<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 4, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------
ECLIPSYS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
7373
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)
65-0632092
(I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
777 EAST ATLANTIC AVENUE
SUITE 200
DELRAY BEACH, FLORIDA 33483
(561) 243-1440
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
HARVEY J. WILSON
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
ECLIPSYS CORPORATION
777 EAST ATLANTIC AVENUE
SUITE 200
DELRAY BEACH, FLORIDA 33483
(561) 243-1440
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------
Copies to:
JOHN A. BURGESS, ESQ.
BRENT B. SILER, ESQ.
HALE AND DORR LLP
1455 PENNSYLVANIA AVENUE, N.W.
WASHINGTON, D.C. 20004
TELEPHONE: (202) 942-8400
TELECOPY: (202) 942-8484
ROBERT W. SWEET, JR., ESQ.
DAVID H. FEINBERG, ESQ.
FOLEY, HOAG & ELIOT LLP
ONE POST OFFICE SQUARE
BOSTON, MASSACHUSETTS 02109
TELEPHONE: (617) 832-1000
TELECOPY: (617) 832-7000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective and certain
other conditions under the Merger Agreement are met or waived.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] __________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
========================================================================================================================
PROPOSED PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM OFFERING PRICE AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE(3)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.01 par value
per share.................... 11,060,808 shares $18.69 $206,726,502 $57,470
========================================================================================================================
</TABLE>
(1) Based upon an estimate of the maximum number of shares of the Common Stock
of the Registrant issuable in the merger described herein to stockholders of
Transition Systems, Inc. ("TSI").
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rules 457(c) and 457(f)(1) under the Securities Act of 1933, as
amended (the "Securities Act"), and based upon the average of the high and
low sales prices of the Common Stock of TSI on the Nasdaq National Market on
November 27, 1998.
(3) A fee of $49,707 was previously paid by the Registrant pursuant to Rule
14a-6 promulgated under the Securities Exchange Act of 1934, as amended, in
connection with the filing of the preliminary Joint Proxy
Statement/Prospectus on November 20, 1998. Pursuant to Rule 457(b) under the
Securities Act, such fee is being credited against the registration fee and,
accordingly, $7,763 in additional fees is being paid in connection with this
Registration Statement.
------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
JOINT PROXY STATEMENT/PROSPECTUS
[ECLIPSYS LOGO] [TSI LOGO]
MERGER PROPOSED -- YOUR VOTE IS VERY IMPORTANT
The Boards of Directors of Eclipsys Corporation and Transition Systems,
Inc. have agreed to a merger in which Eclipsys will acquire TSI. We are seeking
your vote on this important transaction.
If the merger is completed, TSI stockholders will receive 0.525 shares of
Eclipsys Voting Common Stock for each share of TSI Voting or Non-Voting Common
Stock that they own. Eclipsys stockholders will continue to own their existing
shares after the merger. If the merger is completed, the stockholders of TSI
prior to the merger will own approximately 33.7% of the total outstanding shares
of Eclipsys Common Stock on a fully diluted basis (assuming the exercise of all
warrants and stock options of both TSI and Eclipsys, except for options that
will not be exercisable until after December 31, 1998).
The merger cannot be completed unless TSI stockholders approve and adopt
the merger agreement and the merger and Eclipsys stockholders approve the
issuance of shares of Eclipsys Voting Common Stock in the merger. We have
scheduled special meetings for our stockholders to vote on these proposals. Your
vote is very important.
Whether or not you plan to attend a meeting, please take the time to vote
by completing and mailing the enclosed proxy card to us. If you sign, date and
mail your proxy card without indicating how you want to vote, your proxy will be
counted as a vote in favor of the proposals submitted at your meeting. If you
are a TSI stockholder and fail to return the card, the effect will be a vote
against the merger, unless you attend your meeting and vote in favor of the
proposal.
The dates, times and places of the meetings are as follows:
For Eclipsys stockholders:
December 30, 1998
10:00 a.m., local time
Delray Beach Marriott
10 North Ocean Boulevard
Delray Beach, Florida 33444
For TSI stockholders:
December 30, 1998
10:00 a.m., local time
Foley, Hoag & Eliot LLP
One Post Office Square
16th Floor
Boston, Massachusetts 02109
This Joint Proxy Statement/Prospectus provides you with detailed
information about the proposed merger. In addition, you may obtain information
about our companies from documents that we have filed with the Securities and
Exchange Commission. We encourage you to read this entire document carefully.
<TABLE>
<S> <C>
/s/ HARVEY J. WILSON /s/ ROBERT F. RACO
Harvey J. Wilson, Robert F. Raco,
President, Chief Executive Officer and President and Chief Executive Officer
Chairman of the Board Transition Systems, Inc.
Eclipsys Corporation
</TABLE>
Neither the Securities and Exchange Commission nor any state securities
regulator has approved the Eclipsys Voting Common Stock to be issued in the
merger or determined if this Joint Proxy Statement/Prospectus is accurate or
adequate. Any representation to the contrary is a criminal offense.
Joint Proxy Statement/Prospectus dated December 4, 1998, and first mailed to
stockholders on or about December 7, 1998.
<PAGE> 3
[ECLIPSYS LETTERHEAD]
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 30, 1998
To the Stockholders of Eclipsys Corporation:
NOTICE IS HEREBY GIVEN that a special meeting of stockholders (the
"Eclipsys Special Stockholders' Meeting") of Eclipsys Corporation, a Delaware
corporation ("Eclipsys"), will be held on December 30, 1998 at the Delray Beach
Marriott, 10 North Ocean Boulevard, Delray Beach, Florida 33444, commencing at
10:00 a.m., local time for the following purposes:
1. To consider and vote upon a proposal to approve the issuance of
shares of Common Stock, $.01 par value per share, of Eclipsys
("Eclipsys Voting Common Stock"), as contemplated by the Agreement
and Plan of Merger dated as of October 29, 1998 (the "Merger
Agreement") among Eclipsys Corporation, Exercise Acquisition Corp.,
a Massachusetts corporation that is a wholly owned subsidiary of
Eclipsys ("Sub"), and Transition Systems, Inc., a Massachusetts
corporation ("TSI"). The Merger Agreement provides that, among
other things, (a) Sub will be merged with and into TSI, with TSI
being the surviving corporation and becoming a wholly owned
subsidiary of Eclipsys, and (b) each outstanding share of Voting
and Non-Voting Common Stock, $.01 par value per share, of TSI will
be converted into the right to receive 0.525 shares of Eclipsys
Voting Common Stock.
2. To transact such other business as may properly be brought before
the Eclipsys Special Stockholders' Meeting, or any adjournments or
postponements thereof.
A copy of the Merger Agreement is attached as Annex A to the accompanying
Joint Proxy Statement/Prospectus.
Holders of record of Eclipsys Voting Common Stock at the close of business
on November 30, 1998 (the "Record Date") are entitled to notice of and to vote
at the Eclipsys Special Stockholders' Meeting and any adjournment or
postponement of the Eclipsys Special Stockholders' Meeting.
All stockholders of Eclipsys are invited to attend the meeting in person.
However, to ensure your representation at the meeting, you are urged to
complete, sign and return the enclosed proxy card as promptly as possible in the
enclosed postage-prepaid envelope.
By Order of the Board of Directors
/s/ T. JACK RISENHOOVER, II
T. Jack Risenhoover, II
Secretary
December 4, 1998
Delray Beach, Florida
<PAGE> 4
[TSI LETTERHEAD]
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 30, 1998
To the Stockholders of Transition Systems, Inc.:
NOTICE IS HEREBY GIVEN that a special meeting of stockholders (the "TSI
Special Stockholders' Meeting") of Transition Systems, Inc., a Massachusetts
corporation ("TSI"), will be held on December 30, 1998 at the offices of Foley,
Hoag & Eliot LLP, One Post Office Square, 16th Floor, Boston, Massachusetts
02109, commencing at 10:00 a.m., local time, for the following purposes:
1. To consider and vote upon the Agreement and Plan of Merger dated as
of October 29, 1998 (the "Merger Agreement") among Eclipsys
Corporation, a Delaware corporation ("Eclipsys"), Exercise
Acquisition Corp., a Massachusetts corporation ("Sub") and TSI, and
the merger (the "Merger") contemplated thereby. The Merger Agreement
provides that, among other things, (a) Sub, a wholly owned subsidiary
of Eclipsys, will be merged with and into TSI with TSI as the
surviving corporation and with TSI becoming a wholly owned subsidiary
of Eclipsys, and (b) each outstanding share of Voting and Non-Voting
Common Stock of TSI will be converted into the right to receive 0.525
shares of Eclipsys Voting Common Stock.
2. To transact such other business as may properly be brought before the
TSI Special Stockholders' Meeting or any adjournments or
postponements thereof.
A copy of the Merger Agreement is attached as Annex A to the accompanying
Joint Proxy Statement/Prospectus.
If the Merger Agreement and the Merger are approved by the TSI stockholders
at the TSI Special Stockholders' Meeting and the Merger is effected, any
stockholder (1) who files with TSI, before the taking of the vote at the TSI
Special Stockholders' Meeting, written objection to the Merger stating that he
or she intends to demand payment for his or her shares if the Merger is effected
and (2) whose shares are not voted in favor of the Merger has or may have the
right to demand in writing from TSI, within twenty days after the date of
mailing to him or her of notice in writing that the Merger has become effective,
payment for his or her shares and an appraisal of the value thereof. TSI and any
such stockholder shall in such cases have the rights and duties and shall follow
the procedure set forth in sections 88 to 98, inclusive, of chapter 156B of the
General Laws of Massachusetts.
Holders of record of TSI Voting and Non-Voting Common Stock at the close of
business on November 30, 1998 (the "Record Date") are entitled to notice of the
TSI Special Stockholders' Meeting. The holders of record of TSI Voting Common
Stock on the Record Date are entitled to vote at the TSI Special Stockholders'
Meeting and any adjournment or postponement thereof.
All shareholders of TSI are invited to attend the meeting in person.
However, to ensure your representation at the meeting, you are urged to
complete, sign and return the enclosed proxy card as promptly as possible in the
enclosed postage-prepaid envelope.
By Order of the Board of Directors
/s/ DONALD R. WARE
Donald R. Ware
Clerk
December 4, 1998
Boston, Massachusetts
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Questions and Answers about the
Proposed Eclipsys/TSI Merger........ ii
Summary............................... 1
The Companies....................... 1
Reasons for the Merger.............. 1
Effects of the Merger; Issuance of
New Shares; Treatment of TSI
Options and Warrants............. 2
The Stockholders' Meetings.......... 3
Who is Entitled to Vote; What Vote
is Required...................... 3
Voting Agreements................... 3
Share Ownership of Management....... 4
New TSI Designated Directors........ 4
Recommendations of the Boards of
Directors........................ 4
Opinions of Financial Advisors...... 4
Interests of Certain Persons in the
Merger........................... 5
Anticipated Closing of the Merger... 5
Conditions to the Merger............ 5
Termination of the Merger
Agreement........................ 5
Appraisal Rights.................... 6
Regulatory Approvals................ 6
Accounting Treatment................ 6
Federal Income Tax Considerations... 6
Surrender of Stock Certificates..... 6
Certain Effects of the Merger on the
Rights of TSI Stockholders....... 6
Forward-Looking Statements May Prove
Inaccurate....................... 7
Explanation of Certain Terms........ 7
Risk Factors.......................... 8
Market Price Information.............. 16
Selected Consolidated Financial Data
for Eclipsys........................ 17
Selected Consolidated Financial Data
for TSI............................. 19
Selected Unaudited Pro Forma Combined
Financial Data Reflecting the
Merger.............................. 20
Comparative Per Share Data............ 21
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Management's Discussion and Analysis
of Financial Condition and Results
of Operations of Eclipsys........... 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations of TSI................ 32
Eclipsys Special Stockholders'
Meeting............................. 39
TSI Special Stockholders' Meeting..... 41
The Merger............................ 43
Unaudited Pro Forma Condensed Combined
Consolidated Financial Statements... 60
The Merger Agreement.................. 71
Business of Eclipsys.................. 80
Eclipsys Management................... 91
Principal Stockholders of Eclipsys.... 96
Certain Transactions Relating to
Eclipsys............................ 99
Business of TSI....................... 101
Principal Stockholders of TSI......... 108
Description of Eclipsys Capital
Stock............................... 110
Comparison of Stockholders' Rights.... 112
Legal Matters......................... 118
Experts............................... 118
Future Stockholder Proposals.......... 118
Where You Can Find More Information... 119
Forward-Looking Statements............ 119
Where to Find Certain Defined Terms... 120
Index to Financial Statements......... F-1
ANNEXES
Annex A -- Agreement and Plan of
Merger among Eclipsys
Corporation, Exercise
Acquisition Corp. and
Transition Systems, Inc.
dated October 29, 1998.... A-1
Annex B -- Opinion of Morgan Stanley
& Co. Incorporated........ B-1
Annex C -- Opinion of BT Alex. Brown
Incorporated.............. C-1
</TABLE>
<PAGE> 6
QUESTIONS AND ANSWERS ABOUT THE PROPOSED ECLIPSYS/TSI MERGER
Q: WHY ARE THE TWO COMPANIES PROPOSING TO MERGE?
A: We believe that the Merger, by combining the complementary product offerings,
customer bases and other resources of our companies, will position the
combined company to enjoy greater growth and earnings than either company
would have experienced individually. To review the reasons for the merger in
greater detail, see pages 45 through 47.
Q: WHAT DO I NEED TO DO NOW?
A: After you have carefully read this Joint Proxy Statement/Prospectus, just
indicate on your proxy card how you want to vote, and sign and mail it in the
enclosed postage-prepaid return envelope marked "Proxy" as soon as possible,
so that your shares may be represented and voted at the appropriate special
meeting, as indicated below:
Eclipsys Special Stockholders' Meeting
December 30, 1998
10:00 a.m., local time
Delray Beach Marriott
10 North Ocean Boulevard
Delray Beach, Florida 33444
TSI Special Stockholders' Meeting
December 30, 1998
10:00 a.m., local time
Foley, Hoag & Eliot LLP
One Post Office Square
16th Floor
Boston, Massachusetts 02109
Holders of a majority of the shares of Eclipsys Voting Common Stock present
or represented and voting at the Eclipsys special stockholders' meeting must
approve the issuance of shares of Eclipsys Voting Common Stock in connection
with the merger, and therefore it is important that Eclipsys stockholders
return their signed proxy cards. The Eclipsys board of directors recommends
voting "FOR" the issuance of the Eclipsys Voting Common Stock in the merger.
Holders of two-thirds of the outstanding TSI Voting Common Stock must approve
the merger and the merger agreement, and therefore it is important that TSI
stockholders return their signed proxy cards. The TSI board of directors
recommends voting "FOR" the merger and the merger agreement.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Your broker will vote your shares only if you provide instructions on how to
vote. You should follow the directions provided by your broker regarding how
to instruct your broker to vote your shares. If you do not return your proxy,
your shares will not be voted on the proposed merger, which, in the case of
TSI stockholders, will have the same effect as voting against the proposed
merger.
Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
A: Yes. There are three ways in which you may revoke your proxy and change your
vote. First, you may send a written notice to the party to whom you submitted
your proxy stating that you would like to revoke your proxy. Second, you may
complete and submit a new proxy card. Third, you may attend the Eclipsys
Special Stockholders' Meeting or the TSI Special Stockholders' Meeting, as
applicable, and vote in person. Simply attending the special meeting,
however, will not revoke your proxy. If you have instructed a broker to vote
your shares, you must follow directions received from your broker to change
your vote.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. After the merger is completed, Eclipsys will send TSI stockholders
written instructions for exchanging their stock certificates. Eclipsys
stockholders will keep their existing stock certificates.
ii
<PAGE> 7
Q: WHAT WILL HOLDERS OF TSI VOTING AND NON-VOTING COMMON STOCK RECEIVE IN THE
MERGER?
A: At the completion of the merger, each share of TSI Voting and Non-Voting
Common Stock will be converted into 0.525 shares of Eclipsys Voting Common
Stock. Eclipsys will not issue fractional shares of Eclipsys Voting Common
Stock. Instead Eclipsys will pay cash with respect to any fractional shares.
For example, a holder of 100 shares of TSI Voting or Non-Voting Common Stock
would receive 52 shares of Eclipsys Voting Common Stock, plus a cash payment
equal to the value of 0.5 of a share of Eclipsys Voting Common Stock.
Q: WHAT IS THE "EXCHANGE RATIO"?
A: The exchange ratio is the fraction of a share of Eclipsys Voting Common Stock
into which each share of TSI Voting and Non-Voting Common Stock will be
converted upon completion of the merger. The exchange ratio is fixed at
0.525.
Please note that because the exchange ratio is fixed and the market price of
the shares of Eclipsys Voting Common Stock will receive may fluctuate, TSI
stockholders cannot be sure of the market value of the shares of Eclipsys
Voting Common Stock they will receive.
Q: WHAT WILL HAPPEN TO THE TSI OPTIONS AND WARRANTS IN THE MERGER?
A: TSI options and warrants outstanding and unexercised at the time of the
merger will be converted into rights to acquire Eclipsys Voting Common Stock
under the same terms, provided that the number of shares will decrease and
the exercise price per share will increase to reflect the exchange ratio. For
example, an option to purchase 100 shares of TSI Voting Common Stock at an
exercise price of $5.00 per share will become an option to purchase 52 shares
of Eclipsys Voting Common Stock at an exercise price of $9.52 per share.
Q: WHAT WILL THE STOCKHOLDERS OF ECLIPSYS VOTING AND NON-VOTING COMMON STOCK
RECEIVE IN THE MERGER?
A: Holders of Eclipsys Voting and Non-Voting Common Stock will retain the shares
that they currently own and such shares will remain unchanged. However, as a
result of the merger, they will own shares of a larger, more diversified
company, as more fully described in this Joint Proxy Statement/ Prospectus.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: We are working toward completing the merger as quickly as possible. In
addition to the approvals of the holders of Eclipsys Voting Common Stock and
TSI Voting Common Stock, we must also obtain certain regulatory approvals. We
currently expect to close the merger by December 31, 1998.
Q: WHAT ARE THE TAX CONSEQUENCES OF THE MERGER?
A: We expect that for United States federal income tax purposes, your exchange
of shares of TSI Voting or Non-Voting Common Stock for shares of Eclipsys
Voting Common Stock generally will not cause you to recognize any gain or
loss. You will, however, recognize income or gain in connection with any cash
received instead of fractional shares of Eclipsys Voting Common Stock. Your
holding period for the Eclipsys Voting Common Stock received in the merger,
which determines how any gain or loss should be treated for federal income
tax purposes upon future sales of Eclipsys Voting Common Stock, generally
will include the holding period for the TSI Voting or Non-Voting Common Stock
exchanged in the merger. For a more complete discussion of federal income tax
considerations, see pages 57 to 58.
Q: WILL THE COMPOSITION OF THE ECLIPSYS BOARD OF DIRECTORS CHANGE AS A RESULT OF
THE MERGER?
A: Yes. At the time the merger is completed, the Eclipsys board of directors
will appoint Robert F. Raco and Patrick T. Hackett to the Eclipsys board of
directors. Mr. Raco and Mr. Hackett are currently directors of TSI. Eclipsys
will have a total of nine directors after the merger is completed.
iii
<PAGE> 8
Q: WHAT OTHER MATTERS WILL BE VOTED ON AT THE SPECIAL STOCKHOLDERS' MEETINGS?
A: We do not expect to ask the Eclipsys Voting Common Stockholders to vote on
any matter other than the issuance of the Eclipsys Voting Common Stock in
connection with the merger; and we do not expect to ask the TSI Voting Common
Stockholders to vote on any matter other than approval of the merger and the
merger agreement.
Q: WILL THE RIGHTS OF TSI STOCKHOLDERS CHANGE AS A RESULT OF THE MERGER?
A: Yes. Currently the rights of TSI stockholders are governed by Massachusetts
law and TSI's charter and bylaws, whereas the rights of Eclipsys stockholders
are governed by Delaware law and Eclipsys' charter and bylaws. After the
merger, TSI stockholders will become stockholders of Eclipsys, and therefore
their rights will be governed by Delaware law and Eclipsys' charter and
bylaws. For a summary of certain differences between the rights of TSI
stockholders and the rights of Eclipsys stockholders, see pages 112 through
117.
Q: WHOM SHOULD STOCKHOLDERS CALL WITH QUESTIONS AND TO OBTAIN ADDITIONAL COPIES
OF THE JOINT PROXY STATEMENT/PROSPECTUS?
A: Eclipsys stockholders should call Karen Young at (561) 266-2324. TSI
stockholders should call TSI Investor Relations at (617) 305-5283.
iv
<PAGE> 9
SUMMARY
This summary highlights selected information from this document and does
not contain all of the information that may be important to you. To understand
the merger fully and for a more complete description of the legal terms of the
merger, you should read carefully this entire document and the documents to
which we have referred you. See "Where You Can Find More Information" on page
119. We have included page references parenthetically to direct you to a more
complete discussion of the topics presented in this summary.
THE COMPANIES
Eclipsys Corporation (page 80)
777 East Atlantic Avenue
Suite 200
Delray Beach, Florida 33483
(561) 243-1440
Eclipsys Corporation ("Eclipsys") is a healthcare information technology
company delivering solutions that enable healthcare providers to achieve
improved clinical, financial and administrative outcomes. Eclipsys markets its
products primarily to large hospitals, academic medical centers and integrated
healthcare delivery networks. Eclipsys offers an integrated suite of healthcare
products in four critical areas -- clinical management, access management,
patient financial management and enterprise data warehouse and analysis. These
products can be purchased in combination to provide an enterprise-wide solution
or individually to address specific needs. Eclipsys also provides outsourcing,
remote processing and networking services to assist customers in meeting their
healthcare information technology requirements. Eclipsys was formed in December
1995 and has grown to date primarily through three acquisitions, all completed
since January 1997.
Transition Systems, Inc. (page 101)
One Boston Place
Boston, Massachusetts 02108
(617) 723-4222
Transition Systems, Inc. ("TSI") provides management information technology
to hospitals, integrated delivery networks, physician groups and other
healthcare organizations. TSI's software products span a healthcare
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 in a real-time environment. TSI's products help its
customers increase efficiency, improve the quality of care and lower the cost of
care delivery.
On December 3, 1998, TSI completed the acquisition of the capital stock of
HealthVISION, Inc. ("HealthVISION") not already owned by TSI. HealthVISION,
located in Santa Rosa, California, is a provider of electronic medical record
software. HealthVISION products include CareVISION, a patient-centered clinical
data repository and lifetime patient record system that is an integral component
of TSI's new generation of decision support solutions. (page 107)
REASONS FOR THE MERGER (page 45)
We believe that the merger, by combining the complementary product
offerings, customer bases and other resources of our companies, will position
the combined company to enjoy greater growth and earnings than either Eclipsys
or TSI would have experienced individually. We believe the merger will:
- enable the combined company to offer a broader range of products, product
features and technical solutions for customers;
1
<PAGE> 10
- combine the highly complementary customer bases of the two companies;
- enable the combined company to achieve efficiencies and economies of
scale that could not be achieved by either company independently; and
- provide the combined company with substantially greater financial and
other resources.
We believe these factors will benefit the stockholders of both companies.
EFFECTS OF THE MERGER; ISSUANCE OF NEW SHARES; TREATMENT OF TSI OPTIONS AND
WARRANTS (pages 71 and 74-75)
If the proposed merger is completed, TSI will become a wholly owned
subsidiary of Eclipsys. The stockholders of TSI will receive 0.525 shares of
Eclipsys Voting Common Stock for each share of TSI Voting or Non-Voting Common
Stock they own. Eclipsys will not issue any fractional shares. Instead, it will
pay to TSI stockholders an amount equal to the cash value of any fractional
share of Eclipsys Voting Common Stock in place of receiving such fractional
shares. The merger agreement describes the method that will be used to determine
the value of fractional shares. Each outstanding share of Eclipsys stock will
remain unchanged and outstanding after the merger.
After the merger, each outstanding option to acquire shares of TSI Voting
Common Stock, whether such option is vested or unvested, will become an option
to acquire shares of Eclipsys Voting Common Stock, and each outstanding warrant
to acquire shares of TSI Non-Voting Common Stock will become a warrant to
acquire shares of Eclipsys Voting Common Stock. In each case, the number of
shares purchasable will be decreased, and the per-share exercise price will be
increased, to reflect the exchange ratio of 0.525 shares of Eclipsys Voting
Common Stock for every share of TSI Voting and Non-Voting Common Stock. All
other terms of the original options and warrants will remain the same as prior
to the completion of the merger.
If the merger is completed, the stockholders of TSI prior to the merger
will own approximately 33.7% of the total outstanding shares of Eclipsys Voting
Common Stock on a fully diluted basis (assuming exercise of all warrants and
exercisable stock options of both TSI and Eclipsys).
The following table illustrates the maximum number of shares of Eclipsys
Voting Common Stock that could be issued in connection with the merger to TSI
stockholders, option holders and warrant holders. It also illustrates the
relative ownership of Eclipsys Voting Common Stock by TSI and Eclipsys
stockholders, option holders and warrant holders after the merger. These
calculations are based on the shares, options and warrants outstanding on the
record date and assume that all options and warrants outstanding on that date
issued by TSI and Eclipsys are exercised prior to the merger, except for options
that will not be exercisable until after December 31, 1998. These calculations
also treat all shares of Eclipsys Non-Voting Common Stock as if they had been
converted into Eclipsys Voting Common Stock.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE
ECLIPSYS SHARES OF TOTAL
--------------- ----------
<S> <C> <C>
NEW TSI SHARES
TSI stockholders.......................................... 9,662,112 29.4%
TSI option holders........................................ 1,242,284 3.8
TSI warrant holders....................................... 156,412 0.5
EXISTING ECLIPSYS SHARES
Eclipsys stockholders..................................... 20,358,073 62.1
Eclipsys option holders................................... 413,400 1.3
Eclipsys warrant holders.................................. 962,833 2.9
---------- ------
Total............................................. 32,795,114 100.0%
</TABLE>
The Eclipsys options used in these calculations have a weighted average
exercise price of $4.91 per share and the Eclipsys warrants have an exercise
price of $0.01 per share. The TSI options have a
2
<PAGE> 11
weighted average exercise price of $3.93 per share and the TSI warrants have an
exercise price of $0.02 per share. These calculations do not reflect outstanding
options of Eclipsys and TSI that become exercisable after December 31, 1998 (in
the case of Eclipsys, options to purchase an aggregate of 2,025,058 shares of
Eclipsys Voting Common Stock and, in the case of TSI, options to purchase an
aggregate of 1,054,283 shares of TSI Voting Common Stock, or the equivalent of
553,498 shares of Eclipsys Voting Common Stock).
In addition, Eclipsys has agreed, if the merger is completed on or before
March 31, 1999, to permit current TSI employees to apply an aggregate of
approximately $90,000 of salary deferred under TSI's existing employee stock
purchase plan to the purchase of Eclipsys Voting Common Stock on March 31, 1999.
This purchase will be at a price per share equal to the lower of $12.75 per
share or 85% of the market price of Eclipsys Voting Common Stock at that time.
THE STOCKHOLDERS' MEETINGS (pages 39 and 41)
The Eclipsys special stockholders' meeting will be held on December 30,
1998 at the Delray Beach Marriott, 10 North Ocean Boulevard, Delray Beach,
Florida 33444, commencing at 10:00 a.m., local time for the following purpose:
- to approve the issuance of shares of Eclipsys Voting Common Stock in
connection with the merger.
The TSI special stockholders' meeting will be held on December 30, 1998 at
the offices of Foley, Hoag & Eliot LLP, One Post Office Square, 16th Floor,
Boston Massachusetts 02109, commencing at 10:00 a.m., local time for the
following purpose:
- to approve the merger and the merger agreement.
WHO IS ENTITLED TO VOTE; WHAT VOTE IS REQUIRED
Eclipsys (page 39)
You are entitled to vote any shares of Eclipsys Voting Common Stock held by
you at the close of business on November 30, 1998, the record date, at the
Eclipsys special stockholders' meeting. On the record date, there were
19,461,642 outstanding shares of Eclipsys Voting Common Stock, each of which
will be entitled to one vote. Stockholders holding at least a majority of the
shares present or represented by proxy and voting at the Eclipsys special
stockholders' meeting must vote in favor of the proposal submitted for approval
in order for Eclipsys to proceed with the merger.
TSI (page 41)
You are entitled to vote any shares of TSI Voting Common Stock held by you
at the close of business on November 30, 1998, the record date, at the TSI
special stockholders' meeting. On the record date, there were 18,047,762
outstanding shares of TSI Voting Common Stock, each of which will be entitled to
one vote. Stockholders holding at least two-thirds of the outstanding shares of
TSI must vote to approve the merger and the merger agreement in order for TSI to
proceed with the merger. Holders of TSI Non-Voting Common Stock are entitled to
notice of the TSI special stockholders' meeting but are not entitled to vote at
the meeting.
VOTING AGREEMENTS (pages 39 and 41)
Certain stockholders of Eclipsys have agreed to vote the Eclipsys shares
over which they exercise voting control in favor of the issuance of shares of
Eclipsys Voting Common Stock in connection with the merger in accordance with
the terms of the merger agreement. Together, these stockholders control
approximately 53.8% of the shares of Eclipsys Voting Common Stock outstanding on
the record date.
3
<PAGE> 12
Certain stockholders of TSI have agreed to vote the TSI shares over which
they exercise voting control in favor of the approval of the merger and the
merger agreement. Together, these stockholders control approximately 34.4% of
the shares of TSI Voting Common Stock outstanding on the record date.
SHARE OWNERSHIP OF MANAGEMENT (page 56)
On the record date, directors and executive officers of Eclipsys and their
affiliates had voting control over 11,553,707 outstanding shares of Eclipsys
Voting Common Stock (including the shares covered by the voting agreements
described above), or approximately 59.4% of the Eclipsys Voting Common Stock
outstanding on the record date.
On the record date, directors and executive officers of TSI and their
affiliates had voting control over 6,296,672 outstanding shares of TSI Voting
Common Stock (including the shares covered by the voting agreements described
above), or approximately 34.9% of the TSI Voting Common Stock outstanding on the
record date.
The directors and executive officers of each company have indicated that
they intend to vote the Eclipsys Voting Common Stock or TSI Voting Common Stock
owned by them in favor of the proposals submitted for approval at the special
stockholders' meetings.
NEW TSI DESIGNATED DIRECTORS (page 92)
If the merger is completed, Robert F. Raco and Patrick T. Hackett, each a
current director of TSI, will become directors of Eclipsys. Mr. Raco will have a
term ending with the annual stockholders' meeting of Eclipsys to be held in 1999
and Mr. Hackett will have a term ending with the annual stockholders' meeting of
Eclipsys to be held in 2000. There will be a total of nine directors of Eclipsys
after the merger.
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS (page 45)
Eclipsys
The Board of Directors of Eclipsys believes that the merger is fair and is
in the best interests of the stockholders of Eclipsys. Therefore, the Board of
Directors of Eclipsys recommends that the Eclipsys stockholders vote in favor of
the issuance of shares of Eclipsys Voting Common Stock in connection with the
merger.
TSI
The Board of Directors of TSI believes that the merger is fair and is in
the best interests of the stockholders of TSI. Therefore, TSI's Board of
Directors recommends that the TSI stockholders vote to approve the merger and
the merger agreement.
OPINIONS OF FINANCIAL ADVISORS (page 48)
In deciding to approve the merger, the Eclipsys Board of Directors
considered the opinion of Morgan Stanley & Co. Incorporated that the exchange
ratio was, as of the date of the opinion, fair to Eclipsys from a financial
point of view.
The TSI Board of Directors received and considered the opinion of its
financial advisor, BT Alex. Brown Incorporated, that the exchange ratio was, as
of the date of the opinion, fair, from a financial point of view, to the holders
of TSI Voting and Non-Voting Common Stock.
Morgan Stanley & Co. Incorporated and BT Alex. Brown Incorporated gave
these opinions subject to certain important qualifications and assumptions.
These opinions are attached as Annex B and Annex C to this document. Holders of
Eclipsys Voting Common Stock and TSI Voting and Non-Voting Common Stock should
read these opinions carefully.
4
<PAGE> 13
INTERESTS OF CERTAIN PERSONS IN THE MERGER (page 56)
Several directors, executive officers and a significant stockholder of TSI
have interests in the merger that may differ from the interests of other TSI
stockholders:
- two directors of TSI, Robert F. Raco and Patrick T. Hackett, will become
members of the Eclipsys Board of Directors after the merger;
- Eclipsys has agreed to continue certain indemnification and insurance
arrangements for existing and former directors and officers of TSI after
the merger; and
- Eclipsys will grant certain registration rights to a significant
stockholder of TSI.
ANTICIPATED CLOSING OF THE MERGER
We currently anticipate that the merger will be closed by December 31,
1998.
