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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (date of earliest event reported): December 3, 1998
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TRANSITION SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
MASSACHUSETTS 0-28182 04-2887598
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(State or other jurisdiction (Commission (IRS employer
of incorporation) file number) identification no.)
ONE BOSTON PLACE, BOSTON, MASSACHUSETTS 02108
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (617) 723-4222
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NOT APPLICABLE
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(Former name or former address, if changed since last report)
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ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On December 3, 1998, Transition Systems, Inc. (the "Company" or "TSI")
completed its previously announced acquisition of HealthVISION, Inc.
("HealthVISION") by acquiring the approximately 80.5% of the outstanding capital
stock of HealthVISION not already owned by the Company for cash in an amount of
$25.6 million, plus an earnout of up to $10.75 million if specified financial
milestones are met. The acquisition will be accounted for as a purchase.
HealthVISION is a Santa Rosa, California provider of electronic medical
records software. HealthVISION's products include CareVISION, a patient-centered
clinical data repository and lifetime patient record system, which is expected
to constitute an integral component of the Company's Transition IV product.
HealthVISION's total revenues for the year ended December 31, 1997 and for the
nine-month period ended September 30, 1998, were approximately $9.2 million and
$9.4 million, respectively. HealthVISION incurred net losses of $11.1 million
and $5.6 million for such periods, respectively. At September 30, 1998,
HealthVISION employed approximately 150 persons in seven offices in the United
States, Canada and Australia.
The acquisition of the capital stock of HealthVISION not already owned by
the Company was accomplished pursuant to an Agreement and Plan of Reorganization
dated as of October 28, 1998, by and among HealthVISION, the principal
stockholders of HealthVISION, certain other stockholders of HealthVISION and
holders of outstanding options and warrants to purchase capital stock of
HealthVISION, the Company and HEALTHVISION Acquisition Corp., a wholly-owned
subsidiary of the Company (the "Merger Agreement"). Pursuant to the Merger
Agreement, all of the shares of HealthVISION capital stock not already owned by
the Company were converted into cash in an aggregate amount equal to $25.6
million. In addition, former holders of capital stock of HealthVISION will be
entitled to participate in two earnout payments as described below. The first
earnout payment of $3.75 million will be payable if the value of each contract
for the license, implementation or maintenance of Version 3.12 or Version 3.2 of
HealthVISION's CareVISION product entered into with certain qualified customers
of HealthVISION during the three-month period ending December 31, 1998, exceeds
$10 million. The second earnout payment will be payable if the value of
contracts for the license, implementation or maintenance of Version 3.12 or
Version 3.2 of CareVISION entered into with qualified customers during the
nine-month period ending June 30, 1999 exceeds $30 million. In such event, the
second earnout payment will be equal to 10% of the amount of the value of such
contracts in excess of $30 million (but in no event greater than $7 million).
The acquisition of HealthVISION by the Company was funded out of
working capital of the Company. Warburg Pincus Investors, L.P. ("Warburg
Pincus") is a principal stockholder of HealthVISION. Patrick J. Hackett, a
director of the Company, and Joel Ackerman, a director of HealthVISION, also
serve as managing directors of an affiliate of Warburg Pincus. Robert F. Raco
and Robert S. Hillas each serve as directors of both the Company and
HealthVISION. The Company's Board of Directors approved the HealthVISION
acquisition following a recommendation that the acquisition be approved by a
special committee of the Company's Board of Directors, which was comprised of
directors of the Company not affiliated with either Warburg Pincus or
HealthVISION.
The preceding discussion is a summary only of the terms of the acquisition
of HealthVISION by the Company and is qualified in its entirety by
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reference to the Merger Agreement. The Merger Agreement was filed as Exhibit 2.1
to a Current Report on Form 8-K filed by the Company on November 10, 1998.
ITEM 5. OTHER EVENTS.
On or about December 7, 1998, the Company commenced mailing of definitive
proxy materials regarding the previously announced acquisition of the Company by
Eclipsys Corporation ("Eclipsys") pursuant to a merger of a wholly-owned
subsidiary of Eclipsys with and into the Company (the "Merger"). Pursuant to the
proxy materials, the Company has solicited proxies from stockholders of the
Company to approve the Agreement and Plan of Merger by and among Eclipsys,
Exercise Acquisition Corp., a wholly-owned subsidiary of Eclipsys, and the
Company and to approve the Merger at a special meeting of stockholders of the
Company to be held on December 30, 1998.
The definitive proxy materials mailed to stockholders of the Company
included (i) Management's Discussion and Analysis of Financial Condition and
Results of Operations for the Company's two most recent fiscal years (the
"Company MD&A") and (ii) a report of PricewaterhouseCoopers LLP, independent
accountants of the Company, regarding the audited consolidated balance sheets
and related audited consolidated statements of operations, cash flows and
stockholders' equity of the Company and its subsidiaries at September 30, 1997
and 1998 and for each of the three years in the period ended September 30, 1998,
as well as unaudited consolidated balance sheets of the Company and its
subsidiaries dated June 30, 1998 and related unaudited consolidated statements
of operations and cash flows for the nine months ended June 30, 1997 and
June 30, 1998 (collectively, the "Company Financial Statements").
Set forth below is the Company MD&A and Company Financial Statements
included in the Company's definitive proxy materials:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF TSI
This discussion and analysis contains certain forward-looking statements.
These forward-looking statements represent TSI's beliefs, expectations and
intentions concerning future events, including, without limitation, financial
matters, plans and objectives of management for future operations, products and
services, the future economic performance of TSI, and the assumptions underlying
such beliefs, expectations and intentions. Such statements are not guaranties of
future performance, and involve certain risks and uncertainties that could cause
TSI's future results to differ materially from those expressed in any
forward-looking statements made by or on behalf of TSI. Many of such factors are
beyond TSI's ability to control or predict. Readers are accordingly cautioned
not to place undue reliance on forward-looking statements. TSI disclaims any
intent or obligation to update publicly any forward-looking statements, whether
in response to new information, future events or otherwise. These
forward-looking statements are further qualified by important factors that could
cause actual results to differ materially from those in the forward-looking
statements, including, without limitation, those discussed above under the
heading "Risk Factors" at page 8, and in Item 1A, "Risk Factors," in TSI's
Annual Report on Form 10-K filed with the Securities and Exchange Commission for
the fiscal year ended September 30, 1997.
OVERVIEW
TSI provides management information technology to hospitals, integrated
delivery networks, physician groups and other health care organizations. Using
TSI products, these organizations are able to increase efficiency, improve
quality of care and lower the cost of care delivery. TSI product lines span the
health care organization's information technology needs, providing data
integration services, master person identifier solutions, disease management
products and a clinical data repository as well as enterprise-wide financial,
operational and clinical decision support. TSI was founded in 1985 and has been
profitable in each fiscal year since 1987.
TSI's revenues are derived from sales of software licenses and related
implementation services and of software maintenance. The software and
implementation revenues associated with the licensing and installation of TSI's
products at an individual customer site typically range from $0.1 million to
$1.2 million. Software maintenance contracts are sold separately at the time of
the initial software license sale and are generally renewable annually. Annual
software maintenance fees range from 15% to 18% of the initial software license
fee for the product and provide a source of recurring revenue for TSI.
Software and implementation revenues are accounted for using the percentage
of completion method, and revenue is recognized as contract milestones are
reached. The implementation process generally takes from three to twelve months.
The length of time required to complete an implementation depends on many
factors outside the control of TSI, including the state of the customer's
existing information systems and the customer's ability to commit the personnel
and other resources necessary to complete elements of the implementation process
for which the customer is responsible. Revenue attributable to a contract
milestone is recognized upon certification by the customer that the milestone
has been met. As a result, TSI may be unable to predict accurately the amount of
revenue it will recognize in any period in connection with the sale of its
products. The payment terms of a contract may provide that the amount of the
contract price that TSI is entitled to bill upon achievement of a milestone is
less than the revenue recognized by TSI in connection with the achievement of
that milestone. In such cases, the excess of the revenue recognized over the
amount billed is included in accounts receivable as an "unbilled account
receivable." Software maintenance fees, which are generally received annually in
advance, are recorded as deferred revenue on TSI's balance sheet and are
recognized as revenue ratably over the life of the contract. See Notes 2 and 3
of Notes to Consolidated Financial Statements of TSI.
Cost of software and implementation revenue consists primarily of the cost
of third-party software that is resold by TSI or included in TSI's products,
personnel costs, the cost of related benefits, travel and living expenses, costs
of materials and other costs related to the installation and implementation of
TSI's
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products, and amortization of capitalized software development costs. Cost of
maintenance revenue consists primarily of maintenance fees payable by TSI
associated with the third-party software included in TSI's products and
personnel costs incurred in providing maintenance and technical support services
to TSI's customers.
TSI's research and development expenses consist primarily of
personnel-related costs, including employee salaries and benefits and payments
to consultants. TSI capitalizes certain software development costs in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed."
