<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 6, 1998
REGISTRATION NO. 333-52483
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ENVOY CORPORATION
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
TENNESSEE 62-1575729
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
</TABLE>
15 CENTURY BOULEVARD, SUITE 600, NASHVILLE, TENNESSEE 37214
(615) 885-3700
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
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GREGORY T. STEVENS
VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
15 CENTURY BOULEVARD, SUITE 600
NASHVILLE, TENNESSEE 37214
(615) 885-3700
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
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COPIES TO:
<TABLE>
<S> <C>
BOB F. THOMPSON FREDERICK W. KANNER
BASS, BERRY & SIMS PLC DEWEY BALLANTINE LLP
2700 FIRST AMERICAN CENTER 1301 AVENUE OF THE AMERICAS
NASHVILLE, TENNESSEE 37238 NEW YORK, NEW YORK 10019
(615) 742-6200 (212) 259-8000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL
PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
JURISDICTION.
SUBJECT TO COMPLETION, DATED JULY 6, 1998
PROSPECTUS
1,750,000 SHARES
(ENVOY CORPORATION LOGO)
COMMON STOCK
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All of the 1,750,000 shares (the "Shares") of Common Stock, no par value
per share (the "Common Stock"), of ENVOY Corporation ("ENVOY" or the "Company")
offered hereby are being offered by certain shareholders of the Company (the
"Selling Shareholders"). See "Selling Shareholders." The Company will not
receive any proceeds from the sale of the Common Stock offered hereby.
The Common Stock is listed on The Nasdaq Stock Market's National Market
("The Nasdaq Stock Market") under the symbol "ENVY." The last reported sale
price of the Common Stock on The Nasdaq Stock Market on July 2, 1998 was $45.75
per share. See "Price Range of Common Stock."
------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK
OFFERED HEREBY.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND SELLING
PUBLIC COMMISSIONS(1) SHAREHOLDERS(2)
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<S> <C> <C> <C>
Per Share $ $ $
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Total(3) $ $ $
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</TABLE>
(1) For information regarding indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting expenses estimated at $ , of which $ is
payable by the Company and $ is payable by the Selling
Shareholders.
(3) The Selling Shareholders have granted the Underwriters a 30-day option to
purchase up to 262,500 additional shares of Common Stock on the same
terms as set forth above solely to cover over-allotments, if any. See
"Underwriting." If such option is exercised in full, the total Price to
Public, Underwriting Discounts and Commissions and Proceeds to Selling
Shareholders will be $ , $ and $ , respectively.
------------------
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that certificates for the shares
of Common Stock offered hereby will be available for delivery on or about
, 1998, at the office of Smith Barney Inc., 333 West 34th Street,
New York, New York 10001.
------------------
SALOMON SMITH BARNEY MORGAN STANLEY DEAN WITTER
J.C. BRADFORD & CO. DEUTSCHE MORGAN GRENFELL
HAMBRECHT & QUIST LOEWENBAUM & COMPANY INCORPORATED
July , 1998
<PAGE> 3
As required by Rule 304 of Regulation S-T, the following is a
narrative description of the artwork and text that appear on the inside front
cover page of the Prospectus.
A circular graph depicting the movement of information between
participants in the health care industry. The following text appears above the
graph: "ENVOY provides the connectivity required to move information between
participants in the health care industry." The following text appears below the
graph:
Selected Current & Potential Health Care EDI Information Exchanges
<TABLE>
<CAPTION>
Hospitals Payors Physicians & Dentists Pharmacies
- -------------------------------- ----------------------- ------------------------------ ---------------------------
<S> <C> <C> <C>
Claims* Claims* Eligibility* Eligibility*
Remittance* Patient Roster* Referral Management* Electronic Prescriptions
Patient Census Enrollment Lab Order Formulary
Pre-admission Medical/Patient Records Just-In-Time Inventory*
Remittance*
<CAPTION>
Pharmacy Benefit
Laboratories Patients Managers
--------------------------- ---------------------------- --------------------------
<S> <C> <C>
Claims* Enrollment Claims*
Referrals* Provider Directories Formulary
Results Reporting Patient Statements*
</TABLE>
* Indicates health care EDI exchanges currently offered by the Company.
<PAGE> 4
(MOVEMENT OF INFORMATION)
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
INCLUDING BY OVER-ALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus or
incorporated herein by reference. Except as otherwise indicated, (i) all
references herein to "ENVOY" and the "Company" shall include the Company and its
wholly-owned subsidiaries; (ii) the Company's historical financial and other
statistical data included or incorporated by reference herein have been restated
to include the accounts and results of operations of XpiData, Inc., Professional
Office Services, Inc. and Automated Revenue Management, Inc. (collectively, the
"ExpressBill Companies") as a result of the Company's business combinations with
the ExpressBill Companies completed in February 1998, which were accounted for
as poolings of interests; and (iii) all information contained in this Prospectus
assumes no exercise of the Underwriters' over-allotment option. Investors should
carefully consider the information set forth under the heading "Risk Factors."
THE COMPANY
ENVOY is a leading provider of electronic data interchange ("EDI") and
transaction processing services to participants in the health care market,
including pharmacies, physicians, hospitals, dentists, billing services,
commercial insurance companies, managed care organizations, state and federal
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. Through the Company's recently completed business combinations with the
ExpressBill Companies, the Company believes that it has the largest patient
statement processing and printing services business in the United States,
processing more than 100 million patient statements annually. ENVOY's
transaction network, which processed approximately 984.3 million transactions in
the 12 months ended March 31, 1998, consisted of approximately 200,000
physicians, 35,000 pharmacies, 42,000 dentists, 4,600 hospitals and 811 payors,
including approximately 46 Blue Cross Blue Shield Plans, 59 Medicare Plans and
38 Medicaid Plans as of May 31, 1998.
There are many types of transactions, information exchanges and other
communications that occur between participants in the health care industry.
Although the majority of these transactions traditionally have been paper based
and manually processed, technological advances and the evolution of electronic
transaction processing in recent years have created a framework for automation
which is achieving growing acceptance in the health care market. According to
the Health Data Directory, the percentage of health care claims filed
electronically has increased from 41% in 1993 to 60% in 1997. As health care
industry participants look for ways to lower costs, improve decision-making and
be more competitive, the Company anticipates that more payors, providers and
purchasers of health care services will become linked electronically. In
addition to the adjudication of health care claims, health care participants
need, among other things, information and services relating to eligibility,
encounters, referrals, pre-admission certifications, electronic prescriptions,
credit card services, patient statements and lab ordering. The Company believes
that, once an intermediary, such as ENVOY, has established electronic
connectivity between health care payors and providers, these value added
transaction services create opportunities for additional revenues without
significant costs. The Company believes that private and governmental efforts to
contain health care costs, the growth of managed care and the creation of
various health care alliances, as well as other changes in the health care
delivery mechanisms, will accelerate the transition to health care EDI.
ENVOY's strategy is to maintain and enhance its leadership position in the
health care EDI and transaction processing industry by (i) leveraging its
current strengths in the health care EDI and transaction processing industry,
(ii) expanding its product and service offerings, (iii) extending its EDI and
transaction processing network within the health care industry and (iv) pursuing
strategic acquisitions. The Company believes that its reputation for providing
quality and cost-effective services and products and its extensive EDI network
enhance ENVOY's ability to attract and retain customers.
3
<PAGE> 6
As part of its strategy to maintain and enhance its leadership position in
the health care EDI and transaction processing industry, the Company has
completed several recent business combinations, including the following:
- National Electronic Information Corporation. In March 1996, the Company
acquired all the issued and outstanding capital stock of National
Electronic Information Corporation ("NEIC"). With the acquisition of
NEIC, the Company became one of the largest processors of commercial
third-party payor claims based on the number of transactions processed.
The NEIC acquisition significantly enhanced the Company's transaction
network by giving ENVOY the largest number of direct electronic
connections to commercial third-party payors in the health care EDI and
transaction processing industry. The aggregate purchase price for NEIC
was approximately $94.3 million, including fees, expenses and other costs
associated with the acquisition. The NEIC acquisition was financed
through equity and debt financing, including the issuance of 3,730,233
shares of the Company's Series B Convertible Preferred Stock, no par
value per share (the "Series B Preferred Stock"), 333,333 shares of
Common Stock, borrowings of approximately $43.4 million under the
Company's credit facilities and $5.8 million of the Company's available
cash.
- Healthcare Data Interchange Corporation. In August 1997, the Company
completed the acquisition of all the issued and outstanding capital stock
of Healthcare Data Interchange Corporation ("HDIC"), the health care EDI
subsidiary of Aetna U.S. Healthcare, Inc. ("AUSHC"), for approximately
$36.4 million in cash and the assumption of approximately $14.8 million
in liabilities. The cash portion of the purchase price was financed
through the Company's available cash. In connection with the acquisition,
the parties entered into a long-term services agreement under which AUSHC
has agreed to use the Company as its single source EDI technology partner
to process all AUSHC electronic health care transactions.
- ExpressBill Companies. In February 1998, the Company completed business
combinations with the ExpressBill Companies for an aggregate of 3.5
million shares of Common Stock. 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. The addition of the ExpressBill
Companies' patient statement services further expands the breadth of
ENVOY's product and service offerings to health care providers.
- Synergy Health Care, Inc. In May 1998, the Company acquired all the
issued and outstanding capital stock of Synergy Health Care, Inc.
("Synergy"), which provides health care information products and services
to participants in the health care market, for $10.0 million in cash. The
purchase price was financed through the Company's available cash.
Synergy's products and services include health care data warehousing and
analysis, performance tracking, patient studies and disease management
support. This acquisition is anticipated to allow ENVOY to offer new data
analysis services to certain of its existing customers, as well as to
various other participants in the health care market.
The Company's executive offices are located at 15 Century Boulevard, Suite
600, Nashville, Tennessee 37214, and its telephone number at that location is
(615) 885-3700.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Selling Shareholders............ 1,750,000 shares
Common Stock outstanding after the offering(1).............. 21,108,483 shares
Use of proceeds............................................. All proceeds from the offering
will go to the Selling
Shareholders.
The Nasdaq Stock Market symbol.............................. ENVY
</TABLE>
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(1) Excludes (i) 3,858,302 shares of Common Stock issuable upon the exercise of
options granted pursuant to the Company's existing stock option plans, of
which 1,067,767 shares were exercisable at a weighted average exercise price
per share of $6.24, as of May 31, 1998 and (ii) 2,800,000 shares of Common
Stock issuable upon conversion of the Series B Preferred Stock.