CONDITIONS TO THE MERGER (page 75)
Eclipsys and TSI will complete the merger only if certain conditions are
either satisfied or (in some cases) waived. These conditions include, among
other things:
- the merger and the merger agreement have been approved by the TSI
stockholders;
- the issuance of shares of Eclipsys Voting Common Stock in connection with
the merger has been approved by the Eclipsys stockholders;
- the total number of shares of TSI Voting and Non-Voting Common Stock as
to which appraisal rights have been perfected (see "Appraisal Rights"
below) is not more than 5% of all outstanding shares of TSI Voting and
Non-Voting Common Stock;
- no governmental agency or court has prohibited consummation of the
merger;
- counsel to Eclipsys has delivered an opinion to Eclipsys in respect of
certain federal income tax consequences of the merger and counsel to TSI
has delivered a similar opinion to TSI;
- the independent accountants for both Eclipsys and TSI have delivered a
letter to each company stating that they are not aware of any condition
that would preclude the merger from qualifying for pooling-of-interests
accounting treatment; and
- there is no material adverse change in the financial condition, results
of operations, cash flows, business or properties with respect to the
other company (the companies have agreed that the failure of either
company to achieve any level of revenue and earnings at any time shall
not of itself be such a material adverse change).
TERMINATION OF THE MERGER AGREEMENT (page 77)
Eclipsys and TSI can jointly agree to terminate the merger agreement at any
time without completing the merger. In addition, either company can terminate
the merger agreement if:
- the merger is not completed by April 30, 1999;
- a governmental authority or legal action permanently prohibits the
merger;
- the stockholders of the other company do not vote the required number of
shares in favor of the proposals submitted for their approval;
- the other company breaches any of its representations or warranties or
its obligations under the merger agreement, resulting in the inability to
satisfy a condition to the completion of the merger, if such breach is
not cured within 20 business days; or
- the other company's board of directors withdraws or adversely modifies
its recommendation to its stockholders or recommends or announces its
intention to engage in a designated alternative transaction or fails to
hold its special stockholders' meeting.
In addition, TSI may terminate the merger agreement if its Board of
Directors recommends, accepts or approves a proposal for an alternative
transaction that is more favorable to the TSI stockholders.
5
<PAGE> 14
Under certain circumstances, in the event that the merger agreement is
terminated, TSI or Eclipsys may be required to reimburse the other company for
actual expenses up to $2.0 million or to pay to the other company a termination
fee of $9.1 million.
APPRAISAL RIGHTS (page 59)
TSI stockholders who vote against the merger and the merger agreement and
who make a specified written filing with TSI prior to the TSI special
stockholders' meeting are entitled under Massachusetts law to seek an appraisal
of the fair value of their shares. No shares held by these stockholders will be
converted into shares of Eclipsys Voting Common Stock as part of the merger. If
a TSI stockholder has not properly notified TSI prior to the stockholder vote at
the TSI special stockholders' meeting or has withdrawn the demand for appraisal,
that stockholder's shares will be converted into shares of Eclipsys Voting
Common Stock in accordance with the terms of the merger agreement.
Under Delaware law, Eclipsys stockholders are not entitled to an appraisal
of the value of their shares in connection with the merger.
REGULATORY APPROVALS (page 58)
Eclipsys and TSI have each filed the notification and report forms required
by the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, with
the Antitrust Division of the Department of Justice and the Federal Trade
Commission. We were granted early termination of the waiting period under that
Act on November 24, 1998.
ACCOUNTING TREATMENT (page 57)
We expect that the merger will be accounted for as a pooling of interests,
which provides that the companies be treated as if they had always been combined
for accounting and financial reporting purposes. Both Eclipsys and TSI will
obtain from their independent accountants a letter stating that, as of the date
of the letter, they are not aware of any condition that would preclude the
merger from qualifying for pooling-of-interests accounting treatment.
FEDERAL INCOME TAX CONSIDERATIONS (page 57)
Eclipsys and TSI will each receive from its outside counsel an opinion that
the merger will constitute a "reorganization" within the meaning of the Internal
Revenue Code. This means that, as a general matter, TSI stockholders will not be
taxed as a result of the exchange of TSI Voting and Non-Voting Common Stock
solely for Eclipsys Voting Common Stock in the merger. TSI stockholders will be
taxed to the extent they receive cash for fractional shares.
Eclipsys stockholders will not be taxed as a result of the merger.
SURRENDER OF STOCK CERTIFICATES (page 71)
When the merger is completed, Eclipsys will mail a notice and a transmittal
form to all holders of record of TSI Voting and Non-Voting Common Stock
immediately prior to the merger. The notice will contain instructions for
surrendering the certificates representing TSI Voting or Non-Voting Common Stock
in exchange for certificates representing shares of Eclipsys Voting Common Stock
and a cash payment in lieu of fractional shares, if any.
YOU SHOULD NOT SURRENDER STOCK CERTIFICATES UNTIL YOU RECEIVE THE LETTER OF
TRANSMITTAL.
CERTAIN EFFECTS OF THE MERGER ON THE RIGHTS OF TSI STOCKHOLDERS (page 112)
When the merger is completed, TSI stockholders will become stockholders of
Eclipsys. Eclipsys is a company governed by Delaware law and Eclipsys' existing
charter and bylaws. As a result, the rights of TSI stockholders will change with
respect to certain matters.
6
<PAGE> 15
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE (page 119)
We have each made forward-looking statements in this document that are
subject to risks and uncertainties. Forward-looking statements include
information concerning possible or assumed future results of operations of
Eclipsys and TSI. Also, when we use words such as "believes," "expects,"
"anticipates," or similar expressions, we are making forward-looking statements.
You should note that many factors, some of which are discussed elsewhere in this
document, including under the caption "Risk Factors" and, in the case of TSI, in
the documents incorporated by reference, could affect the future financial
results of Eclipsys and TSI and could cause those results to differ materially
from those expressed in any forward-looking statements contained in or
incorporated by reference in this document.
EXPLANATION OF CERTAIN TERMS
We have used the following defined terms throughout this document:
- We refer to Eclipsys Corporation as "Eclipsys."
- We refer to Transition Systems, Inc. as "TSI."
- We refer to Exercise Acquisition Corp., the wholly owned subsidiary of
Eclipsys that will merge with TSI, as "Sub."
- We refer to the proposed merger of Sub with and into TSI as the "Merger."
- TSI will be the surviving corporation in the Merger with Sub and will be
a wholly owned subsidiary of Eclipsys after the Merger. We sometimes
refer to TSI, in that capacity after the Merger, as the "Surviving
Corporation."
- We refer to the agreement dated October 29, 1998 among Eclipsys, Sub and
TSI relating to the Merger as the "Merger Agreement."
- Eclipsys has two classes of common stock: Common Stock, $.01 par value
per share, and Non-Voting Common Stock, $.01 par value per share. We
refer to these respectively as "Eclipsys Voting Common Stock" and
"Eclipsys Non-Voting Common Stock." Sometimes we refer to them together
as "Eclipsys Voting and Non-Voting Common Stock."
- TSI also has two classes of common stock: Common Stock, $.01 par value
per share, and Non-Voting Common Stock, $.01 par value per share. We
refer to these respectively as "TSI Voting Common Stock" and "TSI
Non-Voting Common Stock." Sometimes we refer to them together as "TSI
Voting and Non-Voting Common Stock."
- We refer to the per-share exchange ratio by which each share of TSI
Voting and Non-Voting Common Stock will be converted into 0.525 shares of
Eclipsys Voting Common Stock in the Merger as the "Exchange Ratio."
For an index of other defined terms used in this document, please see page
120.
7
<PAGE> 16
RISK FACTORS
As a stockholder of Eclipsys or TSI, you should carefully consider the
following risk factors in determining whether to vote in favor of the proposals
submitted for approval at the respective special stockholders' meetings. You
should consider these matters together with the other information included and
incorporated by reference in this document.
DIFFICULTY OF INTEGRATING ECLIPSYS AND TSI OPERATIONS
Integrating the operations of Eclipsys with those of TSI and HealthVISION
after the Merger will be difficult and time consuming. Management of the
combined company will need to successfully integrate, among other things, the
product offerings, the product development, sales and marketing and customer
service functions, and the management information systems of both companies. In
addition, the combined company will need to retain the management, key
employees, customers, distributors, vendors and other business partners of both
companies. The integration of these organizations may temporarily distract
management from the day-to-day business of the combined company following the
Merger. The combined company may fail to manage this integration so as to
achieve any of the anticipated synergies and other benefits that both companies
hope to achieve from the Merger.
POTENTIALLY SIGNIFICANT INTEGRATION COSTS AND CHARGES
Eclipsys expects to incur restructuring and integration costs in connection
with the integration of the operations of Eclipsys and TSI. These costs may
include costs for employee severance and other compensation charges, facilities
closures, relocation, discontinuance of overlapping products and other
merger-related costs. Eclipsys has not yet determined the amount of these costs.
Eclipsys expects to charge such costs to operations in the quarter in which the
Merger is completed.
POSSIBLE DILUTION IN PER-SHARE EARNINGS
The combination of the two companies' businesses will not necessarily
result in increased per-share earnings of Eclipsys after the Merger (taking into
consideration the greater number of Eclipsys shares to be outstanding as a
result of the Merger) or a financial condition superior to that which would have
been achieved by Eclipsys or TSI on a stand-alone basis. Eclipsys does not
anticipate that the Merger will dilute the earnings per share of its
stockholders, although TSI does anticipate that the Merger will have such an
effect for its stockholders. The Merger could fail to produce the benefits both
companies anticipate, or could have other adverse effects that neither company
currently foresees. In this event, the Merger could result in a reduction of
per-share earnings of Eclipsys following the Merger as compared to the per-share
earnings that would have been achieved if the Merger had not occurred.
FIXED EXCHANGE RATIO DESPITE POTENTIAL SHARE PRICE FLUCTUATIONS
The Exchange Ratio was fixed at 0.525 at the time Eclipsys and TSI executed
the Merger Agreement. The Exchange Ratio is not subject to adjustment. Any
increase or decrease of the market price of the shares of Eclipsys Voting Common
Stock will correspondingly increase or decrease the value of the merger
consideration to be received by the holders of TSI Voting and Non-Voting Common
Stock in the Merger. In addition, neither company will have the right to
terminate the Merger Agreement or elect not to consummate the Merger as a result
of changes in the market prices of either company's common stock. The relative
market prices of shares of Eclipsys Voting Common Stock and shares of TSI Voting
Common Stock at the time the Merger is completed may vary significantly from
their prices on the date the Merger Agreement was executed, the date hereof or
the date on which the special stockholders' meetings occur. These potential
fluctuations could result from changes in the business, operations, and
prospects of Eclipsys or TSI, from market assessments of the Merger, of the
synergies expected to be achieved in the Merger and of the likelihood that the
Merger will be completed, and from general market and economic conditions and
other factors.
8
<PAGE> 17
LIMITED OPERATING HISTORY OF ECLIPSYS; HISTORY OF OPERATING LOSSES
Eclipsys began operations in 1996 and has grown primarily through a series
of acquisitions completed since January 1997. Accordingly, you have only a
limited combined operating history of Eclipsys and its acquired operations upon
which to base an evaluation of Eclipsys and its prospects. In addition to
managing the integration with TSI, Eclipsys will need to continue to integrate
the operations of these other acquired businesses and to consolidate their
product offerings.
Eclipsys has incurred net losses in each year since its inception,
including net losses of $131.1 million in 1997 and $16.8 million in the first
nine months of 1998. These losses resulted primarily from certain write-offs
related to acquisitions completed by Eclipsys during 1997 and charges in the
first quarter of 1998 related to the buyout by Eclipsys of certain obligations
under an agreement entered into in connection with one of the acquisitions.
Eclipsys expects to continue to incur net losses for the foreseeable future.
Eclipsys cannot predict when or if it will achieve profitability.
MANAGEMENT OF GROWTH
The rapid growth in the size and complexity of Eclipsys' business as a
result of its previous acquisitions has placed a significant strain on Eclipsys'
management and other resources. The difficulties faced by the combined company
in managing its growth will become more acute following the Merger. To compete
effectively and to manage future growth, if any, the combined company will need
to continue to implement and improve operational and financial systems on a
timely basis and to expand, train, motivate and manage its work force. The
combined company's personnel, systems, procedures and controls may not be
adequate to support its operations.
RISKS ASSOCIATED WITH FUTURE ACQUISITIONS
An important element of Eclipsys' business strategy has been expansion
through acquisitions. Eclipsys expects the combined company will continue this
strategy after the Merger. This acquisition strategy involves a number of risks,
which include:
- There is significant competition for acquisition opportunities in the
healthcare information technology industry. Competition may intensify due
to consolidation in the industry, which could increase the costs of
future acquisitions. The combined company will compete for acquisition
opportunities with other companies, some of which may have significantly
greater financial and management resources than the combined company.
- The anticipated benefits from any acquisition may not be achieved unless
the operations of the acquired business are successfully combined with
those of the combined company. The integration of acquired businesses
requires substantial attention from management. The diversion of the
attention of management and any difficulties encountered in the
transition process could hurt the combined company.
- Future acquisitions could result in the issuance of additional shares of
capital stock or the incurrence of additional indebtedness, could entail
the payment of consideration in excess of book value and could have a
dilutive effect on the combined company's net income per share.
- Many business acquisitions must be accounted for under the purchase
method of accounting. Consequently, such acquisitions may generate
significant goodwill or other intangible assets and result in substantial
amortization charges to the combined company. Acquisitions could also
involve significant charges reflecting write-offs of acquired in-process
research and development. As a result of previous acquisitions, Eclipsys
recorded amortization expenses for acquisition-related intangible assets
of $25.3 million in 1997 and wrote off $99.2 million of in-process
research and development. As a result of the acquisition of HealthVISION,
TSI expects to write off approximately $2.5 million of in-process
research and development.
9
<PAGE> 18
POTENTIAL FLUCTUATIONS IN QUARTERLY PERFORMANCE
Both Eclipsys and TSI have experienced significant variations in revenues
and operating results from quarter to quarter. The quarterly operating results
of the combined company following the Merger may continue to fluctuate due to a
number of factors, including:
- potential deferrals of sales resulting from customer concerns over the
Year 2000 issue;
- the timing and size of future acquisitions;
- the timing, size and nature of the combined company's product sales and
implementations;
- the length of the sales cycle;
- the success of implementation efforts;
- market acceptance of new services, products or product enhancements by
the combined company or its competitors;
- product and price competition;
- the relative proportions of revenues derived from systems and services
and from hardware;
- changes in operating expenses;
- personnel changes;
- the performance of the combined company's products; and
- fluctuations in economic and financial market conditions.
It is difficult to predict the timing of revenues from product sales
because the sales cycle can vary depending upon several factors. These factors
include the size of the transaction, the changing business plans of the
customer, the effectiveness of the customer's management and general economic
conditions. In addition, because revenue is recognized at various points during
the term of a contract, the timing of revenue recognition varies considerably.
Factors affecting the timing of revenue recognition include the type of
contract, the availability of personnel, the implementation schedule and the
complexity of the implementation process.
Because a significant percentage of the combined company's expenses will be
relatively fixed, a variation in the timing of sales and implementations could
cause significant variations in operating results from quarter to quarter.
Neither Eclipsys nor TSI believes that period-to-period comparisons of its
historical results of operations are necessarily meaningful. You should not rely
on these comparisons as indicators of future performance.
LONG SALES AND IMPLEMENTATION CYCLES
Both Eclipsys and TSI have experienced long sales and implementation
cycles. These cycles will likely be just as long for the combined company. How
and when to implement, replace, expand or substantially modify an information
system, or modify or add business processes or lines of business, are major
decisions for customers. Furthermore, the purchase of solutions like those
provided by Eclipsys and TSI typically require significant capital expenditures
by the customer. The sales cycle for Eclipsys' systems has ranged from six to 18
months or more from initial contact to contract execution. The sales cycle for
new TSI accounts typically ranges from six to 12 months or more. Historically,
Eclipsys' implementation cycle has ranged from 12 to 36 months from contract
execution to completion of implementation and TSI's implementation cycle has
ranged from three to 12 months. Although Eclipsys believes that the migration of
its products to its new SOLA architecture will significantly shorten the
implementation cycle, Eclipsys cannot provide any assurance in this regard.
During the sales cycle and the implementation cycle,
10
<PAGE> 19
the combined company will expend substantial time, effort and funds preparing
contract proposals, negotiating the contract and implementing the solution.
RISKS ASSOCIATED WITH DEVELOPMENT BY ECLIPSYS OF INTEGRATED CLINICAL MANAGEMENT
SUITE
Eclipsys is currently in the process of integrating selected features and
functionalities from a number of heritage clinical management products acquired
in its previous acquisitions and licensed from Partners HealthCare Systems, Inc.
("Partners") to create the Sunrise Clinical Management suite. See "Business of
Eclipsys." This product suite is currently undergoing field trials. Although
most of the key functionalities of the Sunrise Clinical Management suite are
currently available in heritage products, Eclipsys does not expect the
integrated Sunrise Clinical Management suite to be generally available until
1999. Eclipsys may not be successful in completing the integration of these
functionalities on a timely basis. In addition, the field trials may not be
successful and the Sunrise Clinical Management suite, if and when generally
available, may not meet the needs of the marketplace or achieve market
acceptance.
COMPETITION
The combined company will operate in a market that is intensely
competitive. The principal competitors of the combined company will include
Cerner Corp., HBO & Company, IDX Systems Corp. and Shared Medical Systems
Corporation ("SMS"). The combined company will also face competition from
providers of practice management systems, general decision support and database
systems and other segment-specific applications, as well as from healthcare
technology consultants. A number of existing and potential competitors are more
established and have greater name recognition and financial, technical and
marketing resources than will the combined company. Eclipsys and TSI also expect
that competition will continue to increase as a result of consolidation in both
the information technology and healthcare industries.
DEPENDENCE ON RELATIONSHIP WITH PARTNERS AND OTHER THIRD PARTIES
Eclipsys has an exclusive license granted by Partners to develop,
commercialize, distribute and support certain intellectual property relating to
a clinical information systems software developed at Brigham & Women's Hospital
("Brigham"). If the combined company breaches certain terms of the license,
Partners has the option to convert the license to a non-exclusive license. Such
conversion by Partners could cause the intellectual property and the ability to
develop and commercialize such intellectual property to become more widely
available to competitors of the combined company. Eclipsys also works closely
with physicians and research and development personnel at Brigham and its
affiliate, Massachusetts General Hospital ("MGH"), to develop and commercialize
new information technology solutions for the healthcare industry and to test and
demonstrate new and existing products. If the combined company breaches the
Partners license, the cooperative working relationship with Brigham and MGH,
including future access to products developed by personnel at Brigham granted
under the Partners license, could become strained or cease altogether. The loss
of good relations with Brigham or MGH could hurt the ability of the combined
company to develop new solutions and could cause delays in bringing new products
to the market. In addition, the reputation and status of the combined company in
the industry could be hurt.
TSI depends upon licenses for certain technology used in its products from
a number of third-party vendors, including Computer Corporation of America,
Oracle Corporation and Sterling Software (United States of America), Inc. TSI
also has licenses from HCIA Inc. and Premier, Inc. for certain database
management systems and other software components and clinical benchmarking data.
Most of these licenses expire within one to four years, can be renewed only by
mutual consent and may be terminated if TSI or the combined company breaches the
terms of the license and fails to cure the breach within a specified period of
time. TSI or the combined company may not be able to continue using the
technology licensed under these licenses on commercially reasonable terms or at
all. As a result, TSI or the combined company may have to discontinue, delay or
reduce product shipments until equivalent technology is obtained, which could
hurt TSI or the combined company. Most of TSI's third-party licenses, including
its
11
<PAGE> 20
license from New England Medical Center, Inc. for the original version of the
Transition I software, are non-exclusive. The competitors of TSI or the combined
company may obtain the right to use any of the technology covered by the
licenses and use the technology to directly compete with TSI. In addition, if
TSI's vendors choose to discontinue to support the licensed technology, TSI may
not be able to modify or adapt its own products going forward.
UNCERTAINTY IN THE HEALTHCARE INDUSTRY
The combined company will operate in an industry subject to changing
political, economic and regulatory influences. The potential impact of these
industry changes include:
- During the past several years, the U.S. healthcare industry has been
subject to an increase in governmental regulation and reform proposals.
These reforms may increase governmental involvement in healthcare,
continue to reduce reimbursement rates and otherwise change the operating
environment for customers of the combined company. Customers may react to
these proposals and the uncertainty surrounding the proposals by
curtailing or deferring investments, including those for the products and
services of the combined company.
- Many healthcare providers are consolidating to create larger healthcare
delivery enterprises with greater market power. This consolidation could
erode the customer base of the combined company and could reduce the size
of its target market. In addition, the resulting enterprises could have
greater bargaining power, which may lead to price erosion.
POTENTIAL FDA REGULATION
The U.S. Food and Drug Administration (the "FDA") is likely to become
increasingly active in regulating computer software intended for use in the
healthcare setting. The FDA has recently issued a draft guidance document
addressing the regulation of certain computer products and computer-assisted
products as medical devices under the Federal Food, Drug, and Cosmetic Act (the
"FDC Act") and has recently indicated it may modify such draft policy or create
a new policy. If the FDA chooses to regulate any of the products of the combined
company as medical devices, it can impose extensive requirements upon the
combined company, including:
- the combined company would be required to seek either FDA clearance of a
premarket notification submission demonstrating that the product is
substantially equivalent to a device already legally marketed or obtain
FDA approval of a premarket approval application establishing the safety
and effectiveness of the product;
- the combined company would be required to comply with rigorous
regulations governing the preclinical and clinical testing, manufacture,
distribution, labeling and promotion of medical devices; and
- the combined company would be required to comply with the FDC Act's
general controls, including establishment registration, device listing,
compliance with good manufacturing practices, reporting of certain device
malfunctions and adverse device events.
If the combined company failed to comply with applicable requirements, the
FDA could respond by imposing fines, injunctions or civil penalties, requiring
recalls or product corrections, suspending production, refusing to grant
premarket clearance or approval of products, withdrawing clearances and
approvals, and initiating criminal prosecution. Any final FDA policy governing
computer products, once issued, may increase the cost and time to market of new
or existing products.
NEW REGULATIONS RELATING TO PATIENT CONFIDENTIALITY
State and federal laws regulate the confidentiality of patient records and
the circumstances under which such records may be released. These regulations
govern both the disclosure and use of confidential
12
<PAGE> 21
patient medical record information. Regulations governing electronic health data
transmissions are evolving rapidly and are often unclear and difficult to apply.
On August 22, 1996, President Clinton signed the Health Insurance
Portability and Accountability Act of 1996 ("HIPAA"). This legislation requires
the Secretary of Health and Human Services (the "Secretary") to adopt national
standards for certain types of electronic health information transactions and
the data elements used in such transactions and to adopt standards to ensure the
integrity and confidentiality of health information. The Secretary has recently
issued proposed standards regarding four of the five sets of standards that are
ultimately expected. Eclipsys believes that the proposed standards issued to
date would not materially affect the business of the combined company if adopted
as proposed. Eclipsys cannot predict the potential impact of the standards that
have not yet been proposed or any other standards that might be finally adopted
instead of the proposed standards.
The HIPAA legislation also required the Secretary to submit recommendations
to Congress for legislation to protect privacy and confidentiality of personal
health information. If Congress fails to enact such legislation by August 21,
1999, HIPAA requires the Secretary to promulgate such protections by regulation.
Legislation governing the dissemination of medical record information is also
frequently proposed and debated at the state level. Such legislation, if
enacted, could require patient consent before even non-individually-identifiable
(e.g., coded or anonymous) patient information may be shared with third parties
and could also require that holders or users of such information implement
specified security measures. These laws or regulations, when adopted, could
restrict the ability of customers to obtain, use or disseminate patient
information. This could adversely affect demand for the products of the combined
company.
YEAR 2000 ISSUES
Eclipsys believes that all of its internal management information systems
are currently Year 2000 compliant and, accordingly, does not anticipate any
significant expenditures to remediate or replace existing internal-use systems.
Although all of the products currently offered by Eclipsys are Year 2000
compliant, some of the products previously sold by Alltel and Emtek and
installed in Eclipsys' customer base are not Year 2000 compliant. Eclipsys has
developed and tested solutions for these non-compliant installed products.
Eclipsys currently estimates that the total cost of bringing these installed
products into Year 2000 compliance, in those cases in which Eclipsys is required
to do so at its own expense, will be approximately $900,000. Eclipsys expects
that all of this expense will be incurred by mid-1999. In addition, because
Eclipsys' products are often interfaced with a customer's existing third-party
applications, Eclipsys' products may experience difficulties interfacing with
third-party non-compliant applications. Based on currently available
information, Eclipsys does not expect the cost of compliance related to
interactions with non-compliant third-party systems to be material. However, any
unexpected difficulties in implementing Year 2000 solutions for the installed
Alltel or Emtek products or difficulties in interfacing with third-party
products could hurt the combined company.
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 the 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
13
<PAGE> 22
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 and hurt the
combined company.
Apprehension in the marketplace over Year 2000 compliance issues may lead
businesses, including customers of the combined company, 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. If these deferrals are significant,
the combined company may not achieve expected revenue or earnings levels.
POTENTIAL FOR PRODUCT LIABILITY; SECURITY ISSUES
Both TSI and Eclipsys provide products with applications that relate to
patient medical histories and treatment plans. If these products fail to provide
accurate and timely information, customers could assert liability claims against
the combined company. Both companies attempt to contractually limit their
liability for damages arising from negligence, errors or mistakes. Despite this
precaution, the limitations of liability set forth in these contracts may not be
enforceable or may not otherwise protect the combined company from liability for
damages. The combined company will maintain general liability insurance
coverage, including coverage for errors or omissions. However, such coverage may
not continue to be available on acceptable terms or may not be available in
sufficient amounts to cover one or more large claims. In addition, the insurer
might disclaim coverage as to any future claim. One or more large claims could
exceed available insurance coverage. Litigation with respect to liability
claims, regardless of its outcome, could result in substantial cost to the
combined company, could divert management's attention from operations and could
decrease market acceptance of the combined company's products.
Both companies have included security features in their products that are
intended to protect the privacy and integrity of customer data. Despite the
existence of these security features, these products may be vulnerable to
break-ins and similar disruptive problems. Break-ins and other disruptions could
jeopardize the security of information stored in and transmitted through the
computer systems of customers. The combined company may need to expend
significant capital and other resources to address evolving security issues.
CONTROL BY DIRECTORS AND OFFICERS
Executive officers and directors of the combined company, and their
affiliates, will beneficially own approximately 51.5% of the outstanding
Eclipsys Voting Common Stock following completion of the Merger. These
stockholders, if acting together, would have the ability to elect Eclipsys'
directors and to determine the outcome of corporate actions requiring
stockholder approval, regardless of how other stockholders of Eclipsys may vote.
They might also be able to delay or prevent a change in control of the combined
company.
ANTI-TAKEOVER PROVISIONS
Eclipsys' charter and by-laws contain certain provisions, including a
staggered Board of Directors, that could make it more difficult for a third
party to acquire, and could therefore discourage a third party from attempting
to acquire, control of Eclipsys. These provisions could limit the price that
certain investors might be willing to pay in the future for shares of Eclipsys
Voting Common Stock. In addition, certain provisions of Delaware corporate law
applicable to Eclipsys could have the effect of delaying, deferring or
preventing a change in control of Eclipsys.
14
<PAGE> 23
OTHER RISKS
The combined company will face a variety of other risks typically
encountered by technology and software companies. Among other things:
- The combined company will need to continue to attract, motivate and
retain highly qualified employees.
- The combined company will operate in a market characterized by rapidly
changing technology, industry standards and customer requirements.
Existing products may quickly become obsolete or uncompetitive.
- The means utilized by the combined company to protect its proprietary
technology may not be adequate to prevent misappropriation by others.
- Third parties could assert that the products of the combined company
infringe their proprietary rights. This could result in significant
defense costs and, ultimately, in injunctions preventing the combined
company from distributing certain products.
- The software products of the combined company could contain undetected
errors. This could result in product delays, remediation costs and
decreased market acceptance and customer satisfaction.
- The trading price of the Eclipsys Voting Common Stock could be highly
volatile after the merger, including volatility unrelated to the
particular performance of the combined company.
15
<PAGE> 24
MARKET PRICE INFORMATION
The principal trading market for the Eclipsys Voting Common Stock and for
the TSI Voting Common Stock is the Nasdaq National Market. Eclipsys Voting
Common Stock has been quoted on the Nasdaq National Market under the symbol
"ECLP" since August 7, 1998. TSI Voting Common Stock has been quoted on the
Nasdaq National Market under the symbol "TSIX" since April 18, 1996.
The following tables set forth the reported high and low sale prices of
Eclipsys Voting Common Stock and TSI Voting Common Stock on the Nasdaq National
Market for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
ECLIPSYS
Year Ending December 31, 1998:
Third Quarter (from August 7, 1998)....................... $23.38 $11.88
Fourth Quarter (through December 2, 1998)................. 26.25 18.38
TSI
Fiscal Year Ended September 30, 1997:
First Quarter............................................. $22.00 $ 8.25
Second Quarter............................................ 16.63 11.75
Third Quarter............................................. 18.25 9.00
Fourth Quarter............................................ 21.75 16.88
Fiscal Year Ended September 30, 1998:
First Quarter............................................. $23.88 $17.75
Second Quarter............................................ 24.88 17.38
Third Quarter............................................. 24.25 9.94
Fourth Quarter............................................ 13.25 6.38
Fiscal Year Ending September 30, 1999:
First Quarter (through December 2, 1998).................. $12.00 $ 5.50
</TABLE>
On October 28, 1998, the last full trading day prior to the execution and
delivery of the Merger Agreement and the public announcement thereof, the
reported high and low sale prices on the Nasdaq National Market of Eclipsys
Voting Common Stock were $26.25 and $24.88, respectively, and of TSI Voting
Common Stock were $9.31 and $8.63, respectively. On such date, the last reported
sale price on the Nasdaq National Market of Eclipsys Voting Common Stock was
$25.88 per share and of TSI Voting Common Stock was $8.63 per share. Based on
the Exchange Ratio of 0.525 shares of Eclipsys Voting Common Stock for each
share of TSI Voting Common Stock, the equivalent per-share value of TSI Voting
Common Stock on October 28, 1998 was $13.58 per share.
On December 2, 1998, the most recent practicable date prior to the printing
of this Joint Proxy Statement/Prospectus, the last reported sale price on the
Nasdaq National Market of Eclipsys Voting Common Stock was $22.50 per share and
of TSI Voting Common Stock was $11.38 per share, and the equivalent per-share
value of TSI Voting Common Stock was $11.81 per share.
Because the market price of Eclipsys Voting Common Stock is subject to
fluctuation and the Exchange Ratio is fixed, the market value of the shares of
Eclipsys Voting Common Stock that TSI stockholders will receive in the Merger
may increase or decrease prior to the Merger.
Eclipsys and TSI stockholders are urged to obtain a current market
quotation for the Eclipsys Voting Common Stock and the TSI Voting Common Stock.
16
<PAGE> 25
SELECTED CONSOLIDATED FINANCIAL DATA FOR ECLIPSYS
The selected consolidated financial data of Eclipsys set forth below should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Eclipsys" and the financial statements
and notes thereto included elsewhere in this document. The statement of
operations data for the years ended December 31, 1996 and 1997 and the balance
sheet data at December 31, 1996 and 1997, under the heading "Eclipsys" set forth
below, are derived from, and are qualified by reference to, Eclipsys' audited
consolidated financial statements, which appear elsewhere in this document.
Statement of operations data for the years ended December 31, 1995 and 1996,
under the heading "Predecessor," are derived from, and are qualified by
reference to, the ALLTEL Healthcare Information Services, Inc. ("Alltel")
audited financial statements, which appear elsewhere in this document. The
financial data for the year ended and at December 31, 1994 are derived from
audited financial statements of Alltel not included in this document. The
financial data for the year ended and at December 31, 1993 are derived from
unaudited financial statements of Alltel not included in this document. The
statement of operations data for the nine months ended September 30, 1997 and
1998 and the balance sheet data at September 30, 1998 are derived from, and are
qualified by reference to, Eclipsys' unaudited consolidated financial
statements, which appear elsewhere in this document and, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the financial data for such periods.