Capitalized software costs are amortized over the life of the product (generally
three years) and amounts amortized are included in cost of software and
implementation revenue. Capitalized software as a percentage of total research
and development expense has declined from 17.2% in fiscal 1996 to 15.3% in
fiscal 1997 and 10.6% in fiscal 1998. In each of fiscal 1996, 1997 and 1998, TSI
capitalized $0.7 million of software development costs, while amortization of
capitalized software development costs in such years amounted to $0.8 million,
$0.7 million and $0.7 million, respectively.
In January 1996, TSI repurchased from New England Medical Center and the
other stockholders of TSI 87.4% of the shares of common stock then issued and
outstanding on a fully diluted basis for an aggregate purchase price of
approximately $111.4 million (the "Recapitalization"). The principal purpose of
this transaction was to provide liquidity for the existing stockholders of TSI
while permitting them to retain an ownership interest in TSI. The transaction
has been accounted for by TSI as a leveraged recapitalization. To finance the
repurchase of these shares, TSI issued to Warburg, Pincus Ventures, L.P. and
NationsBank Investment Corporation ("NIC") shares of preferred stock for an
aggregate of $55.0 million. TSI also issued to NIC Senior Subordinated Notes in
the aggregate principal amount of $10.0 million and a related warrant and made
borrowings of $40.0 million under a term loan and a revolving credit facility.
In April 1996, TSI completed an initial public offering of 6,900,000 shares of
its common stock, which generated net proceeds of $114.4 million. The
outstanding balance of these borrowings was repaid in full and all outstanding
Series A non-voting preferred stock was redeemed upon the closing of the initial
public offering.
In July 1996, TSI acquired substantially all of the outstanding stock and a
note held by a selling principal of Enterprising HealthCare, Inc. ("Enterprising
HealthCare"), based in Tucson, Arizona, for a total purchase price of
approximately $1.8 million in cash. Enterprising HealthCare provides system
integration products and services for the health care market. The acquisition
was accounted for under the purchase method with the results of Enterprising
HealthCare included from the date of acquisition. Purchased technology costs of
$1.6 million are being amortized on a straight-line basis over seven years. Pro
forma results of operations have not been presented, as the effect of this
acquisition on the financial statements was not material.
In January 1997, TSI acquired a 19.5% ownership interest in HealthVISION
for $6.0 million in cash. HealthVISION is a Santa Rosa, California provider of
electronic medical record software. Its products include CareVISION, a
patient-centered clinical data repository and lifetime patient record system,
which is expected to constitute an integral component of TSI's Transition IV
product. On December 3, 1998, TSI completed its acquisition of the remaining
capital stock of HealthVISION not already owned by TSI. See "-- Subsequent
Events" below.
In September 1997, TSI acquired all the outstanding shares of Vital
Software Inc. ("Vital"), a privately held developer of products that automate
the clinical processes unique to medical oncology. The purchase price was
approximately $6.3 million, which was comprised of $2.7 million in cash and
252,003 shares of TSI's common stock with a value of $3.6 million. The purchase
price was allocated entirely to purchased research and development. See Note 16
of Notes to Consolidated Financial Statements of TSI.
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RESULTS OF OPERATIONS
The following table sets forth certain revenue and expense data as a
percentage of TSI's total revenues for each period presented:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
SEPTEMBER 30,
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1996 1997 1998
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<S> <C> <C> <C>
Revenues:
Software and implementation........................... 72.5% 74.1% 68.8%
Maintenance........................................... 27.5 25.9 31.2
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Total revenues................................ 100.0 100.0 100.0
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Cost of revenues:
Software and implementation........................... 21.4 23.2 28.1
Maintenance........................................... 9.2 6.4 6.7
Research and development................................ 9.7 8.7 13.5
Sales and marketing..................................... 13.2 15.5 18.0
General and administrative.............................. 6.9 8.7 7.4
Compensation charge..................................... 8.8 -- --
Acquired in-process research and development............ -- 14.1 --
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Total operating expenses................................ 69.2 76.6 73.7
Income from operations.................................. 30.8 23.4 26.3
Net interest income..................................... 0.2 5.6 7.3
Income before income taxes and extraordinary item....... 31.0 29.0 33.6
Provision for income taxes.............................. 12.6 17.1 13.4
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Net income before extraordinary item.................... 18.4 11.9 20.2
Extraordinary item:
Loss on early extinguishment of debt, net of taxes.... 6.3 -- --
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Net income.............................................. 12.1 11.9 20.2
Series A non-voting preferred stock dividends........... 1.7 -- --
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Net income allocable to common stockholders............. 10.4% 11.9% 20.2%
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FISCAL YEARS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
REVENUES. TSI's total revenues decreased 1.4%, to $44.0 million in 1998
from $44.6 million in 1997. Software and implementation revenues decreased 8.5%
to $30.2 million in 1998, compared to $33.0 million in 1997. The decrease in
software and implementation revenue is primarily due to TSI's failure to achieve
planned levels of new system bookings. New system bookings were adversely
impacted by an overall lengthening of the sales cycle. TSI believes the sales
cycle was adversely affected by Year 2000 problems in healthcare legacy systems,
which caused delays in the acquisition of new systems due to resource
constraints. In addition, consolidation among healthcare providers has caused a
lengthening of the purchasing cycle of most healthcare organizations due to
management shifts and more complex approval processes. Maintenance revenue grew
18.9% to $13.7 million in 1998, compared to $11.6 million in 1997, due to
continued growth in TSI's installed base of customers.
COST OF REVENUES. Cost of software and implementation revenue increased
20.0% to $12.4 million (or 40.9% of software and implementation revenue) in
1998, from $10.3 million (or 31.2% of software and implementation revenue) in
1997. The increase is primarily due to costs associated with additional
implementation staff and professional consultants as well as increased royalty
costs for third-party software. Cost of maintenance revenue increased 3.4% to
$2.9 million (or 21.4% of maintenance revenue) in 1998 from $2.8 million (or
24.6% of maintenance revenue) in 1997. The increase in cost of maintenance
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revenue is primarily due to the increase in the number of technical support
staff necessary to support the growth in TSI's installed base.
RESEARCH AND DEVELOPMENT. Research and development expenses increased 53.0%
to $5.9 million in 1998 from $3.9 million in 1997. Research and development
expenses as a percent of total revenue also increased to 13.5% in 1998, compared
to 8.7% in 1997. The increase is primarily due to an increase in staff and
increased professional consulting expense to support new product development,
including Transition IV and Vital Oncology, without a corresponding increase in
revenue.
SALES AND MARKETING. Sales and marketing expenses increased 14.2% to
$7.9 million in 1998, from $6.9 million in 1997. Sales and marketing expenses as
a percent of total revenue also increased to 18.0% in 1998 from 15.5% in 1997.
The increase in spending is primarily associated with the growth of the sales
organization and marketing programs to support the expanding product lines.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased
16.5% to $3.2 million in 1998, from $3.9 million in 1997. General and
administrative expenses as a percent of total revenue also decreased to 7.4% in
1998 from 8.7% in 1997. The decrease in spending is primarily due to a reduction
in performance related compensation expenses during the year as a result of the
decrease in revenue.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. Acquired in-process research
and development expense for 1997 includes a charge for purchased research and
development of $6.3 million relating to the acquisition of Vital.
NET INTEREST INCOME. Net interest income increased to $3.2 million in 1998
from $2.5 million in 1997. The increase in net interest income is attributable
to the interest generated on higher cash balances during fiscal 1998.
PROVISION FOR INCOME TAXES. TSI's effective income tax rate decreased to
40.0% in 1998 from 58.9% in 1997. The decrease was primarily due to the effect
of the charge for in-process research and development associated with the
acquisition of Vital, which was not deductible for tax purposes in fiscal year
1997. No such charge occurred in 1998.
FISCAL YEARS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
REVENUES. TSI's total revenues increased 30.0% to $44.6 million in 1997,
from $34.3 million in 1996. Software and implementation revenues grew 32.8% to
$33.0 million in 1997, compared to $24.9 million in 1996. The growth in software
and implementation revenue is primarily due to sales to new TSI customers,
increased consolidation among existing customers which resulted in the sale of
additional site licenses, and the expansion of TSI's product line which resulted
in increased product sales to existing customers. Maintenance revenue grew 22.7%
to $11.5 million in 1997, compared to $9.4 million in 1996, due to continued
growth in TSI's installed base of customers.
COST OF REVENUES. Cost of software and implementation revenue increased
40.5% to $10.3 million (or 31.2% of software and implementation revenue) in
1997, from $7.3 million (or 29.5% of software and implementation revenue) in
1996. The dollar increase is primarily due to costs associated with additional
implementation staff and professional consultants as well as increased royalty
costs for third-party software. Cost of maintenance revenue decreased 10.4% to
$2.8 million (or 24.6% of maintenance revenue) in 1997 from $3.2 million (or
33.6% of maintenance revenue) in 1996. The decrease in cost of maintenance
revenue is primarily due to the reduced technical support necessary on mature
products.
