughter-in-law, brother-in-law, or sister-in-law, and shall include
adoptive relationships.
Q. "Nasdaq" means The Nasdaq Stock Market.
R. "Non-Employee Director" means a member of the Board who is a
Non-Employee Director within the meaning of Rule 16b-3(b)(3) promulgated under
the Exchange Act and an outside director within the meaning of Treasury
Regulation Sec. 162-27(e)(3) promulgated under the Code.
S. "Non-Qualified Stock Option" means any Stock Option that is not an
Incentive Stock Option.
T. "Normal Retirement" means retirement from active employment with the
Corporation and any Subsidiary or Affiliate on or after age 65.
U. "Performance Goals" means performance goals based on one or more of the
following criteria: (i) pre-tax income or after-tax income; (ii) operating cash
flow; (iii) operating profit; (iv) return on equity, assets, capital, or
investment; (v) earnings or book value per share; (vi) sales or revenues; (vii)
operating expenses; (viii) Common Stock price appreciation; and (ix)
implementation, management, or completion of critical projects or processes.
Where applicable, the Performance Goals may be expressed in terms of attaining a
specified level of the particular criteria or the attainment of a percentage
increase or decrease in the particular criteria, and may be applied to one or
more of the Corporation or any Subsidiary, or a division or strategic business
unit of the Corporation, or may be applied to the performance of the Corporation
relative to a market index, a group of other companies, or a combination
thereof, all as determined by the Committee. The Performance Goals may include a
threshold level of performance below which no payment will be made (or no
vesting will occur), levels of performance at which specified payments will be
made (or specified vesting will occur), and a maximum level of performance above
which no additional payment will be made (or at which full vesting will occur).
Each of the foregoing Performance Goals shall be determined, to the extent
applicable, in accordance with generally accepted accounting principles and
shall be subject to certification by the Committee; provided, that the Committee
shall have the authority to make equitable adjustments to the Performance Goals
in recognition of unusual or non-recurring events affecting the Corporation or
any Subsidiary or the financial statements of the Corporation or any Subsidiary,
in response to changes in applicable laws or regulations, or to account for
items of gain, loss, or expense determined to be extraordinary or unusual in
nature or infrequent in occurrence or related to the disposal of a segment of
business or related to a change in accounting principles.
V. "Plan" means this Envoy Corporation 1998 ExpressBill Stock Option Plan,
as amended from time to time.
W. "Retirement" means Normal or Early Retirement.
X. "Stock Option" or "Option" means any option to purchase shares of Common
Stock granted pursuant to Section 5 below.
Y. "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
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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.
Except as provided below, the Plan shall be administered by a Committee of
not less than two Non- Employee Directors, 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 Non-Employee Directors. The initial Committee shall be
the Compensation Committee of the Board. In the event there are not at least two
Non-Employee Directors on the Board, the Plan shall be administered by the
entire Board and all references herein to the Committee shall refer to the
Board.
The Committee shall have the power to delegate authority to the
Corporation's Chief Executive Officer, or to a committee composed of executive
officers of the Corporation, to grant, on behalf of the Committee, Non-
Qualified Stock Options exercisable at Fair Market Value on the date of grant,
subject to such guidelines as the Committee may determine from time to time;
provided, however that (i) options may only be granted pursuant to such
delegated authority for the purposes specified by the Committee, which may
include attracting new employees, awarding outstanding performance, or retaining
employees, (ii) the Committee shall specify the maximum number of shares that
may be granted for purposes of attracting any single new employee at any
specified level and the maximum number that may be granted to any other employee
for any other purpose, (iii) options to purchase no more than 50,000 shares may
be granted in any fiscal year pursuant to such delegated authority, and (iv) a
report of each grant of an option pursuant to such delegated authority shall be
presented to the Committee at the first meeting of the Committee following such
grant. Options granted pursuant to such delegated authority in accordance
herewith shall be deemed, to the extent permitted under applicable law, to have
been granted by the Committee for all purposes under the Plan.