The results of operations for the nine months ended September 30, 1998 are not
necessarily indicative of the results to be expected for the full year or for
any future period.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------------------- ---------------------
PREDECESSOR ECLIPSYS
--------------------------------------- ------------------------------------------------
1993 1994 1995 1996 1996 1997(1) 1997(1) 1998(1)
------- ------- -------- -------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total revenues.............. $74,136 $80,204 $100,114 $108,800 $ -- $ 94,077 $ 67,479 $ 97,743
------- ------- -------- -------- --------- --------- --------- ---------
Costs and expenses:
Cost of revenues.......... 44,209 48,692 61,335 71,483 -- 80,036 58,223 61,021
Marketing and sales....... 13,082 12,541 11,128 11,091 770 13,662 9,881 13,945
Research and development... 10,596 10,186 8,522 10,271 1,704(2) 15,714 11,991 19,267
General and administrative. 7,215 7,898 8,168 7,101 603 5,672 4,143 4,580
Depreciation and
amortization............ 3,032 3,788 6,735 8,135 32 9,710 7,292 7,937
Write-off of in-process
research and
development(3).......... -- -- -- -- -- 99,189 99,189 --
Write-off of MSA(4)....... -- -- -- -- -- -- -- 7,193
------- ------- -------- -------- --------- --------- --------- ---------
Total costs and
expenses.............. 78,134 83,105 95,888 108,081 3,109 223,983 190,719 113,943
------- ------- -------- -------- --------- --------- --------- ---------
Income (loss) from operations... (3,998) (2,901) 4,226 719 (3,109) (129,906) (123,240) (16,200)
Interest expense (income),
net....................... 983 1,324 2,733 3,758 (156) 1,154 727 628
------- ------- -------- -------- --------- --------- --------- ---------
Income (loss) before income
taxes..................... (4,981) (4,225) 1,493 (3,039) (2,953) (131,060) (123,967) (16,828)
Income tax benefit
(provision)(5)............ -- 1,373 (887) 843 -- -- -- --
------- ------- -------- -------- --------- --------- --------- ---------
Net income (loss)........... (4,981) (2,852) 606 (2,196) (2,953) (131,060) (123,967) (16,828)
Dividends and accretion on
mandatorily Redeemable
Preferred Stock........... -- -- -- -- -- (5,850) (4,199) (10,928)
Preferred stock conversion(6)... -- -- -- -- -- (3,105) (3,105) --
------- ------- -------- -------- --------- --------- --------- ---------
Net income (loss) available
to common shareholders.... $(4,981) $(2,852) $ 606 $ (2,196) $ (2,953) $(140,015) $(131,271) $ (27,756)
======= ======= ======== ======== ========= ========= ========= =========
Basic and diluted net loss
per common share(7)....... $ (.98) $ (39.73) $ (38.28) $ (3.41)
Weighted average common
shares outstanding(7)..... 3,022,660 3,524,313 3,429,385 8,133,275
OTHER DATA:
EBITDA(8)................... $ 905 $ 895 $ 11,148
Net cash provided by
operating activities...... 1,068 3,292 15,176
Net cash used by investing
activities................ (113,670) (111,778) (27,824)
Net cash provided by
financing activities...... 112,771 113,764 20,138
</TABLE>
17
<PAGE> 26
<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------- -------------
PREDECESSOR ECLIPSYS
----------------------------------------- ---------------------------------
1993 1994 1995 1996 1996 1997 1998
-------- -------- -------- -------- ------ -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................ $ 2,808 $ 1,672 $ 2,599 $ 2,022 $4,589 $ 4,786 $ 12,309
Working capital (deficit)................ (4,756) (8,561) (3,923) (9,558) 3,956 (31,504) (8,574)
Total assets............................. 56,411 70,338 88,381 100,443 5,740 106,765 121,691
Debt, including current portion.......... 1,983 810 260 86 -- 16,588 --
Mandatorily Redeemable Preferred Stock... -- -- -- -- -- 35,607 --
Shareholders' equity (deficit)........... (29,310) (23,633) (23,011) (25,387) 4,801 (18,321) 38,567
</TABLE>
- ---------------
(1) The acquisitions of Alltel (the "Alltel Acquisition"), SDK Medical Computer
Services Corporation ("SDK") (the "SDK Acquisition") and the North American
operations of the Emtek Healthcare Systems division of Motorola, Inc.
("Emtek") in January 1998 (the "Emtek Acquisition") were accounted for using
the purchase method of accounting and accordingly the statement of
operations data of Eclipsys for 1997 and 1998 reflect the results of
operations from these businesses from the respective acquisition dates.
(2) Includes a write-off of $1.5 million related to licensed technology acquired
from Partners that was not technologically feasible at the time of the
transaction. See Note 4 of Notes to the Eclipsys Consolidated Financial
Statements.
(3) In connection with the Alltel and SDK Acquisitions, Eclipsys wrote off
in-process research and development of $92.2 million and $7.0 million,
respectively, reflecting the appraised values of certain in-process research
and development acquired in these acquisitions in 1997. See Note 6 of Notes
to the Eclipsys Consolidated Financial Statements.
(4) In connection with the buyout in the first quarter of 1998 of Eclipsys'
obligations under a Management and Services Agreement (the "MSA") entered
into in connection with the Alltel Acquisition (the "MSA Buyout"), Eclipsys
recorded a charge of $7.2 million in 1998. See "Certain Transactions
Relating to Eclipsys" and Note 13 of Notes to the Eclipsys Consolidated
Financial Statements.
(5) Eclipsys has not recorded any benefit for income taxes because management
believes, based on the evidence available at December 31, 1997 and September
30, 1998, it is more likely than not that Eclipsys' net deferred tax assets
will not be realized. Accordingly, Eclipsys has recorded a valuation
allowance against its total net deferred tax assets.
(6) Represents the charge related to the January 1997 issuance of Series F
Convertible Preferred Stock of Eclipsys in exchange for the cancellation of
Series A Convertible Preferred Stock.
(7) See Note 2 of Notes to Eclipsys Consolidated Financial Statements.
(8) Represents earnings before interest expense, income tax expense,
depreciation and amortization and nonrecurring charges ("EBITDA"). EBITDA is
not a measurement in accordance with generally accepted accounting
principles in the United States ("GAAP" or "U.S. GAAP") and should not be
considered an alternative to, or more meaningful than, income from
operations, net income or cash flows as defined by GAAP or as a measure of
Eclipsys' profitability or liquidity. All registrants do not calculate
EBITDA in the same manner and accordingly, EBITDA may not be comparable with
other registrants. Eclipsys has included information concerning EBITDA
herein because management believes EBITDA provides useful information.
18
<PAGE> 27
SELECTED CONSOLIDATED FINANCIAL DATA FOR TSI
The selected consolidated statement of operations data of TSI for the years
ended September 30, 1996, 1997 and 1998 and the selected consolidated balance
sheet data of TSI at September 30, 1997 and 1998 are derived from, and are
qualified by reference to, TSI's audited consolidated financial statements,
which appear elsewhere in this document. The selected consolidated statement of
operations data of TSI for the years ended September 30, 1994 and 1995 and the
selected consolidated balance sheet data of TSI at September 30, 1994, 1995 and
1996 are derived from audited financial statements of TSI not included in this
document. The selected consolidated statement of operations data for the
nine-month periods ended June 30, 1997 and 1998 and the selected consolidated
balance sheet data of TSI at such dates are derived from unaudited financial
statements of TSI, which appear elsewhere in this document, and in the opinion
of management of TSI, include all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the financial data for such
periods. The results of operations of TSI for the nine months ended June 30,
1998 are not necessarily indicative of the results to be expected for the full
year or for any future period.
TSI has never declared or paid cash dividends on the TSI Voting or
Non-Voting Common Stock.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
FISCAL YEAR ENDED SEPTEMBER 30, JUNE 30,
----------------------------------------------- -----------------
1994 1995 1996 1997 1998 1997 1998
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................. $24,497 $27,386 $34,269 $44,565 $43,951 $30,875 $33,946
Income before income taxes and
extraordinary items..................... 8,521 9,975 10,611 12,948 14,762 12,546 11,897
Provision for income taxes................ 3,407 4,349 4,324 7,629 5,905 5,018 4,759
Income before extraordinary item.......... 5,114 5,626 6,287 5,319 8,857 7,528 7,138
Extraordinary item:
Loss on early extinguishment of debt.... -- -- 2,149 -- -- -- --
Net income................................ 5,114 5,626 4,138 5,319 8,857 7,528 7,138
Series A non-voting preferred stock
dividends............................... -- -- 593 -- -- -- --
Net income allocable to common
stockholders............................ 5,114 5,626 3,545 5,319 8,857 7,528 7,138
Net income allocable to common
stockholders per share:
Basic................................... $ 0.19 $ 0.27 $ 0.31 $ 0.49 $ 0.43 $ 0.39
Diluted................................. $ 0.19 $ 0.22 $ 0.27 $ 0.43 $ 0.38 $ 0.35
Weighted average shares:
Basic................................... 30,060 13,214 17,435 18,210 17,333 18,153
Diluted................................. 30,060 16,137 19,977 20,394 19,900 20,459
BALANCE SHEET DATA (END OF PERIOD):
Total assets.............................. $20,274 $27,737 $74,284 $89,819 $99,864 $86,562 $97,814
Working capital........................... 8,207 14,207 55,672 63,569 73,548 59,766 71,275
Long-term debt............................ -- -- 21 -- -- -- --
Stockholders' equity...................... 10,566 16,192 60,633 73,519 84,272 70,987 81,720
</TABLE>
19
<PAGE> 28
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
REFLECTING THE MERGER
The following selected unaudited pro forma combined financial information
has been derived from and should be read in conjunction with the Unaudited Pro
Forma Condensed Combined Financial Statements and notes thereto included
elsewhere in this Joint Proxy Statement/Prospectus. The following selected
unaudited pro forma combined financial information reflects adjustments to the
historical consolidated balance sheets and related historical statements of
income of Eclipsys and TSI to give effect to the Merger, using the
pooling-of-interests method of accounting for business combinations, and to
certain other acquisitions by TSI and Eclipsys. Eclipsys' consolidated financial
statements for its fiscal years ended December 31 have been combined with TSI's
consolidated financial statements for its fiscal years ended September 30.
Eclipsys' unaudited consolidated financial statements for the nine months ended
September 30 have been combined with TSI's unaudited consolidated financial
statements for the nine months ended June 30. The pro forma combined financial
data is not necessarily indicative of the operating results or financial
position that would have been achieved if the Merger had been consummated as of
the beginning of the periods presented, nor is it necessarily indicative of the
future operating results or financial position of the combined company.
The pro forma information does not reflect any costs associated with the
integration and consolidation of the companies anticipated by the management of
Eclipsys as a result of the Merger.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, NINE MONTHS
------------------------------ ENDED
1995 1996 1997 SEPTEMBER 30, 1998
------- ------- -------- ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
COMBINED STATEMENT OF OPERATIONS DATA:
Total revenues............................... $27,386 $34,269 $179,743 $141,410
Income (loss) before extraordinary item
available to common stockholders(1)........ 5,626 2,741 (68,696) (13,875)
Income (loss) per share before extraordinary
item available to common stockholders(1):
Basic...................................... $ 0.36 $ 0.28 $ (2.39) $ (0.47)
Diluted.................................... $ 0.36 $ 0.24 $ (2.39) $ (0.47)
Weighted average shares:
Basic...................................... 15,781 9,959 28,791 29,335
Diluted.................................... 15,781 11,494 28,791 29,335
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
------------------
(IN THOUSANDS)
<S> <C>
COMBINED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 52,450
Working capital............................................. 32,908
Total assets................................................ 226,305
Shareholders' equity........................................ 117,834
</TABLE>
- ---------------
(1) Represents, for each period other than the year ended December 31, 1996,
income (loss) available to common stockholders. For the year ended December
31, 1996, represents income before extraordinary item, after reflecting
accretion of $593,000 of dividends on Series A non-voting preferred stock.
In the year ended December 31, 1996, TSI recorded as an extraordinary item a
loss on early extinguishment of debt of $2.1 million, attributable to the
prepayment of certain debt in connection with TSI's initial public offering.
The pro forma combined income available to common stockholders and income
per share for such period, giving effect to the extraordinary item, are
$592,000, $0.06 per share (basic) and $0.05 per share (diluted),
respectively.
20
<PAGE> 29
COMPARATIVE PER SHARE DATA
The following tables set forth certain historical per share data of
Eclipsys and TSI and combined per share data on an unaudited pro forma basis
after giving effect to the Merger, on a pooling-of-interests basis (and assuming
the issuance of 0.525 shares of Eclipsys Voting Common Stock in the Merger in
exchange for each share of TSI Voting and Non-Voting Common Stock). This data
should be read in conjunction with the selected historical consolidated
financial data, the Unaudited Pro Forma Condensed Combined Financial Statements,
including the notes thereto, and the separate historical consolidated financial
statements appearing elsewhere in this document. The pro forma combined
financial data is not necessarily indicative of the operating results or
financial position that would have been achieved if the Merger had been
consummated as of the beginning of the periods presented, nor is it necessarily
indicative of the future operating results or financial position of Eclipsys.
Neither Eclipsys nor TSI has paid cash dividends on its Voting or Non-Voting
Common Stock.
The pro forma data does not reflect any costs associated with the
integration and consolidation of the companies anticipated by the management of
Eclipsys as a result of the Merger.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS
------------------------ ENDED
1995 1996 1997 SEPTEMBER 30, 1998
----- ------ ------- -------------------
<S> <C> <C> <C> <C>
ECLIPSYS:
Income (loss) before extraordinary item:
Historical (basic and diluted)................. $ -- $(0.98) $(39.73) $(3.41)
Pro forma(1):
Basic....................................... 0.36 0.28 (2.39) (0.47)
Diluted..................................... 0.36 0.24 (2.39) (0.47)
Book value (deficit):
Historical..................................... (5.20) 4.74
Pro forma(1)................................... 4.02
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, NINE MONTHS
------------------------ ENDED
1995 1996 1997 JUNE 30, 1998
----- ------ ------- -------------------
<S> <C> <C> <C> <C>
TSI:
Income (loss) before extraordinary item available
to common stockholders(2):
Historical:
Basic....................................... $0.19 $ 0.43 $ 0.31 $ 0.39
Diluted..................................... 0.19 0.35 0.27 0.35
Equivalent pro forma(3):
Basic....................................... 0.19 0.15 (1.25) (0.25)
Diluted..................................... 0.19 0.13 (1.25) (0.25)
Book value:
Historical..................................... 4.22 4.50
Equivalent pro forma(3)........................ 2.11
</TABLE>
- ---------------
(1) Represents the unaudited pro forma combined income (loss) before
extraordinary item and unaudited pro forma combined book value of Eclipsys
and TSI. See Note 1 of "Selected Unaudited Pro Forma Combined Financial Data
Reflecting the Merger" and "Unaudited Pro Forma Condensed Consolidated
Financial Statements."
(2) Represents, for each period other than the year ended December 31, 1996,
income (loss) available to common stockholders. For the year ended December
31, 1996, represents income before extraordinary item, after reflecting
accretion of $593,000 of dividends on Series A non-voting preferred stock.
(3) Represents the unaudited pro forma amounts for Eclipsys set forth above,
multiplied by the 0.525 Exchange Ratio.
21
<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF ECLIPSYS
Eclipsys was formed in December 1995, but had no significant operations
until 1997. As a result, the following discussion as it relates to 1995 and 1996
reflects the operations of Alltel, which was Eclipsys' predecessor, acquired by
Eclipsys in January 1997. The discussion as it relates to 1997 reflects the
operations of Eclipsys for 1997, which included only 11 months of Alltel
operations. In addition to the Alltel Acquisition, Eclipsys completed the SDK
Acquisition in June 1997 and the Emtek Acquisition in January 1998. As a result,
the following discussion regarding period-to-period comparisons may not be
indicative of future results. The Alltel Acquisition, the SDK Acquisition and
the Emtek Acquisition are referred to collectively as the "Eclipsys
Acquisitions."
OVERVIEW
Eclipsys is a healthcare information technology company delivering
solutions that enable healthcare providers to achieve improved clinical,
financial and administrative outcomes. Eclipsys offers an integrated suite of
core products in four critical areas -- clinical management, access management,
patient financial management and enterprise data warehouse and analysis. These
products can be purchased in combination to provide an enterprise-wide solution
or individually to address specific needs. These solutions take many forms and
can include a combination of software, hardware, maintenance, consulting
services, remote processing services, network services and information
technology outsourcing.
Founded in 1995, Eclipsys has grown to its current position primarily
through a series of strategic acquisitions completed since January 1997. In May
1996, Eclipsys entered into an exclusive license agreement with Partners to
develop, commercialize, distribute and support certain intellectual property
relating to a clinical information systems software developed at Brigham &
Women's Hospital (the "Partners License"). In connection with this license,
Eclipsys issued to Partners 988,290 shares of Eclipsys Voting Common Stock.
In January 1997, Eclipsys purchased Alltel from ALLTEL Information
Services, Inc. ("AIS") for a total purchase price of $201.5 million, after
giving effect to certain purchase price adjustments. The Alltel Acquisition was
paid for with cash, the issuance of Series C Redeemable Preferred Stock (which
was redeemed at the time of the initial public offering) and Series D
Convertible Preferred Stock (which was converted into shares of Eclipsys Voting
Common Stock at the time of the initial public offering) and the assumption of
certain liabilities. The acquisition was accounted for as a purchase, and
Eclipsys recorded total intangible assets of $154.3 million, consisting of $92.2
million of acquired in-process research and development, $42.3 million of
acquired technology, $10.8 million to reflect the value of ongoing customer
relationships and $9.0 million of goodwill. Eclipsys wrote off the acquired
in-process research and development as of the date of the acquisition, and is
amortizing the acquired technology over three years on an accelerated basis. The
value of the ongoing customer relationships and the goodwill are being amortized
over five years and twelve years, respectively.
In June 1997, Eclipsys acquired SDK for a total purchase price of $16.5
million. The SDK Acquisition was paid for with cash as well as the issuance of
$7.6 million of subordinated promissory notes (the "SDK Notes") and Eclipsys
Voting Common Stock. The acquisition was accounted for as a purchase, and
Eclipsys recorded total intangible assets of $14.8 million, consisting of $7.0
million of acquired in-process research and development, $3.2 million of
acquired technology and $4.6 million of goodwill. Eclipsys wrote off the
acquired in-process research and development as of the date of the acquisition,
and is amortizing both the acquired technology and the goodwill over five years.
In January 1998, Eclipsys acquired Emtek from Motorola, Inc. ("Motorola")
for a total purchase price of $11.7 million, net of a $9.6 million receivable
from Motorola. The Emtek Acquisition was paid for with the issuance of Common
Stock and the assumption of certain liabilities. The acquisition was accounted
for as a purchase, and Eclipsys recorded total intangible assets of $4.1
million, consisting of acquired technology which is being amortized over five
years.
22
<PAGE> 31
In April 1998, Eclipsys made a strategic minority investment in Simione
Central Holdings, Inc. ("Simione"), purchasing approximately 4.9% of Simione's
outstanding common stock from certain stockholders of Simione for approximately
$5.6 million (the "Simione Investment"). In connection with this investment,
Eclipsys received the right to designate one member for election to Simione's
board of directors and an option, which expired unexercised in October 1998, to
purchase up to an additional 4.9% of Simione's common stock under certain
circumstances. Concurrently with the Simione Investment, Eclipsys and Simione
entered into a Remarketing Agreement pursuant to which Eclipsys has certain
rights to distribute Simione software products. Simione is a provider of home
healthcare consulting solutions and information systems.
The write-off of acquired in-process research and development of $92.2
million and $7.0 million associated with the Alltel Acquisition and the SDK
Acquisition, respectively, together with the amortization of acquisition-related
intangible assets of $25.3 million, accounted for $124.5 million of Eclipsys'
$131.1 million net loss in 1997. See "-- Acquired In-Process Research and
Development."
REVENUES
Revenues are derived from sales of systems and services, which include the
licensing of software, software and hardware maintenance, remote processing,
outsourcing, implementation, training and consulting, and from the sale of
computer hardware. Eclipsys' products and services are generally sold to
customers pursuant to contracts which range in duration from five to seven
years.
For contracts in which Eclipsys is required to make significant production,
modification or customization changes, revenues from systems and services are
recognized using the percentage-of-completion method over the implementation
period of the contracts. Other systems and services revenues are generally
recognized on a straight-line basis over the term of licensing and maintenance
agreements. Remote processing and outsourcing services are marketed under
long-term agreements and revenues are recognized monthly as the work is
performed. Revenues related to other support services, such as training,
consulting, and implementation, are recognized when the services are performed.
Revenues from the sale of hardware are recognized upon shipment of the product
to the customer.
Eclipsys' revenues can vary from quarter to quarter due to a number of
factors. See "Risk Factors -- Potential Fluctuations in Quarterly Performance."
COST OF REVENUES
The principal costs of systems and services revenues are salaries, benefits
and related overhead costs for implementation, remote processing, outsourcing
and field operations personnel. As Eclipsys implements its growth strategy, it
is expected that additional operating personnel will be required, which would
lead to an increase in cost of revenues on an absolute basis. Other significant
costs of systems and services revenues are the amortization of acquired
technology and capitalized software development costs. Acquired technology is
amortized over three to five years based upon the estimated economic life of the
underlying asset, and capitalized software development costs are amortized over
three years on a straight-line basis commencing upon general release of the
related product. Eclipsys recorded amortization expenses related to acquired
technology from the Alltel and SDK Acquisitions of $19.7 million in 1997, and
expects to record additional acquired technology amortization from the
Acquisitions of approximately $14.8 million, $10.2 million and $2.1 million in
1998, 1999 and 2000, respectively. No capitalized software development costs
were amortized in 1997.
Cost of revenues related to hardware sales include only the Company's cost
to acquire the hardware from the manufacturer.
MARKETING AND SALES
Marketing and sales expenses consist primarily of salaries, benefits,
commissions and related overhead costs. Other costs include expenditures for
marketing programs, public relations, trade shows, advertising
23
<PAGE> 32
and related communications. As Eclipsys continues to implement its growth
strategy, marketing and sales expenses are expected to continue to increase on
an absolute basis.
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of salaries, benefits
and related overhead associated with the design, development and testing of new
products by Eclipsys. Eclipsys capitalizes internal software development costs
subsequent to attaining technological feasibility. Such costs are amortized as
an element of cost of revenues annually over three to five years either on a
straight line basis or, if greater, based on the ratio that current revenues
bear to total anticipated revenues for the applicable product. Eclipsys expects
to continue to increase research and development spending on an absolute basis
as it migrates its products to the SOLA architecture.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of salaries, benefits
and related overhead costs for administration, executive, finance, legal, human
resources, purchasing and internal systems personnel, as well as accounting and
legal fees and expenses. As Eclipsys implements its business plan, general and
administrative expenses are expected to continue to increase on an absolute
basis.
DEPRECIATION AND AMORTIZATION
Eclipsys depreciates the costs of its tangible capital assets on a
straight-line basis over the estimated economic life of the asset, which is
generally not longer than five years. Acquisition-related intangible assets,
which include the value of ongoing customer relationships and goodwill, are
amortized based upon the estimated economic life of the asset at the time of the
acquisition, and will therefore vary among acquisitions. Eclipsys recorded
amortization expenses for acquisition-related intangible assets of $5.7 million
in 1997.
TAXES
As of December 31, 1997, Eclipsys had operating loss carryforwards for
federal income tax purposes of $20.1 million. The carryforwards expire in
varying amounts through 2012 and are subject to certain restrictions. Based on
evidence then available, Eclipsys did not record any benefit for income taxes at
December 31, 1997, because management believed it was more likely than not that
Eclipsys would not realize its net deferred tax assets. Accordingly, Eclipsys
has recorded a valuation allowance against its total net deferred tax assets.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Total revenues increased 44.8% from $67.5 million for the first nine months
of 1997 to $97.7 million for the first nine months of 1998. Systems and services
revenues increased by $24.1 million, or 37.3%, and hardware revenues increased
by $6.2 million, or 206%. These increases were caused primarily by the inclusion
in 1998 of nine full months of the operations of Alltel, as compared to only
eight months in 1997, as well as the inclusion in 1998 of nine months of
operations of SDK and eight months of operations of Emtek, which were not
included in the results of operations in the first nine months of 1997. Also
contributing to the increase was new business contracted in 1998, which was the
result of an increase in marketing efforts related to the regional realignment
of Eclipsys' operations completed in 1997 and the successful integration of the
acquisitions completed in 1997 and 1998.
Total cost of revenues increased 4.8% from $58.2 million, or 86.2% of total
revenues, in the first nine months of 1997 to $61.0 million, or 62.4% of total
revenues, in the first nine months of 1998. The increase in cost was due
primarily to the increase in business activity, offset in part by a reduction in
certain expenses related to integrating the Eclipsys Acquisitions. The reduction
in total cost of revenues as a
24
<PAGE> 33
percentage of total revenues was due to the relatively small increase in costs
compared to the increase in revenues.
Marketing and sales expenses increased 41.1% from $9.9 million, or 14.6% of
total revenues, in the first nine months of 1997 to $13.9 million, or 14.3% of
total revenues, in the first nine months of 1998. The increase was due primarily
to the addition of marketing and direct sales personnel following the Eclipsys
Acquisitions and the regional realignment of Eclipsys' sales operations.
Total expenditures for research and development, including both capitalized
and non-capitalized portions, increased by 73.0% from $12.7 million, or 18.8% of
total revenues, in the first nine months of 1997 to $22.0 million, or 22.5% of
total revenues, in the first nine months of 1998. The increase was due primarily
to the inclusion in 1998 of nine full months of the operations of Alltel and SDK
as well as eight months of Emtek operations, as well as the continued
development of an enterprise-wide, client server platform solution. Research and
development expenditures of $698,000 were capitalized in the first nine months
of 1997 and $2.7 million were capitalized in the first nine months of 1998. The
capitalization of software development costs in 1998 was due primarily to
product development activities related to technology acquired in the Eclipsys
Acquisitions. As a result of this activity, research and development expense
increased 60.7% from $12.0 million in the first nine months of 1997 to $19.3
million in the first nine months of 1998.
General and administrative expenses increased by $437,000, or 10.5%, from
$4.1 million, or 6.1% of total revenues, in the first nine months of 1997 to
$4.6 million, or 4.7% of total revenues, in the first nine months of 1998. The
increase was due primarily to the addition of administrative and finance
personnel following the Eclipsys Acquisitions.
Depreciation and amortization expense increased by 8.8% from $7.3 million,
or 10.8% of total revenues, in the first nine months of 1997 to $7.9 million, or
8.1% of total revenues, in the first nine months of 1998. The increase was due
primarily to the amortization of ongoing customer relationships and goodwill
related to the Eclipsys Acquisitions. Partially offsetting this increase was a
reduction in goodwill amortization as a result of the renegotiation of certain
matters relating to the Alltel Acquisition.
Eclipsys recorded a $7.2 million charge in the first nine months of 1998
related to the MSA Buyout. In the first nine months of 1997, Eclipsys recorded a
charge of $99.2 million related to the write-off of in-process research and
development attributable to the Alltel and SDK Acquisitions.
As a result of the foregoing, net loss decreased from $123.9 million in the
first nine months of 1997 to $16.8 million in the first nine months of 1998.
1997 COMPARED TO 1996
In the period-to-period comparison below, the 1997 results reflect the
operations of Eclipsys and the 1996 results reflect the operations of its
predecessor, Alltel.
Following the Alltel and SDK Acquisitions in 1997, Eclipsys' efforts and
resources were focused on integrating the acquisitions into its operations.
Particular emphasis was placed on retaining customers and integrating the
acquired products into Eclipsys' systems and services offerings in order to
position Eclipsys for future business opportunities. These efforts included
refocusing Eclipsys' research and development operations, realigning the sales
departments and reducing general and administrative overhead. As a result,
Eclipsys did not actively seek to exploit new business opportunities during
1997. Eclipsys believes that the investment of time and resources in improving
the internal structure of Eclipsys and the integration of its acquisitions have
positioned Eclipsys to capitalize on business opportunities in the future.
Total revenues decreased by $14.7 million, or 13.5%, from $108.8 million in
1996 to $94.1 million in 1997. This decrease was caused primarily by the
inclusion in 1997 of only eleven full months of the operations of Alltel, as
well as a reduction in revenues from hardware sales of $5.2 million, offset in
part by the inclusion of $3.5 million in revenues attributable to SDK. In
addition, in accounting for the Alltel Acquisition, Eclipsys reduced deferred
revenue by $7.3 million to reflect the estimated fair value of certain
25
<PAGE> 34
contractual obligations. This accounting adjustment had the effect of reducing
revenues by $4.5 million in 1997 compared to 1996 revenues. Eclipsys does not
expect the deferred revenue adjustment to materially impact future periods.
Adding Alltel results for the 23 days from January 1, 1997 to the closing of the
Alltel Acquisition, 1997 total revenues would have been $100.3 million.
Total cost of revenues increased by $6.8 million, or 9.5%, from $71.5
million, or 65.7% of total revenues, in 1996 to $80.0 million, or 85.1% of total
revenues, in 1997. The increase was due primarily to a $19.7 million increase in
amortization of acquired technology and $2.2 million of amortization of the
value of the MSA. This increase was offset, in part, by a $7.2 million decrease
in amortization of capitalized software costs, as no software costs were
amortized in 1997. Further offsetting the increase were the timing of the Alltel
Acquisition and the reduction in hardware sales. Adding Alltel results for the
period prior to the Alltel Acquisition, total cost of revenues in 1997 would
have been $84.4 million.
Marketing and sales expenses increased by $2.6 million, or 23.2%, from
$11.1 million, or 10.2% of total revenues, in 1996 to $13.7 million, or 14.5% of
total revenues, in 1997. The increase was due primarily to the addition of
marketing and direct sales personnel as part of Eclipsys' investment in its
marketing and sales operations following the Alltel and SDK Acquisitions. This
increase was offset in part by the timing of the Alltel Acquisition. Adding
Alltel results for the period prior to the Alltel Acquisition, 1997 marketing
and sales expenses would have been $14.3 million.
Total expenditures for research and development, including both capitalized
and non-capitalized portions, decreased by $5.1 million, or 22.9%, from $22.4
million, or 20.6% of total revenues in 1996 to $17.3 million, or 18.4% of total
revenues, in 1997. These amounts exclude amortization of previously capitalized
expenditures, which are recorded as cost of revenues. The decrease was due
primarily to the refocusing of Eclipsys' research and development organization,
and, to a lesser extent, the timing of the Alltel Acquisition. The portion of
research and development expenditures that were capitalized decreased by $10.6
million, from $12.2 million in 1996 to $1.6 million in 1997.
The reduction in capitalized software development costs was due primarily
to Eclipsys' emphasis on enhancing existing technology acquired in the Alltel
and SDK Acquisitions, the costs of which were expensed as incurred. As a result
of this emphasis, research and development expense increased $5.4 million, or
53.0%, from $10.3 million in 1996 to $15.7 million in 1997. Adding Alltel
results for the period prior to the Alltel Acquisition, 1997 research and
development expenses would have been $16.5 million.
General and administrative expenses decreased by $1.4 million, or 20.1%,
from $7.1 million, or 6.5% of total revenues, in 1996 to $5.7 million, or 6.0%
of total revenues, in 1997. The decrease was due primarily to the timing of the
Alltel Acquisition, as well as savings generated by the rationalization of
Eclipsys' administrative, financial and legal organizations. Adding Alltel
results for the period prior to the Alltel Acquisition, 1997 general and
administrative expense would have been $6.3 million.
Depreciation and amortization expense increased by $1.6 million, or 19.4%,
from $8.1 million, or 7.5% of total revenues, in 1996 to $9.7 million, or 10.5%
of total revenues, in 1997. The increase was due primarily to the amortization
of the value of ongoing customer relationships and goodwill related to the
Alltel and SDK Acquisitions. Adding Alltel results for the period prior to the
Alltel Acquisition, 1997 depreciation and amortization expense would have been
$10.3 million.
Write-offs of acquired in-process research and development of $99.2 million
were recorded in 1997, of which $92.2 million was attributable to the Alltel
Acquisition and $7.0 million was attributable to the SDK Acquisition. There were
no write-offs recorded in 1996.
As a result of the foregoing factors, net loss increased from $2.2 million
in 1996 to $131.1 million in 1997.
26
<PAGE> 35
1996 COMPARED TO 1995
The period-to-period comparison below reflects the operations of Eclipsys'
predecessor, Alltel, for 1996 and 1995.
Total revenues increased by $8.7 million, or 8.7%, from $100.1 million in
1995 to $108.8 million in 1996. This increase was caused primarily by increases
in revenues related to outsourcing contracts.
Total cost of revenues increased by $10.2 million, or 16.5%, from $61.3
million, or 61.3% of total revenues, in 1995 to $71.5 million, or 65.7% of total
revenues, in 1996. The increase was due primarily to increases in staff related
to outsourcing contracts.
Marketing and sales expenses remained constant at $11.1 million in both
periods, representing 11.1% of total revenues in 1995 and 10.2% of total
revenues in 1996.
Total expenditures for research and development, including both capitalized
and non-capitalized portions, increased by $1.0 million, or 4.7%, from $21.4
million, or 21.4% of total revenues, in 1995 to $22.4 million, or 20.6% of total
revenues, in 1996. These amounts exclude amortization of previously capitalized
expenditures, which are recorded as cost of revenues. The increase was due
primarily to wage increases for research and development personnel. The portion
of research and development expenditures that were capitalized decreased by
$735,000, from $12.9 million in 1995 to $12.2 million in 1996.