4
<PAGE> 7
SUMMARY FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER OPERATING DATA)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------ -----------------
1995(1) 1996 1997 1997 1998
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues.................................................... $34,197 $ 90,572 $137,605 $30,763 $42,524
Operating costs and expenses:
Cost of revenues.......................................... 18,967 43,500 64,304 14,380 19,397
Selling, general and administrative expenses.............. 11,156 24,631 32,734 7,760 10,218
Research and development expenses......................... 1,466 1,779 2,135 842 622
Depreciation and amortization expenses(2)................. 2,725 19,508 26,095 6,073 6,993
Merger and facility integration costs(3).................. -- 4,664 -- -- --
Write-off of acquired in-process technology(4)............ -- 30,700 38,000 3,000 --
EMC losses................................................ -- 540 -- -- --
------- -------- -------- ------- -------
Operating income (loss)..................................... (117) (34,750) (25,663) (1,292) 5,294
Other income (expense):
Interest income........................................... 380 1,032 1,312 453 145
Interest expense.......................................... (659) (2,872) (1,577) (386) (437)
------- -------- -------- ------- -------
Income (loss) from continuing operations before income taxes
and loss in investee...................................... (396) (36,590) (25,928) (1,225) 5,002
Provision (benefit) for income taxes........................ (50) 1,717 (5,218) 739 2,744
Loss in investee............................................ (1,776) -- -- -- --
------- -------- -------- ------- -------
Income (loss) from continuing operations.................... $(2,122) $(38,307) $(20,710) $(1,964) $ 2,258
======= ======== ======== ======= =======
Income (loss) per common share from continuing operations
assuming dilution(5)...................................... $ (0.14) $ (3.22) $ (1.05) $ (0.10) $ 0.09
======= ======== ======== ======= =======
Weighted average shares outstanding assuming dilution....... 14,739 16,519 19,686 18,976 25,102
======= ======== ======== ======= =======
OTHER OPERATING DATA:
Transactions (in millions)................................ 403.0 665.5 912.9 212.4 283.8
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1997 1998
------------ ------------ ---------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $ 47,541 $ 18,027 $ 25,207
Total assets................................................ 140,357 137,523 142,656
Long-term debt, less current portion........................ 8,926 527 231
Preferred stock............................................. 55,021 55,021 41,300
Total shareholders' equity.................................. 108,414 97,559 99,967
</TABLE>
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(1) The Company was incorporated 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, and the Predecessor was merged into First
Data. The Company's financial statements incorporated by reference herein
include financial information for the Predecessor through June 1995, with
the financial services business shown as a discontinued operation. The above
amounts exclude the results of discontinued operations as a result of the
Predecessor's merger with First Data.
(2) Depreciation and amortization expenses primarily relate to acquisitions and
includes amortization of goodwill and identifiable intangible assets of
$14.6 million and $20.0 million in 1996 and 1997, and $4.6 million and $5.3
million in the three month periods ended March 31, 1997 and 1998,
respectively. As of March 31, 1998, amortization expense related to
acquisitions was expected to be approximately $19.1 million in 1998, $7.9
million in 1999 and $4.7 million in 2000. Although goodwill associated with
the acquisition of NEIC will become fully amortized during the first quarter
of 1999, the consummation of additional acquisitions may significantly
increase future amortization costs.
(3) The 1996 results include expenses of $4.7 million relating to merger and
facility integration costs in conjunction with the NEIC and Teleclaims, Inc.
("Teleclaims") acquisitions.
(4) Results for the years ended December 31, 1996 and 1997 and the three months
ended March 31, 1997 include expenses of $30.0 million, $35.0 million and
$3.0 million, related to the write-off of acquired in-process technology in
conjunction with the acquisitions of NEIC, HDIC and Diverse Software
Solutions, Inc. ("DSS"), respectively.
(5) Net loss per common share for the year ended December 31, 1996 has been
restated to give effect to the beneficial conversion feature of the Series B
Preferred Stock in accordance with EITF Topic D-60, "Accounting for the
Issuance of Convertible Preferred Stock and Debt Securities with a
Nondetachable Conversion Feature" ("EITF D-60"). The application of the
beneficial conversion feature of the Series B Preferred Stock prescribed by
EITF D-60, which was promulgated by the Securities and Exchange Commission
(the "SEC") in March 1997 subsequent to the Company's initial accounting
treatment relating to the issuance of the Series B Preferred Stock, requires
that the difference between the market price of the Common Stock on the date
of the Series B Preferred Stock purchase agreement ($14.75 per share) and
the conversion price of the Series B Preferred Stock ($10.75 per share) be
reflected as a preferred dividend in 1996. Accordingly, the Company's
historical financial statements have been restated to reflect the aggregate
effect of the beneficial conversion feature as a preferred dividend ($14.9
million) resulting in a net loss per common share of $3.22 in 1996. The
Company previously had reported a net loss per common share of $2.32 for
1996.
5
<PAGE> 8
RISK FACTORS
In addition to the other information included or incorporated by reference
in this Prospectus, the following risk factors should be considered carefully in
evaluating an investment in the Common Stock offered by this Prospectus.
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 assurance 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 below. 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.
Limited Operating History; Recent Losses. The health care EDI and
transaction processing industry is relatively new, and the Company's operating
history is relatively limited. Although ENVOY was profitable during the first
quarter of fiscal 1998, ENVOY has experienced substantial net losses in recent
years, including a net loss of approximately $20.7 million for the year ended
December 31, 1997, and had an accumulated deficit of approximately $73.5 million
as of March 31, 1998. In order to achieve long-term profitability, the Company
must successfully implement its business strategy and increase its revenues,
while controlling expenses. There can be no assurance that the Company will
achieve long-term profitability.
Financial Impact of Recent Acquisitions. The Company has recently
completed several acquisitions, which have created a significant expansion of
ENVOY's overall business. As a result of the accounting treatment for these
acquisitions, including the acquisitions of NEIC in March 1996 and HDIC in
August 1997, the Company's results of operations have been negatively impacted.
A brief description of significant terms of the NEIC and HDIC acquisitions
follows:
NEIC. The Company acquired NEIC for approximately $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. The Company completed the acquisition of HDIC for approximately
$36.4 million in cash and the assumption of approximately $14.8 million of
liabilities. 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. The Company recorded approximately $16.1 million
of goodwill and identifiable intangible assets related to the HDIC
acquisition and is amortizing the related goodwill of $14.1 million over a
period of 15 years. Also recorded as part of the HDIC acquisition was a
one-time write-off of acquired in-process technology of $35.0 million.
Amortization expense related to acquisitions is expected to be approximately
$19.1 million in 1998 and $7.9 million in 1999, including $3.8 million in the
three months ended March 31, 1999. The consummation of additional acquisitions
may significantly increase amortization costs.
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 (including different transaction processing
systems) or businesses into the Company's operations. Significant competition
for acquisition opportunities exists in the health care EDI and transaction
processing 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
6
<PAGE> 9
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. In that regard, the Company has,
in the past, experienced temporary declines in customer service due to computer
down time and inexperienced customer service representatives in connection with
the integration of certain acquired businesses. Although the Company believes
that it has resolved such problems and that there has been no material adverse
effect in the Company's operating results to date, there can be no assurance
that the Company will not experience temporary declines in customer service in
the future, which could materially adversely affect the Company's business,
operating results or financial condition. 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.
Customer Concentration. Primarily as a result of the HDIC acquisition, the
Company has one customer, AUSHC, that accounted for approximately 12% 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.
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 Company intends to replace or modify the remaining systems
as needed to properly display dates and perform date arithmetic. The Company
commenced 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 Company's Year 2000 project
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 incurred. The Company estimates that Year 2000 expense for 1998
will be approximately $2.5 million. There can be no assurance, however, that
actual costs necessary to deal with these issues will not exceed estimated
amounts. If the Company or the third parties with which it interacts are 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 EDI 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 GTE Data Services Incorporated, located in Tampa,
Florida ("GTEDS"), which processes claims through a single computer center. The
contractual arrangement between the Company and GTEDS requires GTEDS to maintain
24 hours a day, seven days a week processing capability and a "hot site"
disaster recovery system. The Company's current contract with GTEDS expires in
December 1998. The Company also operates a batch claims processing center which
is contained in
7
<PAGE> 10
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. Furthermore, while the Company has insurance coverage
for the Company's host computer system and data centers, 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 due to service problems, delays or outages
from GTEDS 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 EDI and transaction 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 EDI and transaction processing clearinghouses, the
standardization of these claims formats, whether due to consolidation in the
industry or otherwise, could reduce the use of EDI and transaction processing
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 EDI and transaction processing market from companies that are similarly
specialized, including former regional partners of the Company that have direct
provider relationships, and also from companies that are involved in other, more
highly developed sectors of the EDI and transaction processing market. The
Company also faces competition from other companies, such as vendors of provider
information management systems, which have added or may add their own
proprietary transaction processing systems to existing or future products. As a
result of such competition, the Company may be pressured to reduce per
transaction prices or eliminate per transaction prices altogether. If electronic
transaction processing becomes the standard for claims and information
processing, a number of larger and better capitalized entities may elect to
enter the industry and further increase competitive pricing pressures. Many of
the Company's existing and potential competitors are larger and have
significantly greater financial, marketing, technological and other resources
than the Company.
Availability of Direct Links. Certain third-party payors provide
electronic data transmission systems to health care providers that establish a
direct link between the provider and the payor, bypassing third-party processors
such as the Company. Any significant increase in the utilization of direct links
between health care providers and payors would have a material adverse effect on
the Company's business, operating results and financial condition.
Uncertain Regulatory Environment 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
8
<PAGE> 11
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 EDI and transaction processing 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. The Health Insurance Portability and
Accountability Act of 1996 ("HIPAA") mandates the use of standard transactions,
standard identifiers, security and other provisions, the use of which is
currently scheduled to occur as early as the year 2000. HIPAA 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 would impose 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 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.
9
<PAGE> 12
Increasing Dependence on Medical EDI and Patient Statement Transaction
Revenues. Although pharmacy EDI transactions currently represent a majority of
the Company's total transactions, the fees associated with these transactions
are significantly less on a per transaction basis than those received for
medical EDI and patient statement transactions. As a result, pharmacy EDI
revenue constituted less than 19% of the Company's total revenues in 1997, and
less than 17% of the Company's total revenues in the first quarter of 1998. For
1997, the Company's pharmacy EDI business grew at less than half the rate
experienced in the Company's other businesses based on the number of
transactions processed. Because of the significant penetration and lower per
transaction prices already existing in the more mature pharmacy EDI sector, the
Company believes that its pharmacy EDI business as presently conducted will
continue 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 growth
rates associated with the Company's medical EDI and patient statement services
business could have a material adverse effect on the Company's business,
operating results or financial condition. There can be no assurance that the mix
of the Company's business or growth rates will continue at their current level.
Dependence on Key Executives. The Company's success depends upon the
continued contributions of its senior management. The Company believes that its
continued future success also will depend upon its ability to attract, motivate
and retain highly-skilled technical, managerial and marketing personnel. The
loss of the services of certain of the Company's key executives or technical
personnel, particularly Fred C. Goad, Jr. and Jim D. Kever, or the inability to
hire and retain qualified personnel could have a material adverse effect upon
the Company's business, operating results or financial condition.
Unauthorized Access to Data Centers. Unauthorized access to the Company's
data centers and misappropriation of ENVOY's proprietary information could have
a material adverse effect on ENVOY's business, operating results or financial
condition. While ENVOY employs what it believes to be appropriate security
measures to protect against unauthorized access to its data centers and
misappropriation of its proprietary information, there can be no assurance that
such unauthorized access or misappropriation could not occur. Likewise, no
assurances can be made as to the security measures, if any, established by third
parties for whom ENVOY processes or transmits health care information.