The Committee shall have authority to grant Stock Options pursuant to the
terms of the Plan, to employees eligible under Section 4.
In particular, the Committee, or the Board, as the case may be, shall have
the authority, consistent with the terms of the Plan:
(a) to select the employees of the Corporation and its Subsidiaries and
Affiliates to whom Stock Options may from time to time be granted hereunder;
(b) to determine whether and to what extent Non-Qualified Stock Options are
to be granted hereunder to one or more eligible persons;
(c) to determine the number of shares to be covered by each such award
granted hereunder;
(d) 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 or
waiver of forfeiture restrictions regarding any Stock Option and/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 7 hereof;
(e) to determine whether and under what circumstances a Stock Option may be
settled in cash or restricted stock under Section 5(k) or (l), as applicable,
instead of Common Stock;
(f) to determine the terms, conditions, and restrictions of any Performance
Goals and the number of Options subject thereto; and
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(g) to determine whether to require payment of tax withholding requirements
in shares of Common Stock subject to the award.
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; and, except as expressly set
forth herein or otherwise required by law, 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.
SECTION 3. Shares of Common Stock Subject to Plan.
(a) As of the Effective Date, the aggregate number of shares of Common
Stock that may be issued under the Plan shall be 300,000 shares. The shares of
Common Stock issuable under the Plan may consist, in whole or in part, of
authorized and unissued shares or treasury shares.
(b) If any shares of Common Stock that have been optioned cease to be
subject to a Stock Option or any such award otherwise terminates without a
payment being made to the participant in the form of Common Stock, such shares
shall again be available for distribution in connection with future awards under
the Plan.
(c) 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, an appropriate
substitution or adjustment shall be made in the maximum number of shares that
may be awarded under the Plan, in the number and option price of shares subject
to outstanding Options granted under the Plan, in the Performance Goals, as may
be determined to be appropriate by the Committee, in its sole discretion,
provided that the number of shares subject to any award shall always be a whole
number.
SECTION 4. Eligibility.
Employees of the Corporation and its Subsidiaries and Affiliates who are
responsible for or contribute to the management, growth and/or profitability of
the business of the Corporation and/or its Subsidiaries and Affiliates are
eligible to be granted awards under the Plan.
SECTION 5. Stock Options.
Any Stock Option granted under the Plan shall be in such form as the
Committee may from time to time approve.
Stock Options granted under the Plan will be Non-Qualified Stock Options.
No Incentive Stock Options may be granted pursuant to this Plan.
Options granted to employees 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.
(a) Option Price. The option price per share of Common Stock purchasable
under a Stock Option shall be determined by the Committee at the time of grant
but shall be not less than 50% of the Fair Market Value of the Common Stock at
grant.
(b) Option Term. The term of each Stock Option shall be fixed by the
Committee.
(c) Exercisability. Stock 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. The Committee may provide
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that a Stock Option shall vest over a period of future service at a rate
specified at the time of grant, or that the Stock Option is exercisable only in
installments. If the Committee provides, in its sole discretion, that any Stock
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 Committee shall determine in its sole
discretion.
(d) Method of Exercise. Subject to whatever installment exercise
restrictions apply under Section 5(c), Stock 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 after grant, payment
in full or in part may also be made in the form of shares of Common Stock
already owned by the optionee or shares of restricted stock or shares subject to
such Option or another award hereunder (in each case valued at the Fair Market
Value of the Common Stock on the date the Option is exercised). If payment of
the exercise price is made in part or in full with Common Stock, the Committee
may award to the employee a new Stock Option to replace the Common Stock which
was 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, such
restricted stock (and any replacement shares relating thereto) shall remain (or
be) restricted in accordance with the original terms of the restricted stock
award in question, and any additional 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 9(a).
(e) Transferability of Options. No Non-Qualified Stock Option shall be
transferable by the optionee without the prior written consent of the Committee
other than (i) transfers by the Optionee to a member of his or her Immediate
Family or a trust for the benefit of the optionee or a member of his or her
Immediate Family, or (ii) transfers by will or by the laws of descent and
distribution.