General and administrative expenses decreased by $1.1 million, or 13.1%,
from $8.2 million, or 8.2% of total revenues, in 1995 to $7.1 million, or 6.5%
of total revenues, in 1996. The decrease was due primarily to a $1.0 million
decrease in legal fees.
Depreciation and amortization expenses increased by $1.4 million, or 20.8%,
from $6.7 million, or 6.7% of total revenues, in 1995 to $8.1 million, or 7.5%
of total revenues, in 1996. The increase was due primarily to depreciation of
computer equipment acquired for research and development purposes.
As a result of the foregoing factors, net income was $606,000 in 1995 and
net loss was $2.2 million in 1996.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
OVERVIEW
In connection with the Alltel and SDK Acquisitions, Eclipsys wrote off
in-process research and development totaling $92.2 million and $7.0 million,
respectively. These amounts were expensed as non-recurring charges on the
respective acquisition dates. These write-offs were necessary because the
acquired technology had not yet reached technological feasibility and had no
future alternative uses. Eclipsys is using the acquired in-process research and
development to create new clinical management, access management, patient
financial management and data warehousing products which will become part of the
Sunrise product suite over the next several years. Eclipsys anticipates that
certain products using the acquired in-process technology will be generally
released before the end of 1998, with additional product releases in subsequent
periods through 2001. Eclipsys expects that the acquired in-process research and
development will be successfully developed, but there can be no assurance that
commercial viability of these products will be achieved.
The nature of the efforts required to develop the purchased in-process
technology into commercially viable products principally relate to the
completion of all planning, designing, prototyping, verification and testing
activities that are necessary to establish that the product can be produced to
meet its design specifications, including functions, features and technical
performance requirements.
The value of the purchased in-process technology was determined by
estimating the projected net cash flows related to such products, including
costs to complete the development of the technology and the future revenues to
be earned upon commercialization of the products. These cash flows were
discounted back to their net present value. The resulting projected net cash
flows from such projects were based on
27
<PAGE> 36
management's estimates of revenues and operating profits related to such
projects. These estimates were based on several assumptions, including those
summarized below for each of the respective acquisitions.
If these projects to develop commercial products based on the acquired
in-process technology are not successfully completed, the sales and
profitability of Eclipsys may be adversely affected in future periods.
Additionally, the value of other intangible assets may become impaired.
ALLTEL
The primary purchased in-process technology acquired in the Alltel
Acquisition was the client-server based core application modules of the TDS 7000
product. This project represented an integrated clinical software product whose
functionality included order management, health information management,
physician applications, nursing applications, pharmacy, laboratory and radiology
applications and ancillary support. Additionally, the product included
functionality facilitating the gathering and analysis of data throughout a
healthcare organization, a data integration engine and various other
functionality.
Revenue attributable to the in-process technology was assumed to increase
over the twelve-year projection period at annual rates ranging from 234% to 5%,
resulting in annual revenues of approximately $27 million to $640 million. Such
projections were based on assumed penetration of the existing customer base, new
customer transactions, historical retention rates and experiences of prior
product releases. The projections reflect accelerated revenue growth in the
first five years (1997 to 2001) as the products derived from the in-process
technology are generally released. In addition, the projections were based on
annual revenue to be derived from long-term contractual arrangements ranging
from seven to ten years. New customer contracts for products developed from the
in-process technology were assumed to peak in 2001, with rapidly declining sales
volume in the years 2002 to 2003 as other new products are expected to enter the
market. The projections assumed no new customer contracts after 2003. Projected
revenue in years after 2003 was determined using a 5% annual growth rate, which
reflects contractual increases.
Operating profit was projected to grow over the projection period at rates
ranging from 1238% to 5%, resulting in incremental annual operating profit
(loss) of approximately $(5) million to $111 million. The operating profit
projections during the years 1997 to 2001 assumed a growth rate slightly higher
than the revenue projections. The higher growth rate is attributable to the
increase in revenues discussed above, together with research and development
costs expected to remain constant at approximately $15 million annually. The
operating profit projections include a 5% annual growth rate for the years after
2003 consistent with the revenue projections.
To date, revenues and operating profit attributable to in-process
technology have been adversely impacted by the deferral of one outsourcing
contract that had been approved but not finalized at the time the projections
were completed. Although it was successful in contracting outsourcing business
in 1997, Eclipsys decided in late March 1997 to focus its efforts on integrating
the products acquired in the Acquisitions and lower its sales efforts in the
outsourcing arena. In late 1997, Eclipsys reorganized the outsourcing operations
and began to refocus on selling such services in the first quarter of 1998.
Revenue attributable to the deferred contract is expected to be realized in
1999. Management continues to believe the projections used reasonably estimate
the future benefits attributable to the in-process technology. However, no
assurance can be given that deviations from these projections will not occur.
The projected net cash flows were discounted to their present value using
the weighted average cost of capital (the "WACC"). The WACC calculation produces
the average required rate of return of an investment in an operating enterprise,
based on required rates of return from investments in various areas of the
enterprise. The WACC used in the projections was 21%. This rate was determined
by applying the capital asset pricing model. This method yielded an estimated
average WACC of approximately 16.5%. A risk premium was added to reflect the
business risks associated with the stage of development of Eclipsys, as well as
the technology risk associated with the in-process software, resulting in a WACC
of 21%. In addition, the value of customer relationships was calculated using a
discount rate of 21% and a return to net tangible assets was estimated using a
rate of return of 11.25%. The value of the goodwill was
28
<PAGE> 37
calculated as the remaining intangible value not otherwise allocated to
identifiable intangible assets (resulting in an implied discount rate on the
goodwill of approximately 28%).
Eclipsys used a 21% discount rate for valuing existing technology because
it faces substantially the same risks as the business as a whole. Accordingly, a
rate equal to the WACC of 21% was used. Eclipsys used a 28% discount rate for
valuing in-process technology. The spread over the existing technology discount
rate reflects the inherently greater risk of the research and development
efforts. The spread reflected the nature of the development efforts relative to
the existing base of technology and the potential market for the in-process
technology once the products were released.
Eclipsys estimates that the costs to develop the purchased in-process
technology acquired in the Alltel Acquisition into commercially viable products
will be approximately $75 million in the aggregate through 2001 ($15 million per
year from 1997 to 2001).
SDK
The purchased in-process technology acquired in the SDK Acquisition
comprised three major enterprise-wide modules in the areas of physician billing,
home health care billing and long-term care billing; a graphical user interface;
a corporate master patient index; and a standard query language module.
Revenue attributable to the in-process technology was assumed to increase
in the first three years of the ten-year projection period at annual rates
ranging from 497% to 83% decreasing over the remaining years at annual rates
ranging from 73% to 14% as other products are released in the marketplace.
Projected annual revenue ranged from approximately $5 million to $56 million
over the term of the projections. These projections were based on assumed
penetration of the existing customer base, synergies as a result of the SDK
Acquisition, new customer transactions and historical retention rates. Projected
revenues from the in-process technology were assumed to peak in 2000 and decline
from 2000 to 2007 as other new products are expected to enter the market.
Operating profit was projected to grow over the projection period at annual
rates ranging from 1497% to 94% during the first three years, decreasing during
the remaining years of the projection period similar to the revenue growth
projections described above. Projected annual operating profit ranged from
approximately $250,000 to $8 million over the term of the projections.
To date, revenues and operating profit attributable to in-process
technology have been consistent with the projections. However, no assurance can
be given that deviations from these projections will not occur in the future.
The WACC used in the analysis was 20%. This rate was determined by applying
the capital asset pricing model and a review of venture capital rates of return
for companies in a similar life cycle stage.
Eclipsys used a 20% discount rate for valuing existing and in-process
technology because both technologies face substantially the same risks as the
business as a whole. Accordingly, a rate equal to the WACC of 20% was used.
Eclipsys estimates that the costs to develop the in-process technology
acquired in the SDK Acquisition will be approximately $1.7 million in the
aggregate through the year 2000 ($500,000 in 1998, $600,000 in 1999 and $600,000
in 2000).
LIQUIDITY AND CAPITAL RESOURCES
For purposes of the following discussion, cash flow data for 1997 and the
first nine months of 1998 relate to Eclipsys and cash flow data for 1995 and
1996 relate to Alltel.
Eclipsys was formed in December 1995 and has grown primarily through a
series of acquisitions completed since January 1997. Eclipsys' principal sources
of liquidity have been equity capital contributions, borrowings from commercial
lenders and cash provided by operating activities. The funds
29
<PAGE> 38
generated by these sources have been applied primarily to acquisitions and
research and development activities.
Cash provided by operating activities totaled $3.3 million and $15.2
million in the nine months ended September 30, 1997 and 1998, respectively. The
increase in cash provided by operating activities was the result of increased
business activity and the reduction in certain expenses related to integrating
the Eclipsys Acquisitions. Cash provided by financing activities totaled $113.8
million and $20.1 million in the nine months ended September 30, 1997 and 1998,
respectively. The 1997 period included the issuance of $103.8 million of
Preferred Stock in connection with the Alltel Acquisition, which was
subsequently converted into Eclipsys Voting Common Stock at the time of
Eclipsys' initial public offering in August 1998 (the "Eclipsys IPO"). Cash used
by investing activities totaled $111.8 million and $27.8 million in the nine
months ended September 30, 1997 and 1998, respectively. The 1997 period included
$109.0 million applied to the Alltel and SDK Acquisitions. As of September 30,
1998, Eclipsys had $12.3 million of cash and cash equivalents.
Cash provided by operating activities totaled $15.9 million, $15.9 million
and $1.1 million in 1995, 1996 and 1997, respectively. The decrease in cash
provided by operating activities from 1996 to 1997 was primarily the result of a
greater portion of research and development being expensed as incurred, rather
than being capitalized. Cash provided by financing activities totaled $5.5
million, $11.9 million and $112.8 million in 1995, 1996 and 1997, respectively.
The increase from 1996 to 1997 was primarily the result of $103.8 million of
proceeds from the issuance of Preferred Stock concurrently with the Alltel
Acquisition. Cash used by investing activities totaled $20.5 million, $28.2
million and $113.7 million in 1995, 1996 and 1997, respectively. The increase in
cash used by investing activities from 1996 to 1997 was the result of $109.0
million applied to the Alltel and SDK Acquisitions, offset in part by a $10.6
million reduction in capitalization of software development costs.
Eclipsys invested $7.7 million, $9.2 million and $3.1 million in computer
equipment, leasehold improvements and other capital assets in 1995, 1996 and
1997, respectively. Eclipsys also incurred $21.4 million, $22.4 million and
$17.3 million in research and development costs in 1995, 1996 and 1997. Eclipsys
expects that the combined company will invest approximately $6 million and $45
million in capital expenses and research and development, respectively, through
the end of 1999.
In January 1997, Eclipsys entered into a $30 million credit facility,
consisting of a $10 million term loan (the "Term Loan") and a $20 million
revolving loan (the "Revolver"). The Term Loan and the Revolver are secured by
substantially all of Eclipsys' assets, and bear interest at a variable rate. See
Note 7 of Notes to Eclipsys' Consolidated Financial Statements. In January 1998,
the Term Loan was repaid with the proceeds of the issuance of Preferred Stock,
which was subsequently converted into Eclipsys Voting Common Stock at the time
of the Eclipsys IPO. In March 1998, pursuant to the MSA Buyout, Eclipsys paid
AIS $14.0 million. Of this payment, $9.0 million was funded through borrowings
under the Revolver. In April 1998, Eclipsys borrowed an additional $5.6 million
under the Revolver to fund its investment in Simione. In May 1998, the Revolver
was amended to increase the borrowing limit to $50.0 million, under
substantially similar terms and conditions as contained in the original credit
facility. As of September 30, 1998, the effective interest rate for the Revolver
was 6.7% and the amount available for borrowing thereunder was $50.0 million.
In March 1998, pursuant to the renegotiation in the first quarter of 1998
of certain matters relating to the Alltel Acquisition (the "Alltel
Renegotiation"), AIS returned to Eclipsys 11,000 shares of Redeemable Preferred
Stock for cancellation. As part of this transaction, AIS agreed that no
dividends would accrue on the remaining 4,500 shares of Redeemable Preferred
Stock held by it until July 1, 1998. Eclipsys redeemed the full $34.5 million
face value of the outstanding Redeemable Preferred Stock and all accrued
dividends with a portion of the proceeds from the Eclipsys IPO. A charge to
additional paid-in capital was recorded in the quarter ended September 30, 1998
(the period in which the redemption occurred) equal to the difference between
the redemption price of the Redeemable Preferred Stock and its carrying amount
($10.9 million). In addition, this charge resulted in an increase in net loss
available to common stockholders in the statement of operations for the quarter.
30
<PAGE> 39
In August 1998, Eclipsys completed the Eclipsys IPO, selling an aggregate
of 4,830,000 shares of Eclipsys Voting Common Stock and realizing approximately
$66.0 million in net proceeds, after deducting underwriting discounts and
commissions and expenses of the offering payable by Eclipsys. Of these net
proceeds, Eclipsys used (i) approximately $38.8 million to redeem all
outstanding Redeemable Preferred Stock, including $4.3 million of accrued
dividends, (ii) approximately $3.9 million to repay the remaining balance of
subordinated promissory notes issued in connection with the SDK Acquisition and
(iii) approximately $18.5 million to repay the outstanding balance under the
Revolver.
Eclipsys believes that its existing cash balances, funds generated by
operations and borrowings available under the Revolver will be sufficient to
finance its operations for at least the next twelve months. However, to the
extent acquisitions are completed or anticipated capital and operating
requirements change, Eclipsys may be required to raise additional financing.
There can be no assurance that, if needed, such financing would be available, or
would be available on terms satisfactory to Eclipsys.
YEAR 2000 ISSUES
Eclipsys believes that all of its internal management information systems
are currently Year 2000 compliant and, accordingly, does not anticipate any
significant expenditures to remediate or replace existing internal-use systems.
Although all of the products currently offered by Eclipsys are Year 2000
compliant, some of the products previously sold by Alltel and Emtek and
installed in Eclipsys' customer base are not Year 2000 compliant. Eclipsys has
developed and tested solutions for its non-compliant installed products.
Eclipsys currently estimates that the total cost of bringing these installed
products into Year 2000 compliance, in those cases in which Eclipsys is required
to do so at its own expense, will be approximately $900,000, all of which is
expected to be incurred by mid-1999. In addition, because Eclipsys' products are
often interfaced with a customer's existing third-party applications, Eclipsys'
products may experience difficulties interfacing with third-party non-compliant
applications. Based on currently available information, Eclipsys does not expect
the cost of compliance related to interactions with non-compliant third-party
systems to be material. However, any unexpected difficulties in implementing
Year 2000 solutions for the installed Alltel or Emtek products or difficulties
in interfacing with third-party products could have a material adverse effect on
Eclipsys' business, financial condition and results of operations.
BACKLOG
Backlog consists of revenues Eclipsys expects to recognize over the
following twelve months under existing contracts. The revenues to be recognized
may relate to a combination of one-time fees for software licensing and
implementation, hardware sales and installations and professional services, or
annual or monthly fees for licenses, maintenance, and outsourcing or remote
processing services. As of December 31, 1997, Eclipsys had a backlog of
approximately $108 million.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued FAS 130,
"Reporting for Comprehensive Income" and FAS 131, "Disclosure about Segments of
an Enterprise and Related Information." In October 1997, the American Institute
of Certified Public Accountants issued Statement of Position 97-2, "Software
Revenue Recognition." All three statements are effective for fiscal years
beginning after December 15, 1997, and are not expected to have a material
impact on Eclipsys' results of operations or financial condition. Effective
January 1, 1998, Eclipsys adopted Statement of Position 97-2 and implemented FAS
130.
31
<PAGE> 40
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
32
<PAGE> 41
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.
33
<PAGE> 42
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,
---------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Revenues:
Software and implementation............................... 72.5% 74.1% 68.8%
Maintenance............................................... 27.5 25.9 31.2
----- ----- -----
Total revenues.................................... 100.0 100.0 100.0
----- ----- -----
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 --
----- ----- -----
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
----- ----- -----
Net income before extraordinary item........................ 18.4 11.9 20.2
Extraordinary item:
Loss on early extinguishment of debt, net of taxes........ 6.3 -- --
----- ----- -----
Net income.................................................. 12.1 11.9 20.2
Series A non-voting preferred stock dividends............... 1.7 -- --
----- ----- -----
Net income allocable to common stockholders................. 10.4% 11.9% 20.2%
===== ===== =====
</TABLE>
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
34
<PAGE> 43
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
35
<PAGE> 44
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.
36
<PAGE> 45
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
37
<PAGE> 46
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.
38
<PAGE> 47
ECLIPSYS SPECIAL STOCKHOLDERS' MEETING
GENERAL
This Joint Proxy Statement/Prospectus is being furnished to holders of
Eclipsys Voting Common Stock in connection with the solicitation of proxies by
the Board of Directors of Eclipsys (the "Eclipsys Board") for use at the
Eclipsys Special Stockholders' Meeting to be held on December 30, 1998, at the
Delray Beach Marriott, 10 North Ocean Boulevard, Delray Beach, Florida 33444,
commencing at 10:00 a.m., local time, and at any adjournment or postponement
thereof.
This Joint Proxy Statement/Prospectus and the accompanying forms of proxy
are first being mailed to stockholders of Eclipsys on or about December 7, 1998.
Eclipsys' management does not expect a representative from Eclipsys'
accountants to attend the Eclipsys Special Stockholders' Meeting.
MATTERS TO BE CONSIDERED
At the Eclipsys Special Stockholders' Meeting, holders of Eclipsys Voting
Common Stock will be asked to consider and vote upon the issuance of shares of
Eclipsys Voting Common Stock in connection with the Merger. This matter is
referred to as the "Eclipsys Voting Proposal."
BOARD OF DIRECTORS' RECOMMENDATIONS
The Eclipsys Board has, by unanimous vote of all directors present,
approved the Merger and the Merger Agreement and recommends a vote FOR approval
of the Eclipsys Voting Proposal.
RECORD DATE AND VOTING
Holders of record of shares of Eclipsys Voting Common Stock at the close of
business on November 30, 1998 (the "Record Date") are entitled to notice of and
to vote at the Eclipsys Special Stockholders' Meeting. At such date, there were
19,461,642 outstanding shares of Eclipsys Voting Common Stock, each of which is
entitled to one vote at the Eclipsys Special Stockholders' Meeting, which shares
were held by approximately 162 holders of record. The representation, in person
or by properly executed proxy, of the holders of a majority of all of the shares
of stock entitled to vote at the Eclipsys Special Stockholders' Meeting is
necessary to constitute a quorum at the Eclipsys Special Stockholders' Meeting.
The approval of the Eclipsys Voting Proposal will require the affirmative
vote of the holders of a majority of the shares of Eclipsys Voting Common Stock
present in person or represented by proxy and voting at the Eclipsys Special
Stockholders' Meeting.
Shares of Eclipsys Voting Common Stock, represented in person or by proxy,
will be counted for the purpose of determining whether a quorum is present at
the Eclipsys Special Stockholders' Meeting. Shares that abstain from voting as
to a particular matter will be treated as shares that are present and entitled
to vote at the Eclipsys Special Stockholders' Meeting for purposes of
determining whether a quorum exists, but will not be counted as votes cast on
such matter. If a broker or nominee holding stock in "street name" indicates on
a proxy that it does not have discretionary authority to vote as to a particular
matter ("broker non-votes"), those shares will be treated as present and
entitled to vote at the Eclipsys Special Stockholders' Meeting for purposes of
determining whether a quorum exists, but will not be counted as votes cast on
such matter. Accordingly, in determining whether the Eclipsys Voting Proposal
has received the requisite number of affirmative votes, abstentions and broker
non-votes will have no effect on the voting on such proposal.
Stockholders of Eclipsys who have voting control over outstanding shares of
Eclipsys Voting Common Stock representing 53.8% of the votes that may be cast at
the Eclipsys Special Stockholders' Meeting have irrevocably appointed TSI as
proxy to vote all shares of Eclipsys Voting Common Stock held by such
39
<PAGE> 48
stockholders, in favor of the Eclipsys Voting Proposal at the Eclipsys Special
Stockholders' Meeting. In addition, directors and executive officers of Eclipsys
who, together with their affiliates, may be deemed to have voting control over
approximately 5.6% of the outstanding shares of Eclipsys Voting Common Stock not
covered by the Voting Agreements described in the previous sentence, have
advised Eclipsys that they intend to vote or direct the vote of all shares of
Eclipsys Voting Common Stock over which they have voting control for approval of
the Eclipsys Voting Proposal.
PROXIES
This Joint Proxy Statement/Prospectus is being furnished to Eclipsys
stockholders in connection with the solicitation of proxies by and on behalf of
the Eclipsys Board for use at the Eclipsys Special Stockholders' Meeting, and is
accompanied by a form of proxy.
All shares of Eclipsys Voting Common Stock which are entitled to vote and
are represented at the Eclipsys Special Stockholders' Meeting by properly
executed proxies received prior to or at such meeting, and not revoked, will be
voted at such meeting in accordance with the instructions indicated on such
proxies. If no instructions are indicated (other than in the case of broker
non-votes), such proxies will be voted for approval of the Eclipsys Voting
Proposal.
If any other matters are properly presented at the Eclipsys Special
Stockholders' Meeting for consideration, including, among other things,
consideration of a motion to adjourn such meeting to another time and/or place
(including, without limitation, for the purpose of soliciting additional
proxies), the persons named in the enclosed forms of proxy and acting thereunder
will have discretion to vote on such matters in accordance with their best
judgment.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with the Secretary of Eclipsys, at or before the taking of the vote at the
Eclipsys Special Stockholders' Meeting, a written notice of revocation bearing a
later date than the proxy, (ii) duly executing a later dated proxy relating to
the same shares and delivering it to the Secretary of Eclipsys before the taking
of the vote at the Eclipsys Special Stockholders' Meeting, or (iii) attending
the Eclipsys Special Stockholders' Meeting and voting in person (although
attendance at the Eclipsys Special Stockholders' Meeting will not in and of
itself constitute a revocation of a proxy). Any written notice of revocation or
subsequent proxy should be sent to Eclipsys Corporation, 777 East Atlantic
Avenue, Suite 200, Delray Beach, Florida 33483, Attention: Secretary, or hand
delivered to the Secretary of Eclipsys at or before the taking of the vote at
the Eclipsys Special Stockholders' Meeting.
All expenses of Eclipsys' solicitation of proxies, including the cost of
preparing and mailing this Joint Proxy Statement/Prospectus to Eclipsys
stockholders, will be borne by Eclipsys. In addition to solicitation by use of
the mails, proxies may be solicited from Eclipsys stockholders by directors,
officers and employees of Eclipsys in person or by telephone, facsimile or other
means of communication. Such directors, officers and employees will not be
additionally compensated, but may be reimbursed for reasonable out-of-pocket
expenses in connection with such solicitation. In addition, Eclipsys has engaged
MacKenzie Partners, Inc., a proxy solicitation firm, to assist in the
solicitation of proxies for the Eclipsys Special Stockholders' Meeting. Such
firm may solicit proxies in person or by means of telephone, facsimile or other
means of communication. Such firm has been engaged on customary terms and fees
paid to such firm will not be material. Arrangements will also be made with
brokerage houses, custodians, nominees and fiduciaries for forwarding of proxy
solicitation materials to beneficial owners of shares held of record by such
brokerage houses, custodians, nominees and fiduciaries, and Eclipsys will
reimburse such brokerage houses, custodians, nominees and fiduciaries for their
reasonable expenses incurred in connection therewith.
40
<PAGE> 49
TSI SPECIAL STOCKHOLDERS' MEETING
GENERAL
This Joint Proxy Statement/Prospectus is being furnished to holders of TSI
Voting Common Stock in connection with the solicitation of proxies by the Board
of Directors of TSI (the "TSI Board") for use at the TSI Special Stockholders'
Meeting to be held on December 30, at the offices of Foley, Hoag & Eliot LLP,
One Post Office Square, 16th Floor, Boston, Massachusetts 02109, commencing at
10:00 a.m., local time, and at any adjournment or postponement thereof.
This Joint Proxy Statement/Prospectus and the accompanying forms of proxy
are first being mailed to Stockholders of TSI on or about December 7, 1998.
TSI's management does not expect a representative of TSI's accountants to
attend the TSI Special Stockholders' Meeting.
MATTERS TO BE CONSIDERED
At the TSI Special Stockholders' Meeting, holders of TSI Voting Common
Stock will be asked to consider and vote upon a proposal to approve and adopt
the Merger Agreement and the Merger.
BOARD OF DIRECTORS' RECOMMENDATIONS
The TSI Board has unanimously approved the Merger Agreement and the Merger
and recommends a vote FOR approval and adoption of the Merger Agreement and the
Merger.
RECORD DATE AND VOTING
The TSI Board has fixed November 30, 1998 as the record date for the
determination of the TSI stockholders entitled to notice of and to vote at the
TSI Special Stockholders' Meeting. Accordingly, only holders of record of shares
of TSI Voting and Non-Voting Common Stock on the Record Date are entitled to
notice of the TSI Special Stockholders' Meeting and only holders of record of
shares of TSI Voting Common Stock on the Record Date are entitled to vote at the
TSI Special Stockholders' Meeting. As of the Record Date, there were outstanding
and entitled to vote 18,047,762 shares of TSI Voting Common Stock (constituting
all of the voting stock of TSI), which shares were held by approximately 30
holders of record. Each holder of record of shares of TSI Voting Common Stock on
the Record Date is entitled to one vote per share, which may be cast either in
person or by properly executed proxy, at the TSI Special Stockholders' Meeting.
The presence, in person or by properly executed proxy, of the holders of a
majority of the outstanding shares of TSI Voting Common Stock entitled to vote
at the TSI Special Stockholders' Meeting is necessary to constitute a quorum at
the TSI Special Stockholders' Meeting.
The approval and adoption of the Merger Agreement and Merger will require
the affirmative vote of the holders of at least two-thirds of the shares of TSI
Voting Common Stock outstanding on the Record Date.
Shares of TSI Voting Common Stock represented in person or by proxy will be
counted for the purpose of determining whether a quorum is present at the TSI
Special Stockholders' Meeting. Shares which abstain from voting as to a
particular matter, and shares held by a broker or nominee in "street name" which
indicates on a proxy that it does not have discretionary authority to vote as to
a particular matter, will be treated as shares that are present and entitled to
vote at the TSI Special Stockholders' Meeting for purposes of determining
whether a quorum exists. Because the Merger Agreement must be approved by the
holders of at least two-thirds of the shares of TSI Voting Common Stock
outstanding on the Record Date, abstentions and broker non-votes will have the
same effect as a vote against the Merger Agreement.
Certain stockholders of TSI, who have voting control over outstanding
shares of TSI Voting Common Stock representing 34.4% of the votes that may be
cast at the TSI Special Stockholders' Meeting, have
41
<PAGE> 50
irrevocably appointed Eclipsys as proxy to vote all shares of TSI Voting Common
Stock held by such stockholders in favor of the proposal to approve the Merger
Agreement and Merger at the TSI Special Stockholders' Meeting.
PROXIES
This Joint Proxy Statement/Prospectus is being furnished to TSI
stockholders in connection with the solicitation of proxies by and on behalf of
the TSI Board for use at the TSI Special Stockholders' Meeting, and is
accompanied by a form of proxy.
All shares of TSI Voting Common Stock which are entitled to vote and are
represented at the TSI Special Stockholders' Meeting by properly executed
proxies received prior to or at such meeting, and not revoked, will be voted at
such meeting in accordance with the instructions indicated on such proxies. If
no instructions are indicated (other than in the case of broker non-votes), such
proxies will be voted for approval and adoption of the Merger and the Merger
Agreement.
If any other matters are properly presented at the TSI Special
Stockholders' Meeting for consideration, including, among other things,
consideration of a motion to adjourn such meeting to another time and/or place
(including, without limitation, for the purpose of soliciting additional
proxies), the persons named in the enclosed forms of proxy and acting thereunder
will have discretion to vote on such matters in accordance with their best
judgment.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with the Clerk of TSI, at or before the taking of the vote at the TSI Special
Stockholders' Meeting, a written notice of revocation bearing a later date than
the proxy, (ii) duly executing a later dated proxy relating to the same shares
and delivering it to the Clerk of TSI before the taking of the vote at the TSI
Special Stockholders' Meeting or (iii) attending the TSI Special Stockholders'
Meeting and voting in person (although attendance at the TSI Special
Stockholders' Meeting will not in and of itself constitute a revocation of a
proxy). Any written notice of revocation or subsequent proxy should be sent to
Transition Systems, Inc., One Boston Place, Boston, Massachusetts 02108,
Attention: Clerk, or hand delivered to the Clerk of TSI at or before the taking
of the vote at the TSI Special Stockholders' Meeting.
All expenses of TSI's solicitation of proxies, including the cost of
mailing this Joint Proxy Statement/ Prospectus to TSI stockholders, will be
borne by TSI. In addition to solicitation by use of the mails, proxies may be
solicited from TSI stockholders by directors, officers and employees of TSI in
person or by telephone, facsimile or other means of communication. Such
directors, officers and employees will not be additionally compensated, but may
be reimbursed for reasonable out-of-pocket expenses in connection with such
solicitation. In addition, TSI has engaged MacKenzie Partners, Inc., a proxy
solicitation firm, to assist in the solicitation of proxies for the TSI Special
Stockholders' Meeting. Such firm may solicit proxies in person or by means of
telephone, facsimile or other means of communication. Such firm has been engaged
on customary terms and fees paid to such firm will not be material. Arrangements
will also be made with brokerage houses, custodians, nominees and fiduciaries
for forwarding of proxy solicitation materials to beneficial owners of shares
held of record by such brokerage houses, custodians, nominees and fiduciaries,
and TSI will reimburse such brokerage houses, custodians, nominees and
fiduciaries for their reasonable expenses incurred in connection therewith.
TSI STOCKHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR PROXY
CARDS.
42
<PAGE> 51
THE MERGER
THE DISCUSSION IN THIS JOINT PROXY STATEMENT/PROSPECTUS OF THE MERGER AND
THE PRINCIPAL TERMS OF THE MERGER AGREEMENT IS SUBJECT TO, AND QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO, THE MERGER AGREEMENT, A COPY OF WHICH IS ATTACHED TO
THIS JOINT PROXY STATEMENT/PROSPECTUS AS ANNEX A AND IS INCORPORATED HEREIN BY
REFERENCE.
BACKGROUND TO THE MERGER
In March 1998, TSI management began to consider whether, due to competitive
pressures in the healthcare information technology industry, consolidation of
competitors within this industry and other factors, TSI should investigate
various strategic alternatives available to it, including a possible sale of
TSI.
On March 30, 1998, TSI retained BT Alex. Brown Incorporated ("BT Alex.
Brown") to provide advisory and investment banking services to TSI with respect
to its exploration of strategic alternatives, including the possible merger or
sale of TSI, and authorized management and BT Alex. Brown to contact potential
acquirors of TSI.
From April through October, 1998, at the direction of TSI, representatives
of BT Alex. Brown and TSI management had conversations from time to time with
various companies concerning the possibility of a strategic alliance or business
combination with TSI. These conversations were exploratory in nature and did not
progress to the point of specific proposals that the TSI Board considered
acceptable.
On September 16, 1998, Mr. Harvey J. Wilson, the President, Chief Executive
Officer and Chairman of the Board of Eclipsys, met over dinner with Mr. Robert
F. Raco, the President, Chief Executive Officer and Chairman of the Board of
TSI, and Ms. Christine Shapleigh, Senior Vice President of Business Development
for TSI, to explore the possibility of a strategic alliance between Eclipsys and
TSI. Messrs. Wilson and Raco and Ms. Shapleigh determined and agreed that there
were potential strategic advantages to a combination of Eclipsys and TSI, if
mutually agreeable terms could be negotiated.
On September 22, 1998, representatives of Eclipsys, TSI, General Atlantic
Partners, LLC ("General Atlantic") and Warburg, Pincus Ventures, L.P.
("Warburg") met to explore the possibility of an alliance between the companies.
Representatives of Eclipsys made a presentation to TSI and Warburg to
familiarize them with the organization, business, products and services of
Eclipsys.
On September 24, 1998, Mr. Wilson wrote to Mr. Raco and Mr. Patrick T.
Hackett, a director of TSI and a Managing Director of Warburg, to propose a
business combination between Eclipsys and TSI.
On September 30 and October 1, 1998, representatives of Warburg, General
Atlantic, Eclipsys, TSI and BT Alex. Brown met to discuss the possibility of a
business combination. Preliminary discussions were held relating to the
valuation, structure and other terms for such a combination.
On October 2, 1998, TSI and Eclipsys executed a confidentiality agreement,
following which both TSI and Eclipsys began to share financial and other
confidential information for use by the other company in its due diligence
investigation.