RESEARCH AND DEVELOPMENT. Research and development expenses increased 17.0%
to $3.9 million in 1997 from $3.3 million in 1996. The increase in spending is
primarily a result of organizational changes which resulted in a net increase in
the number of staff assigned to research and development roles. Research and
development expenses as a percent of total revenue decreased slightly to 8.7% in
1997, compared to 9.7% in 1996. The decrease is primarily due to increased
productivity from investments in technologies made in prior years and maturing
of the core product lines. TSI expects that research and
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development expenses will increase as a percentage of revenue in future periods
as new development projects are undertaken.
SALES AND MARKETING. Sales and marketing expenses increased 53.6% to
$6.9 million in 1997, from $4.5 million in 1996. Sales and marketing expenses as
a percent of total revenue also increased to 15.5% in 1997 from 13.2% in 1996.
The increase in spending is primarily due to additional staff and marketing
programs as well as increased commission expense directly related to the growth
in revenue.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
64.2% to $3.9 million in 1997, from $2.4 million in 1996. General and
administrative expenses as a percent of total revenue also increased to 8.7% in
1997 from 6.9% in 1996. The increase in spending is primarily due to
professional services and other costs associated with becoming a publicly traded
company as well as additional administrative expenses related to Enterprising
HealthCare, which was acquired in July 1996.
COMPENSATION CHARGE. In fiscal 1996 TSI incurred a compensation charge of
$3.0 million arising from its acquisition, in connection with the January 1996
Recapitalization, of shares of common stock issued to certain executive officers
pursuant to the exercise of options.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. Acquired in-process research
and development expense includes a charge for purchased research and development
of $6.3 million relating to the acquisition of Vital in September 1997.
NET INTEREST INCOME. Net interest income increased to $2.5 million in 1997
from $0.1 million in 1996. The increase in net interest income is primarily due
to the repayment out of the proceeds of TSI's initial public offering in April
1996 of debt incurred in the January 1996 Recapitalization and interest earned
on cash balances generated from operations and the balance of the proceeds of
TSI's initial public offering.
PROVISION FOR INCOME TAXES. TSI's effective income tax rate increased to
58.9% in 1997 from 40.6% in 1996, primarily due to the effect of the charge for
in-process research and development associated with the acquisition of Vital,
which is not deductible for tax purposes. The tax rate for 1997 without the
effect of the charge for in-process research and development was 39.7%.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, TSI had cash and cash equivalents of $38.7 million
and short term investments of $27.3 million, an increase of $7.5 million from
the amount at September 30, 1997. The increase in cash and cash equivalents and
short term investments was comprised primarily of net cash provided by operating
activities of $10.0 million. Net cash provided by operating activities in fiscal
1998 was generated primarily from net income.
TSI has an unsecured revolving line of credit in the amount of $15 million.
The credit facility contains covenants setting minimum net worth, maximum
leverage ratio and minimum net income requirements for TSI. There have been no
amounts drawn on this line. Advances under the revolving line of credit bear
interest, at TSI's election, either at a "base rate" or at a "eurodollar rate."
The base rate is a floating rate equal to the greater of (a) the prime rate or
(b) the federal funds effective rate plus one-half of one percent (.50%). The
eurodollar rate is equal to the sum of (x) a rate determined by reference to the
then-current interbank offered rate for dollar-denominated eurodollar deposits,
with certain adjustments, plus (y) one percent (1.0%).
TSI believes available funds, cash generated from operations and its unused
line of credit of $15 million will be sufficient to finance TSI's operations and
planned capital expenditures for at least the next twelve months. There can be
no assurance, however, that TSI will not require additional financing during
that time or thereafter.
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YEAR 2000 ISSUES
TSI's software license agreements generally contain warranties concerning
the Year 2000 compliance of the licensed product. TSI has tested the products it
has developed internally and believes that, with the exception of its Transition
for Quality product (for which TSI expects to release a fully Year 2000
compliant version in early 1999), the current release of each of its internally
developed products is Year 2000 compliant. TSI includes in its products certain
software licensed from third-party vendors. TSI has not yet completed its
evaluation of Year 2000 compliance of all such third-party software. For
example, TSI has not yet verified that Uniface, licensed from Compuware
Corporation, is Year 2000 compliant. In order to use TSI's products customers
must themselves license software, including certain operating system and
database management system software, from third-party vendors such as Microsoft
Corporation and Oracle Corporation. Not all such third-party software may be
fully Year 2000 compliant. For example, Microsoft Corporation has not certified
that its Windows NT operating system is Year 2000 compliant. TSI has also
evaluated the Year 2000 compliance of its critical internal software systems,
including its financial, payroll and human resources systems and its telephone
switch, and believes, based in part on certification from the vendors of such
systems, that such systems are Year 2000 compliant. TSI does not expect to incur
material costs in completing its Year 2000 assessment and remediation program.
However, the discovery of previously undetected Year 2000 defects in TSI's
products (including those licensed from third-party vendors), in third-party
software required for customers to use TSI's products or in its internal
software systems could damage TSI's business. Also, apprehension in the
marketplace over Year 2000 compliance issues has led and may in the future lead
businesses, including customers of TSI, to defer significant capital investments
in information technology programs and software. They could elect to defer those
investments either because they decide to focus their capital budgets on the
expenditures necessary to bring their own existing systems into compliance or
because they wish to purchase only software with a proven ability to process
data after 1999.
SUBSEQUENT EVENTS
On October 29, 1998, TSI entered into the Merger Agreement pursuant to
which a wholly-owned subsidiary of Eclipsys will be merged into TSI, with TSI
becoming a wholly-owned subsidiary of Eclipsys.
On December 3, 1998, TSI completed its acquisition of HealthVISION by
acquiring the approximately 80.5% of the outstanding capital stock of
HealthVISION not already owned by TSI for cash in the amount of $25.6 million
plus assumed liabilities of $9.3 million, net of cash acquired, plus an earn-out
of up to $10.8 million if specified financial milestones are met. The
acquisition will be accounted for as a purchase. HealthVISION's total revenues
for the year ended December 31, 1997 and for the nine-month period ended
September 30, 1998, were approximately $9.2 million and $9.4 million,
respectively. HealthVISION incurred net losses of $11.1 million and $6.0 million
for such periods, respectively. At September 30, 1998, HealthVISION employed
approximately 150 persons in seven offices in the United States, Canada and
Australia.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive
Income" ("SFAS 130"), which establishes standards for reporting and display of
comprehensive income and its components (revenue, expenses, gains and losses) in
a full set of general purpose financial statements. TSI will be required to
adopt the standard in the first quarter of its 1999 fiscal year, and does not
believe this statement will have a material effect on TSI's financial position
or results of operations.
In June 1997, the FASB issued Statement of Financial Accounting Standard
No. 131 ("SFAS 131"), "Disclosure about Segments of an Enterprise and Related
Information." Based on the management approach to segment reporting, SFAS No.
131 establishes requirements to report selected segment information quarterly
and to report entity-wide disclosures about products and services, major
customers
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and the countries in which the entity holds material assets and reports material
revenue. TSI will be required to adopt the standard in the first quarter of its
1999 fiscal year, and does not believe this statement will have a material
effect on TSI's financial disclosures.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("SFAS 133") "Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting standards for such
instruments. SFAS 133 is effective for fiscal years beginning after June 15,
1999. Currently, TSI has no such derivative holdings.
On October 27, 1997, the AICPA Accounting Standards Executive Committee
issued Statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition."
SOP 97-2 supersedes Statement of Position 91-1, "Software Revenue Recognition,"
and provides guidance on when and in what amounts revenue should be recognized
for the licensing, selling, leasing, or marketing of computer software. SOP 97-2
is effective for transactions beginning in the first quarter of TSI's 1999
fiscal year. TSI is analyzing the impact of the SOP which may cause a deferral
of revenue.