(f) Bonus for Taxes. The Committee in its discretion may award at the time
of grant or thereafter the right to receive upon exercise of such Stock 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.
(g) Termination by Death. Subject to Section 5(k), if an optionee's
employment by the Corporation and any Subsidiary or Affiliate terminates by
reason of death, any Stock Option held by such optionee may thereafter be
exercised, to the extent such option was exercisable at the time of death or on
such accelerated basis as the Committee may determine at or after grant 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 other period as the
Committee may specify at or after grant) from the date of such death or until
the expiration of the stated term of such Stock Option, whichever period is the
shorter.
(h) Termination by Reason of Disability. Subject to Section 5(k), if an
optionee's employment by the Corporation and any Subsidiary or Affiliate
terminates by reason of Disability, any Stock Option held by such optionee may
thereafter be exercised by the optionee, to the extent it was exercisable at the
time of termination or on such accelerated basis as the Committee may determine
at or after grant, for a period of three years (or such other period as the
Committee may specify at or after grant) from the date of such termination of
employment or until the expiration of the stated term of such Stock Option,
whichever period
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is the shorter; provided however, that, if the optionee dies within the period
specified above (or other such period as the Committee shall specify at or after
grant), any unexercised 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 Stock Option, whichever period is shorter.
(i) Termination by Reason of Retirement. Subject to Section 5(k), if an
optionee's employment by the Corporation and any Subsidiary or Affiliate
terminates by reason of Normal or Early Retirement, any Stock 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 on such accelerated basis as the
Committee may determine at or after grant, for a period of three years (or such
other period as the Committee may specify at or after grant) from the date of
such termination of employment or the expiration of the stated term of such
Stock Option, whichever period is the shorter; provided however, that, if the
optionee dies within the period specified above (or other such period as the
Committee shall specify at or after grant), any unexercised 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 Stock Option,
whichever period is shorter.
(j) Other Termination. Subject to Section 5(k), unless otherwise determined
by the Committee (or pursuant to procedures established by the Committee) at or
after grant, if an optionee's employment by the Corporation and any Subsidiary
or Affiliate is involuntarily terminated for any reason other than death,
Disability or Normal or Early Retirement, the Stock Option shall thereupon
terminate, except that such Stock Option may be exercised, to the extent
otherwise then exercisable, for the lesser of three months or the balance of
such Stock Option's term if the involuntary termination is without Cause. For
purposes of this Plan, "Cause" means (i) a felony conviction of a participant or
the failure of a participant to contest prosecution for a felony, or (ii) 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, in each case as determined by the Committee, in its sole direction.
If an optionee voluntarily terminates employment with the Corporation and any
Subsidiary or Affiliate (except for Disability, Normal or Early Retirement), the
Stock Option shall thereupon terminate; provided, however, that the Committee at
grant or thereafter may extend the exercise period in this situation for the
lesser of three months or the balance of such Stock Option's term.
(k) Buyout Provisions. The Committee may at any time offer to buy out for a
payment in cash, 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.
(l) Settlement Provisions. If the option agreement so provides at grant or
is amended after grant and prior to exercise to so provide (with the optionee's
consent), the Committee may require that all 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.
(m) 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 six months prior to its expiration if the conditions to exercise have not
theretofore been satisfied.
SECTION 6. Change in Control Provisions.
(a) Impact of Event. In the event of:
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(1) a "Change in Control" as defined in Section 6(b); or
(2) a "Potential Change in Control" as defined in Section 6(c), but only if
and to the extent so determined by the Committee or the Board at or after grant
(subject to any right of approval expressly reserved by the Committee or the
Board at the time of such determination);
(i) subject to the limitations set forth below in this Section 6(a), the
following acceleration provisions shall apply:
Any Stock Option awarded under the Plan not previously exercisable and
vested shall become fully exercisable and vested.