From October 5, 1998 through October 9, 1998, representatives and advisors
of Eclipsys met at TSI's offices to conduct business, financial and legal due
diligence reviews of TSI. On October 8 and October 9, 1998, TSI's management
made presentations to Eclipsys representatives to familiarize them with the
organization, business, products and services of TSI. On October 12, 1998, an
initial draft of the Merger Agreement was distributed by Hale and Dorr LLP,
outside counsel to Eclipsys ("Hale and Dorr").
From October 14, 1998 through October 16, 1998, representatives and
advisors of TSI met at Eclipsys' Atlanta office to conduct business, financial
and legal due diligence reviews of Eclipsys and discussions with representatives
of Eclipsys.
On October 19, 1998, representatives of Eclipsys met with TSI customers in
Ohio and California as part of the business due diligence review. On October 20,
1998 and October 21, 1998, representatives of
43
<PAGE> 52
Eclipsys met with representatives and advisors of TSI at HealthVISION's
headquarters in Santa Rosa, California, to conduct due diligence reviews of
HealthVISION. Since early 1998, TSI had been engaged in discussions with
HealthVISION regarding the acquisition by TSI of the 80.5% of the outstanding
capital stock of HealthVISION not already owned by TSI.
On October 21, 1998, Foley, Hoag & Eliot LLP, outside legal counsel to TSI
("Foley Hoag"), provided written comments on the initial draft of the Merger
Agreement.
On October 23, 1998, representatives of TSI, Warburg, Eclipsys, General
Atlantic and BT Alex. Brown met to negotiate the principal business terms of the
Merger.
On October 24, 1998, the Eclipsys Board met telephonically to discuss the
proposed merger. The Eclipsys Board reviewed with Eclipsys management and
discussed, among other things, the status of the discussions with TSI, the
strategic rationale for the combination, the benefits and risks associated with
the combination, the proposed financial terms and conditions of the transaction,
a schedule for completing the transaction, as well as the business and the
prospects of the companies and other related issues. The Eclipsys Board
authorized management to continue discussions with representatives of TSI
regarding a possible business combination.
On October 25, 1998, a revised draft of the Merger Agreement was
distributed by Hale and Dorr.
On October 26 and 27, 1998, representatives of Foley Hoag conducted
additional legal due diligence reviews at Eclipsys' offices in Florida. On
October 27 and October 28, 1998, representatives of Eclipsys met with
HealthVISION customers in Florida and New York City as part of the business due
diligence review.
On October 26, 1998, the TSI Board met telephonically to discuss the
proposed merger. The TSI Board reviewed with management and its legal and
financial advisors, among other things, the status of the discussions with
Eclipsys, the business and prospects of the two companies, the rationale for the
combination and its benefits and risks, the proposed financial terms of the
transaction and a schedule for completing it, and other related matters. The TSI
Board authorized management to continue discussions with representatives of
Eclipsys regarding a possible business combination.
Over the course of October 26, 27 and 28, 1998, legal counsel and the
executive officers of Eclipsys and TSI and representatives of Warburg, General
Atlantic and BT Alex. Brown held further discussions regarding the terms of the
proposed Merger Agreement and related documents, including the terms of the
proposed Voting Agreements, the termination rights contained in the proposed
Merger Agreement, the conditions upon which any termination fees would be
payable and the amount of such fees, the rights of Eclipsys and TSI under the
proposed Merger Agreement to consider and negotiate other acquisition proposals
in certain circumstances and the representations, warranties and covenants to be
made by Eclipsys and TSI. In addition, the management of both companies and
their financial advisors continued to have further discussions regarding
valuation issues relevant to negotiation of a mutually acceptable exchange ratio
for the stock of TSI and Eclipsys, as well as other terms and conditions of a
possible acquisition of TSI by Eclipsys.
On October 27, 1998, the Eclipsys Board met telephonically to consider and
vote upon the proposed Merger Agreement and the related agreements. At this
specially scheduled meeting, (i) management of Eclipsys reported that an
agreement had been reached as to the principal terms of the Merger Agreement,
including the Exchange Ratio for the stock of Eclipsys and TSI, (ii) the
Eclipsys Board considered reports from management, legal and financial advisors
as to the results of their due diligence investigation of TSI, (iii) management
responded to questions regarding various aspects of the proposed Merger, (iv)
management reported on the status of TSI's negotiations with HealthVISION
regarding the acquisition by TSI of the remaining 80.5% of the outstanding
capital stock of HealthVISION not already owned by TSI, (v) Eclipsys' legal
advisors reviewed the proposed definitive terms of the Merger Agreement and
related documents, (vi) Morgan Stanley & Co. Incorporated ("Morgan Stanley")
made a presentation to the Eclipsys Board regarding the Exchange Ratio, reviewed
its detailed financial analysis and pro forma and other information with respect
to the companies and delivered its oral opinion to the
44
<PAGE> 53
effect that, as of such date, the Exchange Ratio was fair to Eclipsys from a
financial point of view, which opinion was subsequently confirmed in writing
(see "-- Opinions of Financial Advisors -- Eclipsys") and (vii) the Eclipsys
Board, by unanimous vote of those present, approved the Merger, the Merger
Agreement and related agreements.
On October 28, 1998, the TSI Board met telephonically to consider and vote
upon the proposed Merger and the Merger Agreement and the related agreements. At
this specially scheduled meeting, (i) management of TSI reported that an
agreement had been reached as to the principal terms of the Merger Agreement,
including the Exchange Ratio for the stock of TSI and Eclipsys, (ii) the TSI
Board considered reports from management, legal and financial advisors as to the
results of their due diligence investigation of Eclipsys, (iii) management and
TSI's financial and legal advisors responded to questions regarding various
aspects of the proposed Merger, (iv) TSI's legal advisors held discussions
regarding the TSI Board's fiduciary duties in considering a business combination
and reviewed proposed definitive terms of the Merger Agreement and related
documents, including the Voting Agreements, (v) BT Alex. Brown reviewed with the
TSI Board the financial analyses performed by BT Alex. Brown in connection with
its evaluation of the Exchange Ratio and delivered to the TSI Board its oral
opinion (which was subsequently confirmed by delivery of a written opinion dated
October 29, 1998, the date of execution of the Merger Agreement) to the effect
that, as of the date of such opinion and based upon and subject to certain
matters stated therein, the Exchange Ratio was fair, from a financial point of
view, to the holders of TSI Voting and Non-Voting Common Stock (see "-- Opinions
of Financial Advisors -- TSI") and (vi) the TSI Board approved the Merger, the
Merger Agreement and related agreements. At this meeting, the TSI Board also
approved the HealthVISION Acquisition.
In the evening of October 28, 1998, TSI and HealthVISION executed the
definitive agreement relating to the acquisition by TSI of the 80.5% of the
outstanding stock of HealthVISION not already owned by TSI (the "HealthVISION
Acquisition").
Early in the morning of October 29, 1998, the final version of the Merger
Agreement was distributed to and executed by TSI, Eclipsys and Sub and Voting
Agreements were executed by certain management personnel and a principal
stockholder of TSI and by certain principal stockholders of Eclipsys. Prior to
the opening of trading on the Nasdaq National Market, Eclipsys and TSI issued a
joint press release announcing the Merger.
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
The Eclipsys Board has, by unanimous vote of those present, determined that
the Merger is in the best interests of Eclipsys and its stockholders and
recommends that the stockholders of Eclipsys vote "FOR" approval of the Eclipsys
Voting Proposal for the reasons set forth below.
The TSI Board has unanimously determined that the Merger is in the best
interests of TSI and its stockholders and recommends that the stockholders of
TSI vote "FOR" approval and adoption of the Merger and the Merger Agreement for
the reasons set forth below.
REASONS FOR THE MERGER
JOINT REASONS FOR THE MERGER
We believe that the Merger, by combining the complementary product
offerings, customer bases and other resources of our companies, will position
the combined company to enjoy greater growth and earnings than either company
would have experienced individually. The Eclipsys and TSI Boards identified a
number of potential benefits of the Merger which they believe could contribute
to the success of the combined company and therefore benefit the stockholders of
both companies, including the following:
- The Boards believe that the Merger will enable the combined company to
offer a broader range of products, product features and technical
solutions for customers, enhancing the competitive strength of the
combined company and increasing its ability to satisfy the requirements
of existing and new customers.
45
<PAGE> 54
- The Boards believe that the Merger will combine the highly complementary
customer bases of the two companies, resulting in more diverse and
stronger revenue sources and an enhanced ability to cross-market existing
products of each company to the customer base of the other company, as
well as the ability to market new products to a larger combined customer
base.
- The Boards believe that the Merger will enable the combined company to
achieve efficiencies and economies of scale in product development, sales
and marketing, customer service, administration and other areas, which
could not be achieved by either company independently.
- The Boards believe that the Merger, by providing the combined company
with substantially greater financial and other resources, will enhance
the opportunity for the potential realization of the strategic objectives
of both companies and increase the combined company's ability to compete
more effectively in the highly competitive healthcare information
technology industry.
ECLIPSYS' REASONS FOR THE MERGER
In reaching its conclusion to approve the Merger Agreement, the Eclipsys
Board considered the factors described above under "-- Joint Reasons for the
Merger," as well as the opportunity of the Eclipsys stockholders to participate
in the potential growth of the combined company after the Merger.
In the course of its deliberations during the Eclipsys Board meetings held
on October 24 and October 27, 1998, the Eclipsys Board considered and reviewed
with management a number of factors relevant to the Merger, including, but not
limited to, the following: (i) historical information concerning Eclipsys' and
TSI's respective businesses, prospects, financial performance and condition,
operations, technology, management and competitive position, including public
reports concerning results of operations filed during the most recent fiscal
year and fiscal quarter for each company with the Securities and Exchange
Commission (the "Commission"); (ii) the financial condition, results of
operations and businesses of Eclipsys and TSI before and after giving effect to
the Merger; (iii) current financial market conditions and historical market
prices, volatility and trading information with respect to the TSI Voting Common
Stock and the Eclipsys Voting Common Stock; (iv) the consideration to be
received by TSI's stockholders in the Merger and the relationship between the
market value of the Eclipsys Voting Common Stock to be issued in exchange for
each share of TSI Voting and Non-Voting Common Stock and a comparison of
comparable merger transactions; (v) the belief that the terms of the Merger
Agreement, including the parties' representations, warranties and covenants, and
the conditions to their respective obligations, are reasonable; (vi) the
prospects of Eclipsys as an independent company; (vii) detailed financial
analysis and pro forma and other information with respect to the companies
presented by Morgan Stanley to the Eclipsys Board, including Morgan Stanley's
opinion that, as of such date, the Exchange Ratio was fair to Eclipsys from a
financial point of view (a copy of this opinion is annexed hereto as Annex B and
stockholders are urged to review it carefully); and (viii) reports from
management, legal and financial advisors as to the results of the due diligence
investigation of TSI. The Eclipsys Board also considered the terms of the
proposed Merger Agreement, including the possible effects of the provisions
regarding termination fees. In addition, the Eclipsys Board noted that the
Merger is expected to be accounted for as a pooling of interests under U.S. GAAP
and that no goodwill is expected to be created on the books of Eclipsys as a
result thereof.
The Eclipsys Board also considered a number of potential risks relating to
the Merger, including (i) the risk that the synergies and benefits sought in the
Merger would not be fully achieved, (ii) the risk that the Merger would not be
consummated, and the effect of the public announcement of the Merger on the
market price of Eclipsys Voting Common Stock, (iii) the risk that the
announcement of the Merger would result in a certain degree of disruption in
Eclipsys' and TSI's marketing efforts, (iv) the substantial charges expected to
be incurred by Eclipsys in connection with the Merger and (v) various other
risks, including the risks described under "Risk Factors" herein. The Eclipsys
Board believed that these risks were outweighed by the potential benefits to be
realized from the Merger.
The foregoing discussion of the information and factors considered by the
Eclipsys Board is not intended to be exhaustive but is believed to include all
material factors considered by the Eclipsys Board.
46
<PAGE> 55
In view of the wide variety of information and factors considered, the Eclipsys
Board did not find it practical to, and did not, assign any relative or specific
weights to the foregoing factors, and individual directors may have given
differing weights to different factors.
TSI'S REASONS FOR THE MERGER
In reaching its conclusion to approve the Merger Agreement, the TSI Board
considered the factors described above under "-- Joint Reasons for the Merger,"
as well as the opportunity of the TSI stockholders to participate in the
potential growth of the combined company after the Merger.
In the course of its deliberations during TSI Board meetings held on
October 26 and 28, 1998, the TSI Board considered and reviewed with management a
number of factors relevant to the Merger, including, but not limited to, the
following: (i) historical information concerning TSI's and Eclipsys' respective
businesses, prospects, financial performance and condition, operations,
technology, management and competitive position, including public reports
concerning results of operations during the most recent fiscal year and fiscal
quarter for each company with the Commission; (ii) the financial condition,
results of operations and businesses of TSI and Eclipsys before and after giving
effect to the Merger; (iii) current financial market conditions and historical
market prices, volatility and trading information with respect to the TSI Voting
Common Stock and the Eclipsys Voting Common Stock and the limited trading
history of Eclipsys Voting Common Stock; (iv) the consideration to be received
by TSI's stockholders in the Merger and the relationship between the market
value of the Eclipsys Voting Common Stock to be issued in exchange for each
share of TSI Voting and Non-Voting Common Stock and a comparison of comparable
merger transactions; (v) the belief that the terms of the Merger Agreement,
including the parties' representations, warranties and covenants, and the
conditions to their respective obligations, are reasonable; (vi) the prospects
of TSI as an independent company; (vii) the potential for other third parties to
enter into strategic relationships with or to acquire TSI; (viii) reports from
management, legal and financial advisors as to the results of TSI's due
diligence investigation of Eclipsys; (ix) the financial presentation of BT Alex.
Brown to the TSI Board, including its opinion to the effect that, as of the date
of such opinion and based upon and subject to certain matters stated therein,
the Exchange Ratio was fair, from a financial point of view, to the holders of
TSI Voting and Non-Voting Common Stock; and (x) the impact of the Merger on
TSI's customers and employees. The TSI Board also considered the terms of the
proposed Merger Agreement regarding TSI's rights to consider and negotiate other
acquisition proposals in certain circumstances, as well as the possible effects
of the provisions regarding termination fees.
The TSI Board also considered a number of potential risks relating to the
Merger, including, but not limited to: (i) the risk that the potential benefits
sought in the Merger might not be fully realized; (ii) the possibility that the
Merger might not be consummated and the effect of the public announcement of the
Merger on (a) TSI's sales, operating results and stock price, (b) TSI's ability
to attract and retain key management, sales, marketing, product development and
technical personnel and (c) progress of certain development projects; (iii) the
substantial charges to be incurred in connection with the Merger, including
costs of integrating the businesses and transaction expenses arising from the
Merger; (iv) the risk that despite the efforts of the Surviving Corporation, key
technical and management personnel might not remain employed by the Surviving
Corporation; (v) risks associated with fluctuations in Eclipsys' stock price
prior to closing of the Merger; and (vi) various other risks, including the
risks described under "Risk Factors" herein. The TSI Board believed that these
risks were outweighed by the potential benefits of the Merger.
The foregoing discussion of the information and factors considered by the
TSI Board is not intended to be exhaustive but is believed to include all
material factors considered by the TSI Board. In view of the wide variety of
information and factors considered, the TSI Board did not find it practical to,
and did not, assign any relative or specific weights to the foregoing factors,
and individual directors may have given differing weights to different factors.
47
<PAGE> 56
OPINIONS OF FINANCIAL ADVISORS
ECLIPSYS
Eclipsys retained Morgan Stanley to render a financial opinion letter (the
"Morgan Stanley Opinion") to the Eclipsys Board in connection with the Merger
and related matters based upon Morgan Stanley's qualifications, expertise and
reputation. On October 28, 1998, Morgan Stanley rendered an oral opinion, which
was subsequently confirmed in writing, to the Eclipsys Board that, as of such
date, and based upon and subject to the considerations set forth in the written
opinion, the Exchange Ratio pursuant to the Merger Agreement is fair from a
financial point of view to Eclipsys.
THE FULL TEXT OF THE MORGAN STANLEY OPINION, DATED AS OF OCTOBER 28, 1998,
WHICH SETS FORTH, AMONG OTHER THINGS, THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED,
MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED AS
ANNEX B TO THIS JOINT PROXY STATEMENT/ PROSPECTUS. THE MORGAN STANLEY OPINION IS
DIRECTED TO THE ECLIPSYS BOARD AND THE FAIRNESS OF THE EXCHANGE RATIO PURSUANT
TO THE MERGER AGREEMENT FROM A FINANCIAL POINT OF VIEW TO ECLIPSYS AS OF THE
DATE OF SUCH OPINION AND DOES NOT ADDRESS ANY OTHER ASPECT OF THE MERGER, NOR
DOES IT CONSTITUTE A RECOMMENDATION TO ANY ECLIPSYS STOCKHOLDER AS TO HOW SUCH
STOCKHOLDER SHOULD VOTE AT THE ECLIPSYS SPECIAL STOCKHOLDERS' MEETING HELD IN
CONNECTION WITH THE MERGER. THE SUMMARY OF THE MORGAN STANLEY OPINION SET FORTH
IN THIS JOINT PROXY STATEMENT/ PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF THE MORGAN STANLEY OPINION ATTACHED AS ANNEX B
HERETO. STOCKHOLDERS OF ECLIPSYS ARE URGED TO, AND SHOULD, READ THE MORGAN
STANLEY OPINION CAREFULLY AND IN ITS ENTIRETY.
In arriving at the Morgan Stanley Opinion, Morgan Stanley, among other
things: (i) reviewed certain publicly available financial statements and other
information of TSI and Eclipsys; (ii) reviewed certain internal financial
statements and other financial and operating data concerning TSI and Eclipsys
prepared by the managements of TSI and Eclipsys, respectively; (iii) discussed
the past and current operations and financial condition and the prospects of TSI
with senior executives of TSI; (iv) discussed the past and current operations
and financial condition and the prospects of Eclipsys, including information
relating to certain strategic, financial and operational benefits anticipated
from the Merger, with senior executives of Eclipsys; (v) discussed with the
senior managements of TSI and Eclipsys certain research analyst projections for
TSI and Eclipsys, respectively; (vi) reviewed the pro forma impact of the Merger
on Eclipsys' earnings per share and other financial ratios; (vii) reviewed the
reported prices and trading activity for the TSI Voting Common Stock and the
Eclipsys Voting Common Stock; (viii) compared the financial performance of TSI
and Eclipsys and the prices and trading activity of the TSI Voting Common Stock
and the Eclipsys Voting Common Stock with that of certain other comparable
publicly-traded companies and their securities; (ix) reviewed the financial
terms, to the extent publicly available, of certain comparable acquisition
transactions; (x) participated in discussions among representatives of TSI and
Eclipsys and their financial and legal advisors; (xi) reviewed the draft Merger
Agreement dated October 21, 1998 and certain related documents; and (xii)
performed such other analyses as Morgan Stanley deemed appropriate.
In arriving at the Morgan Stanley Opinion, Morgan Stanley assumed and
relied upon without independent verification the accuracy and completeness of
the information reviewed by Morgan Stanley for the purposes of its opinion. With
respect to the financial projections, including information relating to certain
strategic, financial and operational benefits anticipated from the Merger,
Morgan Stanley assumed that they were reasonably prepared on bases reflecting
the best currently available estimates and judgments of the future financial
performance of TSI and Eclipsys, respectively. In addition, Morgan Stanley
assumed that the Merger will be consummated in accordance with the terms set
forth in the Merger Agreement, including, among other things, that the Merger
would be accounted for as a "pooling-of-interests" business
48
<PAGE> 57
combination in accordance with U.S. GAAP and the Merger will be treated as a
tax-free reorganization and/or exchange pursuant to the Code. Morgan Stanley did
not make any independent valuation or appraisal of the assets or liabilities of
TSI, nor was Morgan Stanley furnished with any such appraisals. The Morgan
Stanley Opinion is necessarily based on economic, market and other conditions as
in effect on, and the information made available to Morgan Stanley as of, the
date of the Morgan Stanley Opinion.
The following is a summary of certain of the financial analyses performed
by Morgan Stanley in connection with its rendering the Morgan Stanley Opinion to
the Eclipsys Board on October 28, 1998.
Historical Common Stock Performance. Morgan Stanley's analysis of TSI
Voting Common Stock performance consisted of an historical analysis of closing
prices and trading volumes over the period from April 18, 1996 to October 23,
1998. During that period, based on closing prices on the Nasdaq National Market,
TSI Voting Common Stock achieved a high closing price of $35.63 on May 21, 1996
and a low closing price of $6.50 on October 7, 1998. Additionally, Morgan
Stanley noted that TSI Voting Common Stock closed at a price of $8.75 on October
23, 1998.
Morgan Stanley's analysis of Eclipsys Voting Common Stock performance
consisted of an historical analysis of closing prices and trading volumes over
the period from August 7, 1998 (the date of the Eclipsys IPO) to October 23,
1998. During that period, based on closing prices on the Nasdaq National Market,
Eclipsys Voting Common Stock achieved a high closing price of $25.45 on October
20, 1998 and a low closing price of $11.88 on August 31, 1998. Morgan Stanley
noted that Eclipsys Voting Common Stock closed at a price of $24.88 on October
23, 1998.
Comparative Stock Price Performance. Morgan Stanley performed an
historical analysis of closing prices from August 7, 1997 to October 23, 1998 of
TSI Voting Common Stock, the S&P 500 Index and an index of comparable healthcare
information services companies ("Comparable Companies") consisting of Cerner
Corp., HBO & Co., IDX Systems Corp. and SMS. Morgan Stanley observed that over
this period, TSI Voting Common Stock decreased 65%, the S&P 500 Index increased
4% and the index of the Comparable Companies increased 19%.
Morgan Stanley also performed an historical analysis of closing prices from
August 7, 1998 to October 23, 1998 of Eclipsys Voting Common Stock, the S&P 500
Index and the Comparable Companies. Morgan Stanley observed that over the period
from August 7, 1998 to October 23, 1998, Eclipsys Voting Common Stock increased
19%, the S&P 500 Index decreased 10% and the index of Comparable Companies
decreased 10%.
Comparable Public Company Analysis. As part of its analysis, Morgan
Stanley compared certain publicly available financial information of certain
comparable companies, including HBO & Co., IDX Systems Corp., Medical Manager
Corporation, Cerner Corp., Quadramed, MECON and SMS ("Information Services
Comparable Companies"). Morgan Stanley then compared this information to the
financial performance of TSI and Eclipsys. Such financial information included
price to earnings multiples, the ratio of the price to earnings multiple to the
forecasted long-term earnings growth rate, and the aggregate value to revenue
multiple, based on First Call median EPS forecasts and research analysts' mid-
range and low estimates of forward operating performance.
Such analyses indicated that as of October 23, 1998 and based on the
mid-range estimates, TSI Voting Common Stock traded at 20.6 times mid-range
forecasted earnings for the calendar year 1998, 16.2 times mid-range forecasted
earnings for the calendar year 1999, (representing a multiple of 0.6 times its
forecasted, long-term earnings growth rate), and aggregate value represented 2.9
times mid-range forecasted revenues for the calendar year 1998. In addition, the
analyses indicated that as of October 23, 1998 and based on the mid-range
estimates, Eclipsys Voting Common Stock traded at 77.7 times forecasted earnings
for the calendar year 1998, 42.9 times forecasted earnings for the calendar year
1999, (representing a multiple of 2.1 times its forecasted, long-term earnings
growth rate), and market capitalization represented 4.3 times forecasted
revenues for the calendar year 1998. These multiples compared to a range of
multiples based on 1998 forecasted earnings (16.3 to 33.7 times), 1999 earnings
(13.0 to 17.0 times), the ratio of the price to 1999 earnings multiple to the
forecasted long-term growth
49
<PAGE> 58
rates (0.7 to 1.2 times), and multiple of aggregate value to forecasted revenues
(1.3 to 6.8 times) for the Information Services Comparable Companies.
No company utilized in the comparable public company analysis or the
comparable stock price performance analysis is identical to TSI or Eclipsys.
Accordingly, an analysis of the results of the foregoing necessarily involves
complex considerations and judgments concerning differences in financial and
operating characteristics of TSI or Eclipsys and other factors that could affect
the public trading value of the companies to which they are being compared. In
evaluating the comparable companies, Morgan Stanley made judgments and
assumptions with regard to industry performance, general business, economic,
market and financial conditions and other matters, many of which are beyond the
control of TSI or Eclipsys, such as the impact of competition on TSI or Eclipsys
and the industry generally, industry growth and/or technological change and the
absence of any material adverse change in the financial condition and prospects
of TSI or Eclipsys or the industry or in the financial markets in general.
Mathematical analysis (such as determining the mean or median) is not, in
itself, a meaningful method of using comparable company data.
Discounted Equity Analysis. Morgan Stanley performed an analysis of the
present value per share of TSI Voting Common Stock's respective future trading
prices based on ranges of the following assumptions: a range of earnings per
share estimates for the years 2000 and 2001; illustrative multiples of earnings
per share, ranging from 16.0 to 20.0; and illustrative discount rates, ranging
from 12.0% to 18.0%. Based on these assumptions, Morgan Stanley calculated the
present value of future theoretical trading values, ranging from approximately
$6 per share to $16 per share.
Analysis of Selected Precedent Transactions. Using publicly available
information, Morgan Stanley reviewed the terms of certain announced, pending or
completed healthcare information services acquisition transactions
(collectively, the "Healthcare Information Services Transactions"). For the
Healthcare Information Services Transactions, the median multiple of aggregate
value to trailing revenues was approximately 4.0.
No transaction utilized as a comparison in the analysis of selected
precedent transactions is identical to the Merger. Accordingly, an analysis of
the results of the foregoing necessarily involves complex considerations and
judgments concerning differences in financial and operating characteristics and
other factors that would affect the acquisition value of the companies to which
it is being compared. In evaluating the precedent transactions, Morgan Stanley
made judgments and assumptions with regard to industry performance, global
business, economic, market and financial conditions and other matters, many of
which are beyond the control of TSI, such as the impact of competition on TSI
and the industry generally, and the absence of any adverse material change in
the financial conditions and prospects of TSI or the industry or the financial
markets in general. Mathematical analysis (such as determining the mean or
median) is not, in itself, a meaningful method of using precedent transactions
data.
Exchange Ratio Analysis. Morgan Stanley analyzed the ratio of closing
prices per share of TSI Voting Common Stock and Eclipsys Voting Common Stock
from August 7, 1998 to October 23, 1998. Morgan Stanley observed that the
implied exchange ratio had averaged 0.44 since August 7, 1998, 0.39 over the
last month period prior to October 23, 1998, and 0.39 over the last two weeks
prior to October 23, 1998. Morgan Stanley also observed that the implied
exchange ratio based on the closing market prices of TSI Voting Common Stock and
Eclipsys Voting Common Stock on October 23, 1998 was 0.35.
Pro Forma Analysis of the Merger. Morgan Stanley performed certain pro
forma analyses of the Merger on the earnings per share of the combined company
in 1999 and 2000. The pro forma results were based on projected earnings and
cash flow derived from First Call estimates for TSI and Eclipsys. The pro forma
analysis also took into account the synergies and cost savings expected to be
derived from the Merger as estimated by management of Eclipsys. Morgan Stanley
noted that the Merger would be accretive to Eclipsys' earnings per share in 1999
and 2000.
50
<PAGE> 59
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description. In
arriving at its opinion, Morgan Stanley considered the results of all of its
analyses as a whole and did not attribute any particular weight to any
particular analysis or factor considered by it. Furthermore, selecting any
portion of Morgan Stanley's analyses, without considering all analyses, would
create an incomplete view of the process underlying the Morgan Stanley Opinion.
In addition, Morgan Stanley may have deemed various assumptions more or less
probable than other assumptions, so that the ranges of valuations resulting from
any particular analysis described above should not be taken to be Morgan
Stanley's view of the actual value of TSI or Eclipsys.
In performing its analysis, Morgan Stanley made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of TSI or Eclipsys. The
analyses performed by Morgan Stanley are not necessarily indicative of actual
values, which may be significantly more or less favorable than suggested by such
analyses. Such analyses were prepared solely as a part of Morgan Stanley's
analysis of the fairness of the exchange ratio pursuant to the Merger Agreement
from a financial point of view to Eclipsys and were provided to the Eclipsys
Board in connection with the delivery of the Morgan Stanley Opinion. The
analyses do not purport to be appraisals or to reflect the prices at which TSI
or Eclipsys might actually be sold. In addition, as described above, the Morgan
Stanley Opinion was one of many factors taken into consideration by the Eclipsys
Board in making its determination to approve the Merger.
Morgan Stanley is an internationally recognized investment banking and
advisory firm. Morgan Stanley, as part of its investment banking business, is
regularly engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for corporate, estate and other purposes. In the
ordinary course of its trading, brokerage and financing activities, Morgan
Stanley and its affiliates may, at any time, have a long or short position in,
and buy and sell the debt or equity securities and senior loans of TSI or
Eclipsys for its account or the account of its customers. Morgan Stanley and its
affiliates have, in the past, provided financial advisory services to Eclipsys
and have received fees for the rendering of such services.
Pursuant to a letter agreement dated October 23, 1998 between Eclipsys and
Morgan Stanley, Eclipsys has agreed to pay Morgan Stanley a fee for rendering
the Morgan Stanley Opinion to the Eclipsys Board in connection with the business
combination. In addition, Eclipsys has agreed to reimburse Morgan Stanley for
its expenses related to the engagement and to indemnify Morgan Stanley and its
affiliates, their respective directors, officers, agents and employees and each
person, if any, controlling Morgan Stanley or any of its affiliates against
certain liabilities, including liabilities under federal securities laws, and
expenses, related to or arising out of Morgan Stanley's engagement and the
transactions in connection therewith.
TSI
TSI engaged BT Alex. Brown to act as its exclusive financial advisor in
connection with the Merger. On October 28, 1998, at a meeting of the TSI Board
held to evaluate the proposed Merger, BT Alex. Brown rendered to the TSI Board
an oral opinion (which opinion was subsequently confirmed by delivery of a
written opinion dated October 29, 1998, the date of execution of the Merger
Agreement) to the effect that, as of the date of such opinion and based upon and
subject to certain matters stated therein, the Exchange Ratio was fair, from a
financial point of view, to the holders of TSI Voting and Non-Voting Common
Stock.
THE FULL TEXT OF THE WRITTEN OPINION OF BT ALEX. BROWN DATED OCTOBER 29,
1998, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS
OF THE REVIEW UNDERTAKEN, IS ATTACHED AS ANNEX C TO THIS JOINT PROXY
STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE. BT ALEX. BROWN'S
OPINION IS DIRECTED TO THE TSI BOARD, ADDRESSES ONLY THE FAIRNESS OF THE
EXCHANGE RATIO FROM A FINANCIAL POINT OF VIEW, AND DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW
51
<PAGE> 60
SUCH STOCKHOLDER SHOULD VOTE AT THE TSI SPECIAL STOCKHOLDERS' MEETING. THE
SUMMARY OF THE OPINION OF BT ALEX. BROWN IN THIS JOINT PROXY
STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT
OF SUCH OPINION ATTACHED AS ANNEX C HERETO. HOLDERS OF TSI VOTING AND NON-VOTING
COMMON STOCK ARE URGED TO, AND SHOULD, READ THE BT ALEX. BROWN OPINION CAREFULLY
AND IN ITS ENTIRETY.
In connection with BT Alex. Brown's role as financial advisor to TSI, and
in arriving at its opinion, BT Alex. Brown reviewed certain publicly available
financial and other information concerning TSI and Eclipsys and certain internal
analyses and other information furnished to or discussed with BT Alex. Brown by
TSI, Eclipsys and their respective advisors. BT Alex. Brown also held
discussions with members of the senior management of TSI and Eclipsys regarding
the business and prospects of their respective companies and the joint prospects
of a combined company. In addition, BT Alex. Brown (i) reviewed the reported
prices and trading activity for TSI Voting Common Stock and Eclipsys Voting
Common Stock, (ii) compared certain financial and stock market information for
TSI and Eclipsys with similar information for certain other companies whose
securities are publicly traded, (iii) reviewed the financial terms of certain
recent business combinations which BT Alex. Brown deemed comparable in whole or
in part, (iv) reviewed the terms of the Merger Agreement, and (v) performed such
other studies and analyses and considered such other factors as BT Alex. Brown
deemed appropriate. In connection with its engagement, BT Alex. Brown was
authorized to approach, and held discussions with, certain third parties to
solicit indications of interest with respect to the acquisition of TSI.
BT Alex. Brown did not assume responsibility for independent verification
of, and did not independently verify, any information, whether publicly
available or furnished to BT Alex. Brown, concerning TSI, Eclipsys and the
combined company, including, without limitation, any financial information,
forecasts or projections considered in connection with the rendering of its
opinion. Accordingly, for purposes of its opinion, BT Alex. Brown assumed and
relied upon the accuracy and completeness of all such information and BT Alex.