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Transition Systems, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of cash flows and of
stockholders' equity present fairly, in all material respects, the financial
position of Transition Systems, Inc. at September 30, 1997 and 1998, and the
results of its operations and its cash flows for each of the three years in the
period ended September 30, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
November 16, 1998
-10-
<PAGE> 11
TRANSITION SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------- JUNE 30,
1997 1998 1998
------------- ------------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $58,485 $ 38,660 $65,179
Investments (Note 4)................................... -- 27,291 --
Accounts receivable, net (Note 3)...................... 19,339 18,994 19,662
Other current assets................................... 696 1,483 1,179
Deferred income taxes (Note 13)........................ 853 1,960 853
------- -------- -------
Total current assets................................ 79,373 88,388 86,873
------- -------- -------
Property and equipment, net (Note 5)................... 1,357 1,457 1,638
Capitalized software costs, net........................ 1,411 1,411 1,410
Purchased technology (Note 16)......................... 1,376 1,160 1,219
Intangible assets, net................................. 302 1,448 674
Investment (Note 6).................................... 6,000 6,000 6,000
------- -------- -------
Total assets........................................ $89,819 $ 99,864 $97,814
======= ======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 279 $ 1,168 $ 1,334
Accrued expenses....................................... 6,680 4,515 3,717
Income taxes payable................................... 1,476 1,067 2,871
Deferred revenue....................................... 7,369 8,090 7,676
------- -------- -------
Total current liabilities........................... 15,804 14,840 15,598
------- -------- -------
Deferred income taxes (Note 13)........................ 496 752 496
------- -------- -------
Total liabilities................................... 16,300 15,592 16,094
------- -------- -------
Commitments (Note 15)
Stockholders' equity (Notes 2 and 9):
Common stock, $.01 par value; 30,000,000 shares
authorized at September 30, 1997 and 1998;
17,713,683 shares issued and outstanding at
September 30, 1997; 18,029,095 shares issued and
outstanding at September 30, 1998................... 177 180 179
Non-voting common stock, $.01 par value; 1,000,000
shares authorized at September 30, 1997 and 1998;
356,262 shares issued and outstanding at September
30, 1997 and 1998................................... 4 4 4
Non-voting common stock warrant........................ 395 395 395
Additional paid-in capital............................. 46,717 48,610 47,778
Retained earnings...................................... 26,226 35,083 33,364
------- -------- -------
Total stockholders' equity.......................... 73,519 84,272 81,720
------- -------- -------
Total liabilities and stockholders' equity.......... $89,819 $ 99,864 $97,814
======= ======== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-11-
<PAGE> 12
TRANSITION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED SEPTEMBER 30, JUNE 30,
--------------------------------- -----------------
1996 1997 1998 1997 1998
--------- --------- --------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Software and implementation................ $24,860 $33,017 $30,224 $22,537 $23,881
Maintenance................................ 9,409 11,548 13,727 8,338 10,065
------- ------- ------- ------- -------
Total revenues.......................... 34,269 44,565 43,951 30,875 33,946
------- ------- ------- ------- -------
Cost of revenues:
Software and implementation................ 7,341 10,313 12,371 7,293 9,190
Maintenance................................ 3,165 2,835 2,932 2,062 2,125
Research and development..................... 3,310 3,872 5,925 2,709 4,435
Sales and marketing.......................... 4,506 6,922 7,907 5,067 6,023
General and administrative................... 2,365 3,884 3,245 2,996 2,561
Compensation charge.......................... 3,024 -- -- -- --
Acquired in-process research and development
(Note 16).................................. -- 6,292 -- -- --
------- ------- ------- ------- -------
Total operating expenses................ 23,711 34,118 32,380 20,127 24,334
------- ------- ------- ------- -------
Income from operations....................... 10,558 10,447 11,571 10,748 9,612
Interest income.............................. 1,294 2,501 3,191 1,798 2,285
Interest expense............................. (1,241) -- -- -- --
------- ------- ------- ------- -------
Income before income taxes and
extraordinary items........................ 10,611 12,948 14,762 12,546 11,897
Provision for income taxes................... 4,324 7,629 5,905 5,018 4,759
------- ------- ------- ------- -------
Net income before extraordinary item......... 6,287 5,319 8,857 7,528 7,138
Extraordinary item:
Loss on early extinguishment of debt
(net of taxes of $1,492)................ 2,149 -- -- -- --
------- ------- ------- ------- -------
Net income............................ $ 4,138 $ 5,319 $ 8,857 $ 7,528 $ 7,138
======= ======= ======= ======= =======
Series A non-voting preferred stock
dividends.................................. 593 -- -- -- --
------- ------- ------- ------- -------
Net income allocable to common
stockholders.......................... $ 3,545 $ 5,319 $ 8,857 $ 7,528 $ 7,138
======= ======= ======= ======= =======
Income per share (Note 2 and 9):
Net income allocable to common
stockholders............................ $ 3,545 $ 5,319 $ 8,857 $ 7,528 $ 7,138
Basic income allocable per share........ 0.27 0.31 0.49 0.43 0.39
Diluted income allocable per share...... 0.22 0.27 0.43 0.38 0.35
Weighted average shares outstanding
Basic................................... 13,214 17,435 18,210 17,333 18,153
Diluted................................. 16,137 19,977 20,394 19,900 20,459
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-12-
<PAGE> 13
TRANSITION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED SEPTEMBER 30, JUNE 30,
------------------------------- -------------------
1996 1997 1998 1997 1998
-------- -------- --------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 4,138 $ 5,319 $ 8,857 $ 7,528 $ 7,138
Adjustments to reconcile net income to net cash provided
by operating activities:
Extraordinary item, gross............................... 3,642 -- -- -- --
Write-off of in-process research and development........ -- 6,292 -- -- --
Deferred income taxes................................... (1,640) 2,448 (851) 1,409 --
Depreciation and amortization........................... 1,443 1,632 1,805 1,195 1,329
Compensation charge in connection with the
recapitalization...................................... 3,024 -- -- -- --
Compensation charge related to options granted.......... 91 (91) -- (92) --
Tax benefit from stock option exercises................... -- 2,770 1,201 2,162 467
Changes in operating assets and liabilities net of effects
from purchase of businesses:
Accounts receivable..................................... (1,789) (5,921) 345 (4,140) (323)
Other current assets.................................... (963) 1,135 (359) (161) (483)
Accounts payable........................................ (98) (315) 889 (289) 1,055
Accrued expenses........................................ 243 2,388 (2,165) 1,428 (2,963)
Due to affiliates....................................... (9) -- -- -- --
Deferred revenue........................................ 1,220 1,114 721 323 307
Income taxes payable.................................... 731 (539) (409) 468 1,395
-------- -------- --------- -------- --------
Net cash provided by operating activities............. 10,033 16,232 10,034 9,831 7,922
-------- -------- --------- -------- --------
Cash flows provided by (used by) investing activities:
Purchase of investments................................... (1,595) (250) (36,870) (250) --
Maturities of investments................................. 3,164 250 9,329 -- --
Sales of investments...................................... 5,755 -- 250 -- --
Note from related party................................... -- -- (428) -- --
Purchase of property and equipment........................ (572) (911) (951) (699) (904)
Additions to capitalized software costs................... (704) (712) (700) (537) (524)
Additions to intangible assets............................ (124) (217) (1,184) (212) (396)
Investment................................................ -- (6,000) -- (6,000) --
Acquisition of businesses, net of cash acquired........... (1,728) (2,667) -- -- --
-------- -------- --------- -------- --------
Net cash (used by) provided by investing activities... 4,196 (10,507) (30,554) (7,698) (1,824)
-------- -------- --------- -------- --------
Cash flows provided by (used by) financing activities:
Proceeds from initial public offering..................... 114,429 -- -- -- --
Issuance of Series A preferred stock...................... 20,000 -- -- -- --
Redemption of Series A preferred stock.................... (20,000) -- -- -- --
Payments of Series A preferred stock dividends............ (593) -- -- -- --
Proceeds from issuance of debt............................ 49,605 -- -- -- --
Early extinguishment of debt.............................. (50,000) -- -- -- --
Proceeds from issuance of Series B preferred stock........ 33,612 -- -- -- --
Proceeds from issuance of Series C preferred stock........ 1,388 -- -- -- --
Payment of fees related to recapitalization............... (3,360) -- -- -- --
Purchase of common stock.................................. (111,410) -- -- -- --
Exercise of options....................................... 783 1,237 594 760 495
Payments on note payable.................................. -- (9) -- (7) --
Proceeds from stock purchase plan......................... -- 32 101 -- 101
Proceeds from warrants issued............................. 394 -- -- -- --
Equity issuance costs..................................... (1,416) (5) -- (5) --
-------- -------- --------- -------- --------
Net cash provided by financing activities............. 33,432 1,255 695 748 596
-------- -------- --------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 47,661 6,980 (19,825) 2,881 6,694
Cash and cash equivalents -- beginning of year.............. 3,844 51,505 58,485 51,505 58,485
-------- -------- --------- -------- --------
Cash and cash equivalents -- end of year.................... $ 51,505 $ 58,485 $ 38,660 $ 54,386 $ 65,179
======== ======== ========= ======== ========
Supplemental information:
Income taxes paid......................................... $ 3,063 $ 2,508 $ 5,631 $ 956 $ 2,728
Interest paid............................................. $ 1,119 -- -- -- --
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-13-
<PAGE> 14
TRANSITION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NON-VOTING
COMMON STOCK COMMON STOCK NON-VOTING TREASURY STOCK
------------------- ---------------- COMMON STOCK -----------------------
SHARES AMOUNT SHARES AMOUNT WARRANT SHARES AMOUNT
---------- ------ ------ ------ ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1995................. 30,060,000 $301 (1,670,000) $ (1,471)
Stock options exercised...................... 1,320,191 13
Repurchase of common stock in connection with
the recapitalization....................... (28,592,404) (108,386)
Retirement of treasury shares................ (30,262,404) (303) 30,262,404 109,857
Issuance of common stock warrant............. $395
Issuance of common stock in initial public
offering................................... 6,900,000 69
Equity issuance costs........................
Issuance of common stock with conversion of
Series B convertible preferred stock....... 8,627,310 86
Issuance of non-voting common stock with
conversion of Series C convertible
preferred stock............................ 356,262 $ 4
Compensation expense.........................