Certain Anti-takeover Provisions. The charter, bylaws and shareholders'
rights plan of the Company, and Tennessee law, contain certain provisions that
may have the effect of inhibiting a non-negotiated merger or other business
combination involving the Company. Such provisions are intended to encourage any
person interested in acquiring the Company to negotiate with and obtain the
approval of the Company's Board of Directors (the "Board of Directors") in
connection with any such transaction. These provisions include a staggered Board
of Directors, blank check preferred stock, supermajority voting provisions, the
ability to issue stock purchase rights, and the application of Tennessee law
provisions on business combinations. Certain of these provisions may discourage
a future acquisition of the Company not approved by the Board of Directors in
which shareholders might receive a premium value for their shares. As a result,
shareholders who might desire to participate in such a transaction may not have
the opportunity to do so. In addition, the Board of Directors has the power to
designate the issuance of shares of preferred stock. The rights and preferences
for any series or class of preferred stock may be set by the Board of Directors,
in its sole discretion and without approval of the holders of the Common Stock,
and the rights and preferences of any such preferred stock may be superior to
those of the Common Stock, thus adversely affecting the rights of the holders of
Common Stock. Furthermore, there are currently authorized and outstanding
2,800,000 shares of Series B Preferred Stock. The Series B Preferred Stock has a
liquidation preference to the Common Stock and the creation of any other class
or series of preferred stock senior to or pari passu with the Series B Preferred
Stock.
Volatility of Stock Price; Absence of Dividends. From time to time, there
may be significant volatility in the market price for the Common Stock.
Quarterly operating results of the Company, changes in earnings estimates by
analysts, changes in general conditions in the Company's industry or the economy
or the financial markets or other developments affecting the Company could cause
the market price of the Common Stock to fluctuate substantially. In addition, in
recent years the stock market has experienced significant price and volume
fluctuations. This volatility has had a significant effect on the market prices
of securities issued by many companies for reasons unrelated to their operating
performance. For the foreseeable future, it is expected that earnings, if any,
generated from ENVOY's operations will be used to finance the growth of its
business, and that no dividends will be paid to holders of the Common Stock.
10
<PAGE> 13
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock is listed on The Nasdaq Stock Market under the symbol
"ENVY." The following table sets forth, for the periods indicated, the high and
low sale prices for the Common Stock as reported by The Nasdaq Stock Market.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
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
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
1998
First Quarter............................................. $46.63 $26.38
Second Quarter............................................ 55.63 37.50
Third Quarter (through July 2, 1998)...................... 48.25 44.75
</TABLE>
On July 2, 1998, the last reported sale price for the Common Stock on The
Nasdaq Stock Market was $45.75 per share. At June 25, 1998, there were
approximately 5,700 beneficial holders of the Common Stock, including
approximately 227 holders of record.
The Company has never declared or paid a cash dividend on its Common Stock.
It is the present policy of the Board of Directors to retain all earnings to
support operations and to finance expansion; therefore, the Company does not
anticipate declaring or paying cash dividends on the Common Stock in the
foreseeable future. The declaration and payment of dividends in the future will
be determined by the Board of Directors based on a number of factors, including,
but not limited to, the Company's earnings, financial condition and
requirements, restrictions in financing agreements and other factors deemed
relevant by the Board of Directors. Pursuant to the Company's $50 million credit
facility, the Company is prohibited from paying cash dividends on its capital
stock.
11
<PAGE> 14
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below are derived from
the Company's financial statements. The selected consolidated financial
information for the three months ended March 31, 1997 and 1998 are derived from
the unaudited consolidated financial statements which, in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the financial position and the
results of operations for these periods.
Operating results for the three-month period ended March 31, 1998 are not
necessarily indicative of results for the full year. The selected consolidated
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
consolidated financial statements and notes thereto included or incorporated by
reference in this Prospectus. The financial and other statistical data have been
restated to include the accounts and results of operations of the ExpressBill
Companies.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------ ------------------
1995(1) 1996 1997 1997 1998
-------- -------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues.................................................... $34,197 $ 90,572 $137,605 $ 30,763 $42,524
Operating costs and expenses:
Cost of revenues.......................................... 18,967 43,500 64,304 14,380 19,397
Selling, general and administrative expenses.............. 11,156 24,631 32,734 7,760 10,218
Research and development expenses......................... 1,466 1,779 2,135 842 622
Depreciation and amortization expenses(2)................. 2,725 19,508 26,095 6,073 6,993
Merger and facility integration costs(3).................. -- 4,664 -- -- --
Write-off of acquired in-process technology(4)............ -- 30,700 38,000 3,000 --
EMC losses................................................ -- 540 -- -- --
------- -------- -------- -------- -------
Operating income (loss)..................................... (117) (34,750) (25,663) (1,292) 5,294
Other income (expense):
Interest income........................................... 380 1,032 1,312 453 145
Interest expense.......................................... (659) (2,872) (1,577) (386) (437)
------- -------- -------- -------- -------
Income (loss) from continuing operations before income taxes
and loss in investee...................................... (396) (36,590) (25,928) (1,225) 5,002
Provision (benefit) for income taxes........................ (50) 1,717 (5,218) 739 2,744
Loss in investee............................................ (1,776) -- -- -- --
------- -------- -------- -------- -------
Income (loss) from continuing operations.................... $(2,122) $(38,307) $(20,710) $ (1,964) $ 2,258
======= ======== ======== ======== =======
Income (loss) per common share from continuing operations
assuming dilution(5)...................................... $ (0.14) $ (3.22) $ (1.05) $ (0.10) $ 0.09
======= ======== ======== ======== =======
Weighted average shares outstanding assuming dilution....... 14,739 16,519 19,686 18,976 25,102
======= ======== ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------- ---------
1996 1997 1998
-------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $ 47,541 $ 18,027 $ 25,207
Total assets................................................ 140,357 137,523 142,656
Long-term debt, less current portion........................ 8,926 527 231
Preferred stock............................................. 55,021 55,021 41,300
Total shareholders' equity.................................. 108,414 97,559 99,967
</TABLE>
- ---------------
(1) The Company was incorporated in August 1994 as a wholly-owned subsidiary of
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, 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, and the Predecessor was merged into First Data. The Company's
financial statements incorporated by reference herein include financial
information for the Predecessor through June 1995, with the financial
services business shown as a discontinued operation. The above amounts
exclude the results of discontinued operations as a result of the
Predecessor's merger with First Data.
(2) Depreciation and amortization expenses primarily relate to acquisitions and
includes amortization of goodwill and identifiable intangible assets of
$14.6 million and $20.0 million in 1996 and 1997, and $4.6 million and $5.3
million, in the three month periods ended March 31, 1997 and 1998,
respectively. As of March 31, 1998, amortization expense related to
acquisitions was expected to be approximately $19.1 million in 1998, $7.9
million in 1999 and $4.7 million in 2000. Although goodwill associated with
the acquisition of NEIC will become fully amortized during the first quarter
of 1999, the consummation of additional acquisitions may significantly
increase future amortization costs.
(3) The 1996 results include expenses of $4.7 million relating to merger and
facility integration costs in conjunction with the NEIC and Teleclaims
acquisitions.
(4) Results for the years ended December 31, 1996 and 1997 and the three months
ended March 31, 1997 include expenses of $30.0 million, $35.0 million, and
$3.0 million, related to the write-off of acquired in-process technology in
conjunction with the acquisitions of NEIC, HDIC and DSS, respectively.
(5) Net loss per common share for the year ended December 31, 1996 has been
restated to give effect to the beneficial conversion feature of the Series B
Preferred Stock in accordance with EITF D-60. The application of the
beneficial conversion feature of the Series B Preferred Stock prescribed by
EITF D-60, which was promulgated by the SEC in March 1997 subsequent to the
Company's initial accounting treatment relating to the issuance of the
Series B Preferred Stock, requires that the difference between the market
price of the Common Stock on the date of the Series B Preferred Stock
purchase agreement ($14.75 per share) and the conversion price of the Series
B Preferred Stock ($10.75 per share) be reflected as a preferred dividend in
1996. Accordingly, the Company's historical financial statements have been
restated to reflect the aggregate effect of the beneficial conversion
feature as a preferred dividend ($14.9 million) resulting in a net loss per
common share of $3.22 in 1996. The Company previously had reported a net
loss per Common Share of $2.32 in 1996.
12
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with,
and is qualified in its entirety by, the Company's consolidated financial
statements, including the notes thereto, incorporated by reference herein.
OVERVIEW
The Company is a leading provider of EDI and transaction processing
services to participants in the health care market, including pharmacies,
physicians, hospitals, dentists, billing services, commercial insurance
companies, managed care organizations, state and federal government agencies and
others.
On February 27, 1998, the Company completed business combinations with the
ExpressBill Companies pursuant to separate agreements and plans of merger for an
aggregate of 3.5 million shares of Common Stock. These combinations have been
accounted for as poolings of interests, and the historical financial statements
of the Company for all periods have been restated to include the accounts and
results of operations of the ExpressBill Companies.
The Company also has made several acquisitions since the beginning of 1996,
including the acquisitions of NEIC and several other businesses in 1996
(collectively, the "1996 Acquired Businesses") and HDIC and DSS in 1997
(collectively, the "1997 Acquired Businesses"). The 1996 Acquired Businesses and
1997 Acquired Businesses are sometimes collectively referred to herein as the
"Acquired Businesses." These acquisitions were accounted for under the purchase
method of accounting and, as a result, the Company has recorded the assets and
liabilities of the Acquired Businesses at their estimated fair values, with the
excess of the purchase price over these amounts being recorded as goodwill. In
connection with the allocation of purchase price for these Acquired Businesses,
valuations of all identified intangible assets of these Acquired Businesses were
made. The intangible assets of the Acquired Business included in-process
technology projects, among other assets, which were related to research and
development that had not reached technological feasibility and for which there
was no alternative future use. As a result, the purchase price allocated to
these projects was expensed pursuant to applicable accounting pronouncements.
The financial statements for all periods reflect the operations of the Acquired
Businesses for the periods after their respective dates of acquisition.
In connection with the business combinations with certain of the Acquired
Businesses, including NEIC, HDIC and DSS, the Company recorded write-offs of
acquired in-process technology of $38.0 million in 1997 and $30.7 million in
1996. These in-process technology projects primarily included: (i) projects for
the integration of NEIC service offerings into ENVOY product lines; (ii) the
extension and integration of on-line adjudication processes developed by HDIC
into ENVOY service offerings; and (iii) the development of additional interfaces
and functionality for accounts receivable management service offerings provided
by DSS. The fair value of each project was based on analysis of the markets,
cash flows and risks associated with achieving such cash flows. In projecting
these cash flows, revenues were forecasted based on several factors, including
aggregate revenue growth rates for the business as a whole, individual service
offering revenues, characteristics of the potential market for the service
offerings and the anticipated life of the underlying technology. Operating
expenses and resulting profit margins were forecasted based on the
characteristics and cash flow generating potential of each project, and included
assumptions that certain expenses would decline over time as operating
efficiencies were obtained. Cash flows for in-process technology projects were
discounted to present value at rates ranging from 20% to 30%, based on the
evaluation of risks associated with each project.