Brown did not conduct a physical inspection of any of the properties or assets,
and did not prepare or obtain any independent evaluation or appraisal of any of
the assets or liabilities, of TSI or Eclipsys. With respect to financial
forecasts and projections made available to BT Alex. Brown and used in its
analyses, BT Alex. Brown assumed that they were prepared on bases reflecting
reasonable estimates and judgments as to the matters covered thereby. In
rendering its opinion, BT Alex. Brown expressed no view as to the reasonableness
of such forecasts and projections or the assumptions on which they are based. BT
Alex. Brown's opinion was necessarily based upon economic, market and other
conditions as in effect on, and the information made available to BT Alex. Brown
as of, the date of its opinion.
For purposes of rendering its opinion, BT Alex. Brown assumed that, in all
respects material to its analysis, the representations and warranties of TSI,
Eclipsys and Sub contained in the Merger Agreement are true and correct, TSI,
Eclipsys and Sub will each perform all of the covenants and agreements to be
performed by it under the Merger Agreement and all conditions to the obligations
of each of TSI, Eclipsys and Sub to consummate the Merger will be satisfied
without any waiver thereof. BT Alex. Brown also assumed that all material
governmental, regulatory or other approvals and consents required in connection
with the consummation of the Merger will be obtained and that in connection with
obtaining any necessary governmental, regulatory or other approvals and
consents, or any amendments, modifications or waivers to any agreements,
instruments or orders to which either TSI or Eclipsys is a party or is subject
or by which it is bound, no limitations, restrictions or conditions will be
imposed or amendments, modifications or waivers made that would have a material
adverse effect on TSI or Eclipsys or materially reduce the contemplated benefits
of the Merger to TSI. In addition, BT Alex. Brown was informed by the TSI Board,
and accordingly for purposes of rendering its opinion BT Alex. Brown assumed,
that the Merger will qualify as a tax-free reorganization for federal income tax
purposes and will be accounted for as a pooling-of-interests. BT Alex. Brown did
not express an opinion as to the price at which Eclipsys Voting Common Stock
will trade at any time. No other limitations were imposed by the TSI Board upon
52
<PAGE> 61
BT Alex. Brown with respect to the investigations made or the procedures
followed by it in rendering its opinion.
The following is a summary of the material analyses underlying BT Alex.
Brown's opinion given to the TSI Board in connection with the Merger:
Analysis of Selected Public Companies. BT Alex. Brown compared certain
financial and stock market information for TSI and the following selected
publicly held companies in the healthcare information technology industry: DAOU
Systems, Inc., HCIA Inc., Healthcare Recoveries, Inc., Health Management
Systems, Inc., Mecon, Inc., National Research Corporation, Oacis Healthcare
Holdings Corp., ProxyMed, Inc., and Sunquest Information Systems, Inc.
(collectively, the "Selected Companies"). BT Alex. Brown calculated equity
market values as multiples of, among other things, latest 12 months and
estimated calendar years 1998 and 1999 net income, and adjusted market values
(equity market value, plus debt, less cash) as multiples of, among other things,
latest 12 months EBITDA and earnings before interest and taxes ("EBIT"). All
multiples were based on closing stock prices on October 23, 1998. Net income
estimates for TSI and the Selected Companies were based on analysts' estimates
as reported by I/B/E/S, a market research database. This analysis indicated for
the Selected Companies a range of (i) implied equity market value multiples of
latest 12 months and estimated calendar 1998 and 1999 net income of 12.0x to
32.8x (with a mean of 22.6x), 10.2x to 28.4x (with a mean of 17.2x) and 6.7x to
18.4x (with a mean of 12.1x), respectively, and (ii) implied adjusted market
value multiples of latest 12 months revenues, EBITDA and EBIT of 0.5x to 6.0x
(with a mean of 1.7x), 3.2x to 11.7x (with a mean of 7.5x) and 4.7x to 20.0x
(with a mean of 11.7x), respectively. Based on the closing price of Eclipsys
Voting Common Stock on October 23, 1998, the Exchange Ratio equated to implied
multiples for TSI of latest 12 months and estimated calendar 1998 and 1999 net
income of 36.3x, 24.0x and 18.0x, respectively, and latest 12 months revenues,
EBITDA and EBIT of 4.4x, 12.0x and 13.3x, respectively.
Analysis of Recent Mergers and Acquisitions. BT Alex. Brown reviewed the
purchase prices and implied transaction multiples in eight selected merger and
acquisition transactions effected in the healthcare information technology
industry since January 1, 1995 (the "Selected Transactions"). All multiples were
based on publicly available information at the time of announcement of the
relevant transaction. BT Alex. Brown calculated equity purchase price multiples
of, among other things, latest 12 months and one-year forward net income, and
adjusted purchase price multiples of latest 12 months revenues, EBITDA and EBIT.
This analysis indicated for the Selected Transactions a range of (i) implied
equity purchase price multiples of latest 12 months and one-year forward net
income of 21.9x to 64.7x (with a mean of 42.9x) and 20.8x to 43.7x (with a mean
of 32.0x), respectively, and (ii) implied adjusted purchase price multiples of
latest 12 months revenues, EBITDA and EBIT of 1.5x to 3.4x (with a mean of
2.3x), 6.3x to 25.6x (with a mean of 17.5x) and 9.1x to 40.4x (with a mean of
24.9x), respectively. Based on the closing price of Eclipsys Voting Common Stock
on October 23, 1998, the Exchange Ratio equated to implied multiples for TSI of
latest 12 months and one-year forward net income of 36.3x and 19.1x,
respectively, and latest 12 months revenues, EBITDA and EBIT of 4.4x, 12.0x and
13.3x, respectively.
Discounted Cash Flow Analyses. BT Alex. Brown performed separate
discounted cash flow analyses for each of TSI and Eclipsys to estimate the
present value of the stand-alone, unlevered, after-tax free cash flows that each
of TSI and Eclipsys could generate over the fiscal years 1999 through 2003,
based on extrapolated analysts' estimates as reported by I/B/E/S. The
stand-alone discounted cash flow analysis was determined by (i) adding (x) the
present value of the projected free cash flows over the fiscal years 1999
through 2003 and (y) the present value of the estimated terminal values in
fiscal year 2003 and (ii) subtracting the current net debt for TSI and Eclipsys,
respectively. The range of estimated terminal values for TSI and Eclipsys was
calculated by applying terminal value multiples ranging from 6.5x to 8.5x for
TSI and 15.0x to 17.0x for Eclipsys to the projected fiscal year 2003 EBITDA of
TSI and Eclipsys, respectively. The cash flows and terminal values were
discounted to present value using discount rates ranging from 17% to 19% for TSI
and discount rates ranging from 15% to 17% for Eclipsys. This analysis yielded
an implied equity reference range for Eclipsys Voting Common Stock of
approximately $31.03 to $37.20 per share, as compared to the closing price of
Eclipsys Voting Common Stock on October 23, 1998
53
<PAGE> 62
of $24.88. This analysis yielded an implied equity reference range for TSI
Voting Common Stock of approximately $11.62 to $14.52 per share, as compared to
the equity value implied by the Exchange Ratio of approximately $13.06 based on
the closing price of Eclipsys Voting Common Stock on October 23, 1998.
Premium Analysis. BT Alex. Brown analyzed, among other things, the (i)
premiums paid in 100 change of control transactions having transaction values of
between approximately $100 and $400 million effected since January 1, 1996,
which indicated a range of premiums, based on the target company's stock price
one day and one month prior to public announcement of the transaction, of
approximately (26.7)% to 88.9% (with a mean of 26.7%) and (21.7)% to 105.6%
(with a mean of 38.4%), respectively, (ii) premiums paid in 22 change of control
transactions involving healthcare companies having transaction values between
approximately $100 million and $400 million, which indicated a range of
premiums, based on the target company's stock price one day and one month prior
to public announcement of the transaction, of approximately (26.7)% to 80.5%
(with a mean of 25.5%) and (17.5)% to 87.2% (with a mean of 41.1%),
respectively, and (iii) premiums paid in four change of control transactions
involving healthcare information technology companies having transaction values
between approximately $83 million and $177 million, which indicated a range of
premiums, based on the target company's stock price one day and one month prior
to public announcement of the transaction, of approximately 1.4% to 38.6% (with
a mean of 15.5%) and 14.2% to 78.3% (with a mean of 40.8%), respectively. The
implied premiums payable in the Merger based on the closing price of Eclipsys
Voting Common Stock one day and one month prior to public announcement of the
Merger were approximately 49.3% and 44.0%, respectively.
Historical Exchange Ratio Analysis. BT Alex. Brown compared the Exchange
Ratio with the ratio of the closing prices of TSI Voting Common Stock and
Eclipsys Voting Common Stock on October 23, 1998 and the historical ratio of the
average daily closing prices of TSI Voting Common Stock and Eclipsys Voting
Common Stock over the five-day, 10-day, 20-day, 30-day, 40-day and 50-day
periods ended October 23, 1998 (collectively, the "Market Exchange Ratios"). The
Market Exchange Ratios on October 23, 1998 and during such periods were 0.3518,
0.3672, 0.3831, 0.3809, 0.4033, 0.4172 and 0.4295, respectively, as compared to
the Exchange Ratio of 0.525. The implied premiums derived by comparing the
Market Exchange Ratios to the Exchange Ratio do not necessarily reflect the
underlying market value of either TSI Voting Common Stock or Eclipsys Voting
Common Stock or how the TSI Voting Common Stock, Eclipsys Voting Common Stock or
the common stock of the pro forma combined company may trade in the future.
Pro Forma Merger Analysis. BT Alex. Brown analyzed, among other things,
the pro forma effects of the Merger on the earnings per share (the "EPS") of
Eclipsys in calendar years 1999 and 2000 based on analysts' estimates as
reported by I/B/E/S, both before and after giving effect to certain cost savings
and other potential synergies anticipated by the managements of TSI and Eclipsys
to result from the Merger (excluding non-recurring costs resulting from the
Merger). This analysis indicated that the Merger could be accretive to the EPS
of Eclipsys in each of the calendar years analyzed both before and after giving
effect to potential synergies and other cost savings anticipated by the
managements of TSI and Eclipsys to result from the Merger (excluding
non-recurring costs resulting from the Merger). BT Alex. Brown also analyzed the
potential pro forma effect of the Merger on TSI's EPS during calendar years 1999
and 2000 relative to TSI on a stand-alone basis. This analysis indicated that
the Merger could be dilutive to TSI's EPS in calendar years 1999 and 2000. The
actual operating or financial results achieved by the pro forma combined company
may vary from projected results and variations may be material as a result of
business and operational risks, the timing and amount of synergies, the costs
associated with achieving such synergies and other factors.
Contribution Analysis. BT Alex. Brown analyzed the relative contributions
of TSI and Eclipsys to, among other things, the net income, revenues, EBITDA and
EBIT of the pro forma combined company for the 12 month period ended June 30,
1998, the estimated net income of the pro forma combined company for calendar
years 1999 and 2000 based on analysts' estimates as reported by I/B/E/S and the
estimated book value of the pro forma combined company as of June 30, 1998, and
compared such contributions to the pro forma ownership of the current holders of
TSI Common Stock in the pro forma
54
<PAGE> 63
combined company. This analysis indicated that (i) for the 12 month period ended
June 30, 1998, TSI would have contributed approximately 29.5% of revenues, 44.9%
of EBITDA and 100.0% of EBIT for the pro forma combined company; (ii) in
calendar years 1999 and 2000, TSI would contribute approximately 52.9% and
48.9%, respectively, of the net income for the pro forma company, and (iii) as
of June 30, 1998, TSI would contribute approximately 62.0% of book value for the
pro forma combined company. A contribution percentage for the latest 12 month
period net income was not meaningful as the pro forma combined company had
negative data for such operating measure. Based on the Exchange Ratio of 0.525,
current holders of TSI Voting and Non-Voting Common Stock would own
approximately 32.7% of the pro forma combined company upon consummation of the
Merger.
Other Factors. In rendering its opinion, BT Alex. Brown also reviewed and
considered, among other things: (i) historical and projected financial data for
TSI and Eclipsys; (ii) historical market prices and trading volumes for TSI
Voting Common Stock and Eclipsys Voting Common Stock and the relationship
between movements in TSI Voting Common Stock, the movements in the common stock
of the Selected Companies and movements in the S&P 500 Index and (iii) selected
analysts' reports on TSI and Eclipsys, including EPS and growth rate estimates
of such analysts for TSI and Eclipsys.
The summary set forth above does not purport to be a complete description
of the opinion of BT Alex. Brown to the TSI Board or the financial analyses
performed and factors considered by BT Alex. Brown in connection with its
opinion. The preparation of a fairness opinion is a complex analytic process
involving various determinations as to the most appropriate and relevant methods
of financial analyses and the application of those methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
summary description. BT Alex. Brown believes that its analyses and the summary
set forth above must be considered as a whole and that selecting portions of its
analyses, without considering all analyses, or selecting portions of the above
summary, without considering all factors and analyses, could create a misleading
or incomplete view of the processes underlying such analyses and opinion. In
performing its analyses, BT Alex. Brown made numerous assumptions with respect
to industry performance, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of TSI and
Eclipsys. No company, transaction or business used in such analyses as a
comparison is identical to TSI, Eclipsys, the pro forma combined company or the
proposed Merger, nor is an evaluation of the results of such analyses entirely
mathematical; rather, such analyses involve complex considerations and judgments
concerning financial and operating characteristics and other factors that could
affect the Merger, public trading or other values of the companies, business
segments or transactions being analyzed. The estimates contained in such
analyses and the ranges of valuations resulting from any particular analysis are
not necessarily indicative of actual values or future results, which may be
significantly more or less favorable than those suggested by such analyses. In
addition, analyses relating to the value of businesses or securities do not
purport to be appraisals or to reflect the prices at which businesses or
securities actually may be sold. Accordingly, such analyses and estimates are
inherently subject to substantial uncertainty.
The type and amount of consideration payable in the Merger was determined
through negotiation between TSI and Eclipsys. Although BT Alex. Brown provided
financial advice to TSI during the course of these negotiations, the decision to
enter into the Merger was solely that of the TSI Board. BT Alex. Brown's opinion
and financial analyses were only one of many factors considered by the TSI Board
in its evaluation of the proposed Merger and should not be viewed as
determinative of the views of the TSI Board or the management of TSI with
respect to the Exchange Ratio or the Merger.
Pursuant to the terms of BT Alex. Brown's engagement, TSI has agreed to pay
BT Alex. Brown an aggregate financial advisory fee equal to 0.8% of the
aggregate consideration (including liabilities assumed) payable in connection
with the Merger, a significant portion of which is contingent upon consummation
of the Merger. In addition, TSI has agreed to reimburse BT Alex. Brown for its
reasonable travel and other out-of-pocket expenses, including reasonable fees
and disbursements of counsel, and to indemnify BT Alex. Brown and certain
related parties against certain liabilities, including certain liabilities under
the federal securities laws, relating to, or arising out of, its engagement.
55
<PAGE> 64
BT Alex. Brown is an internationally recognized investment banking firm
and, as a customary part of its investment banking business, is engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, private placements and valuations for
estate, corporate and other purposes. TSI selected BT Alex. Brown based on BT
Alex. Brown's reputation, expertise and familiarity with TSI. BT Alex. Brown and
its affiliates have in the past provided financial services to TSI unrelated to
the proposed Merger, for which services BT Alex. Brown and its affiliates have
received compensation. BT Alex. Brown maintains a market in TSI Voting Common
Stock and regularly publishes research reports regarding the businesses and
securities of TSI and other publicly traded companies in the healthcare
information technology industry. In the ordinary course of business, BT Alex.
Brown may actively trade or hold the securities and other instruments and
obligations of TSI and Eclipsys for its own account and the accounts of
customers and, accordingly, may at any time hold a long or short position in
such securities, instruments or obligations.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
If the Merger is completed, two directors of TSI, Robert F. Raco and
Patrick T. Hackett will be appointed to serve on the Eclipsys Board of
Directors.
Eclipsys has agreed to certain indemnification and insurance arrangements
for existing and former directors and officers of TSI. From and after the
Effective Time, Eclipsys has agreed to, and will cause the Surviving Corporation
to agree to, indemnify each present and former director and officer of TSI
against any costs or expenses incurred in connection with claims arising out of
or pertaining to matters occurring prior to the Effective Time. In addition, for
a period of three years after the Effective Time, Eclipsys has agreed to cause
the Surviving Corporation to maintain a directors' and officers' liability
insurance policy for the benefit of the directors and officers of TSI who were
covered by TSI's policy immediately prior to the Effective Time, with coverage
in an amount and scope at least as favorable as TSI's existing coverage;
provided that neither Eclipsys nor the Surviving Corporation shall be required
to expend in excess of 200% of the annual premium paid by TSI as of the date of
the Merger Agreement for such coverage except to the extent any excess amount is
attributable to Eclipsys' claims history or price increases in the market that
are unrelated to TSI specifically. If the premium at any time exceeds such
limitation, the Surviving Corporation will maintain insurance policies that
provide the maximum and best coverage available at an annual premium equal to
such limitation. If any legal action has been pending at any time subsequent to
the second anniversary of the Effective Time against any person currently
covered by TSI's directors' and officers' liability insurance policy and such
pending action would be covered in whole or in part by such policy, the
Surviving Corporation will continue to maintain such policy in effect (subject
to the limitations above) until the fifth anniversary of the Effective Time.
In addition, Eclipsys has agreed to arrange for certain registration rights
for Warburg following the Merger. See "Description of Eclipsys Capital
Stock -- Registration Rights."
OWNERSHIP AND VOTING OF STOCK
As of the Record Date, directors and executive officers of Eclipsys and
their affiliates may be deemed to have voting control over approximately 59.4%
of the outstanding shares of Eclipsys Voting Common Stock. See "Principal
Stockholders of Eclipsys."
As of the Record Date, directors and executive officers of TSI and their
affiliates may be deemed to have voting control over approximately 34.9% of the
outstanding shares of TSI Voting Common Stock. See "Principal Stockholders of
TSI."
Warburg, Pincus Ventures, L.P., Robert F. Raco, Christine Shapleigh and
Donald C. Cook have each entered into Voting Agreements, dated as of October 29,
1998, with Eclipsys pursuant to which they have agreed to vote all shares of TSI
Voting Common Stock over which they exercise voting control (an aggregate of
6,212,583 shares of TSI Voting Common Stock on the Record Date) in favor of
approval and adoption of the Merger Agreement and the Merger.
General Atlantic Partners 28, L.P., General Atlantic Partners 38, L.P.,
General Atlantic Partners 47, L.P., General Atlantic Partners 48, L.P., GAP
Coinvestment Partners, L.P., Harvey J. Wilson, Wilfam
56
<PAGE> 65
Ltd. and Partners HealthCare System, Inc. have each entered into Voting
Agreements, dated as of October 29, 1998, with TSI pursuant to which they have
agreed to vote all shares of Eclipsys Voting Common Stock over which they
exercise voting control (an aggregate of 10,470,508 shares of Eclipsys Voting
Common Stock on the Record Date) in favor of the Eclipsys Voting Proposal.
ACCOUNTING TREATMENT
The Merger is intended to qualify as a pooling of interests for financial
reporting purposes under U.S. GAAP. Under this method of accounting, the
recorded assets and liabilities of Eclipsys and TSI will be carried forward to
the combined company at their recorded amounts. The reported operating results
of the separate companies for periods prior to the combination will be combined
and restated as the operating results of the combined company. A condition to
the Merger is that Eclipsys and TSI each shall have received a letter at the
closing of the Merger from PricewaterhouseCoopers LLP regarding its concurrence,
as of the date of the letter, with the conclusions of management as to the
appropriateness of pooling-of-interests accounting treatment, under Accounting
Principles Board Opinion No. 16 and related interpretations, for the Merger.
Each of the affiliates of Eclipsys and TSI has executed a written agreement
to the effect that such person will not transfer shares of common stock of
either Eclipsys or TSI during the period beginning 30 days prior to the
Effective Time and ending on the date that Eclipsys publishes financial
statements which reflect 30 days of combined operations of Eclipsys and TSI
(which agreements relate to the ability of Eclipsys to account for the Merger as
a pooling of interests).
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion addresses the material federal income tax
considerations of the Merger that are applicable to holders of TSI Voting and
Non-Voting Common Stock. TSI stockholders should be aware that this section does
not deal with all federal income tax considerations that may be relevant to
particular TSI stockholders in light of their particular circumstances, such as
stockholders who are dealers in securities, who are foreign persons or who
acquired their TSI Voting or Non-Voting Common Stock through stock option or
stock purchase programs or in other compensatory transactions or who otherwise
hold convertible securities, options or warrants. In addition, the following
discussion does not address the tax consequences of transactions effectuated
prior to or after the Merger (whether or not such transactions are in connection
with the Merger), including, without limitation, the exercise of options,
warrants or other rights to purchase TSI Voting or Non-Voting Common Stock in
anticipation of the Merger. Finally, no foreign, state or local tax
considerations are addressed herein. ACCORDINGLY, TSI STOCKHOLDERS ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE
MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES TO THEM.
The following discussion is based on the Internal Revenue Code of 1986, as
amended (the "Code"), applicable Treasury Regulations, judicial authority and
administrative rulings and practice, all as of the date hereof. The Internal
Revenue Service (the "IRS") is not bound by such discussion and is not precluded
from adopting a contrary position. In addition, there can be no assurance that
future legislative, judicial or administrative changes or interpretations will
not adversely affect the accuracy of the statements and conclusions set forth
herein. Any such changes or interpretations could be applied retroactively and
could affect the tax consequences of the Merger to Eclipsys, TSI and their
respective stockholders.
The Merger is intended to constitute a "reorganization" within the meaning
of Section 368(a) of the Code (a "Reorganization"). Assuming the Merger is a
Reorganization, then, subject to the assumptions, limitations and qualifications
referred to herein, the Merger should result in the following federal income tax
consequences:
(a) No gain or loss will be recognized by the holders of TSI Voting
and Non-Voting Common Stock upon the receipt of Eclipsys Voting Common
Stock solely in exchange for such TSI Voting and Non-Voting Common Stock in
the Merger (except to the extent of cash received in lieu of fractional
shares).
57
<PAGE> 66
(b) The aggregate tax basis of the Eclipsys Voting Common Stock so
received by TSI stockholders in the Merger (including any fractional share
of Eclipsys Voting Common Stock not actually received) will be the same as
the aggregate tax basis of the TSI Voting and Non-Voting Common Stock
surrendered in exchange therefor.
(c) The holding period of the Eclipsys Voting Common Stock received by
each TSI stockholder in the Merger will include the holding period for the
TSI Voting and Non-Voting Common Stock surrendered in exchange therefor,
provided that the TSI Voting and Non-Voting Common Stock so surrendered is
held as a capital asset.
(d) Cash payments received by holders of TSI Voting and Non-Voting
Common Stock in lieu of a fractional share will be treated as received in
redemption of such fractional share, subject to the provisions of Section
302 of the Code, as if such fractional share of Eclipsys Voting Common
Stock had been issued in the Merger and then redeemed by Eclipsys.
(e) Each of Eclipsys, Sub and TSI will be a party to the
Reorganization and as such will not recognize gain or loss solely as a
result of the Merger.
Neither Eclipsys nor TSI has requested a ruling from the IRS in connection
with the Merger. However, it is a condition of the respective obligations of
Eclipsys and TSI to consummate the Merger that such parties receive opinions
from their respective counsel (the "Tax Opinions") to the effect that, for
federal income tax purposes, the Merger will constitute a Reorganization. These
Tax Opinions neither bind the IRS nor preclude the IRS from adopting a contrary
position. The Tax Opinions will be subject to certain assumptions and
qualifications and will be based on the truth and accuracy of certain
representations of Eclipsys, TSI and Sub and certain stockholders of TSI.
A successful IRS challenge to the Reorganization status of the Merger would
result in a TSI stockholder recognizing gain or loss with respect to each share
of TSI Voting and Non-Voting Common Stock surrendered equal to the difference
between the stockholder's basis in such share and the fair market value, as of
the Effective Time, of the Eclipsys Voting Common Stock received in exchange
therefor. In such event, a stockholder's aggregate basis in the Eclipsys Voting
Common Stock so received would equal its fair market value, and the
stockholder's holding period for such stock would begin the day after the
Merger.
REGULATORY APPROVALS
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the "HSR Act") and the rules promulgated thereunder by the Federal Trade
Commission (the "FTC"), the Merger may not be consummated until notifications
have been given and certain information has been furnished to the FTC and the
Antitrust Division of the Department of Justice (the "Antitrust Division") and
specified waiting period requirements have been satisfied. Early termination of
the waiting period under the HSR Act was granted on November 24, 1998. At any
time before or after consummation of the Merger, and notwithstanding that the
HSR Act waiting period has terminated, the Antitrust Division or the FTC could
take such action under the antitrust laws as it deems necessary or desirable in
the public interest, including seeking to enjoin the consummation of the Merger
or seeking divestiture of assets of Eclipsys or TSI. At any time before or after
the Effective Time of the Merger, and notwithstanding that the HSR Act waiting
period has terminated, any state could take such action under its antitrust laws
as it deems necessary or desirable in the public interest. Such action could
include seeking to enjoin the consummation of the Merger or seeking divestiture
of assets of Eclipsys or TSI. Private parties may also seek to take legal action
under the antitrust laws under certain circumstances.
Based on information available to them, Eclipsys and TSI believe that the
Merger can be effected in compliance with federal and state antitrust laws.
However, there can be no assurance that a challenge to the consummation of the
Merger on antitrust grounds will not be made or that, if such a challenge were
made, Eclipsys and TSI would prevail or would not be required to accept certain
conditions, including the divestitures of assets, in order to consummate the
Merger.
58
<PAGE> 67
FEDERAL SECURITIES LAW CONSEQUENCES
All shares of Eclipsys Voting Common Stock received by TSI stockholders in
the Merger will be freely transferable, except that shares of Eclipsys Voting
Common Stock received by persons who are deemed to be "affiliates" of TSI prior
to the Merger may be resold by them only in transactions permitted by the resale
provisions of Rule 145 promulgated under the Securities Act of 1933, as amended
(the "Securities Act") (or Rule 144 in the case of such persons who become
affiliates of Eclipsys) or otherwise in compliance with (or pursuant to an
exemption from) the registration requirements of the Securities Act. Persons
deemed to be affiliates of Eclipsys or TSI are those individuals or entities
that control, are controlled by, or are under common control with, such party
and generally include executive officers and directors of such party as well as
certain principal stockholders of such party. The Merger Agreement requires TSI
to use its best efforts to cause each of its affiliates to execute a written
agreement to the effect that such person will not offer or sell or otherwise
dispose of any of the shares of Eclipsys Voting Common Stock issued to such
person in or pursuant to the Merger except in compliance with the Securities Act
and the rules and regulations promulgated by the Commission thereunder. This
Joint Proxy Statement/Prospectus does not cover any resales of Eclipsys Voting
Common Stock received by affiliates of TSI in the Merger.
STOCK MARKET QUOTATION
It is a condition to the Merger that the shares of Eclipsys Voting Common
Stock to be issued pursuant to the Merger Agreement be approved for quotation on
the Nasdaq National Market, subject to official notice of issuance. An
application for listing the shares of Eclipsys Voting Common Stock on the Nasdaq
National Market has been filed.
APPRAISAL RIGHTS
TSI stockholders voting against the Merger and the Merger Agreement who
have filed with TSI prior to the stockholder vote at the TSI Special
Stockholders' Meeting a written objection to the Merger along with a statement
that they intend to demand payment for their shares are entitled under the
Massachusetts Business Corporation Law to seek an appraisal of the fair value of
their shares. No such shares will be converted into shares of Eclipsys Voting
Common Stock as part of the Merger. If a TSI stockholder has not properly
notified TSI prior to the stockholder vote at the TSI Special Stockholders'
Meeting, has withdrawn the demand for appraisal or has voted in favor of the
Merger, such stockholder's shares will be converted into shares of Eclipsys
Voting Common Stock in accordance with the terms of the Merger Agreement.
Under the Delaware General Corporation Law, the Eclipsys stockholders are
not entitled to dissenters' appraisal rights in connection with the Merger
because Eclipsys is not a constituent corporation in the Merger.
59
<PAGE> 68
UNAUDITED PRO FORMA CONDENSED COMBINED
CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements
reflect adjustments to the historical consolidated balance sheets and statements
of operations of Eclipsys and TSI to give effect to the Merger, using the
pooling-of-interests method of accounting for business combinations, and to
certain other acquisitions by Eclipsys and TSI as discussed below.
The unaudited pro forma condensed combined statements of operations for the
years ended December 31, 1995, 1996 and 1997 and for the nine months ended
September 30, 1998 assume the Merger was effected on January 1, 1995. Eclipsys'
December 31 fiscal year end consolidated financial statements have been combined
with TSI's September 30 fiscal year end consolidated financial statements.
Eclipsys' unaudited consolidated financial statements for the nine months ended
September 30 have been combined with TSI's unaudited consolidated financial
statements for the nine months ended June 30.
The unaudited pro forma combined condensed financial information of
Eclipsys for the year ended December 31, 1997 and the nine months ended
September 30, 1998 includes adjustments to give effect to:
- the Alltel Acquisition
- the SDK Acquisition
- the Emtek Acquisition
- the return by AIS to Eclipsys for cancellation of 11,000 shares of
Redeemable Preferred Stock in return for extinguishing claims against
AIS related to the Alltel Acquisition (the "AIS Settlement")
- the MSA Buyout
- the issuance of shares of Convertible Preferred Stock for total
consideration of $9.0 million in February 1998 (the "1998 Preferred
Stock Issuance") and the use of the proceeds therefrom to repay $9.0
million under the Term Loan
- the scheduled repayment in April 1998 (the "SDK Partial Repayment") of
$4.0 million of principal and accrued interest of the $7.6 million of
SDK Notes
- the January 1998 scheduled $2.0 million payment to AIS under the MSA
- borrowings under the Revolver to fund the MSA Buyout and the Simione
Investment
- the conversion of Eclipsys' Convertible Preferred Stock in connection
with the Eclipsys IPO
- the Eclipsys IPO and the use of a portion of the proceeds therefrom to
repay the outstanding balance under the Revolver and the remaining
outstanding balance under the SDK Notes and to redeem the remaining
Redeemable Preferred Stock with a face value of $34.5 million
The unaudited pro forma condensed combined balance sheet at September 30,
1998 reflects the Eclipsys September 30, 1998 balance sheet combined with the
TSI June 30, 1998 balance sheet, adjusted for the HealthVISION Acquisition and
to conform to the Eclipsys financial presentation.
Eclipsys acquired Alltel effective January 24, 1997 for an aggregate
purchase price of $201.5 million, including liabilities assumed of $58.4 million
and after giving effect to the cancellation of 4,500 shares of Redeemable
Preferred Stock held by Alltel related to an October 1997 settlement of certain
matters related to the acquisition. Consideration paid consisted of $104.8
million in cash, 15,500 shares of Redeemable Preferred Stock valued at
approximately $10.3 million, 2,077,497 shares of Convertible Preferred Stock
valued at approximately $26.1 million, deferred payments due under the MSA over
four years valued at $9.5 million and transaction costs of approximately $2.0
million.
Eclipsys acquired SDK effective June 26, 1997 for an aggregate purchase
price of $16.5 million, including 499,997 shares of Eclipsys Voting Common Stock
valued at approximately $3.2 million, $2.2 million in cash, the SDK Notes
aggregating $7.6 million and assumed liabilities of approximately $3.5 million.
Eclipsys acquired Emtek effective January 30, 1998 for an aggregate
purchase price of approximately $11.7 million, including 1,000,000 shares of
Eclipsys Voting Common Stock valued at $9.1 million and
60
<PAGE> 69
liabilities assumed of approximately $12.3 million. In addition, Motorola agreed
to pay Eclipsys $9.6 million in cash for working capital purposes.
The unaudited pro forma combined condensed financial information of TSI for
the year ended September 30, 1997 and the nine months ended June 30, 1998
includes adjustments to give effect to the HealthVISION Acquisition. On December
3, 1998, TSI completed its acquisition of the remaining 80.5% of HealthVISION
not already owned by TSI for cash in the amount of $25.6 million, plus an
earn-out of up to $10.8 million if specified milestones are met. The acquisition
will be accounted for under the purchase method of accounting, reflecting an
estimated aggregate purchase price, including TSI's initial 1997 investment, of
$40.7 million, which includes $6.4 million previously paid by TSI and $9.3
million of assumed liabilities, net of cash acquired. The results of operations
of HealthVISION will be included in TSI's financial statements from the date of
acquisition.
The pro forma and pro forma combined adjustments are based upon available
information and certain assumptions that Eclipsys and TSI believes are
reasonable under the circumstances. The unaudited pro forma combined condensed
financial information should be read in conjunction with the historical
financial statements of Eclipsys, TSI, Alltel, SDK and HealthVISION and the
respective notes thereto, "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Eclipsys" and the other financial
information included herein. The unaudited pro forma combined condensed
financial information is provided for information purposes only and does not
purport to be indicative of the results which would have been obtained had the
Merger been completed on the date indicated or which may be expected to occur in
the future.