Dividends on Series A non-voting preferred
stock......................................
Net income...................................
---------- ---- ------- ---- ---- ----------- ---------
Balance at September 30, 1996................. 16,645,097 166 356,262 4 395 -- --
---------- ---- ------- ---- ---- ----------- ---------
Stock options exercised...................... 813,371 8
Issuance of common stock related to
acquisition of Vital Software.............. 252,003 3
Issuance of common stock in connection with
employee stock purchase plan............... 3,212 --
Equity issuance costs........................
Cancellation of compensatory stock option
grants.....................................
Income tax benefit from stock options
exercised..................................
Net income...................................
---------- ---- ------- ---- ---- ----------- ---------
Balance at September 30, 1997................. 17,713,683 177 356,262 4 395 -- --
---------- ---- ------- ---- ---- ----------- ---------
Stock options exercised...................... 307,770 3
Issuance of common stock in connection with
employee stock purchase plan............... 7,642
Income tax benefit from stock options
exercised..................................
Net income...................................
---------- ---- ------- ---- ---- ----------- ---------
Balance at September 30, 1998................. 18,029,095 $180 356,262 $ 4 $395 -- $ --
========== ==== ======= ==== ==== =========== =========
<CAPTION>
ADDITIONAL TOTAL
PAID-IN RETAINED STOCKHOLDERS'
CAPITAL EARNINGS EQUITY
---------- -------- -------------
<S> <C> <C> <C>
Balance at September 30, 1995................. $17,362 $16,192
Stock options exercised...................... $ 770 783
Repurchase of common stock in connection with
the recapitalization....................... (108,386)
Retirement of treasury shares................ (109,554) --
Issuance of common stock warrant............. 395
Issuance of common stock in initial public
offering................................... 114,360 114,429
Equity issuance costs........................ (1,416) (1,416)
Issuance of common stock with conversion of
Series B convertible preferred stock....... 33,526 33,612
Issuance of non-voting common stock with
conversion of Series C convertible
preferred stock............................ 1,384 1,388
Compensation expense......................... 91 91
Dividends on Series A non-voting preferred
stock...................................... (593) (593)
Net income................................... 4,138 4,138
------- ------- -------
Balance at September 30, 1996................. 39,161 20,907 60,633
------- ------- -------
Stock options exercised...................... 1,229 1,237
Issuance of common stock related to
acquisition of Vital Software.............. 3,622 3,625
Issuance of common stock in connection with
employee stock purchase plan............... 32 32
Equity issuance costs........................ (6) (6)
Cancellation of compensatory stock option
grants..................................... (91) (91)
Income tax benefit from stock options
exercised.................................. 2,770 2,770
Net income................................... 5,319 5,319
------- ------- -------
Balance at September 30, 1997................. 46,717 26,226 73,519
------- ------- -------
Stock options exercised...................... 591 594
Issuance of common stock in connection with
employee stock purchase plan............... 101 101
Income tax benefit from stock options
exercised.................................. 1,201 1,201
Net income................................... 8,857 8,857
------- ------- -------
Balance at September 30, 1998................. $48,610 $35,083 $84,272
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-14-
<PAGE> 15
TRANSITION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF THE BUSINESS
Transition Systems, Inc. (the "Company") is a leading provider of
integrated clinical and financial decision support systems for hospitals,
integrated delivery networks, physician groups and other healthcare
organizations. The Company was founded in 1985 as a for-profit, majority-owned
subsidiary of New England Medical Center, Inc. ("NEMC"). The Company was a
majority-owned subsidiary of NEMC until the January 1996 leveraged
recapitalization transaction (the "Recapitalization") described in Note 10.
NOTE 2. SUMMARY OF ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Transition
Systems, Inc. and its wholly-owned subsidiaries. All significant intercompany
transactions have been eliminated.
CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments with a maturity date of three
months or less at the time of purchase to be cash equivalents. Cash equivalents
are stated at cost plus accrued interest which approximates market.
INVESTMENTS IN DEBT AND EQUITY SECURITIES
Management determines the appropriate classification of its investments in
debt and equity securities at the time of purchase and reevaluates such
determination at each balance sheet date. Realized or unrealized gains or losses
applicable to the transfer of securities to the available-for-sale category and
subsequent sale of these investments were immaterial.
CAPITALIZED SOFTWARE COSTS
Software development costs subsequent to the establishment of technological
feasibility are capitalized. Capitalized internally developed software costs
approximated $700,000 for fiscal years 1996, 1997 and 1998. Amortization of
capitalized software costs, which begins with the general release of a product
to customers, is included in cost of software and implementation revenues and
amounted to approximately $767,000, $700,000 and $700,000 for the fiscal years
ended 1996, 1997 and 1998, respectively. Amortization of capitalized software
costs is provided on a product-by-product basis at the greater of the amount
calculated on a straight-line basis over the estimated economic life of the
products, generally three years, or the ratio that current gross revenues for a
product bear to the total of current and anticipated future gross revenues for
that product. Accumulated amortization of software development costs was
$4,116,000, $4,816,000 and $5,516,000 at the end of fiscal years 1996, 1997 and
1998, respectively.
All other expenditures for research and development are charged to
operations when incurred.
PURCHASED TECHNOLOGY COSTS
Purchased technology costs are carried at cost less accumulated
amortization which is calculated on a straight-line basis over an estimated
useful life of seven years. Accumulated amortization on purchased technology
costs was $0, $275,000 and $491,000 at the end of fiscal years 1996, 1997 and
1998, respectively.
-15-
<PAGE> 16
TRANSITION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INTANGIBLE ASSETS
Intangible assets include the costs incurred to register trademarks,
copyrights and related legal expenses, acquisition related costs, and debt
issuance costs. Amortization is computed using the straight-line method over
estimated useful lives ranging from three to five years.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets as
follows:
<TABLE>
<S> <C>
Equipment................. 3 to 5 years
Furniture and fixtures.... 3 to 5 years
Leasehold improvements.... the lesser of the useful life or remaining lease term
</TABLE>
Maintenance and repair costs are expensed when incurred and betterments are
capitalized. Upon retirement or sale, the cost of the assets disposed of and the
related accumulated depreciation are removed from the accounts and any resulting
gain or loss is credited or charged to income.
REVENUE RECOGNITION
The percentage of completion method is used by the Company primarily in
connection with sales in which the customer is implementing the Company's core
products for the first time. Add-on sales in which an existing customer licenses
new modules or adds additional functionality generally do not involve
substantial implementation effort and are recognized upon contract execution and
shipment of the product. In fiscal 1996, the Company changed its method of
recognizing software license revenue when associated with substantial
implementation effort from percentage of completion based principally on costs
incurred to percentage of completion based principally upon progress and
performance as measured by achievement of contract milestones. The change in
method was made in accordance with Accounting Principles Board Opinion No. 20 in
contemplation of an initial public offering and in recognition of the Company's
increased focus on providing a solution that combines software and
implementation, as well as to facilitate the timely quarterly reporting
requirements as a Securities and Exchange Commission ("SEC") registrant.
Revenues from maintenance contracts are recognized ratably over the life of
the service contract, generally twelve months. Deferred revenue relates
primarily to these maintenance contracts.
ADVERTISING AND PROMOTION EXPENSES
All advertising and promotion costs are expensed as incurred. All contract
procurement costs are included in sales and marketing expense and are expensed
as incurred.
INCOME TAXES
Deferred tax assets and liabilities are recognized based on temporary
differences between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
temporary differences are expected to reverse.
RISKS AND UNCERTAINTIES
The Company sells its products primarily to hospitals and other health care
institutions. The Company performs ongoing credit evaluations of its customers.
The Company maintains reserves for potential credit losses and such losses have
been within management's expectations.
The Company invests its daily excess cash in a money market fund with a
major bank. The Company has not experienced any material losses on its
investments.
-16-
<PAGE> 17
TRANSITION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets, liabilities and litigation at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates and would
impact future results of operations and cash flows.
BASIC AND DILUTED NET INCOME PER SHARE
The Company has adopted Statement of Financial Accounting Standards No. 128
("SFAS 128"), "Earnings per Share," for the period ending September 30, 1998 and
prior period amounts have been restated to conform to the provisions of this
statement.
Basic earnings per share is computed using the weighted average number of
shares outstanding, and diluted earnings per share reflects the potential
dilution from assumed conversions of all dilutive securities such as stock
options. A reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation is
shown below.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------------------------------
1996 1997 1998
---------------------------------- --------------------------------- ---------------------------------
PER SHARE PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
---------- ----------- --------- ---------- ---------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BASIC EPS
Net income......... $3,545,000 13,214,433 $0.27 $5,319,000 17,434,729 $0.31 $8,857,000 18,210,050 $0.49
EFFECT OF DILUTIVE
SECURITIES
Warrants........... 251,781 220,749 231,291
Dilutive stock
options.......... 2,670,941 2,321,616 1,952,551
----------- ---------- ----------
DILUTED EPS
Income to common
stockholders..... $3,545,000 16,137,155 $0.22 $5,319,000 19,977,094 $0.27 $8,857,000 20,393,892 $0.43
---------- ----------- ----- ---------- ---------- ----- ---------- ---------- -----
</TABLE>
For the fiscal year ended September 30, 1996, basic and diluted earnings
per share for income before extraordinary item were $0.37 and $0.32,
respectively, and the impact to basic and diluted earnings per share of the
extraordinary item was a reduction of $0.13 and $0.11, respectively.