Total costs incurred for the projects completed from the respective dates
of acquisition through March 1998 totalled approximately $2 million. The
anticipated costs to complete the remaining development of the in-process
technology projects from April 1998 through their various estimated dates of
completion, estimated to be between $1 million and $2 million, are being
expensed as incurred. The Company has not experienced any material variations
from the projected revenue, estimated costs to complete or underlying
projections and assumptions relating to the in-process technology projects.
Furthermore, although the projects are at various
13
<PAGE> 16
stages of completion, the Company has not experienced any delays in the
estimated completion dates which have resulted in material variations to the
projected revenues or cost to complete. The Company currently expects to
complete the development of these projects at various dates during 1998 and 1999
and will begin offering the related products and services to its customers upon
completion; however, it is possible that future developments in the health care
and health care EDI and transaction processing industries, changes in EDI and
transaction processing technology, or changes in other service offerings may
cause the Company to alter or abandon these plans. Failure to complete the
development of these projects in their entirety, or in a timely manner, could
have a material adverse impact on the Company's operating results, financial
condition and results of operations.
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 results of operations of the Government
Services Business are included in the Company's consolidated statements of
operations through the date of disposition, and includes revenues for 1997 of
approximately $466,000. Accordingly, the sale of the Government Services
business is not expected to have a material impact on the Company's future
results of operations.
The Company's revenues principally have been derived from EDI and
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 the ExpressBill Companies and some
of the Acquired Businesses. This revenue includes maintenance, licensing and
support activities, as well as the sale of ancillary software and hardware
products and, in the case of the ExpressBill Companies, certain printing
services.
The Company's revenues generally are comprised of the following types of
EDI and transaction processing services: (i) pharmacy EDI, (ii) medical and
other EDI and (iii) patient statements. The table below shows the number of
transactions processed by the Company for the periods presented:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------- -------------------
1995 1996 1997 1997 1998
------- ------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Pharmacy EDI............................. 363,084 478,526 597,609 146,662 178,512
Medical and other EDI.................... 15,308 132,724 215,437 46,164 71,647
Patient statements....................... 24,582 54,251 99,823 19,546 33,637
------- ------- ------- ------- -------
Totals......................... 402,974 665,501 912,869 212,372 283,796
======= ======= ======= ======= =======
</TABLE>
The transactions reflected above include the transactions of the Acquired
Businesses from the date of acquisition, and include the transactions of the
ExpressBill Companies for all periods.
While pharmacy EDI transactions currently represent a majority of the
Company's total transactions, the fees associated with these transactions are
significantly less on a per transaction basis than those received for medical
EDI and patient statement transactions. As a result, pharmacy EDI revenue
constituted less than 19% of the Company's total revenues in 1997, and less than
17% of the Company's total revenues in the first quarter of 1998. For 1997, the
pharmacy EDI business grew at a rate of approximately 25%, less than half the
rate experienced in the Company's other businesses based on the number of
transactions processed. The Company believes the limited growth in the Company's
pharmacy EDI revenues as compared to the Company's medical EDI and patient
statement revenues primarily is the result of two factors. First, the
acquisitions of the Acquired Businesses have contributed significantly to the
growth of the medical EDI and patient statement business, and the Company has
not made any acquisitions in the pharmacy EDI business. In addition, the Company
believes that growth in the pharmacy EDI business has not been as great as in
the medical EDI and patient statement business because of the larger market
penetration in the more mature pharmacy EDI business. As a result, the Company
expects its pharmacy EDI 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
14
<PAGE> 17
business changes, a decline in the growth rates associated with the Company's
medical EDI and patient statement business could have a material adverse effect
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.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the percentage
relationship certain statements of operations items bear to revenues.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
----------------------- --------------
1995 1996 1997 1997 1998
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues........................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues................................... 55.5 48.0 46.7 46.8 45.6
Selling, general and administrative expenses....... 32.6 27.2 23.8 25.2 24.0
Research and development expenses.................. 4.3 2.0 1.6 2.7 1.5
Depreciation and amortization expenses............. 8.0 21.5 19.0 19.7 16.4
Merger and facility integration costs.............. -- 5.2 -- -- --
Write-off of acquired in-process technology........ -- 33.9 27.6 9.8 --
EMC losses......................................... -- 0.6 -- -- --
----- ----- ----- ----- -----
Operating income (loss)............................ (0.3) (38.4) (18.7) (4.2) 12.5
Interest income.................................... 1.1 1.1 1.0 1.5 0.3
Interest expense................................... (1.9) (3.2) (1.2) (1.3) (1.0)
----- ----- ----- ----- -----
Income (loss) from continuing operations before
income taxes and loss in investee................ (1.2) (40.4) (18.8) (4.0) 11.8
Provision (benefit) for income taxes............... (0.2) 1.9 (3.8) 2.4 6.5
Loss in investee................................... (5.2) -- -- -- --
----- ----- ----- ----- -----
Income (loss) from continuing operations........... (6.2)% (42.3)% (15.1)% (6.4)% 5.3%
===== ===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998 AS COMPARED WITH THREE MONTHS ENDED MARCH 31,
1997
Revenues. Revenues for the quarter ended March 31, 1998 were $42.5 million
compared to $30.8 million for the same period last year, an increase of $11.7
million or 38.0%. The increase in revenue is primarily the result of higher
transaction volumes. In total, transaction volumes increased 33.6% and revenue
increased 38.2%. The increases were primarily the result of medical EDI internal
transaction growth, and, to a lesser extent, the acquisition of HDIC and the
related increase in transaction volume. Without the increased transaction volume
from HDIC, transaction volumes would have increased 28.8% in the first quarter
of 1998 compared to the same period in 1997.
Cost of Revenues. Cost of revenues includes the cost of communications,
computer operations, operating supplies, product development and customer
support, as well as the cost of hardware sales and rebates to third parties for
transaction processing volume. Cost of revenues in the first quarter of 1998 was
$19.4 million compared to $14.4 million for the first quarter of 1997, an
increase of $5.0 million or 34.7%. The dollar increase is attributable to the
additional costs associated with the increased transaction volume and increases
in rebates paid to third parties in connection with medical EDI transactions.
These third parties aggregate medical EDI transactions from health care
providers, but require a clearinghouse (such as ENVOY) with direct connections
to payors in order to complete the processing of the transactions. ENVOY
typically receives revenue from payors on these transactions, and pays rebates
based on volume to certain of
15
<PAGE> 18
these third parties as an inducement to use ENVOY as their clearinghouse for
these transactions. The increase in rebates paid to third parties was
approximately $1.6 million, and primarily results from an increase in the volume
of claims received from certain large third party vendors and claim
clearinghouses. If the mix of revenues continues to shift toward larger vendors
and claim clearinghouses, the Company expects rebates to represent an increasing
portion of its costs of revenues. As a percentage of revenues, cost of revenues
continued to improve to 45.6% in the first quarter of 1998 compared to 46.8% in
the first quarter of 1997. The improvement primarily is attributable to the
Company's ability to spread certain fixed costs of revenue over a larger base of
revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include marketing, finance, accounting and
administrative costs. Selling, general and administrative expenses for the three
months ended March 31, 1998 were $10.2 million compared to $7.8 million in the
same period in 1997, an increase of 30.8%. As a percentage of revenues, however,
selling, general and administrative expenses were 24.0% for the first quarter of
1998 compared to 25.2% for the first quarter of 1997. The improvement is
attributable to the Company's ability to spread its infrastructure costs over a
larger base of revenues. Transaction costs related to the business combinations
with the ExpressBill Companies totaled $780,000 in the first quarter of 1998,
and consisted of approximately $500,000 in legal and accounting fees, $200,000
for financial advisory services and $80,000 in filing fees and other transaction
costs. These amounts are included in selling, general and administrative
expenses. Excluding these transaction costs, selling, general and administrative
expenses as a percentage of revenues for the first quarter of 1998 would have
been 22.1%.
Research and Development Expenses. Expenses related to research and
development of new products are expensed as incurred until technological
feasibility is established for the product. Thereafter, all development costs
are capitalized until the products are available for general use by customers.
Research and development expenses for the three months ended March 31, 1998 were
$622,000 compared to $842,000 for the comparable period in 1997.
Depreciation and Amortization Expenses. Depreciation and amortization
expense relates primarily to host computers, communications equipment and
goodwill and identifiable intangible assets related to acquisitions.
Depreciation and amortization expense for the first quarter of 1998 was $7.0
million compared to $6.1 million for the comparable period in 1997. The increase
is primarily the result of the amortization of goodwill and identifiable
intangible assets related to the 1997 Acquired Businesses. At March 31, 1998,
the Company had net goodwill of $29.2 million associated with the Acquired
Businesses remaining to be amortized over periods of three to 15 years following
the acquisitions. In addition, the Company had net identifiable intangible
assets of $21.0 million remaining to be amortized over two to nine year time
periods, as applicable.
Write-off of Acquired In-Process Technology. The Company incurred a
one-time write-off of acquired in-process technology of $3.0 million in
connection with the March 1997 acquisition of DSS. This amount represents an
allocation of purchase price to projects that consisted primarily of the
development of additional interfaces and functionality for DSS service
offerings. Such amount was charged to expense because the projects related to
research and development that had not reached technological feasibility and for
which there was no alternative future use.
Net Interest Income (Expense). The Company recorded net interest expense
of $292,000 for the three months ended March 31, 1998 compared to net interest
income of $67,000 for the first quarter in 1997. Interest income decreased from
$453,000 in the first quarter of 1997 to $145,000 in the first quarter of 1998.
In August 1997, the Company acquired HDIC for approximately $36.4 million in
cash and the assumption of certain liabilities associated with unfavorable
contracts. Following this acquisition, the Company had less cash available for
investment, accounting for the reduction in interest income in the first quarter
of 1998. Interest expense increased from $386,000 in the first quarter of 1997
to $437,000 in the first quarter of 1998. Interest expense in the first quarter
of 1998 resulted primarily from interest expense that is required to be imputed
in order to account for certain unfavorable long-term contracts assumed in the
HDIC acquisition. Interest expense in the three months ended March 31, 1997
resulted primarily from the Company's $10.0 million 9% convertible subordinated
notes issued in June 1995 (the "Convertible Notes"). In a series of transactions
16
<PAGE> 19
completed during 1996 and 1997, all of the Convertible Notes were converted into
shares of Common Stock and, therefore, were not outstanding during the first
quarter of 1998.
Income Tax Provision. The Company's income tax provision for the first
quarter of 1998 was $2.7 million compared to $739,000 for the comparable period
in 1997. Amortization of certain goodwill and identifiable intangible assets is
not deductible for income tax purposes.