61
<PAGE> 70
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ECLIPSYS(1) TSI(2)(3) ADJUSTMENTS COMBINED
----------- ----------- ----------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Systems and services............................ $-- $27,386 2$7,386
Costs and expenses:
Cost of systems and services revenues........... -- 7,471 7,471
Marketing and sales............................. -- 3,967 3,967
Research and development........................ -- 2,724 2,724
General and administrative...................... -- 2,299 2,299
Depreciation and amortization................... -- 1,379 1,379
--- ------- -----
Total costs and expenses................ -- 17,840 17,840
--- ------- -----
Income from operations............................ -- 9,546 9,546
Interest income, net.............................. -- (429) (429)
--- ------- -----
Income before income tax provision.............. -- 9,975 9,975
Income tax provision.............................. -- (4,349) (4,349)
--- ------- -----
Net income........................................ -- 5,626 5,626
Net income available to common stockholders....... $-- $ 5,626 $5,626
=== ======= =====
Net income available to common stockholders per
share:
Basic........................................... $-- $ 0.19 $0.36
Diluted......................................... $-- $ 0.19 $0.36
Weighted average common shares outstanding:
Basic........................................... -- 30,060 15,781(4)
Diluted......................................... -- 30,060 15,781(4)
</TABLE>
- ---------------
(1) Eclipsys was formed in December 1995 and commenced operations in 1996.
Accordingly, the Unaudited Pro Forma Condensed Combined Statement of
Operations only reflects the operating results of TSI.
(2) Reflects the operations of TSI for the fiscal year ended September 30, 1995.
(3) The statement of operations data for TSI reflects the reclassification of
certain costs and expenses, principally depreciation and amortization, to
conform to the presentation of Eclipsys' consolidated statement of
operations.
(4) Gives effect to the conversion in the Merger of TSI common share equivalents
into Eclipsys common share equivalents based on the 0.525 Exchange Ratio.
62
<PAGE> 71
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ECLIPSYS TSI(1) ADJUSTMENTS COMBINED
-------- ----------- ----------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Systems and services....................... $ -- $34,269 $34,269
Costs and expenses:
Cost of systems and services revenues...... -- 9,313 9,313
Marketing and sales........................ 770 4,424 5,194
Research and development................... 1,704 3,192 4,896
General and administrative................. 603 2,315 2,918
Compensation charge........................ -- 3,024 3,024
Depreciation and amortization.............. 32 1,443 1,475
------- ------- -------
Total costs and expenses.............. 3,109 23,711 26,820
------- ------- -------
Income (loss) from operations................... (3,109) 10,558 7,449
Interest expense (income), net.................. (156) (53) (209)
------- ------- -------
Income (loss) before income tax
provision................................ (2,953) 10,611 7,658
Income tax provision............................ -- (4,324) (4,324)
------- ------- -------
Income (loss) before extraordinary item......... (2,953) 6,287 3,334
Extraordinary item:
Loss on early extinguishment of debt, net
of taxes................................. -- (2,149) (2,149)
------- ------- -------
Net income (loss)............................... (2,953) 4,138 1,185
Dividends on Series A non-voting preferred
stock......................................... -- (593) (593)
------- ------- -------
Income (loss) available to common
stockholders.................................. $(2,953) $ 3,545 $ 592
======= ======= =======
Income (loss) before extraordinary item
available to common stockholders per share(2):
Basic...................................... $ (0.98) $ 0.43 $ 0.28
Diluted.................................... $ (0.98) $ 0.35 $ 0.24
Net income (loss) per common share:
Basic...................................... $ (0.98) $ 0.27 $ 0.06
Diluted.................................... $ (0.98) $ 0.22 $ 0.05
Weighted average common shares outstanding:
Basic...................................... 3,022 13,214 9,959(3)
Diluted.................................... 3,022 16,137 11,494(3)
</TABLE>
- ---------------
(1) Represents the historical results of operations of TSI for the fiscal year
ended September 30, 1996 and reflects the reclassification of certain costs
and expenses, principally depreciation and amortization, to conform to the
presentation of Eclipsys' consolidated statement of operations.
(2) TSI and Pro Forma Combined information represents income before
extraordinary item after reflecting accretion of $593,000 of dividends on
TSI non-voting preferred stock.
(3) Gives effect to the conversion in the Merger of TSI common share equivalents
into Eclipsys common share equivalents based on the 0.525 Exchange Ratio.
63
<PAGE> 72
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
ECLIPSYS
---------------------------------------------------------------------
ACQUISITION
AND OTHER ECLIPSYS
ECLIPSYS ALLTEL(1) SDK(2) EMTEK(3) ADJUSTMENTS PRO FORMA TSI(4)
---------- --------- ------ -------- ----------- --------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Systems and services............. $ 89,722 $ 6,064 $3,037 $14,274 $113,097 $44,565
Hardware......................... 4,355 122 486 8,464 13,427 --
--------- ------- ------ -------- -------- -------
Total revenues............. 94,077 6,186 3,523 22,738 126,524 44,565
--------- ------- ------ -------- -------- -------
Costs and expenses:
Cost of systems and services
revenues....................... 77,083 4,277 2,193 11,459 $ 341(7) 95,353 11,834
Cost of hardware revenues........ 2,953 104 340 7,394 10,791 --
Marketing and sales.............. 13,662 660 336 6,235 20,893 6,805
Research and development......... 15,714 794 -- 12,804 29,312 3,725
General and administrative....... 5,672 621 992 6,671 13,956 3,829
Depreciation and amortization.... 9,710 568 -- 904 703(7) 11,885 1,632
Write off of in-process research
and development(9)............. 99,189 -- -- -- (99,189) -- 6,293
--------- ------- ------ -------- -------- -------
Total costs and expenses... 223,983 7,024 3,861 45,467 182,190 34,118
--------- ------- ------ -------- -------- -------
Income (loss) from operations...... (129,906) (838) (338) (22,729) (55,666) 10,447
Interest expense (income), net..... 1,154 379 (19) -- (1,683)(10) (169) (2,501)
Foreign currency transaction
loss............................. -- -- -- -- -- --
--------- ------- ------ -------- -------- -------
(131,060) (1,217) (319) (22,729) (55,497) 12,948
Income tax benefit (provision)..... -- 437 -- -- (437)(12) -- (7,629)
--------- ------- ------ -------- -------- -------
Net income (loss)(14).............. (131,060) (780) (319) (22,729) (55,497) 5,319
Dividends and accretion on
mandatorily redeemable preferred
stock............................ (5,850) -- -- -- 5,850 (15) -- --
Preferred stock conversion(17)..... (3,105) -- -- -- (3,105) --
--------- ------- ------ -------- -------- -------
Net income (loss) available to
common
stockholders..................... $(140,015) $ (780) $(319) $(22,729) $(58,602) $ 5,319
========= ======= ====== ======== ======== =======
Net income (loss) available to
common stockholders per share:
Basic............................ $ (39.73) $ (2.98) $ 0.31
Diluted.......................... $ (39.73) $ (2.98) $ 0.27
Weighted average common shares
outstanding:
Basic............................ 3,524 19,638 17,435
Diluted.......................... 3,524 19,638 19,977
<CAPTION>
HEALTH- PRO FORMA PRO FORMA
VISION(5) ADJUSTMENTS COMBINED
--------- ----------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues:
Systems and services............. $ 8,607 $ (500)(6) $165,769
Hardware......................... 547 13,974
-------- --------
Total revenues............. 9,154 179,743
-------- --------
Costs and expenses:
Cost of systems and services
revenues....................... 4,814 10,990 (8) 122,991
Cost of hardware revenues........ 398 11,189
Marketing and sales.............. 4,498 32,196
Research and development......... 6,189 (5)(6) 39,221
General and administrative....... 1,907 19,692
Depreciation and amortization.... 1,612 15,129
Write off of in-process research
and development(9)............. -- 6,293
-------- --------
Total costs and expenses... 19,418 246,711
-------- --------
Income (loss) from operations...... (10,264) (66,968)
Interest expense (income), net..... 3 1,280 (11) (1,387)
Foreign currency transaction
loss............................. 10 10
-------- --------
(10,277) (65,591)
Income tax benefit (provision)..... (75) 7,704 (13) --
-------- --------
Net income (loss)(14).............. (10,352) (65,591)
Dividends and accretion on
mandatorily redeemable preferred
stock............................ (795) 795 (16)
Preferred stock conversion(17)..... -- (3,105)
-------- --------
Net income (loss) available to
common
stockholders..................... $(11,147) $(68,696)
======== ========
Net income (loss) available to
common stockholders per share:
Basic............................ $ (2.39)
Diluted.......................... $ (2.39)
Weighted average common shares
outstanding:
Basic............................ 28,791(18)
Diluted.......................... 28,791(18)
</TABLE>
64
<PAGE> 73
- ---------------
(1) Represents the historical results of operations of Alltel for the period
from January 1, 1997 through January 23, 1997.
(2) Represents the historical results of operations of SDK from January 1,
1997 through June 26, 1997.
(3) Represents the historical results of operations of Emtek from January 1,
1997 through December 31, 1997.
(4) Represents the historical results of operations of TSI for the year ended
September 30, 1997 and reflects the reclassification of certain costs and
expenses, principally depreciation and amortization, to conform to the
presentation of Eclipsys' historical consolidated statement of operations.
(5) Represents the historical results of operations of HealthVISION for the
year ended December 31, 1997 and reflects the reclassification of certain
costs and expenses, principally depreciation and amortization, to conform
to the presentation of Eclipsys' historical consolidated statement of
operations.
(6) Represents the elimination of certain intercompany transactions between
TSI and HealthVISION.
(7) Represents adjustments for amortization expense related to the Eclipsys
Acquisitions and the Alltel Renegotiation as if they had occurred January
1, 1997 as follows (in thousands):
<TABLE>
<CAPTION>
ALLTEL SDK EMTEK TOTAL
------ ----- ------- -------
<S> <C> <C> <C> <C>
MSA............................................ $ 200 $ -- $ -- $ 200
Amortization of capitalized software reflected
in the historical accounts prior to the
Eclipsys Acquisitions........................ (377) (197) (1,794) (2,368)
Acquired technology.......................... 1,763 321 425 2,509
------ ----- ------- -------
$1,586 $ 124 $(1,369) $ 341
====== ===== ======= =======
Ongoing customer relationships................. $ 181 $ -- $ -- $ 181
Goodwill....................................... 66 456 -- 522
------ ----- ------- -------
$ 247 $ 456 $ -- $ 703
====== ===== ======= =======
</TABLE>
The Eclipsys Acquisitions were accounted for using the purchase method of
accounting and accordingly the net assets acquired have been recorded at
estimated fair value on the date of acquisition and the historical
statement of operations data of Eclipsys reflect the results of operations
from these businesses from the date acquired. In connection with the
Eclipsys Acquisitions, Eclipsys acquired intangible assets as follows (in
thousands):
<TABLE>
<CAPTION>
VALUE FIRST YEAR AMORTIZATION
------------------------- -------------------------
ALLTEL SDK EMTEK ALLTEL SDK EMTEK
------- ------ ------ -------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Acquired technology.............. $42,312 $3,205 $2,125 $21,156 $641 $425
Management and service
agreement...................... 9,543 -- -- 2,386 -- --
------- ------ ------ ------- ---- ----
$51,855 $3,205 $2,125 $23,542 $641 $425
======= ====== ====== ======= ==== ====
Ongoing customer relationships... $10,846 $ -- $ -- $ 2,169 $ -- $ --
Goodwill......................... 8,997 4,553 -- 788 911 --
------- ------ ------ ------- ---- ----
$19,843 $4,553 $ -- $ 2,957 $911 $ --
======= ====== ====== ======= ==== ====
</TABLE>
The acquired technology costs are being amortized annually over three to
five years either on a straight line basis or, if greater, based on the
ratio that current revenues bear to total anticipated revenues
attributable to the applicable product. Ongoing customer relationships are
being amortized over five years. Goodwill is being amortized over five to
twelve years.
(8) Represents an adjustment to record amortization of acquired technology
recorded in connection with the HealthVISION Acquisition as if the
transaction had closed on October 1, 1996. In
65
<PAGE> 74
connection with this transaction, TSI will record an acquired technology
asset of $33.0 million. This asset will be amortized over its estimated
useful life of three years.
(9) In connection with the Alltel and SDK acquisitions, Eclipsys wrote-off
in-process research and development of $92.2 million and $7.0 million,
respectively, related to the appraised values of certain in-process
research and development acquired in these acquisitions. In connection
with TSI's acquisition of Vital Software, Inc., TSI wrote-off in-process
research and development of $6.3 million related to the appraised value of
certain in-process research and development acquired in this acquisition.
Based on the preliminary results of an appraisal, TSI anticipates
recording a $2.5 million write-off of in-process research and development
in conjunction with the HealthVISION Acquisition. TSI will record this
write-off in the period in which the transaction closes. The value of
in-process research and development 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 of
completing the development projects and the risks related to the viability
of and potential changes in future target markets.
The estimated costs to be incurred to complete the development of the
in-process research and development into commercially viable products is
$2.7 million.
(10) Includes adjustments to net interest expense to give effect to the
following (in thousands):
<TABLE>
<S> <C>
Interest income foregone on $2.2 million cash paid for
SDK Acquisition for the period from January 1, 1997
through June 25, 1997................................. $ 94
Additional interest expense on $20.6 million of
borrowings under the Revolver to fund the MSA Buyout,
SDK Partial Repayment and Simione Investment as if
they had occurred on January 1, 1997.................. 1,752
Additional interest expense on the SDK Notes as if they
had been issued on January 1, 1997.................... 360
Reduction of interest expense on $3.8 million of SDK
Notes as if the SDK Partial Repayment had occurred as
of January 1, 1997.................................... (360)
Reduction of interest expense as a result of the
elimination of the accretion of the discount recorded
in connection with the MSA as if MSA Buyout had
occurred as of January 1, 1997........................ (563)
Reduction of interest expense from the cancellation of
payables to AIS as if the Alltel Acquisition had
occurred as of January 1, 1997 (interest calculated on
average payables balance of $56.8 million at an annual
interest rate of 8%).................................. (379)
Reduction of interest expense on the Term Loan as if
the 1998 Preferred Stock Issuance had occurred as
January 1, 1997....................................... (850)
Repayment of a portion of the pro forma balance of the
Revolver as if it had occurred as of January 1,
1997.................................................. (1,377)
Repayment of the pro forma balance of the SDK Notes as
if it had occurred as of January 1, 1997.............. (360)
-------
$(1,683)
=======
</TABLE>
(11) Represents an adjustment to reduce interest income of TSI as if the
HealthVISION Acquisition had occurred on October 1, 1996.
(12) Represents an adjustment to reduce the income tax benefit related to
Alltel for the period from January 1, 1997 through January 23, 1997 as if
the Alltel Acquisition had occurred on January 1, 1997.
(13) Represents an adjustment to eliminate the income tax provision as if the
HealthVISION Acquisition had occurred on October 1, 1996.
66
<PAGE> 75
(14) Eclipsys has not recorded any benefit for income taxes as management
believes at December 31, 1997 it is more likely than not that Eclipsys net
deferred tax assets will not be realized. Accordingly, Eclipsys has
recorded a valuation allowance against its total net deferred tax assets.
(15) Represents the reduction of $1.1 million in the dividends and accretion on
Eclipsys Redeemable Preferred Stock held by AIS after giving effect to the
AIS Settlement and the reduction of $4.7 million in the dividends and
accretion on the Redeemable Preferred Stock with a face value of $34.5
million as if the proceeds of the Eclipsys IPO were utilized to redeem
34,500 shares of the Redeemable Preferred Stock on January 1, 1997.
(16) Represents the reduction of $795,000 in the dividends and accretion on the
redeemable preferred stock of HealthVISION as if the HealthVISION
Acquisition had taken place on October 1, 1996.
(17) Represents a charge related to the January 1997 conversion of Series A
Convertible Preferred Stock to Series F Convertible Preferred Stock.
(18) Gives effect to the conversion in the Merger of TSI common share
equivalents into Eclipsys common share equivalents based on the 0.525
Exchange Ratio.
67
<PAGE> 76
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
ECLIPSYS
-----------------------------------------------
ACQUISITION
AND OTHER ECLIPSYS HEALTH- PRO FORMA PRO FORMA
ECLIPSYS EMTEK(1) ADJUSTMENTS PRO FORMA TSI(2) VISION(3) ADJUSTMENTS COMBINED
-------- -------- ----------- --------- ------- --------- ----------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Systems and
services............ $ 88,541 $ 705 $ 89,246 $33,946(4) $ 9,416 (675)(5) $131,933
Hardware.............. 9,202 275 9,477 -- -- 9,477
-------- ------- -------- ------- ------- --------
Total revenues.... 97,743 980 98,723 33,946 9,416 141,410
-------- ------- -------- ------- ------- --------
Costs and expenses:
Cost of systems
and services
revenues............ 53,196 744 (77)(6) 53,863 10,316 3,645 8,243(7) 76,067
Cost of hardware
revenues............ 7,825 245 8,070 -- -- 8,070
Marketing and sales... 13,945 580 14,525 5,911 3,251 23,687
Research and
development......... 19,267 738 20,005 4,273 4,951 (227)(5) 29,002
General and
administrative...... 4,580 276 4,856 2,505 2,027 9,388
Depreciation and
amortization........ 7,937 87 8,024 1,329 597 9,950
Write-off of MSA(8)... 7,193 -- (7,193) -- -- -- --
-------- ------- -------- ------- ------- --------
Total costs and
expenses........ 113,943 2,670 109,343 24,334 14,471 156,164
-------- ------- -------- ------- ------- --------
Income (loss) from
operations.............. (16,200) (1,690) (10,620) 9,612 (5,055) (14,754)
Interest expense (income),
net..................... 628 -- (379)(9) 249 (2,285) 176 953(10) (907)
Foreign currency
transaction loss........ -- -- -- -- 28 28
-------- ------- -------- ------- ------- --------
(16,828) (1,690) (10,869) 11,897 (5,259) (13,875)
Income tax benefit
(provision)............. -- -- -- (4,759) (87) 4,846(11) --
-------- ------- -------- ------- ------- --------
Net income (loss)(12)..... (16,828) (1,690) (10,869) 7,138 (5,346) (13,875)
Dividends and accretion on
mandatorily redeemable
preferred stock......... (10,928) -- 10,928(13) -- -- (621) 621(14) --
-------- ------- -------- ------- ------- --------
Net income (loss)
available to
common stockholders..... $(27,756) $(1,690) $(10,869) $ 7,138 $(5,967) $(13,875)
======== ======= ======== ======= ======= ========
Net income (loss)
available to common
stockholders per share:
Basic................. $ (3.41) $ (0.55) $ 0.39 $ (0.47)
Diluted............... $ (3.41) $ (0.55) $ 0.35 $ (0.47)
Weighted average common
shares outstanding:
Basic................. 8,133 19,805 18,153 29,335(15)
Diluted............... 8,133 19,805 20,459 29,335(15)
</TABLE>
- ---------------
(1) Represents the historical results of operations of Emtek for the period
from January 1, 1998 through January 30, 1998.
(2) Represents the historical results of operations of TSI for the nine months
ended June 30, 1998 and reflects the reclassification of certain costs and
expenses, principally depreciation and amortization, to conform to the
presentation of Eclipsys' historical consolidated statement of operations.
(3) Represents the historical results of operations of HealthVISION for the
nine months ended September 30, 1998.
(4) AICPA Statement of Position 97-2 ("SOP 97-2"), "Software Revenue
Recognition," will be effective for TSI transactions beginning in the first
quarter of TSI's 1999 fiscal year. TSI is analyzing the impact of SOP 97-2,
which may cause a deferral of revenue. After the consummation of the
Merger, SOP 97-2 will be applied to TSI transactions beginning on January
1, 1998 in order to conform to Eclipsys' date of adoption of SOP 97-2. No
pro forma adjustment has been made to the pro forma combined statement of
operations to reflect the impact of adoption of SOP 97-2. See Note 2 of
Notes to Consolidated Financial Statements of TSI.
(5) Represents the elimination of certain intercompany transactions between TSI
and HealthVISION.
68
<PAGE> 77
(6) Represents adjustments for amortization expense related to the Emtek
Acquisition as if it had occurred January 1, 1997 as follows (in
thousands):
<TABLE>
<S> <C>
Amortization of capitalized software development costs
reflected in the historical accounts prior to
the Emtek Acquisition..................................... $(145)
Acquired technology......................................... 68
-----
Total.............................................. $ (77)
=====
</TABLE>
(7) Represents an adjustment to record amortization of acquired technology
recorded in connection with the HealthVISION Acquisition as if the
transaction had closed on October 1, 1997.
(8) In connection with the MSA Buyout, Eclipsys recorded a charge of $7.2
million in 1998. See Note 13 of Notes to Eclipsys' Consolidated Financial
Statements. Adjustments represent the elimination of this non-recurring
charge.
(9) Includes adjustments to net interest expense to give effect to the
following (in thousands):
<TABLE>
<S> <C>
Additional interest expense on $18.6 million of borrowings
under the Revolver to fund the MSA Buyout, SDK Partial
Repayment and Simione Investment if they had occurred on
January 1, 1997........................................... $ 395
Reduction of interest expense on $3.8 million of SDK Notes
as if the SDK Partial Repayment had occurred on January 1,
1997...................................................... (90)
Reduction of interest expense as a result of the elimination
of the accretion of the discount recorded in connection
with the MSA as if the MSA Buyout had occurred as of
January 1, 1997........................................... (129)
Reduction of interest expense on the Term Loan as if the
1998 Preferred Stock Issuance had occurred as of January
1, 1997................................................... (70)
Reduction of interest expense as a result of the repayment
of the pro forma balance of the Revolver as if it had
occurred as of January 1, 1997............................ (395)
Reduction of interest expense as a result of the repayment
of the pro forma balance of the SDK Notes as if it had
occurred on January 1, 1997............................... (90)
-----
Total............................................. $(379)
=====
</TABLE>
(10) Represents an adjustment to reduce interest income of TSI as if the
HealthVISION Acquisition had occurred on October 1, 1997.
(11) Represents an adjustment to reduce the income tax provision as if the
HealthVISION Acquisition had occurred on October 1, 1997.
(12) Eclipsys has not recorded any benefit for income taxes as management
believes, based on evidence available at December 31, 1997 and September
30, 1998, it is more likely than not that Eclipsys' net deferred tax assets
will not be realized. Accordingly, Eclipsys has recorded a valuation
against its total net deferred tax asset.
(13) Represents the reduction of $ 181,000 in the dividends and accretion on
Redeemable Preferred Stock held by AIS after giving effect to the AIS
Settlement as if it had occurred on January 1, 1997 and the reduction of
$10.8 million in the dividends and accretion on the Redeemable Preferred
Stock with a face value of $34.5 million as if the proceeds of the Eclipsys
IPO were utilized to redeem 34,500 shares of the Redeemable Preferred Stock
on January 1, 1998.
(14) Represents the reduction of $621,000 in the dividends and accretion on the
redeemable preferred stock of HealthVISION as if the HealthVISION
Acquisition had taken place on October 1, 1997.
(15) Gives effect to the conversion in the Merger of TSI common share
equivalents into Eclipsys common share equivalents based on the 0.525
Exchange Ratio.
69
<PAGE> 78
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
ADJUSTMENTS FOR
SEPTEMBER 30, JUNE 30, THE
1998 1998 HEALTHVISION ADJUSTMENTS PRO FORMA
ECLIPSYS TSI ACQUISITION(1) FOR THE MERGER COMBINED
------------- -------- ---------------- -------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......... $ 12,309 $65,179 $(25,038) $ 52,450
Accounts receivable, net........... 40,443 19,662 3,696 63,801
Inventory.......................... 539 -- 539
Other current assets............... 9,757 1,179 802 11,738
Deferred income taxes.............. 853 853
--------- ------- ---------
Total current assets............ 63,048 86,873 129,381
--------- ------- ---------
Property and equipment, net.......... 10,530 1,638 770 12,938
Capitalized software development
costs, net......................... 4,277 1,410 5,687
Acquired technology, net............. 18,798 1,219 32,970 52,987
Intangible assets, net............... 15,559 674 (400) 15,833
Other assets......................... 9,479 6,000 (6,000) 9,479
--------- ------- ---------
$ 121,691 $97,814 $ 226,305
========= ======= =========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Accounts payable................... $ -- $ 1,334 $ 401 $(1,735)(2) $ --
Accrued liabilities................ -- 3,717 750 (4,467)(2) --
Income taxes payable............... -- 2,871 2,871
Deferred revenue................... 39,211 7,676 6,660 53,547
Other current liabilities.......... 32,411 -- 1,442 6,202(2) 40,055
--------- ------- ---------
Total current liabilities....... 71,622 15,598 96,473
--------- ------- ---------
Deferred revenue..................... 7,789 -- 7,789
Other long-term liabilities.......... 3,713 -- 3,713
Deferred income taxes................ -- 496 496
--------- ------- ---------
Total liabilities............... 83,124 16,094 108,471
--------- ------- ---------
Shareholders' equity:
Common stock, voting............... 193 179 (92)(3) 280
Common stock, non-voting........... 9 4 (4)(3) 9
Non-voting common stock warrant.... -- 395 395
Additional paid-in capital......... 189,341 47,778 96(3) 237,215
Unearned compensation.............. (196) -- (196)
Retained earnings
(accumulated deficit)........... (150,841) 33,364 (2,453) (119,930)
Accumulated other comprehensive
income.......................... 61 -- 61
--------- ------- ---------
Total shareholders' equity...... 38,567 81,720 117,834
--------- ------- ---------
Total liabilities and
shareholders' equity.......... $ 121,691 $97,814 $ 226,305
========= ======= =========
</TABLE>
- ---------------
(1) Represents an entry to record the HealthVISION Acquisition as of June 30,
1998.
(2) Represents adjustments to reclassify accounts payable and accrued
liabilities as other current liabilities in order to conform TSI's financial
presentation to that of Eclipsys.
(3) Represents an adjustment to reflect the issuance of approximately 9.6
million shares in connection with the Merger.
70
<PAGE> 79
THE MERGER AGREEMENT
The following is a brief summary of certain provisions of the Merger
Agreement, a copy of which is attached as Annex A to this Joint Proxy
Statement/Prospectus and is incorporated herein by reference. Such summary is
qualified in its entirety by reference to the Merger Agreement. Stockholders of
Eclipsys and TSI are urged to read the Merger Agreement in its entirety for a
more complete description of the terms and conditions of the Merger.
GENERAL
The Merger Agreement provides that, following the approval of the Eclipsys
Voting Proposal by the stockholders of Eclipsys, the approval and adoption of
the Merger and the Merger Agreement by the stockholders of TSI, and the
satisfaction or waiver of the other conditions to the Merger, Sub will be merged
with and into TSI, with TSI continuing as the Surviving Corporation, which will
be a wholly owned subsidiary of Eclipsys.
If all conditions to the Merger are satisfied or waived, the Merger will
become effective at the time (the "Effective Time") of the filing by TSI and Sub
of duly executed Articles of Merger with the Secretary of State of the
Commonwealth of Massachusetts or at such time thereafter as shall be provided in
the Articles of Merger.
CONVERSION OF SHARES
Upon consummation of the Merger, pursuant to the Merger Agreement, each
issued and outstanding share of TSI Voting and Non-Voting Common Stock (other
than shares owned by TSI as treasury stock or by Eclipsys, Sub or any other
wholly owned subsidiary of Eclipsys, all of which will be cancelled, and other
than shares, if any, as to which dissenters rights, if any, are perfected in
accordance with Section 2.01(d) of the Merger Agreement) will be converted into
0.525 shares of Eclipsys Voting Common Stock. Based upon the number of
outstanding shares of Eclipsys Voting and Non-Voting Common Stock and TSI Voting
and Non-Voting Common Stock as of the Record Date, the stockholders of TSI
immediately prior to the consummation of the Merger will own approximately 33.7%
of the outstanding shares of Eclipsys Voting Common Stock immediately following
consummation of the Merger on a fully diluted basis (assuming exercise of all
warrants and stock options of both TSI and Eclipsys that are exercisable on or
before December 31, 1998 and assuming conversion of all shares of Eclipsys
Non-Voting Common Stock into Eclipsys Voting Common Stock). If a holder of
shares of TSI Voting or Non-Voting Common Stock would be entitled to receive a
number of shares of Eclipsys Voting Common Stock that includes a fraction, then,
in lieu of the fractional share, such holder will be entitled to receive cash in
an amount equal to such fractional share multiplied by the average of the last
reported sale price of Eclipsys Voting Common Stock, as reported on the Nasdaq
National Market on each of the ten trading days immediately preceding the
closing date of the Merger. Each share of the Common Stock of Sub issued and
outstanding immediately prior to the Effective Time will be converted into one
share of common stock of TSI as the Surviving Corporation.
As soon as reasonably practicable after the Effective Time, BankBoston,
N.A. (the "Exchange Agent") will mail transmittal forms and exchange
instructions to each holder of record of TSI Voting and Non-Voting Common Stock
to be used to surrender and exchange certificates formerly evidencing shares of
TSI Voting and Non-Voting Common Stock for certificates evidencing the shares of
Eclipsys Voting Common Stock to which such holder has become entitled. After
receipt of such transmittal forms, each holder of certificates formerly
representing TSI Voting and Non-Voting Common Stock will be able to surrender
such certificates to the Exchange Agent, and each such holder will receive in
exchange therefor certificates evidencing the number of whole shares of Eclipsys
Voting Common Stock to which such holder is entitled and any cash which may be
payable in lieu of a fractional share of Eclipsys Voting Common Stock. TSI
STOCKHOLDERS SHOULD NOT SEND IN THEIR STOCK CERTIFICATES UNTIL THEY RECEIVE A
TRANSMITTAL FORM.
71
<PAGE> 80
After the Effective Time, each certificate formerly representing TSI Voting
and Non-Voting Common Stock, until so surrendered and exchanged, shall be
deemed, for all purposes, to evidence only the right to receive the number of
whole shares of Eclipsys Voting Common Stock which the holder of such
certificate is entitled to receive in the Merger and any cash payment in lieu of
a fractional share of Eclipsys Voting Common Stock. The holder of such
unexchanged certificate will not be entitled to receive any dividends or other
distributions declared or made by Eclipsys with a record date after the
Effective Time with respect to Eclipsys Voting Common Stock until the
certificate has been exchanged. Subject to applicable laws, following surrender
of such certificates, such dividends and distributions, together with any cash
payment in lieu of a fractional share of Eclipsys Voting Common Stock, will be
paid without interest.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various customary representations and
warranties relating to, among other things: (a) due organization, valid
existence and good standing of each of Eclipsys, TSI and each of their
respective subsidiaries and certain similar corporate matters; (b) the capital
structure of each of Eclipsys, TSI and Sub; (c) the authorization, execution,
delivery and enforceability of the Merger Agreement, the consummation of the
transactions contemplated by the Merger Agreement and related matters; (d)
conflicts under their respective charters or bylaws, required consents or
approvals and violations of any instruments or law; (e) documents and financial
statements filed by each of Eclipsys and TSI with the Commission and the
accuracy of information contained therein; (f) undisclosed liabilities; (g) the
absence of certain material adverse events, changes or other actions (although
Eclipsys and TSI have both agreed that the failure of either company to achieve
any level of revenue and earnings at any time shall not of itself constitute a
material adverse change); (h) taxes and tax returns; (i) properties; (j)
intellectual property; (k) agreements, contracts and commitments; (l)
litigation; (m) environmental matters; (n) compliance with laws; (o) accounting
and tax matters relating to the Merger; (p) the accuracy of information supplied
by each of Eclipsys, TSI and Sub in connection with this Joint Proxy
Statement/Prospectus and the registration statement of which it is a part (the
"Registration Statement"); (q) labor matters; (r) employee benefit plans; (s)
insurance; (t) the absence of existing discussions by TSI or Eclipsys with other
parties with respect to an Acquisition Proposal (as defined under "-- No
Solicitation" below) (other than discussions regarding the acquisition by TSI of
the capital stock of HealthVISION not owned by TSI); (u) opinions of financial
advisors; (v) the inapplicability of certain provisions of the General Laws of
Massachusetts, in the case of TSI, to the Merger and related transactions; and
(w) the interim operations of TSI and Sub.