For the twelve months ended September 30, 1996, 1997 and 1998, 0, 330,000
and 626,000 options, respectively, were excluded from the computation of diluted
EPS. These options were excluded because the effect would have been antidilutive
for the period.
UNAUDITED INFORMATION
The interim financial information for the nine months ended June 30, 1997
and 1998 is unaudited. However, in the opinion of management, such information
has been prepared on the same basis as the audited financial statements and
includes all adjustments, consisting solely of normal recurring adjustments,
necessary for a fair presentation of the financial position and results of
operations for the periods presented. The interim results, however, are not
necessarily indicative of results for any future period.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB")issued
Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive
Income" ("SFAS 130"), which establishes standards for reporting and display of
comprehensive income and its components (revenue, expenses, gains and losses) in
a full set of general purpose financial statements. The Company will be required
to adopt the standard in the first quarter of its 1999 fiscal year, and does not
believe this statement will have a material effect on the Company's financial
position or results of operations.
-17-
<PAGE> 18
TRANSITION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June 1997, the FASB issued Statement of Financial Accounting Standard
No. 131 ("SFAS 131"), "Disclosure about Segments of an Enterprise and Related
Information." Based on the management approach to segment reporting, SFAS No.
131 establishes requirements to report selected segment information quarterly
and to report entity-wide disclosures about products and services, major
customers and the countries in which the entity holds material assets and
reports material revenue. The Company will be required to adopt the standard in
the first quarter of its 1999 fiscal year, and does not believe this statement
will have a material effect on the Company's financial disclosures.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("SFAS 133") "Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting standards for such
instruments. SFAS 133 is effective for fiscal years beginning after June 15,
1999. Currently, the Company has no such derivative holdings.
On October 27, 1997, the AICPA Accounting Standards Executive Committee
issued Statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition."
SOP 97-2 supersedes Statement of Position 91-1, "Software Revenue Recognition,"
and provides guidance on when and in what amounts revenue should be recognized
for the licensing, selling, leasing, or marketing of computer software. SOP 97-2
is effective for transactions beginning in the first quarter of the Company's
1999 fiscal year. The Company is analyzing the impact of the SOP which may cause
a deferral of revenue.
NOTE 3. ACCOUNTS RECEIVABLE
At September 30, accounts receivable consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Billed...................................................... $11,973 $10,862
Unbilled.................................................... 7,541 8,332
------- -------
19,514 19,194
Allowance for doubtful accounts............................. (175) (200)
------- -------
$19,339 $18,994
======= =======
</TABLE>
Unbilled accounts receivable arise from differences in the timing of
revenue recognition and billing under the contract terms. Write-offs for bad
debts for fiscal years 1996, 1997 and 1998 were $73,000, $102,000 and $166,000,
respectively.
NOTE 4. INVESTMENTS
As of September 30, 1998, the Company has classified all investments as
held to maturity. The securities totaled $27,291,000 as of September 30, 1998
and consist of federal agency obligations. The estimated fair value of each
investment approximates the amortized cost plus accrued interest. Unrealized
gains at September 30, 1998 were $71,000.
NOTE 5. PROPERTY AND EQUIPMENT
At September 30, property and equipment consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Equipment................................................... $ 3,537 $ 2,064
Furniture and fixtures...................................... 1,079 372
Leasehold improvements...................................... 355 356
------- -------
4,971 2,792
Accumulated depreciation and amortization................... (3,614) (1,335)
------- -------
$ 1,357 $ 1,457
======= =======
</TABLE>
-18-
<PAGE> 19
TRANSITION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation expense for the fiscal years 1996, 1997 and 1998 was $514,000,
$662,000 and $851,000 respectively. During fiscal 1998, the Company retired
assets of $2,911,000 which had no book value.
NOTE 6. INVESTMENT IN HEALTHVISION
On January 31, 1997 the Company acquired a 19.5% ownership interest in
HealthVISION, Inc. ("HealthVISION") for $6 million in cash. HealthVISION is a
provider of electronic medical record software based in Santa Rosa, California.
This investment is being accounted for on the cost basis. The Company holds an
option to purchase the remaining outstanding shares of HealthVISION. This option
expires on December 31, 1998. (See note 17.)
NOTE 7. RELATED PARTY AGREEMENTS AND TRANSACTIONS
The Company had an arrangement to reimburse NEMC for administrative
services provided to the Company by employees of NEMC. Under this arrangement,
the Company incurred expenses of $24,000 in fiscal year 1996. This arrangement
was terminated as of January 24, 1996. Since that date, these administrative
services have been performed internally by Company personnel. This change has
not resulted in a material increase in the Company's costs.
The Company obtained certain other services through NEMC, including health
benefits for its employees, for which it incurred a total of $134,000 in
operating expenses in fiscal year 1996. The Company discontinued this
arrangement as of December 31, 1995, and arranged to provide comparable benefits
directly to its employees. This change has not resulted in a material increase
in the Company's cost of providing and administering these employee benefits.
Additionally, the Company used the computer facilities of New England
Medical Center Hospitals, Inc., an affiliate of NEMC, pursuant to a data
processing agreement. This service was provided at a charge of $82,000 in fiscal
year 1996. This service was discontinued in June 1996.
NOTE 8. LINE OF CREDIT -- BANK
On April 26, 1996, the Company entered into a $25 million unsecured
revolving line of credit with a bank group led by NationsBank, N.A. as agent and
as lender. The credit facility contains covenants setting minimum net worth,
maximum leverage ratio and minimum net income requirements for the Company. On
September 20, 1996, the Company amended its total revolving credit commitment
from $25 million to $15 million. There have been no amounts drawn on this line.
Advances under the revolving line of credit bear interest, at the Company's
election, either at a "base rate" or at a "eurodollar rate." The base rate is a
floating rate equal to the greater of (a) the prime rate or (b) the federal
funds effective rate plus one-half of one percent (.50%). The eurodollar rate is
equal to the sum of (x) a rate determined by reference to the then-current
interbank offered rate for dollar denominated eurodollar deposits, with certain
adjustments, plus (y) one percent (1.0%). The eurodollar interest rate was 5.43%
at September 30, 1998.
NOTE 9. STOCKHOLDERS' EQUITY
On February 26, 1996, the Company's Board of Directors approved a 334-for-1
split of the Company's Common Stock to be effected in the form of a stock
dividend to the stockholders of record as of March 28, 1996. This stock split
has resulted in a reclassification of $112,695 and $187,003 from the Company's
additional paid-in capital and retained earnings accounts, respectively, to the
Company's Common Stock account, representing the par value of shares issued. All
share and per share amounts have been restated to retroactively reflect the
stock split. In addition, on February 26, 1996, the Board of Directors also
voted to retire and return to the status of authorized and unissued capital
stock all shares of Common Stock then held in the Company's treasury, and adopt
an amendment to the Articles of Organization of the Company to, among other
things, increase the authorized shares of Common Stock
-19-
<PAGE> 20
TRANSITION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and Non-Voting Common Stock to 30,000,000 and 1,000,000 shares, respectively,
which was subsequently approved by the stockholders of the Company.
On April 18, 1996, the Company completed an initial public offering of
6,900,000 shares of its common stock which generated net proceeds of $114.4
million. A substantial part of the proceeds were used to redeem $20.6 million of
Series A preferred stock and accrued dividends, to repay the $34.7 million
outstanding principal amount and accrued interest under the secured term loan
facility, to repay the $10.3 million outstanding principal amount and accrued
interest under the senior subordinated notes and to repay the $5.1 million
outstanding principal amount and accrued interest under the Company's revolving
credit facility.
STOCK OPTION PLANS
In 1995, the Company's Board of Directors adopted, and the stockholders
approved, the 1995 Incentive and Nonstatutory Stock Option Plan. The Plan
provides for the grant of nonqualified and incentive stock options to employees
and others to purchase the Company's Common Stock. Options granted during fiscal
1995 provided for vesting over three years and expiration ten years after the
date of grant. Options granted during fiscal 1996, 1997 and 1998 provided for
vesting over five years and expiration ten years after the date of grant. At
September 30, 1997 and 1998, 6,070,116 shares of Common Stock were authorized
under the plan.