FISCAL YEAR 1997 AS COMPARED WITH 1996
Revenues. Revenues for the year ended December 31, 1997 were $137.6
million compared to $90.6 million for the same period last year, an increase of
$47.0 million or 51.9%. The increase in revenue is primarily due to a 37.2%
increase in transactions in 1997 compared to 1996. Transaction growth was
derived from both internal growth and the Acquired Businesses. Without the
increased transaction volume from the Acquired Businesses, transaction growth
would have been 32.3%. In addition, the acquisition of DSS provided additional
revenues of $2.8 million from software licensing, maintenance and support
activities.
Cost of Revenues. Cost of revenues in 1997 was $64.3 million compared to
$43.5 million for 1996, an increase of $20.8 million or 47.8%. The dollar
increase is attributable to the additional costs associated with the increased
transaction volume, the inclusion of the Acquired Businesses following the date
of acquisition and increases in rebates paid to third parties in connection with
medical EDI transactions, which increased by approximately $4.7 million. As a
percentage of revenues, cost of revenues improved to 46.7% in 1997 compared to
48.0% in 1996. The improvement primarily is attributable to the Company's
ability to spread certain fixed costs of revenue over a larger base of revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for 1997 were $32.7 million compared to $24.6 million in
1996, an increase of 32.9%. The dollar increase is the result of the inclusion
of the Acquired Businesses following the date of acquisition and the required
infrastructure to support the larger base of revenues. As a percentage of
revenues, selling, general and administrative expenses decreased to 23.8% for
1997 compared to 27.2% 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 following the date of acquisition.
Research and Development Expenses. Research and development expenses for
the year ended December 31, 1997 were $2.1 million compared to $1.8 million in
1996.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses for 1997 were $26.1 million compared to $19.5 million for 1996. The
increase in 1997 is primarily the result of the amortization of $20.0 million in
goodwill and identifiable intangible assets related to the Acquired Businesses,
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.
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 acquisitions. These charges represent costs incurred as a direct
result of the plan to integrate NEIC and Teleclaims. 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. These amounts represent an allocation of purchase price to
projects that primarily included: (i) projects for the integration of NEIC
service offerings into ENVOY product lines; (ii) the extension and integration
of on-line adjudication processes developed by HDIC into ENVOY service
offerings; and (iii) the development of additional interfaces and functionality
for accounts receivable management service offerings provided by DSS. Such
amounts were charged to expense because the projects related to research and
development that had not reached technological feasibility and for which there
was no alternative future use.
17
<PAGE> 20
Net Interest Expense. The Company recorded net interest expense of
$265,000 for 1997 compared to net interest expense of $1.8 million for 1996.
Interest income increased to $1.3 million in 1997 compared to $1.0 million in
1996, primarily because of an increase in the amount of cash available for
investment during 1997. In this regard, operating activities provided cash of
$22.0 million in 1997 compared to $3.2 million in 1996, and the Company's August
1996 public offering of 3,320,000 shares of Common Stock provided cash of
approximately $83.0 million. The proceeds from this public offering were used,
in part, to retire indebtedness under a $25 million term loan and $12.9 million
outstanding under the Company's revolving credit facility. Primarily as a result
of these debt repayments, interest expense decreased to $1.6 million in 1997
compared to $2.9 million in 1996.
Income Tax Provision (Benefit). The Company's income tax benefit for 1997
was $5.2 million compared to a tax provision of $1.7 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.
FISCAL YEAR 1996 AS COMPARED WITH 1995
Revenues. Revenues for the year ended December 31, 1996 were $90.6 million
compared to $34.2 million for the same period in 1995, an increase of $56.4
million or 165%. This increase is primarily attributable to additional revenues
generated from the 1996 Acquired Businesses following the date of acquisition
and a 31.8% increase in pharmacy EDI transactions over 1995.
Cost of Revenues. Cost of revenues in 1996 was $43.5 million compared to
$19.0 million in 1995, an increase of 129%. The dollar increase is attributable
to the inclusion of results of the 1996 Acquired Businesses following the date
of acquisition and increased transaction volume in the Company's pre-acquisition
business. As a percentage of revenues, cost of revenues was 48.0% in 1996
compared to 55.5% in 1995. The improvement is attributable to the inclusion of
results of the 1996 Acquired Businesses following the date of acquisition, which
historically 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 $24.6 million compared to $11.2 million in
1995, an increase of 120%. These expenses increased due to the inclusion of
results of the 1996 Acquired Businesses following the date of acquisition and
the additional costs associated with such acquisitions. As a percentage of
revenues, selling, general and administrative expenses decreased to 27.2% for
1996 compared to 32.6% for 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 1996 Acquired Businesses following the date of
acquisition.
Research and Development Expenses. Research and development expenses for
the year ended December 31, 1996 were $1.8 million, compared to $1.5 million in
1995.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses for 1996 were $19.5 million compared to $2.7 million for 1995. The
increase is the result of the amortization of goodwill and identifiable
intangible assets during 1996 of $14.6 million primarily related to the 1996
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.
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
write-off of acquired in-process technology of $30.7 million in 1996 related to
the NEIC and Teleclaims acquisitions. These amounts represent an allocation of
purchase price to projects that consisted primarily of the integration of
service offerings of NEIC and Teleclaims into ENVOY product lines. Such amounts
were charged to expense because the projects related to research and development
that had not reached technological feasibility and for which there was no
alternative future use.
18
<PAGE> 21
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. At December 31, 1995, the Company determined it would
terminate the management agreement and would not exercise its option to purchase
the remaining 82.5% interest in EMC, principally as a result of similar products
and technology being available to the Company through the acquisition of NEIC,
EMC's poor operating performance and the belief that operating losses at EMC
likely would continue. As such, the Company determined that it was probable an
impairment of its equity investment in EMC as of December 31, 1995 had occurred
and recorded an adjustment to recognize an impairment in the carrying value of
its investment, including writing off advances and providing for future
commitments to EMC at the time when the Company's investment was recorded at net
realizable value of zero. 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. 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.
Net Interest Expense. The Company recorded net interest expense in 1996 of
$1.8 million compared to $279,000 of net interest expense for 1995. Interest
income increased to $1.0 million in 1996 compared to $380,000 in 1995, primarily
because of an increase in the amount of cash available for investment following
the Company's August 1996 public offering of 3,320,000 shares of Common Stock.
Interest expense increased to $2.9 million in 1996 compared with $659,000 in
1995, primarily as a result of borrowings under the Convertible Notes and
borrowings under the Company's bank credit facilities.
Income Tax Provision (Benefit). The Company's income tax provision in 1996
was $1.7 million compared to an income tax benefit of $50,000 in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred operating losses in recent years primarily as a
result of the write-off of acquired in-process technology related to the
Acquired Businesses, together with substantial non-cash depreciation and
amortization charges. During these periods, however, operations have generated
positive cash flows of $1.8 million in 1995, $3.2 million in 1996, $22.0 million
in 1997 and $12.7 million for the three months ended March 31, 1998.
Investing activities consist primarily of payments for acquired businesses
and purchases of property and equipment. Investing activities used $13.3 million
in 1995, $94.0 million in 1996, $51.2 million in 1997 and $1.4 million in the
three months ended March 31, 1998.
Financing activities consist primarily of proceeds from the issuance of
capital stock, and proceeds from and payments on debt. Financing activities
provided $7.4 million in 1995, $127.2 million in 1996 and $1.0 million in 1997,
and used $1.6 million in the three months ended March 31, 1998.
On May 6, 1998, the Company completed the acquisition of Synergy for $10.0
million in cash. Following this acquisition and as of June 23, 1998, the Company
had available cash and cash equivalents of approximately $13.0 million.
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 $8.7 million and $5.4 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.
19
<PAGE> 22
The Company is expensing as incurred all costs associated with system
changes related to its Year 2000 compliance project. 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 incurred during 1998. These costs are
being funded with available cash. See "Risk Factors -- Year 2000 Compliance."
At June 30, 1998, the Company had no amounts outstanding under its $50
million revolving credit facility. Any future borrowings made under 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 future borrowings under the
credit facility would 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 to
shareholders of the Company, acquisitions, incurrence of debt and other
restrictive provisions; however, there are no restrictions on the ability of the
Company's subsidiaries to transfer funds to the Company in the form of
dividends, loans or advances. The credit facility is secured by substantially
all of the assets of the Company and its subsidiaries.
In February 1998, the Company issued 3.5 million shares of Common Stock in
connection with the ExpressBill Companies' business combinations. Also in
February 1998, 930,233 shares of the Series B Preferred Stock were converted
into an equal number of shares of Common Stock. As a result of these
transactions, the number of shares of Common Stock outstanding increased by
approximately 4.4 million shares, or 27%, to 21.1 million shares.
From time to time, the Company has engaged and will continue to engage in
acquisition discussions with 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
increased interest expense or 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 $50.0 million revolving credit facility will
provide the capital resources necessary to meet its liquidity and cash flow
requirements over the next 12 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. As of March 31, 1998, the
Company's long-term obligations totaled $8.8 million, and consisted of $231,000
in long-term debt net of current portion, and $8.6 million in long-term
obligations related to unfavorable contracts assumed in connection with the HDIC
acquisition. The Company's available cash is invested in interest bearing
securities with maturities of up to 30 days.
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.
20
<PAGE> 23
BUSINESS
ENVOY is a leading provider of EDI and transaction processing services to
participants in the health care market, including pharmacies, physicians,
hospitals, dentists, billing services, commercial insurance companies, managed
care organizations, state and federal 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. Through the Company's
recently completed business combinations with the ExpressBill Companies, the
Company believes that it has the largest patient statement processing and
printing services business in the United States, processing more than 100
million patient statements annually. ENVOY's transaction network, which
processed approximately 984.3 million transactions in the 12 months ended March
31, 1998, consisted of approximately 200,000 physicians, 35,000 pharmacies,
42,000 dentists, 4,600 hospitals and 811 payors, including approximately 46 Blue
Cross Blue Shield Plans, 59 Medicare Plans and 38 Medicaid Plans as of May 31,
1998.
INDUSTRY BACKGROUND
Throughout the 1980's, advances in computer software, telecommunications
and microprocessor technology enabled the development of on-line, real-time
systems that electronically capture and transmit information, replacing the
recording and processing of transaction information on paper. In addition to
offering greater convenience, these electronic systems reduce processing costs,
settlement delays and losses from fraudulent transactions. The earliest and most
significant advances in electronic transaction processing occurred in the
financial services market, particularly in the areas of credit card
authorization and settlement. The Company believes the evolution of electronic
transaction processing in the financial services market has created the
framework for automation of other markets, such as health care, still dominated
by paper-based processing.
The first major departure from paper-based claims processing in the health
care market occurred in the late 1980s 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 and 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 EDI and transaction
processing for certain portions of the health care market has increased over the
past few years, many health care transactions continue to be paper-based and
manually-processed. Existing EDI and transaction processing 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.
21
<PAGE> 24
Health care providers initiate EDI and 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 86% of the 1.7
billion third-party pharmacy claims processed in 1997 were processed
electronically. The Company believes that only a small percentage of nonclaim
pharmacy transactions, such as the delivery of prescriptions by the physician to
the pharmacist or formulary inquiries to pharmacy benefit managers, are
delivered electronically through real-time on-line systems. The Company believes
that there are opportunities to expand EDI and transaction 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
correspondingly.