(ii) subject to the limitations set forth below in this Section 6(a), the
value of all outstanding Stock Options, to the extent vested, shall, unless
otherwise determined Board or by the Committee in its sole discretion prior to
any Change in Control, be cashed out on the basis of the "Change in Control
Price" as defined in Section 6(d) 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 Board or Committee may determine prior to the Change in Control.
(iii) The Board or the Committee may impose additional conditions on the
acceleration or valuation of any award in the award agreement.
(b) Definition of Change in Control. For purposes of Section 6(a), 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 35% or more of the combined voting power of the then outstanding
securities of the Corporation that may be cast for the election of 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, sales 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 any 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 any such period.
(c) Definition of Potential Change in Control. For purposes of Section
6(a), a "Potential Change in Control" means the happening of any one of the
following:
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(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 as
defined in Section 6(b); 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 5% 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. For purposes of this Section 6, "Change in
Control Price" means the highest price per share paid in any transaction
reported on Nasdaq 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 Potential or actual 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 Stock Appreciation Rights or,
where applicable, the date on which a cash out occurs under Section 6(a)(ii).
SECTION 7. Amendments and Termination.
The Board may at any time amend, alter or discontinue the Plan without
shareholder approval to the fullest extent permitted by the Exchange Act and the
Code; provided, however, that no amendment, alteration, or discontinuation shall
be made which would impair the rights of an optionee or participant under a
Stock Option theretofore granted, without the participant's consent.
The Committee may amend the terms of any Stock Option or other award
theretofore granted, prospectively or retroactively, but, subject to Section 3
above, no such amendment shall impair the rights of any holder without the
holder's consent. The Committee may also substitute new Stock Options for
previously granted Stock Options (on a one for one or other basis), including
previously granted Stock Options having higher option exercise prices.
SECTION 8. 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 Common Stock or payments in lieu of or with
respect to awards hereunder; provided, however, that, unless the Committee
otherwise determines with the consent of the affected participant, the existence
of such trusts or other arrangements is consistent with the "unfunded" status of
the Plan.
SECTION 9. General Provisions.
(a) The Committee may require each person purchasing shares pursuant to a
Stock Option 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 stop-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
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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) 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) 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) 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 Common Stock, including Common Stock that is 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) 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.
(f) 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 as 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.
(g) In addition to any other restrictions on transfer that may be
applicable under the terms of this Plan or the applicable award agreement, no
Stock Option issued under this Plan is transferable by the participant without
the prior written consent of the Committee, other than (i) transfers by an
Optionee to a member of his or her Immediate Family or a trust for the benefit
of the optionee or a member of his or her Immediate Family or (ii) transfers by
will or by the laws of descent and distribution. The designation of a
beneficiary will not constitute a transfer.
SECTION 10. Effective Date of Plan.
The Plan shall be effective as of the date of approval of the Plan by the
Board of Directors of the Corporation (the "Effective Date").
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SECTION 11. Term of Plan.
No Stock Option shall be granted pursuant to the Plan on or after the tenth
anniversary of the Effective Date of the Plan, but awards granted prior to such
tenth anniversary may be extended beyond that date.
Ex10-12 for 10-K ExBill Stock Op Plan
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EXHIBIT 21
SUBSIDIARIES
1. National Electronic Information Corporation
2. Medical Electronic Data Exchange, Inc. (indirect subsidiary)
3. Medical Electronic Data Index, Inc. (indirect subsidiary)
4. Professional Office Systems, Inc.
5. Healthcare Data Interchange Corporation
6. ENVOY/Express Bill, Inc.
7. Automated Revenue Management, Inc.
<PAGE> 1
EXHIBIT 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-93542, 333-2824 and 333-33207) pertaining to the 1995 Employee
Stock Incentive Plan, the 1995 Stock Option Plan for Outside Directors, and the
Employee Stock Purchase Plan of ENVOY Corporation of our report dated March 5,
1998, 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, 1997.
ERNST & YOUNG LLP
Nashville, Tennessee
March 5, 1998
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