A summary of the Company's stock option activity for the years ended
September 30 follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
---------- --------
<S> <C> <C>
Outstanding at
September 30, 1995.................................. 4,331,646 $ 1.02
Granted.......................................... 1,079,564 6.74
Exercised........................................ (1,320,191) 0.59
Canceled......................................... (27,165) 1.20
---------- ------
Outstanding at
September 30, 1996.................................. 4,063,854 2.67
Granted.......................................... 802,400 15.15
Exercised........................................ (813,371) 1.52
Canceled......................................... (495,364) 13.71
---------- ------
Outstanding at
September 30, 1997.................................. 3,557,519 4.22
---------- ------
Granted.......................................... 425,000 20.32
Exercised........................................ (307,770) 1.93
Canceled......................................... (74,821) 15.75
---------- ------
Outstanding at
September 30, 1998.................................. 3,599,928 $ 6.08
========== ======
</TABLE>
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), requires that companies either recognize
compensation expense for grants of stock, stock options, and other equity
instruments based on fair value, or provide pro forma disclosure of net income
and earnings per share in the notes to the financial statements. The Company
adopted the disclosure provisions of SFAS 123 in 1997 and has applied APB
Opinion 25 and related interpretations in accounting for its stock option plans
in 1997 and 1998. Accordingly, no compensation cost has been recognized for its
stock option plans. The effects of applying SFAS 123 in this pro forma
disclosure are not likely to be
-20-
<PAGE> 21
TRANSITION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
representative of the effects on reported income or loss for future years. SFAS
123 does not apply to awards prior to 1996 and additional awards in future years
are anticipated.
At September 30, 1996, 1997 and 1998, respectively, options to purchase
2,195,716, 2,080,823 and 2,372,645 shares of Common Stock were exercisable with
a weighted average exercise price of $1.20, $1.80 and $2.04, respectively.
Exercise prices for options outstanding as of September 30, 1998 ranged from
$1.20 to $23.00. The weighted average remaining contractual life of those
options is 7.34 years.
The weighted average fair value of the Common Stock at date of grant for
options granted in fiscal 1996, 1997 and 1998 was $3.61, $8.12 and $10.90 per
option, respectively. The fair value of these options at date of grant was
estimated using the Black-Scholes model with the following assumptions: a risk
free interest rate of 5.4% in fiscal 1996, 6.1% in fiscal 1997 and 5.7% in
fiscal 1998; a dividend yield of 0%; a volatility factor of the expected market
price of the Company's Common Stock of 55% and a weighted average expected life
of the options of 5 years.
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates as calculated in
accordance with SFAS 123, the Company's net income and earnings per share for
the years ended September 30, 1996, 1997 and 1998 would have been reduced to the
pro forma amounts indicated as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Net income as reported................... $3,545,000 $5,319,000 $8,857,000
Basic earnings per share............. .21 .31 .49
Diluted earnings per share........... .18 .27 .43
Net income pro forma..................... 2,696,000 3,970,000 6,190,000
Basic earnings per share............. .16 .23 .34
Diluted earnings per share........... .14 .20 .30
</TABLE>
At September 30, 1996, 1997 and 1998, options to purchase 1,354,071,
1,047,035 and 696,856 shares of Common Stock, respectively, were available for
grant.
The following table summarizes information about stock options outstanding
at September 30, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- --------------------------
REMAINING WEIGHTED- WEIGHTED-
RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 1.20............. 1,944,437 6.6 $ 1.20 1,944,437 $ 1.20
3.90............. 713,491 7.3 3.90 338,408 3.90
10.38 -- 13.50.... 316,000 8.5 11.99 89,800 13.32
18.50 -- 18.81.... 280,000 8.8 18.61 -- --
19.62 -- 23.00.... 346,000 9.2 -- -- --
---------- ---------
3,599,928 7.3 $ 6.08 2,372,645 $ 2.04
</TABLE>
In connection with the Recapitalization, the Company accelerated the
vesting of options to purchase an aggregate of 2,442,208 shares of Common Stock
granted to certain executive officers during fiscal 1995, so as to make such
options exercisable in full immediately prior to the closing of the
Recapitalization. On January 24, 1996, an aggregate of 638,608 shares of Common
Stock were issued to such officers upon their exercise of such options.
NOTE 10. RECAPITALIZATION
In January 1996, prior to its contemplation of an initial public offering,
the Company effected a Recapitalization, in which the Company repurchased
28,592,404 shares of Common Stock then issued and outstanding from NEMC and the
other stockholders of the Company for an aggregate of approximately $111.4
million. In addition, Warburg, Pincus Ventures, L.P. ("WP Ventures") purchased
from certain executive officers of the Company an aggregate of 2,308,608 shares
of Common Stock, including an
-21-
<PAGE> 22
TRANSITION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
aggregate of 638,608 shares of Common Stock acquired by such executive officers
pursuant to their exercise of stock options, for an aggregate of approximately
$9.0 million. WP Ventures then contributed such shares of Common Stock to the
Company. The principal purpose of the Recapitalization was to provide liquidity
to the Company's existing stockholders while permitting them to retain an
ownership interest in the Company, and the Company has accounted for the
transaction as a leveraged recapitalization. To finance the repurchase of these
shares, the Company issued to certain institutional investors 20,000 shares of
Series A non-voting preferred stock for an aggregate of $20.0 million, 33,512
shares of Series B convertible preferred stock (convertible into 8,627,310
shares of Common Stock) for an aggregate of $33.6 million and 1,388 shares of
Series C non-voting convertible preferred stock (convertible into 356,262 shares
of Common Stock) for an aggregate of $1.4 million. In addition, the Company
entered into a secured term loan in the amount of $35.0 million and received an
advance of $5.0 million under a secured revolving credit facility in the maximum
principal amount of $15.0 million, and issued Senior Subordinated Notes, due
2003, in the aggregate principal amount of $10.0 million (the "Senior
Subordinated Notes"). The holder of the Senior Subordinated Notes also received
a warrant to acquire an aggregate of 297,928 shares of non-voting common stock
at an initial exercise price of $3.90 per share, subject to adjustment in
certain circumstances. In addition, in the second quarter of fiscal 1996 the
Company incurred a non-cash compensation charge of $3.0 million. This
compensation charge arose from the purchase by the Company (both directly and
indirectly, through WP Ventures) from certain of its executive officers of
972,608 shares of Common Stock that had been acquired by such officers
immediately prior to the Recapitalization through the exercise of employee stock
options. The amount of the compensation charge is equal to the difference
between the aggregate $765,800 exercise price paid by such officers upon such
exercise and the $3,789,764 of aggregate proceeds received by the officers from
the purchase by the Company of such shares.
NOTE 11. EXTRAORDINARY ITEM
In fiscal 1996, the Company incurred an extraordinary loss of approximately
$2,149,000 representing the after tax effect of the write-off of approximately
$3,642,000 of unamortized capitalized financing costs. These costs were
attributable to indebtedness incurred in the Recapitalization that was repaid
out of the proceeds of the Company's initial public offering.
NOTE 12. PREFERRED STOCK DIVIDEND
The holders of the Series A preferred stock (issued in connection with the
Recapitalization on January 24, 1996) were entitled to receive, when and as
declared by the Board of Directors, out of funds legally available therefor,
preferential cumulative dividends at the rate of 12% per annum. The Company was
not obligated to pay dividends prior to the redemption of the Series A preferred
stock, and no dividends were declared by the Board. The Series A preferred stock
was subject to mandatory redemption, provided funds were legally available
therefor, upon the closing of an initial public offering or the sale of the
Company, but in no event later than January 2006. Upon the closing of the
Company's initial public offering, on April 23, 1996, at which time funds became
legally available for the redemption of the Series A preferred stock and payment
of dividends, the Company redeemed in full the Series A preferred stock and paid
dividends thereon from the date of the Recapitalization.
-22-
<PAGE> 23
TRANSITION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13. INCOME TAXES
At September 30, provision for income taxes consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1996 1997 1998
------- ------ ------
<S> <C> <C> <C>
Federal:
Current..................................... $ 5,129 $4,535 $5,731
Deferred.................................... (1,413) 2,090 (723)
------- ------ ------
3,716 6,625 5,008
State:
Current..................................... 835 646 1,025
Deferred.................................... (227) 358 (128)
------- ------ ------
608 1,004 897
------- ------ ------
Provision for income taxes.................... $ 4,324 $7,629 $5,905
======= ====== ======
</TABLE>
A reconciliation between the Company's effective rate and the U.S.
statutory rate is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
U.S. statutory rate.................................. 35.0% 35.0% 35.0%
State taxes, net of federal benefits................. 5.6 5.0 4.0
Acquired in-process research and development......... -- 17.0 --
Other................................................ -- 1.9 1.0
---- ---- ----
Effective income tax rate............................ 40.6% 58.9% 40.0%
==== ==== ====
</TABLE>
Components of the Company's deferred tax liabilities and assets are as
follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------
1997 1998
----- ------
<S> <C> <C>
Capitalized software........................................ $(576) $ (576)
Depreciation................................................ 103 178
Accounts receivable reserve................................. 51 82
Accrued compensation........................................ 280 675
Reserves and other.......................................... 499 849
----- ------
Net deferred tax assets..................................... $ 357 $1,208
===== ======
</TABLE>
There are no valuation allowances recorded against the Company's deferred
tax assets, since taxable income in the carryback period is sufficient to
realize the benefit of future deductions.