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.
STRATEGY
ENVOY's strategy is to maintain and enhance its leadership position in the
health care EDI and transaction processing industry. The key elements of this
strategy include:
Leverage current strengths in the health care EDI and transaction
processing industry. ENVOY intends to continue to expand its real-time
pharmacy and health care EDI and transaction processing business through
aggressive marketing and strategic alliances with third parties that have
access to a large number of health care industry participants. The Company
believes that its strengths include an extensive transaction network and
range of health care EDI delivery platforms between payors and providers
and high quality customer service. In addition, the Company will seek to
leverage its transaction volume in an effort to be the low cost provider of
health care EDI services.
Expand product and service offerings. The Company believes that much
of the information that flows from and among each of the various
participants in the health care market can be transmitted electronically
and by third parties, such as the Company, with greater efficiency and cost
effectiveness. To further expand its health care EDI and transaction
processing business, the Company has in development and testing additional
service offerings, such as electronic prescriptions, lab orders, lab
results and other transactions. In this regard, the Company's electronic
prescription transaction processing services currently are being tested in
the field and are scheduled to be rolled out during the first quarter of
1999, and lab orders and lab results transaction services currently are
being developed by the Company in cooperation with a national laboratory
and independent practice association. In addition, the Company's
22
<PAGE> 25
software enables providers and payors to electronically process
transactions such as remittance advice, patient rosters, electronic fund
transfers and E-mail.
Extend EDI and transaction processing network within the health care
industry. The Company plans to increase the connection to and
interconnection among physicians, hospitals, pharmacies, managed care
organizations and other third-party payors, laboratories, medical equipment
suppliers and, eventually, employers and patients. The Company believes
that a higher degree of interconnectivity among these health care
participants will increase the overall level of electronic and related
transactions.
Pursue strategic acquisitions. The Company expects to continue to
pursue acquisitions of related health care information businesses in order
to achieve greater economies of scale and to remain a cost effective
provider of health care EDI and transaction processing services. In
addition, the Company believes that as the currently fragmented health care
EDI and transaction processing industry grows and consolidates, acquisition
opportunities should arise for the Company as well as other market
competitors and, thus, lead to the emergence of a few industry leaders. The
Company believes that, among other opportunities, low volume processors may
eventually seek to sell their portfolios of physician and hospital customer
relationships to higher volume health care EDI and transaction processors
such as the Company. The Company also intends to continue to pursue
strategic acquisitions as a means of broadening its product and service
offerings, as it did with the business combinations with the ExpressBill
Companies and the acquisition of Synergy.
COMPANY SERVICES
ENVOY provides various EDI and transaction processing services to
participants in the health care market.
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 commences with an 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
information regarding the amount and timing of the pending payment. As of March
31, 1998, ENVOY's pharmacy EDI network was linked to approximately 35,000 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. Through its EDI and transaction processing network, the Company
has real-time access to several of the largest managed care and commercial
insurer databases in the United States, including Prudential Healthcare, CIGNA,
AUSHC, Oxford Health Plans, MetraHealth, Pacificare, Empire Blue Cross and Blue
Shield and Blue Cross and Blue Shield for the National Capital Area, and is a
sponsored participant to the Blue Cross and Blue Shield BluesNet network. For
Medicaid eligibility verification and related transactions, the Company
currently has access to databases for 27 states. In addition, if a 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 not as time-sensitive or
as easily processed on a real-time basis and, as a result are processed on a
collective and delayed basis, usually daily. 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
23
<PAGE> 26
collects and verifies receipt of the claims and performs reformatting and
editing required to conform to a particular payor's specifications, aggregates
daily transactions by payor and transmits claims to payors based upon each
payor's chosen communications protocols. As of March 31, 1998, ENVOY's
transaction network was connected with 668 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. These products, and the functions they
enable, include the following:
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 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
transaction processing network. 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
substantially all of the assets of DSS in March 1997, the Company acquired
EDI technology used for automatic posting of transactions into a hospital
or practice management information system. 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 business combinations with the ExpressBill
Companies, the Company is able to offer automated patient billing services to
the hospital and other health care provider markets. The Company believes it has
the largest stand alone patient statement processing and printing services
business in the United States, processing more than 100 million patient
statements annually. The Company's patient statement services include electronic
data transmission and formatting, statement printing and mailing services for
health care providers and practice management system vendors.
24
<PAGE> 27
Customer Service. As an adjunct to its healthcare EDI and transaction
processing services, the Company maintains customer service facilities with help
desks for 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 health care EDI and 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 June 5, 1998, ENVOY employed approximately 115 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, including major health care practice
management system vendors. These relationships give ENVOY access to a large
health care provider population as the Company expands the breadth of its
services from the payor to the health care providers' desktop.
In the pharmacy segment, the Company traditionally has 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. 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. In addition, the Company works closely with practice management
system vendors to provide an integrated solution to health care industry
participants.
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, AUSHC, that accounted for
approximately 12% of the Company's revenues during 1997. 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. The Stratus systems are scaleable and 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-up 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
25
<PAGE> 28
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
to GTEDS. 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 GTEDS requires the processor to maintain 24 hours a day, seven days a week
processing capability and a "hot site" disaster recovery system. The Company's
current contract with GTEDS 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 the EDI and 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 and
transaction processing market not only from other companies that are similarly
specialized, including former regional partners of the Company that have direct
provider relationships, but also from companies involved in other, more highly
developed sectors of the EDI and transaction processing market. Such companies
could enter into, or focus more attention on, the health care EDI and
transaction processing market as it develops. In addition, the Company faces
competition by selected providers bypassing the Company's 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 and transaction
processing market.
Factors influencing competition in the health care EDI and transaction
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 June 25, 1998, ENVOY had approximately 840 employees, including
approximately 580 salaried and 260 non-salaried employees (including temporary
employees). None of these employees is represented by a union. ENVOY believes
its relationship with its employees is good.
26
<PAGE> 29
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 point-of-service devices and proprietary software. Any delays in
obtaining necessary certifications with respect to future products and services
could delay their introduction. In addition, the Federal Communications
Commission requires ENVOY's products and services to comply with certain rules
and regulations governing performance. The Company believes its existing
products and services comply with all current rules and regulations. The Company
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 EDI and
transaction data. See "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.
27
<PAGE> 30
MANAGEMENT
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Fred C. Goad, Jr.(1)......... 57 Chairman of the Board, Co-Chief Executive Officer and
Director
Jim D. Kever(1).............. 45 President, Co-Chief Executive Officer and Director
Kevin M. McNamara............ 42 Senior Vice President, Chief Financial Officer and
Director
Harlan F. Seymour............ 48 Senior Vice President of Corporate Strategy and
Development and Director
William E. Ford(2)........... 36 Director
W. Marvin Gresham(3)......... 68 Director
Laurence E. Hirsch(1)(3)..... 52 Director
Richard A. McStay(2)......... 61 Director
Dewey A. Greene.............. 42 Chief Operating Officer
Sheila H. Schweitzer......... 50 Senior Vice President of Operations
Gregory T. Stevens........... 33 Vice President, General Counsel and Secretary
</TABLE>
- ---------------
(1) Member of Executive Committee of the Board of Directors.
(2) Member of Audit Committee of the Board of Directors.
(3) Member of Compensation Committee of the Board of Directors.
Mr. Goad has served as the Company's Chairman of the Board 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 since the Company's incorporation
in August 1994. Prior to such time, he served as the Company's Executive Vice
President, Secretary and General Counsel. Mr. Kever had served as a Director and
Secretary, Treasurer and General Counsel of the Predecessor since 1981 and as
Executive Vice President since 1984. Mr. Kever 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 subsidiary of First Financial Management Corporation ("FFMC"),
from October 1994 to December 1995. Mr. McNamara served as Senior Executive Vice
President and Chief Financial Officer of National Bancard Corporation, another
subsidiary of FFMC, 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. Prior to such time, 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 FFMC, for 11 years, 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.
Mr. Ford was appointed a Director of the Company on March 6, 1996. Mr. Ford
has served as a managing member of General Atlantic Partners LLC, the general
partner of General Atlantic Partners 25, L.P. and as a general partner of GAP
Coinvestment Partners, L.P. since 1991. Mr. Ford also serves as a
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<PAGE> 31
Director of GT Interactive Software Corporation, a provider of entertainment and
educational consumer software; MAPICS, Inc., a provider of enterprise resource
planning software applications for manufacturing enterprises; LHS Group, Inc., a
provider of scaleable client/server-based billing solutions to carriers in the
telecommunications industry; SS&C Technologies, Inc., a financial software
company; and E*Trade Group, Inc., a discount on-line electronic brokerage
company.
Mr. Gresham has served as a Director of the Company since February 1995 and
had served as a Director of the Predecessor from 1981 through June 6, 1995. Mr.
Gresham is the retired President of Gresham Drugs, Inc., a chain of pharmacies
in the State of Florida.
Mr. Hirsch has served as a Director of the Company since February 1995 and
had served as a Director of the Predecessor from 1987 through June 6, 1995. Mr.
Hirsch has served as the President of Centex Corporation, a corporation engaged
in home building, mortgage banking and related businesses, from March 1985 to
July 1991, as its Chief Executive Officer since July 1988, and as its Chairman
of the Board of Directors since July 1991. Mr. Hirsch also serves as a Director
of Commercial Metals Company, a company engaged in the manufacturing and
recycling of steel and metal products, and as a Trustee of BlackRock Investors,
Inc., a registered investment company.
Mr. McStay has served as a Director of the Company since February 1995 and
had served as a Director of the Predecessor from 1985 through June 6, 1995. Mr.
McStay served as President of Southern Capital Advisors, Inc., the investment
advisory subsidiary of Morgan Keegan & Company, Inc., from 1986 until his
retirement in March 1998, and is a Director of TBC Corporation, a wholesaler of
automobile tires and accessories.
Mr. Greene has served as the Company's Chief Operating Officer since March
1998. Before joining the Company, Mr. Greene served from March 1994 to September
1997 as a division president for Columbia/ HCA Healthcare Corporation. Prior to
such time, he served as Chief Executive Officer of Longview Regional Hospital, a
wholly-owned subsidiary of HealthTrust, Inc., from July 1991 to March 1994.
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. From 1990 until he joined the Company in September 1996,
Mr. Stevens was an attorney with the law firm of Bass, Berry & Sims PLC in
Nashville, Tennessee.
29
<PAGE> 32
SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common Stock by the Selling Shareholders as of , 1998, and
as adjusted to reflect the sale of the Common Stock offered hereby.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK SHARES OF COMMON
BENEFICIALLY STOCK TO BE BENEFICIALLY
OWNED PRIOR TO OWNED
OFFERING(1) SHARES AFTER OFFERING(1)
------------------------ BEING ------------------------
NAME NUMBER PERCENT(2) OFFERED NUMBER PERCENT(2)
- ---- --------- ---------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Richard B. McIntyre/The McIntyre
Charitable Remainder Trust DTD
06/02/98(3)(4)................. 2,131,000 10.1%/8.9% 965,000 1,166,000 5.5%/4.9 %
Michael F. Marolf, Sr.(3)........ 713,854 3.4/3.0 305,937 407,917 1.9/1.7
Jeffrey B. Marolf(3)............. 217,048 1.0/* 93,021 124,027 */*
Lisa A. Marolf(3)................ 217,048 1.0/* 93,021 124,027 */*
Michael F. Marolf, Jr.(3)........ 217,048 1.0/* 93,021 124,027 */*
Fred C. Goad, Jr.(5)............. 624,849(6) 2.9/2.6 100,000 524,849 2.4/2.2
Jim D. Kever(7).................. 710,526(8) 3.3/2.9 100,000 610,526 2.8/2.5
--------- --------- --------- --------- ---------
Total.................. 1,750,000
=========
</TABLE>
- ---------------
* less than one percent
(1) For the purpose of determining "beneficial ownership," the rules of the SEC
require that every person who has or shares the power to vote or dispose of
shares of stock be reported as a "beneficial owner" of all shares as to
which such power exists. As a consequence, multiple persons may be deemed to
be the "beneficial owners" of the same securities. The SEC rules also
require that certain shares of stock that a beneficial owner has the right
to acquire pursuant to the exercise of stock options within 60 days of the
date as of which information is reported are deemed to be outstanding for
the purpose of calculating the percentage ownership of such owner, but are
not deemed outstanding for the purpose of calculating the percentage
ownership of any other person. At the close of business on May 31, 1998,
there were 21,108,483 and 2,800,000 shares of Common Stock and Series B
Preferred Stock, respectively, outstanding.
(2) The second percentage assumes conversion of all outstanding shares of Series
B Preferred Stock into Common Stock.
(3) The indicated shareholder received the shares of Common Stock in connection
with the Company's business combinations with the ExpressBill Companies. In
connection with these business combinations, the former shareholders of the
ExpressBill Companies received the right to demand the registration of the
shares being offered hereby pursuant to a Registration Rights Agreement,
dated February 27, 1998.
(4) The shares of Common Stock beneficially owned by Mr. McIntyre include: (a)
854,000 shares of Common Stock held by Aggie Titan Limited Partnership, of
which Mr. McIntyre is the Managing General Partner; and (b) 105,000 shares
of Common Stock held by The McIntyre Charitable Remainder Trust, of which
Mr. McIntyre is the trustee, and of which Mr. McIntyre and his wife are the
sole beneficiaries. Of the shares indicated as being offered by Mr.
McIntyre, 860,000 shares are held in the name of Mr. McIntyre individually
and 105,000 shares are held in the name of The McIntyre Charitable Remainder
Trust.
(5) Mr. Goad is the Chairman of the Board, Co-Chief Executive Officer and a
Director of ENVOY. See "Management."
(6) Includes 400,000 shares issuable pursuant to exercisable options for the
purchase of Common Stock. Also includes 13,126 shares of Common Stock held
by Mr. Goad's spouse. Mr. Goad disclaims beneficial ownership of the shares
held by his spouse.
(7) Mr. Kever is the President, Co-Chief Executive Officer and a Director of
ENVOY. See "Management."
(8) Includes 490,000 shares issuable pursuant to exercisable options for the
purchase of Common Stock.
30
<PAGE> 33
UNDERWRITING
Upon the terms and subject to conditions stated in the Underwriting
Agreement dated the date hereof, each of the Underwriters named below (the
"Underwriters"), has severally agreed to purchase, and the Selling Shareholders
have agreed to sell to each such Underwriter, shares of Common Stock which equal
the number of shares of Common Stock set forth opposite the name of such
Underwriter below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Smith Barney Inc............................................
Morgan Stanley & Co. Incorporated...........................
J.C. Bradford & Co. ........................................
Deutsche Morgan Grenfell Inc................................
Hambrecht & Quist LLC.......................................
Loewenbaum & Company Incorporated...........................
---------
Total............................................. 1,750,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares are subject to
approval of certain legal matters by counsel and to certain other conditions.
The Underwriters are obligated to take and pay for all shares of Common Stock
offered hereby (other than those covered by the over-allotment option described
below) if any such shares are taken.
The Underwriters propose to offer a portion of the shares directly to the
public at the public offering price set forth on the cover page of this
Prospectus and a portion of the shares to certain dealers at a price which
represents a concession not in excess of $ per share below the public
offering price. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to other underwriters or to
certain other dealers. After the initial offering of the shares to the public,
the public offering price and such concessions may be changed by the
Underwriters.
The Selling Shareholders have granted to the Underwriters an option,
exercisable for 30 days from the date of this Prospectus, to purchase up to
262,500 additional shares of Common Stock at the price to public set forth on
the cover page of this Prospectus, less the underwriting discounts and
commissions. To the extent such option is exercised, each Selling Shareholder
will be obligated to sell approximately the same percentage of such additional
shares as the number of shares set forth opposite such Selling Shareholder's
name in the table of Selling Shareholders bears to the total number of shares
listed in such table. The Underwriters may exercise such option to purchase
additional shares solely for the purpose of covering over-allotments, if any, in
connection with the offering of the shares offered hereby. To the extent such
option is exercised, each Underwriter will be obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares as the number of shares set forth opposite each Underwriter's name in the
preceding table bears to the total number of shares listed in such table.
The Company, the directors and certain officers of the Company and the
Selling Shareholders have agreed that they will not, without the prior written
consent of Smith Barney Inc., for a period of 90 days after the date of this
Prospectus, offer, sell, contract to sell, pledge or otherwise dispose of, or
file (or participate in the filing of) a registration statement with the SEC in
respect of, or establish or increase a put equivalent position or liquidate or
decrease a call equivalent position within the meaning of Section 16 of the
Securities and Exchange Act of 1934, as amended (the "Exchange Act"), with
respect to, any shares of capital stock of the Company or any securities
convertible into or exercisable or exchangeable for such capital stock, or
publicly announce an intention to effect any such transaction, other than with
respect to shares of Common Stock disposed of as bona fide gifts approved by
Smith Barney Inc. or capital stock in connection with certain acquisitions.
The Company, the Selling Shareholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act of 1933, as amended (the "Securities Act").
31
<PAGE> 34
In connection with the Offering and in compliance with applicable law, the
Underwriters may over-allot (i.e., sell more Common Stock than the total amount
shown on the list of Underwriters and participations which appear above) and may
effect transactions which stabilize, maintain or otherwise affect the market
price of the Common Stock at levels above those which might otherwise prevail in
the open market. Such transactions may include placing bids for the Common Stock
or effecting purchases of Common Stock for the purpose of pegging, fixing or
maintaining the price of the Common Stock for the purpose of reducing a short
position created in connection with the Offering. A short position may be
covered by exercise of the option described above in lieu of or in addition to
open market purchases. In addition, the contractual arrangements between the
Underwriters include a provision whereby, if the Underwriters purchase Common
Stock in the open market for the account of the Underwriters and the securities
purchased can be traced to a particular Underwriter or member of the selling
group, the Underwriters may require the Underwriter or selling group member in
question to purchase the Common Stock in question at the cost price to the
Underwriters or may recover from (or decline to pay to) the Underwriter or
selling group member in question the selling concession applicable to the
securities in question. The Underwriters are not required to engage in any of
these activities, and any such activities, if commenced, may be discontinued at
any time.
Certain Underwriters and their affiliates have provided and may continue to
provide investment banking and other services to the Company. In particular, in
connection with the Company's business combinations with the ExpressBill
Companies in February 1998, Hambrecht & Quist LLC provided financial advisory
services to the Company, and received customary compensation therefor. Also, in
connection with this offering, Trilogy Capital Partners ("Trilogy") is being
paid a referral fee of $50,000 by the Underwriters. Trilogy provided financial
advisory services to the former shareholders of the ExpressBill Companies in
connection with the Company's business combinations with the ExpressBill
Companies, and may continue to provide such services to the former shareholders
of the ExpressBill Companies in the future.
LEGAL MATTERS
Certain legal matters with respect to the Common Stock offered hereby will
be passed upon for the Company and for Messrs. Goad and Kever by Bass, Berry &
Sims PLC, Nashville, Tennessee. Certain legal matters with respect to the Common
Stock offered hereby will be passed upon for the remaining Selling Shareholders
by Graham & James LLP, Palo Alto, California. Certain legal matters with respect
to the shares of Common Stock offered hereby will be passed upon for the
Underwriters by Dewey Ballantine LLP, New York, New York, who will rely on Bass,
Berry & Sims PLC for matters of Tennessee law.
EXPERTS
The consolidated financial statements and the schedule of ENVOY at December
31, 1997 and 1996, and for each of the three years in the period ended December
31, 1997, incorporated by reference in the registration statement, of which this
Prospectus forms a part, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon incorporated by reference
elsewhere herein, and are based in part on the reports of Arthur Andersen LLP,
independent public accountants. The financial statements and schedule referred
to above are incorporated by reference herein in reliance upon such reports
given upon the authority of such firms as experts in accounting and auditing.
With respect to the ExpressBill Companies, the financial statements of
Professional Office Services, Inc. and XpiData, Inc. incorporated by reference
in this Prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are
incorporated herein in reliance upon the authority of said firm as experts in
giving such reports. The financial statements of Automated Revenue Management,
Inc. have not been incorporated by reference herein due to the immaterial nature
of its financial position and results of operations.
32
<PAGE> 35
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Exchange Act
and, in accordance therewith, files reports, proxy statements and other
information with the SEC. Such reports, proxy statements and other information
may be inspected and copied at the office of the SEC at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549 or at its Regional Offices located in the
Citicorp Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661
and Seven World Trade Center, Suite 1300, New York, New York 10007. Copies of
such material also may be obtained from the Public Reference Section of the SEC,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Company's public filings are also available to the public at the web site
maintained by the SEC at "http://www.sec.gov." The Common Stock is listed on The
Nasdaq Stock Market, and such reports, proxy statements and other information
can also be inspected at the offices of Nasdaq Operations, 1735 K Street, N.W.,
Washington, D.C. 20006.
The Company has filed with the SEC a Registration Statement on Form S-3,
including amendments thereto, relating to the Common Stock offered hereby (the
"Registration Statement"). This Prospectus, which is part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. For further information with
respect to the Company and the Common Stock offered hereby, reference is hereby
made to the Registration Statement and such exhibits and schedules, which may be
inspected and copied in the manner and at the locations described above.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to are not necessarily complete and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement or as previously filed with the SEC and
incorporated herein by reference.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents or portions of documents filed by the Company with
the Commission are incorporated herein by reference:
(1) Annual Report on Form 10-K for the year ended December 31, 1997.
(2) Quarterly Report on Form 10-Q for the quarter ended March 31,
1998.
(3) Current Reports on Form 8-K dated February 23, 1998, February 27,
1998 (as amended by Form 8-K/A, dated May 5, 1998) and July 2, 1998.
(4) The description of the Common Stock contained in the Company's
Registration Statement under the Exchange Act on Form 10 on November 1,
1994, as amended through Post-Effective Amendment No. 4, filed on May 4,
1995.