NOTE 14. EMPLOYEE BENEFIT PLANS
401(k) PLAN
The Company maintains a savings plan for its eligible employees under
Section 401(k) of the Internal Revenue Code. The plan allows employees to defer
up to a percentage of their income equal to the lesser of the IRS statutory rate
or 15% on a pre-tax basis through contributions to the plan. Contributions by
the Company under this plan are discretionary. Total contributions by the
Company under the plan approximated $263,000, $306,000, and $376,000 in fiscal
years 1996, 1997 and 1998, respectively.
The Company previously obtained health benefit plans through NEMC (see Note
6). Beginning January 1, 1996, the Company established independent health
benefit plans for its employees that provide a similar level of benefits.
-23-
<PAGE> 24
TRANSITION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EMPLOYEE STOCK PURCHASE PLAN
In 1996, the Company adopted an Employee Stock Purchase Plan (the "Stock
Purchase Plan"), under which employees may purchase up to 300,000 shares of
Common Stock.
During each six-month offering period under the Stock Purchase Plan,
participating employees are entitled to purchase shares through payroll
deductions. The maximum number of shares which may be purchased is determined on
the first day of the offering period pursuant to a formula under which a
specific percentage of the employee's projected base pay for the offering period
is divided by a percentage of the market value of one share of Common Stock on
the first day of the offering period. During each offering period, the price at
which the employee will be able to purchase the Common Stock will be a specific
percentage of the last reported sale price of the Common Stock of the NASDAQ
National Market on the date on which the offering period commences or concludes,
whichever is lower.
The Stock Purchase Plan is administered by the Compensation Committee. All
employees, other than certain highly-compensated employees, who meet certain
minimum criteria based on hours worked per week and length of tenure with the
Company are eligible to participate in the Stock Purchase Plan. No employee may
purchase shares pursuant to the Stock Purchase Plan if, after such purchase such
employee would own more than five percent of the total combined voting power or
value of the securities of the Company.
NOTE 15. COMMITMENTS
The Company leases office and office equipment under operating lease
arrangements which expire on various dates through 2002. Certain operating lease
arrangements include options to renew for additional periods or payment terms
that are subject to increases due to taxes and other operating costs of the
lessor. Future minimum lease commitments, by year and in the aggregate, under
these long-term noncancelable operating leases consist of the following at
September 30, 1998 (in thousands):
<TABLE>
<CAPTION>
OPERATING
FISCAL YEAR LEASES
- ----------- ---------
<S> <C>
1999....................................................... $ 627
2000....................................................... 495
2001....................................................... 58
2002....................................................... 2
------
Total minimum lease payments............................. $1,182
======
</TABLE>
Rent expense amounted to $370,000, $553,000, and $753,000 in fiscal years
1996, 1997 and 1998, respectively.
The Company has an agreement with a vendor of third-party software to pay a
fixed annual license and maintenance fees through June 2003. Aggregate annual
expenses under the agreement as renegotiated are expected to approximate
$2,500,000. The annual fees may be adjusted in the fourth and fifth year of the
amendment for changes in the number of users of the software. Aggregate license
and maintenance fees under this agreement were $2,004,000, $2,000,000 and
$2,019,000 for fiscal years 1996, 1997 and 1998, respectively.
NOTE 16. CONSOLIDATION AND ACQUISITIONS
On July 22, 1996, the Company acquired substantially all of the outstanding
stock and a note held by a selling principal of Enterprising HealthCare, Inc.
("Enterprising HealthCare"), based in Tucson, Arizona, for a total purchase
price of approximately $1.8 million in cash. Enterprising HealthCare provides
system integration products and services for the health care market.
-24-
<PAGE> 25
TRANSITION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The acquisition was accounted for under the purchase method with the
results of Enterprising HealthCare included from July 22, 1996. Purchased
technology costs of $1.6 million are being amortized on a straight-line basis
over 7 years. Pro forma results of operations have not been presented, as the
effect of this acquisition on the financial statements was not material.
On September 19, 1997, the Company acquired all outstanding shares of Vital
Software Inc. ("Vital"), a privately held developer of products that automate
the clinical processes unique to medical oncology. The purchase price was
approximately $6.3 million, which was comprised of $2.7 million in cash and
252,003 shares of the Company's common stock with a value of $3.6 million.
The amount allocated to acquired in-process research and development was
based on the results of an independent appraisal. Acquired in-process research
and development represented development projects in areas that had not reached
technological feasibility and had no alternative future use. Accordingly, the
amount of $6.3 million was charged to operations at the date of the acquisition.
The value of completed technologies and in-process research and development
were determined using a risk-adjusted, discounted cash flow approach. The value
of in-process research and development, specifically, was determined by
estimating the costs to develop the in-process projects into commercially viable
products, estimating the resulting net cash flows from such projects, and
discounting the net cash flows back to their present values. This evaluation
considered the inherent difficulties and uncertainties in completing the
development projects and the risks related to the viability of and potential
changes in future target markets.
In-process research and development projects identified at the acquisition
date focus primarily on a flexible architecture to accommodate multiple disease
categories, functionality including internet access, porting code to a 32 bit
environment, multi-resource scheduling capabilities, billing and HL-7
interfaces, integrating protocol modeling with financial and scheduling
modeling, clinical repository integration and development of decision support
objects. The nature of the efforts to develop the purchased in-process
technology into commercially viable products principally relates to the
following activities: (i) redesign and rewrite software code of the application
to support multiple disease category framework, (ii) add internet content
download for protocols and reference materials, (iii) write software code to
integrate multi-resource scheduling, clinical repository, billing and HL-7
interfaces, (iv) port entire application to 32 bit format, (v) enhance and
develop disease specific decision support objects.
NOTE 17. SUBSEQUENT EVENTS
HEALTHVISION ACQUISITION
On October 28, 1998, the Company signed a definitive agreement to acquire
the approximately 80.5% of the outstanding capital stock of HealthVISION not
already owned by the Company for cash in the amount of $25.6 million, the
assumption of $9.3 million of liabilities, plus an earn-out of up to $10.8
million if specified financial milestones are met. The acquisition will be
accounted for as a purchase. HealthVISION is a provider of electronic medical
record software. HealthVISION's products include CareVISION, a patient-centered
clinical data repository and lifetime patient record system, which is expected
to constitute an integral component of the Company's Transition IV product. The
Company expects to close the acquisition in the first quarter of fiscal 1999.
ECLIPSYS CORPORATION MERGER
On October 29, 1998, the Company entered into a merger agreement with
Eclipsys Corporation, a healthcare information technology company delivering
solutions that enable healthcare providers to achieve improved clinical,
financial and administrative outcomes. Under the terms of the agreement, each
share of the Company's common stock will be converted to .525 shares of
Eclipsys' common stock. The transaction, which is subject to regulatory as well
as stockholder approval, is intended to be accounted for as a pooling of
interests and is expected to close by the end of December 1998.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements of Business Acquired.
The financial statements required by Item 7(a) of Form 8-K will be
filed by amendment of this Form 8-K not later than 60 days after the date
hereof, unless the Company ceases to be subject to the reporting requirements of
Section 13 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), prior to such time.
(b) Pro Forma Financial Information.
The pro forma financial statements required by Item 7(b) of Form 8-K
will be filed by amendment of this Form 8-K not later than 60 days after the
date hereof, unless the Company ceases to be subject to the reporting
requirements of Section 13 of the Exchange Act prior to such time.
-25-
<PAGE> 26
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements of Business Acquired.
The financial statements required by Item 7(a) of Form 8-K were
previously reported in the Company's definitive proxy materials filed on
Schedule 14A under Section 14 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") on December 4, 1998.
(b) Pro Forma Financial Information.
The pro forma financial statements required by Item 7(b) of Form 8-K
will be filed by amendment of this Form 8-K not later than 60 days after the
date hereof, unless the Company ceases to be subject to the reporting
requirements of Section 13 of the Exchange Act prior to such time.
-26-
<PAGE> 27
(c) Exhibits.
Exhibit
Number Description
------ -----------
23.1 Consent of PricewaterhouseCoopers LLP.
-27-
<PAGE> 28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TRANSITION SYSTEMS, INC.
Date: December 18, 1998 By: /s/ Paula J. Malzone
-------------------------------------
Paula J. Malzone
Chief Financial Officer and Treasurer
-28-
<PAGE> 29
EXHIBIT INDEX
Page Number in
Exhibit Sequentially
Number Description Numbered Copy
------- ----------- --------------
23.1 Consent of Price Waterhouse Coopers LLP.
-29-
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statements of Transition Systems, Inc. on Form S-8 (File No. 333-10411 and File
No. 333-10413) of our report dated November 16, 1998, on our audits of the
consolidated financial statements of Transition Systems, Inc. as of September
30, 1998 and 1997 and for the years ended September 30, 1998, 1997 and 1996,
which report is included in this Form 8-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 18, 1998