All reports and other documents filed by the Company pursuant to Sections
13(a), 13(c), 14 or 15 (d) of the Exchange Act after the date of this Prospectus
and prior to the termination of the offering of Common Stock hereunder shall be
deemed to be incorporated by reference in this Prospectus and to be part hereof
from the filing date of such documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein,
or in any other subsequently filed document that also is incorporated or is
deemed to be incorporated by reference herein, modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
Subject to the foregoing, all information appearing in this Prospectus is
qualified in its entirety by the information appearing in the documents
incorporated herein by reference.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON WRITTEN OR ORAL
REQUEST, AT NO CHARGE, FROM THE COMPANY. REQUESTS SHOULD BE DIRECTED TO THE
COMPANY, 15 CENTURY BOULEVARD, SUITE 600, NASHVILLE, TENNESSEE 37214, ATTENTION:
INVESTOR RELATIONS.
33
<PAGE> 36
======================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR BY ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES
OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THOSE TO WHICH IT
RELATES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH OFFER
IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT
THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Price Range of Common Stock and
Dividend Policy..................... 11
Selected Consolidated Financial
Data................................ 12
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 13
Business.............................. 21
Management............................ 28
Selling Shareholders.................. 30
Underwriting.......................... 31
Legal Matters......................... 32
Experts............................... 32
Available Information................. 33
Incorporation of Certain Information
by Reference........................ 33
</TABLE>
======================================================
======================================================
1,750,000 SHARES
(ENVOY CORPORATION LOGO)
COMMON STOCK
------------
PROSPECTUS
JULY , 1998
------------
SALOMON SMITH BARNEY
MORGAN STANLEY DEAN WITTER
J.C. BRADFORD & CO.
DEUTSCHE MORGAN GRENFELL
HAMBRECHT & QUIST
LOEWENBAUM & COMPANY
INCORPORATED
======================================================
<PAGE> 37
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<CAPTION>
SELLING
COMPANY SHAREHOLDERS
-------- ------------
<S> <C> <C>
SEC registration fee........................................ $ -- $ 23,377
NASD fee.................................................... -- 8,425
*Accounting fees and expenses............................... 90,000 --
*Legal fees and expenses.................................... 100,000 30,000
*Printing and engraving expenses............................ 22,000 118,198
*Blue Sky fees and expenses................................. 10,000 --
*Miscellaneous expenses..................................... 8,000 --
-------- --------
*Total............................................ $230,000 $180,000
======== ========
</TABLE>
- ---------------
* Estimated.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Tennessee Business Corporation Act ("TBCA") provides that a corporation
may indemnify any of its directors and officers against liability incurred in
connection with a proceeding if (i) the director or officer acted in good faith,
(ii) in the case of conduct in his or her official capacity with the
corporation, the director or officer reasonably believed such conduct was in the
corporation's best interest, (iii) in all other cases, the director or officer
reasonably believed that his or her conduct was not opposed to the best interest
of the corporation, and (iv) in connection with any criminal proceeding, the
director or officer had no reasonable cause to believe that his or her conduct
was unlawful. In actions brought by or in the right of the corporation, however,
the TBCA provides that no indemnification may be made if the director or officer
was adjudged to be liable to the corporation. In cases where the director or
officer is wholly successful, on the merits or otherwise, in the defense of any
proceeding instigated because of his or her status as an officer or director of
a corporation, the TBCA mandates that the corporation indemnify the director or
officer against reasonable expenses incurred in the proceeding. The TBCA also
provides that in connection with any proceeding charging improper personal
benefit to an officer or director, no indemnification may be made if such
officer or director is adjudged liable on the basis that personal benefit was
improperly received. Notwithstanding the foregoing, the TBCA provides that a
court of competent jurisdiction, upon application, may order that an officer or
director be indemnified for reasonable expenses if, in consideration of all
relevant circumstances, the court determines that such individual is fairly and
reasonably entitled to indemnification, whether or not the standard of conduct
set forth above was met.
Article 8 of the Amended and Restated Charter (the "Charter") of the
Company and its Amended and Restated Bylaws (the "Bylaws") provide that the
Company shall indemnify against liability, and advance expenses to, any present
or former director or officer of the Company to the fullest extent allowed by
the TBCA, as amended from time to time, or any subsequent law, rule or
regulation adopted in lieu thereof. Additionally, the Charter provides that no
director of the Company shall be personally liable to the Company or any of its
shareholders for monetary damages for breach of any fiduciary duty except for
liability arising from (i) any breach of a director's duty of loyalty to the
Company or its shareholders, (ii) acts or omissions not in good faith or which
involved intentional misconduct or a knowing violation of law, (iii) any
unlawful distributions, or (iv) receiving any improper personal benefit. The
Company has entered into indemnification agreements with each of the Company's
directors and executive officers.
The Company currently has in effect an executive liability policy which
provides coverage for its directors and officers in amounts of $15.0 million per
claim and $15.0 million for annual aggregate claims. The policy covers any
error, misstatement, act or omission, or breach of duty committed by a director
or officer, subject to certain specified exclusions.
II-1
<PAGE> 38
The proposed form of the Underwriting Agreement filed as Exhibit 1 to this
Registration Statement contains certain provisions relating to the
indemnification of the Company and its controlling persons by the Underwriters
and relating to the indemnification of the Underwriters by the Company and its
controlling persons.
ITEM 16. EXHIBITS.
See Index to Exhibits on Page II-4.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange
Act that is incorporated by reference in the Registration Statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the registrant
pursuant to the foregoing provisions, the registrant has been informed that in
the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered hereunder, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-2
<PAGE> 39
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on this Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in Nashville, Tennessee on July 6, 1998.
ENVOY CORPORATION
By: /s/ FRED C. GOAD, JR.
------------------------------------
Fred C. Goad, Jr.
Chairman, Co-Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ FRED C. GOAD, JR. Chairman of the Board, Co-Chief July 6, 1998
- ----------------------------------------------------- Executive Officer and Director
Fred C. Goad, Jr.
* President, Co-Chief Executive July 6, 1998
- ----------------------------------------------------- Officer and Director
Jim D. Kever
* Senior Vice President, Chief July 6, 1998
- ----------------------------------------------------- Financial Officer and Director
Kevin M. McNamara (Principal Accounting Officer)
* Senior Vice President of July 6, 1998
- ----------------------------------------------------- Corporate Strategy and
Harlan F. Seymour Development and Director
* Director July 6, 1998
- -----------------------------------------------------
William E. Ford
* Director July 6, 1998
- -----------------------------------------------------
W. Marvin Gresham
* Director July 6, 1998
- -----------------------------------------------------
Laurence E. Hirsch
* Director July 6, 1998
- -----------------------------------------------------
Richard A. McStay
</TABLE>
*By: /s/ FRED C. GOAD, JR.
-------------------------------
Fred C. Goad, Jr.
Attorney-in-fact
II-3
<PAGE> 40
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <C> <S>
1 -- Underwriting Agreement*
4.1 -- Charter, as amended(1)
4.2 -- Shareholder Rights Plan(2)
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)
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(4)
5 -- Opinion of Bass, Berry & Sims PLC
23.1 -- Consent of Ernst & Young LLP
23.2 -- Consent of Arthur Andersen LLP
23.3 -- Consent of Bass, Berry & Sims PLC (included in Exhibit 5)
24 -- Power of Attorney (included on page II-3)**
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed.
(1) Charter as originally amended incorporated by reference to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995 and
Certificate of Designations setting forth terms of Series B Preferred Stock
incorporated by reference to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1997.
(2) Incorporated by reference to the Registrant's Form 10, as amended,
Commission File No. 0-25062.
(3) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed March 21, 1996.
(4) Incorporated by reference to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1997.
<PAGE> 1
EXHIBIT 5
BASS, BERRY & SIMS PLC
A PROFESSIOANL LIMITED LIBILITY COMPANY
ATTORNEYS AT LAW
2700 FIRST AMERICAN CENTER 1700 RIVERVIEW TOWER
NASHVILLE, TENNESSEE 37238-2700 POST OFFICE BOX 1509
TELEPHONE (615) 742-6200 KNOXVILLE, TENNESSEE 37901-1509
TELECOPIER (615) 742-6293 TELEPHONE (423) 521-6200
TELECOPIER (423) 521-6234
July 2, 1998
ENVOY Corporation
15 Century Boulevard, Suite 600
Nashville, Tennessee 37214
Re: Registration Statement on Form S-3
Ladies and Gentlemen:
We have acted as your counsel in connection with your preparation of a
Registration Statement on Form S-3 (the "Registration Statement") filed by you
with the Securities and Exchange Commission on May 12, 1998, covering 2,012,500
shares, including 262,500 shares subject to an over-allotment option, no par
value, of common stock (the "Common Stock") of ENVOY Corporation (the "Company")
to be sold by Richard B. McIntyre, Michael F. Marolf, Sr., Jeffrey B. Marolf,
Lisa A. Marolf, Michael F. Marolf, Jr., Fred C. Goad, Jr., and Jim D. Kever (the
"Selling Shareholders") on the terms set forth in the Registration Statement.
In connection with this opinion, we have examined and relied upon such
records, documents, certificates, and other instruments as in our judgment are
necessary or appropriate in order to express the opinions hereinafter set forth
and have assumed the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, and the conformity to original documents
of all documents submitted to us as certified or photostatic copies.
Based on the foregoing and such other matters as we have deemed
relevant, we are of the opinion that the shares of Common Stock to be sold by
the Selling Shareholders are validly issued, fully paid, and nonassessable.
We hereby consent to the reference to our law firm in the Registration
Statement under the caption "Legal Matters," and the use of this opinion as an
exhibit to the Registration Statement.
Very truly yours,
/s/ Bass, Berry & Sims PLC
----------------------------------
Bass, Berry & Sims PLC
<PAGE> 1
Exhibit 23.1
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Experts" in Amendment
No. 1 to the Registration Statement (Form S-3 No. 333-52483) and related
Prospectus of ENVOY Corporation for the registration of its common stock and to
the incorporation by reference therein of our report dated March 5, 1998, except
for Notes 1 and 4, as to which the date is April 29, 1998, and Note 2, as to
which the date is June 26, 1998, with respect to the consolidated financial
statements and schedule of ENVOY Corporation for the year ended December 31,
1997, included in its Amendment No. 2 to Current Report on Form 8-K dated
February 27, 1998, as amend May 5, 1998 to be filed with the Securities and
Exchange Commission.
Nashville, Tennessee
July 1, 1998
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement on Form S-3, as amended, of our report
dated February 11, 1998 relating to the financial statements of Professional
Office Services, Inc. as of December 31, 1997 and 1996 and for each of the three
years in the period ended December 31, 1997 and our report dated January 30,
1998 relating to XpiData, Inc. as of December 31, 1997 and 1996 and for each of
the three years in the period ended December 31, 1997 included in Envoy
Corporation's Current Report on Form 8-K and to all references to our Firm
included in this registration statement.
/s/ Arthur Andersen LLP
-----------------------
ARTHUR ANDERSEN LLP
Nashville, Tennessee
July 6, 1998