CERTAIN COVENANTS
Pursuant to the Merger Agreement, each of Eclipsys and TSI has agreed that,
during the period from the date of the Merger Agreement until the Effective
Time, except as otherwise consented to in writing by the other party or as
contemplated by the Merger Agreement, it and each of its respective subsidiaries
will, among other things: (a) carry on its business in the ordinary course in
substantially the same manner as previously conducted; (b) pay its debts and
taxes and perform other obligations when due subject to good faith disputes over
such debts, taxes or obligations; (c) use all reasonable efforts consistent with
past practices and policies to preserve intact its present business
organization, management team and business relationships; (d) not accelerate,
amend or change the period of exercisability of options or restricted stock
granted under any employee stock plan or authorize cash payments in exchange for
any options granted under any employee stock plan, except as required pursuant
to the plan or any related agreements; (e) not declare or pay any dividends on
or make other distributions in respect of any of its capital stock, not effect
certain other changes in its capitalization, and not purchase or otherwise
acquire, directly or indirectly, any shares of its capital stock except from
former employees, directors and consultants in accordance with agreements
providing for the repurchase of shares in connection with the termination of
service; (f) not issue or sell, or authorize or propose the issuance or sale of,
any shares of its capital stock or securities convertible into shares of its
capital stock, or any subscriptions, rights, warrants or options to acquire, or
other agreements obligating it to issue any such shares or other convertible
securities, subject to certain exceptions; (g) not make any material
acquisitions, subject to certain exceptions; (h) not sell, lease,
72
<PAGE> 81
license or otherwise dispose of material properties or assets outside the
ordinary course of business; (i) not increase the compensation payable to its
officers or employees (except for increases to non-officer employees consistent
with past practices), grant additional severance or termination pay or enter
into employment or severance agreements, enter into any collective bargaining
agreement or establish, adopt, enter into or amend any plan for the benefit of
its directors, officers, or employees; (j) not amend its charter or bylaws,
except as contemplated by the Merger Agreement; and (k) not take, or agree in
writing or otherwise to take, any of the actions described in (a) through (j)
above.
In addition, TSI has agreed that, during the period from the date of the
Merger Agreement until the Effective Time, except as otherwise consented to in
writing by Eclipsys or as contemplated by the Merger Agreement, it and each of
its respective subsidiaries will not: (a) incur indebtedness for money borrowed
other than pursuant to credit agreements in effect as of the date of the Merger
Agreement; (b) initiate, compromise or settle any material litigation or
arbitration except in connection with the Merger Agreement or the transactions
contemplated thereby; (c) except in the ordinary course of business modify,
amend or terminate any material contracts or release material rights or claims;
or (d) except as required by generally accepted accounting principles, change
its methods of accounting.
Pursuant to the Merger Agreement, Eclipsys and TSI each have agreed to use
their respective best efforts to (a) take all appropriate action to consummate
the transactions contemplated by the Merger Agreement as promptly as practical,
(b) obtain any consents, licenses, permits, waivers, approvals, authorizations
or orders from governmental entities or other third parties required in
connection with the transactions contemplated by the Merger Agreement and (c)
make all necessary filings and submissions with respect to the transactions
contemplated by the Merger Agreement under federal and state securities laws,
antitrust laws and other applicable laws. Eclipsys and TSI have also agreed to
use their respective best efforts to obtain any governmental clearances required
under antitrust laws for the closing of the Merger. Neither Eclipsys nor TSI,
nor any of their respective subsidiaries, are required either to divest any of
their businesses, product lines or assets or take other action that would
reasonably be expected to have a material adverse effect on such company.
NO SOLICITATION
The Merger Agreement provides that neither Eclipsys nor TSI will, directly
or indirectly, through any officer, director, employee, financial advisor,
representative or agent, (a) solicit, initiate or encourage any inquiries or
proposals that constitute, or could reasonably be expected to lead to, a
proposal or offer for a merger, consolidation, business combination, sale of
substantial assets, sale of shares of capital stock (including without
limitation by way of a tender offer) or similar transaction involving such
parties or any of their respective subsidiaries, other than the transactions
contemplated by the Merger Agreement and, in the case of Eclipsys, certain
permitted acquisitions (any of the foregoing inquiries or proposals being
referred to as an "Acquisition Proposal"), (b) engage in negotiations or
discussions concerning, or provide any non-public information to any person or
entity relating to, any Acquisition Proposal, or (c) agree to or recommend any
Acquisition Proposal; provided, however, that nothing contained in the Merger
Agreement shall prevent Eclipsys or TSI, or their respective Boards of
Directors, from (i) furnishing non-public information to, or entering into
discussions or negotiations with, any person or entity in connection with an
unsolicited bona fide written Acquisition Proposal by such person or entity or
recommending an unsolicited bona fide written Acquisition Proposal to the
stockholders of the respective company, if and only to the extent that (1) the
Board of Directors of such company believes in good faith (after consultation
with its financial advisor) that such Acquisition Proposal is reasonably capable
of being completed on the terms proposed and, after taking into account, among
other relevant factors, the strategic benefits anticipated to be derived from
the Merger and the long-term prospects of TSI and Eclipsys as a combined
company, would, if consummated, result in a transaction more favorable to the
stockholders of such company than the transaction contemplated by the Merger
Agreement (any such more favorable Acquisition Proposal being referred to as a
"Superior Proposal") and such Board of Directors determines in good faith after
consultation with outside legal counsel that such action is necessary for such
Board of Directors to comply with its fiduciary duties to stockholders under
applicable law and (2) prior to furnishing such non-public
73
<PAGE> 82
information to, or entering into discussions or negotiations with, such person
or entity, such Board of Directors receives from such person or entity an
executed confidentiality agreement with terms no less favorable to such party
than those contained in the confidentiality agreement dated October 2, 1998,
between Eclipsys and TSI; or (ii) complying with Rule 14e-2 promulgated under
the Exchange Act with regard to an Acquisition Proposal.
Each of Eclipsys and TSI has agreed to notify the other party (orally and
in writing) immediately after receipt by such party or an advisor to such party
of any Acquisition Proposal or request for non-public information in connection
with an Acquisition Proposal or for access to the properties, books or records
of such party by any person or entity that informs such party that it is
considering making, or has made, an Acquisition Proposal. In addition to
indicating in reasonable detail the identity of any offeror and the terms and
conditions of any proposal, each of Eclipsys and TSI has agreed to continue to
keep the other party informed on a current basis of the status of any
discussions and the terms being discussed or negotiated.
RELATED MATTERS AFTER THE MERGER
At the Effective Time, Sub will be merged with and into TSI, and TSI will
be the surviving corporation and a wholly owned subsidiary of Eclipsys. Each
share of Common Stock of Sub issued and outstanding immediately prior to the
Effective Time will be converted into and exchanged for one validly issued,
fully paid and nonassessable share of common stock of the Surviving Corporation.
The Articles of Organization of Sub, as in effect immediately prior to the
Effective Time, will become the Articles of Organization of the Surviving
Corporation (except that the name of the company shall change to Transition
Systems, Inc.). The Bylaws of Sub, as in effect immediately prior to the
Effective Time, will become the Bylaws of the Surviving Corporation (except that
the name of the company shall change to Transition Systems, Inc.).
After the Effective Time, all shares of TSI Voting Common Stock will cease
to be listed on the Nasdaq National Market, and the Surviving Corporation will
terminate the registration of TSI Voting Common Stock under the Exchange Act.
STOCK OPTIONS AND WARRANTS; EMPLOYEE STOCK PLANS
At the Effective Time, each outstanding option to purchase shares of TSI
Voting Common Stock (a "TSI Stock Option"), whether vested or unvested, will be
deemed to constitute an option to acquire, on the same terms and conditions as
were applicable under such TSI Stock Option, the number of shares of Eclipsys
Voting Common Stock (rounded down to the nearest whole number) as the holder of
such TSI Stock Option would have received had such holder exercised such option
in full immediately prior to the Effective Time (thereby being subject to the
Exchange Ratio calculations). The exercise price per share of each such option,
as so converted, will be equal to (x) the aggregate exercise price for the
shares of TSI Voting Common Stock otherwise purchasable pursuant to such TSI
Stock Option immediately prior to the Effective Time divided by (y) the number
of whole shares of Eclipsys Voting Common Stock deemed purchasable pursuant to
such TSI Stock Option as determined above. As of November 30, 1998, options to
acquire 3,420,540 shares of TSI Voting Common Stock were outstanding. Of these,
options to purchase 2,366,257 shares of TSI Voting Common Stock will be
exercisable as of December 31, 1998.
Eclipsys has agreed to reserve for issuance a sufficient number of shares
of Eclipsys Voting Common Stock for delivery upon exercise of the TSI Stock
Options assumed as described above. As soon as practicable after the Effective
Time, Eclipsys will file a registration statement on Form S-8 with respect to
the shares of Eclipsys Voting Common Stock subject to such options and will use
its best efforts to maintain the effectiveness of such registration statement
for so long as such options remain outstanding.
At the Effective Time, each outstanding warrant to purchase shares of TSI
Non-Voting Common Stock (a "TSI Warrant") will be deemed to constitute a warrant
to acquire, on the same terms and conditions as were applicable under such TSI
Warrant, the number of shares of Eclipsys Voting Common
74
<PAGE> 83
Stock as the holder of such TSI Warrant would have received had such holder
exercised such warrant in full immediately prior to the Effective Time (thereby
being subject to the Exchange Ratio calculations). The exercise price per share
of each such warrant, as so converted, will be equal to (x) the aggregate
exercise price for the shares of TSI Non-Voting Common Stock otherwise
purchasable pursuant to such TSI Warrant immediately prior to the Effective Time
divided by (y) the number of whole shares of Eclipsys Voting Common Stock deemed
purchasable pursuant to such TSI Warrant as determined above. As of November 30,
1998, warrants to acquire 297,928 shares of TSI Non-Voting Common Stock were
outstanding. Eclipsys has agreed to reserve for issuance a sufficient number of
shares of Eclipsys Voting Common Stock for delivery upon exercise of the TSI
Warrants assumed as described above.
TSI has agreed to terminate its Employee Stock Purchase Plan (the "TSI
Stock Purchase Plan") in accordance with its terms as of or prior to the
Effective Time, provided that such termination will not affect the rights of the
plan's participants to purchase shares in the current offering period, which
commenced on October 1, 1998 and terminates on March 31, 1999. If the Merger is
closed before March 31, 1999, participants in the current offering under the TSI
Stock Purchase Plan will have the right on March 31, 1999 to apply approximately
$90,000 of deferred salary to the purchase of shares of Eclipsys Voting Common
Stock (up to an aggregate of 14,227 shares) at an exercise price per share equal
to the lower of $12.75 or 85% of the market value (determined in accordance with
the TSI Stock Purchase Plan) of Eclipsys Voting Common Stock as of March 31,
1999, all subject to and in accordance with the terms of the TSI Stock Purchase
Plan. After the Effective Time, Eclipsys will file a registration statement on
Form S-8 with respect to the shares of Eclipsys Voting Common Stock issuable
upon such purchase.
DIRECTOR AND OFFICER INDEMNIFICATION
The Merger Agreement provides that, from and after the Effective Time,
Eclipsys and the Surviving Corporation will indemnify and hold harmless each
present and former director and officer of TSI against all costs or expenses
(including attorneys' fees), judgments, fines, losses, claims, damages,
liabilities or amounts paid in settlement incurred in connection with any claim,
action, suit, proceeding or investigation arising out of or pertaining to any
matter existing or occurring at or prior to the Effective Time, whether asserted
or claimed prior to, or at or after the Effective Time, to the fullest extent
permitted under Massachusetts law. Eclipsys and the Surviving Corporation shall
also be obligated to advance expenses as incurred to the fullest extent
permitted under applicable law, provided the person to whom expenses are
advanced provides an undertaking to repay such advances if it is ultimately
determined that such person is not entitled to indemnification.
For a period of three years after the Effective Time, Eclipsys shall cause
the Surviving Corporation to maintain in effect (to the extent available in the
market) a directors' and officers' liability insurance policy covering those
persons who are covered as of the date of the Merger Agreement by TSI's
directors' and officers' liability insurance policy, with coverage in an amount
and scope at least as favorable as TSI's existing coverage; provided that
neither Eclipsys nor the Surviving Corporation shall be required to expend in
excess of 200% of the annual premium paid by TSI as of the date of the Merger
Agreement for such coverage except to the extent any excess amount is
attributable to Eclipsys' claims history or price increases in the market for
such insurance that are unrelated to TSI specifically. If the premium at any
time exceeds such limitation, the Surviving Corporation will maintain insurance
policies that provide the maximum and best coverage available at an annual
premium equal to such limitation. If any legal action had been pending at any
time subsequent to the second anniversary of the Effective Time against any
person currently covered by TSI's directors' and officers' liability insurance
policy and such pending action would be covered in whole or in part by such
policy, the Surviving Corporation will continue to maintain such policy in
effect (subject to the limitations above) until the fifth anniversary of the
Effective Time.
CONDITIONS
The respective obligations of Eclipsys and TSI to effect the Merger are
subject to the satisfaction (or waiver) of the following conditions: (a) the
Merger and the Merger Agreement shall have been approved by the holders of
two-thirds of the outstanding shares of TSI Voting Common Stock and the Eclipsys
75
<PAGE> 84
Voting Proposal shall have been approved and adopted by the holders of a
majority of the shares of Eclipsys Voting Common Stock represented in person or
by proxy and voting at the Eclipsys Special Stockholders' Meeting; (b) the
waiting period applicable to the consummation of the Merger under the HSR Act
shall have expired or been terminated; (c) all material governmental
authorizations, consents, orders or approvals shall have been obtained; (d) the
Registration Statement shall have become effective and shall not be the subject
of a stop order or proceedings seeking a stop order; (e) no order, injunction or
judgment, or statute, rule or regulation, shall be in effect that makes the
Merger illegal or otherwise prohibits the consummation of the Merger; and (f)
Eclipsys and TSI each shall have received a letter from PricewaterhouseCoopers
LLP regarding its concurrence, as of the date of the letter, with management's
conclusions as to the appropriateness of accounting for the Merger as a pooling
of interests under Accounting Principles Board Opinion No. 16.
In addition, the obligations of Eclipsys and Sub to effect the Merger are
subject to the satisfaction of the following conditions: (a) the representations
and warranties of TSI in the Merger Agreement (including the representation that
there has been no Material Adverse Change, as defined below, as to TSI) shall be
true and correct as of the date of the Merger Agreement and (except to the
extent such representations and warranties speak as of an earlier date) as of
the Closing Date as though made on and as of the Closing Date, except for
changes contemplated by the Merger Agreement and, in the case of breaches which
are not qualified as to materiality, where the failure to be so true and correct
individually or in the aggregate have not had and are not reasonably likely to
have a material adverse effect upon either TSI or the consummation of the
transactions contemplated by the Merger Agreement (the "TSI Representation
Bringdown Condition"); (b) TSI shall have performed in all material respects all
obligations required to be performed by it under the Merger Agreement at or
prior to the Closing Date (the "TSI Covenant Condition"); (c) Eclipsys shall
have received a written legal opinion from its counsel to the effect that the
Merger will be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code; and (d) the total number of
shares of TSI Voting or Non-Voting Common Stock as to which appraisal rights
have been perfected shall not be greater than 5% of the total number of shares
of TSI Voting and Non-Voting Common Stock outstanding immediately prior to the
Effective Date. The Merger Agreement defines a "Material Adverse Change" for
either TSI or Eclipsys as a material adverse change in the financial condition,
results of operations, cash flows, business or property of the respective
company and its subsidiaries, taken as a whole (other than changes that are the
effect or result of economic factors affecting the economy as a whole or
economic or market factors affecting the healthcare information systems industry
generally), except that the failure of either company to achieve any level of
revenues and earnings at any time does not of itself constitute a Material
Adverse Change.
The obligations of TSI to effect the Merger are subject to the satisfaction
of the following conditions: (a) the representations and warranties of each of
Eclipsys and Sub in the Merger Agreement (including the representation that
there has been no Material Adverse Change as to Eclipsys and Sub) shall be true
and correct as of the date of the Merger Agreement and (except to the extent
such representations and warranties speak as of an earlier date) as of the
Closing Date as though made on and as of the Closing Date, except for changes
contemplated by the Merger Agreement and, in the case of breaches which are not
qualified as to materiality, where the failure to be so true and correct
individually or in the aggregate have not had and are not reasonably likely to
have a material adverse effect upon either Eclipsys or the consummation of the
transactions contemplated by the Merger Agreement (the "Eclipsys Representation
Bringdown Condition"); (b) Eclipsys and Sub shall have performed in all material
respects all obligations required to be performed by them under the Merger
Agreement at or prior to the Closing Date (the "Eclipsys Covenant Condition");
(c) TSI shall have received a written legal opinion from its counsel to the
effect that the Merger will be treated for federal income tax purposes as a
tax-free reorganization within the meaning of Section 368(a) of the Code; (d)
Eclipsys shall have entered into an agreement with Warburg, Pincus Ventures,
L.P., a TSI stockholder, granting such stockholder certain registration rights;
and (e) the shares of Eclipsys Voting Common Stock to be issued in the Merger
shall have been approved for listing on the Nasdaq National Market.
76
<PAGE> 85
TERMINATION; TERMINATION FEES AND EXPENSES
The Merger Agreement may be terminated at any time prior to the Effective
Time, whether before or after approval of the matters presented in connection
with the Merger by the stockholders of Eclipsys and TSI:
(a) by mutual written consent of Eclipsys and TSI; or
(b) by either Eclipsys or TSI if the Merger shall not have been
consummated by April 30, 1999 (the "Outside Date") (provided that the right
to terminate the Merger Agreement under this clause shall not be available
to any party whose failure to fulfill any obligation under the Merger
Agreement has been the cause of or resulted in the failure of the Merger to
occur on or before such date); or
(c) by either Eclipsys or TSI if a Governmental Entity (as defined in
the Merger Agreement) or a court of competent jurisdiction shall have
issued a nonappealable final order, decree or ruling or taken any other
nonappealable final action, in each case having the effect of permanently
restraining, enjoining or otherwise prohibiting the Merger; or
(d) by Eclipsys if at the TSI Special Stockholders' Meeting (including
any adjournment or postponement), the requisite vote of the stockholders of
TSI in favor of the Merger and the Merger Agreement shall not have been
obtained; or by TSI if at the Eclipsys Special Stockholders' Meeting
(including any adjournment or postponement), the requisite vote of the
stockholders of Eclipsys in favor of the Eclipsys Voting Proposal shall not
have been obtained; or
(e) by Eclipsys, if (i) the Board of Directors of TSI shall have
withdrawn or modified in a manner adverse to Eclipsys its recommendation of
the Merger Agreement or the Merger; (ii) the Board of Directors of TSI
shall have recommended to the stockholders of TSI an Alternative
Transaction (as defined below); (iii) a tender offer or exchange offer for
15% or more of the outstanding shares of TSI Voting Common Stock is
commenced (other than by Eclipsys or an affiliate of Eclipsys) and the
Board of Directors of TSI recommends that the stockholders of TSI tender
their shares in such tender or exchange offer; or (iv) for any reason TSI
fails to call and hold the TSI Special Stockholders' Meeting by the Outside
Date (provided that Eclipsys' right to terminate the Merger Agreement under
this clause (iv) is not available if at such time TSI would be entitled to
terminate the Merger Agreement because of a breach by Eclipsys or Sub as
described in paragraph (h) below); or
(f) by TSI, if (i) the Board of Directors of Eclipsys shall have
withdrawn or modified its recommendation of the Merger Agreement, the
Merger or the Eclipsys Voting Proposal; (ii) the Board of Directors of
Eclipsys shall have recommended to the stockholders of Eclipsys an
Alternative Transaction (as defined below); (iii) a tender offer or
exchange offer for 15% or more of the outstanding shares of Eclipsys Voting
Common Stock is commenced (other than by TSI or an affiliate of TSI) and
the Board of Directors of Eclipsys recommends that the stockholders of
Eclipsys tender their shares in such tender or exchange offer; or (iv) for
any reason Eclipsys fails to call and hold the Eclipsys Special
Stockholders' Meeting by the Outside Date (provided that TSI's right to
terminate the Merger Agreement under this clause (iv) is not available if
at such time Eclipsys would be entitled to terminate the Merger Agreement
because of a breach by TSI as described in paragraph (h) below); or
(g) by TSI, if the TSI Board accepts or approves a Superior Proposal
(as defined under "-- No Solicitation" above), or recommends a Superior
Proposal to the TSI stockholders; or
(h) by Eclipsys or TSI, if there has been a breach of any
representation, warranty, covenant or agreement on the part of the other
party set forth in the Merger Agreement, which breach causes the TSI
Representation Bringdown Condition or the TSI Covenant Condition (in the
case of a termination by Eclipsys) or the Eclipsys Representation Bringdown
Condition or the Eclipsys Covenant Condition (in the case of a termination
by TSI) not to be satisfied and such breach shall
77
<PAGE> 86
not have been cured within 20 business days following receipt by the breaching
party of written notice of the breach from the other party.
In the event of any termination of the Merger Agreement by either as
provided above, the Merger Agreement will immediately become void and there will
be no liability or obligation on the part of Eclipsys or TSI or their respective
officers, directors, stockholders or affiliates, except with respect to the
payment of certain fees and expenses as described below.
Except as described below, whether or not the Merger is consummated, all
fees, costs and expenses incurred in connection with the Merger Agreement and
the transactions contemplated thereby (other than expenses (other than
attorneys' fees) incurred with respect to the printing and filing of this Joint
Proxy Statement/Prospectus and the Registration Statement, including exhibits
and financial statements, which shall be shared equally) shall be paid by the
party incurring such expenses.
TSI has agreed to pay Eclipsys up to $2,000,000 as reimbursement for
expenses of Eclipsys actually incurred relating to the transactions contemplated
by the Merger Agreement prior to termination (including fees and expenses of
Eclipsys' counsel, accountants and financial advisors, but excluding any
discretionary fees paid to such financial advisors), upon the termination of the
Merger Agreement by Eclipsys under the circumstances described in paragraphs
(d), (e) or (h) above or by TSI under the circumstances described in paragraph
(g) above.
TSI has also agreed to pay Eclipsys a termination fee of $9,100,000, less
amounts reimbursed for expenses as described in the previous paragraph (the
"Eclipsys Termination Fee"), upon the earliest to occur of the following events:
(i) termination of the Merger Agreement by Eclipsys under the circumstances
described in paragraph (e) above; (ii) the termination of the Merger Agreement
by Eclipsys under the circumstances described in paragraph (h) above after a
breach by TSI of certain designated covenants set forth in the Merger Agreement;
(iii) consummation of an Alternative Transaction with respect to TSI within 12
months following the failure to receive the requisite vote for approval of the
Merger by the stockholders of TSI at the TSI Special Stockholders' Meeting if,
at the time of such failure, there shall have been announced any Alternative
Transaction relating to TSI which shall not have been absolutely and
unconditionally withdrawn and abandoned or (iv) the termination of the Merger
Agreement by TSI because TSI's Board had accepted, approved or recommended a
Superior Proposal to the TSI Stockholders.
Eclipsys has agreed to pay TSI up to $2,000,000 as reimbursement for
expenses of TSI actually incurred relating to the transactions contemplated by
the Merger Agreement prior to termination (including fees and expenses of TSI's
counsel, accountants and financial advisors, but excluding any discretionary
fees paid to such financial advisors), upon the termination of the Merger
Agreement by TSI under the circumstances described in paragraphs (d), (f) and
(h) above.
Eclipsys has agreed to pay TSI a termination fee of $9,100,000, less
amounts reimbursed for expenses as described in the previous paragraph (the "TSI
Termination Fee"), upon the earliest to occur of the following events: (i)
termination of the Merger Agreement by TSI under the circumstances described in
paragraph (f) above; (ii) termination of the Merger Agreement by TSI under the
circumstances described in paragraph (h) above after a breach by Eclipsys of
certain designated covenants set forth in the Merger Agreement; or (iii)
consummation of an Alternative Transaction with respect to Eclipsys within 12
months following the failure to receive the requisite vote for approval of
Eclipsys Voting Proposal by the stockholders of Eclipsys at the Eclipsys Special
Stockholders' Meeting if, at the time of such failure, there shall have been
announced any Alternative Transaction relating to Eclipsys which shall not have
been absolutely and unconditionally withdrawn and abandoned.
As used in the Merger Agreement, "Alternative Transaction" means any of (i)
a transaction (other than certain permitted acquisitions by Eclipsys) pursuant
to which any person (or group of persons), other than Eclipsys or TSI or their
respective affiliates (a "Third Party"), acquires more than 15% of the
outstanding shares of TSI Voting Common Stock or Eclipsys Voting Common Stock,
as the case may be, pursuant to a tender offer or exchange offer or otherwise,
(ii) a merger or other business combination
78
<PAGE> 87
involving Eclipsys or TSI pursuant to which any Third Party acquires more than
15% of the outstanding shares of TSI Voting Common Stock or Eclipsys Voting
Common Stock, as the case may be, or the entity surviving such merger or
business combination, (iii) any other transaction (other than certain permitted
acquisitions by Eclipsys) pursuant to which any Third Party acquires control of
assets (including for this purpose the outstanding equity securities of
subsidiaries of Eclipsys or TSI, and the entity surviving any merger or business
combination including any of them) of Eclipsys or TSI having a fair market value
equal to more than 15% of the fair market value (as determined by the Board of
Directors of Eclipsys or TSI, as the case may be, in good faith) of all the
assets of Eclipsys or TSI and its subsidiaries, taken as a whole, as the case
may be, immediately prior to such transaction or (iv) any public announcement of
a proposal, plan or intention to do any of the foregoing or any agreement to
engage in any of the foregoing.
If applicable, any expenses and fees payable as described above shall be
paid within one business day after the first to occur of the relevant
termination events. Payment of the Eclipsys Termination Fee or the TSI
Termination Fee, as the case may be, constitutes liquidated damages and is the
sole and exclusive remedy to the other party for any losses, damages, claims,
costs or expenses arising from the occurrence of any event giving rise to the
obligation to make such payment.
AMENDMENT AND WAIVER
The Merger Agreement may be amended by the respective Boards of Directors
of Eclipsys or TSI at any time before or after approval by the stockholders of
either party of the matters presented in connection with the Merger. After any
such stockholder approval, however, no amendment may be taken which by law
requires further approval by such stockholders until such further approval has
been obtained.
At any time prior to the Effective Time, Eclipsys or TSI, by action taken
or authorized by their respective Boards of Directors, may (i) extend the time
for the performance of any of the obligations or other acts of the other
company, (ii) waive any inaccuracies in the representations and warranties of
the other company contained in the Merger Agreement or in any document delivered
pursuant hereto and (iii) waive compliance with any of the agreements or
conditions contained therein.
79
<PAGE> 88
BUSINESS OF ECLIPSYS
The information in this section relates to the business of Eclipsys as it
is currently conducted without giving effect to the Merger.
OVERVIEW
Eclipsys is a healthcare information technology company delivering
solutions that enable healthcare providers to achieve improved clinical,
financial and administrative outcomes. Eclipsys offers an integrated suite of
healthcare products in four critical areas -- clinical management, access
management, patient financial management and enterprise data warehouse and
analysis. These products can be purchased in combination to provide an
enterprise-wide solution or individually to address specific needs. Eclipsys'
products have been designed specifically to deliver a measurable impact on
outcomes, enabling Eclipsys' customers to quantify clinical benefits and return
on investment in a precise and timely manner. Eclipsys' products can be
integrated with a customer's existing information systems, which Eclipsys
believes reduces overall cost of ownership and increases the attractiveness of
its products. Eclipsys also provides outsourcing, remote processing and
networking services to assist customers in meeting their healthcare information
technology requirements. Eclipsys was formed in December 1995 and has grown
primarily through its three acquisitions, all completed since January 1997.
These acquisitions, together with internally generated growth, have resulted in
revenues of $126.5 million in 1997 on the pro forma basis described herein.
Eclipsys markets its products primarily to large hospitals, academic
medical centers and integrated healthcare delivery networks. Eclipsys has one or
more of its products installed or being installed in over 350 facilities. To
provide direct and sustained customer contact, Eclipsys maintains decentralized
sales, implementation and customer support teams in each of its five North
American regions. Eclipsys' field sales force has an average of 18 years of
experience in the healthcare industry.
COMPETITIVE STRENGTHS
Eclipsys believes that its products and services, focus on physicians'
needs, leading technology, strategic relationships, management team and
well-positioned customer base are competitive strengths that will enable it to
capitalize on continued opportunities for growth.
- Comprehensive Product Offering. Through both acquisitions and internal
development, Eclipsys has assembled a comprehensive suite of products
that perform core functions in the four areas Eclipsys believes are most
critical to its customers -- clinical management, access management,
patient financial management and enterprise data warehouse and analysis.
Eclipsys' individual products can be integrated to provide a
comprehensive healthcare information technology solution. Eclipsys'
product strategy has been to acquire or develop industry-leading products
in each core category and then integrate them to provide a comprehensive
healthcare information technology solution.
- Physician-Oriented Products. Eclipsys' clinical products are designed to
reflect and support the way physicians work, and include features such as
alerts, reminders, just-in-time clinical decision support, sub-second
response times, an intuitive graphical user interface, continuous event
monitoring and a customizable rules and protocol engine. This focus on
physicians is important because Eclipsys believes that they are key
decision makers in the trend toward the use of healthcare information
technology solutions to improve work processes and outcomes across the
continuum of healthcare delivery.
- Leading Technology. Eclipsys has recently announced the development of,
and has commenced migrating its products to, its new SOLA architecture.
SOLA is a browser-enabled, multi-tiered, database-neutral architecture
that supports multiple platforms and can be used across a broad range of
computing environments from client-server systems to legacy mainframes.
SOLA is designed to facilitate the integration of Eclipsys' products with
its customers' existing systems, as well as with future products
developed or acquired by Eclipsys.
80
<PAGE> 89
- Strategic Relationships. One of Eclipsys' important strategic
relationships is with Partners, including two of its hospital
subsidiaries, Brigham and MGH. This relationship provides intensive
physician-driven research and development for new and existing products,
testing and development support. In addition, Brigham and MGH, academic
medical centers affiliated with Harvard Medical School, provide potential
forums for training future users and customers. Eclipsys also has
relationships with other academic medical centers, which also provide
testing and development support.
- Proven Management Team with Successful Track Record. Eclipsys' senior
management team averages over 22 years in the healthcare and information
technology industries and includes four former chief executive officers.
Harvey J. Wilson, Chairman of the Board, President and Chief Executive
Officer of Eclipsys, was a co-founder of SMS. Eclipsys believes that the
range and depth of its senior management team position it to address the
evolving requirements of its customers and to manage the growth required
to meet its strategic goals.
- Well-positioned Customer Base. Eclipsys' customers include large
hospitals, integrated healthcare delivery networks and academic medical
centers. Eclipsys believes that these entities are generally the first to
adopt new technology and are the drivers of industry consolidation.
Management believes that Eclipsys' commitment to quality, innovation,
rapid product implementation and ongoing customer support has enabled it
to build and maintain strong and stable customer relationships and
positions it to capitalize on the opportunities for growth within its
existing customer base. At December 31, 1997, Eclipsys had a backlog of
approximately $108 million. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Eclipsys -- Backlog."
INDUSTRY
In recent years, the healthcare industry has undergone, and is continuing
to undergo, radical and rapid change. The increasing cost of providing
healthcare has led the government sector, followed by the private sector, to
develop new payment mechanisms that encourage healthcare providers to contain
costs. This has caused the provider reimbursement environment to move away from
the indemnity model, characterized by fee-for-service arrangements and
traditional indemnity insurance, toward the managed-care model, in which
providers are aligned within networks and healthcare delivery must follow
plan-established rules to qualify for reimbursement. As a result, the emphasis
of healthcare providers has shifted from providing care regardless of cost to
providing high-quality care in the most cost-effective manner possible. Many
providers are realizing that the traditional method of cost containment --
cutting expenses -- is not by itself enough to maintain their competitiveness in
the face of these pressures. Management believes that providers must also
improve the processes by which healthcare is provided, including improving the
quality of care, the efficiency with which it is delivered and patient
satisfaction. In particular, healthcare providers are focusing on avoiding
costly adverse clinical events.
The pressures to achieve successful clinical outcomes more efficiently
while managing costs more effectively has led to significant industry
consolidation, as healthcare providers seek to offer and control the full
continuum of healthcare. The result has been the development of large integrated
healthcare delivery networks. These are comprehensive vertical networks of
healthcare providers, typically organized around an anchor hospital, and include
physicians, outpatient facilities, laboratories, radiology facilities, home
healthcare providers and long-term and rehabilitative facilities. As these
networks grow larger and more dispersed, the challenge of effectively managing
and delivering information throughout the enterprise also increases.
Traditional healthcare information systems are limited in their ability to
support restructuring of healthcare delivery processes or the evolving
requirements of integrated healthcare delivery networks. Such systems have
generally been financially oriented, focusing primarily on the ability to
capture charges and generate bills. Many information technology vendors have
attempted to apply their existing financially oriented systems to meet the
demand for clinical solutions. However, because these systems were not
originally developed to address clinical requirements, they often lack the basic
structure and functionality
81
<PAGE> 90
to support better overall management of costs, care quality, outcome measurement
and patient satisfaction across the healthcare delivery continuum. Moreover,
because these vendors historically developed and marketed such systems primarily
to financial managers, physicians, who influence a significant portion of
variable healthcare costs, were often excluded from the design of healthcare
information systems and from the system selection process. In addition,
traditional systems were typically designed to operate in a single facility,
which has made them less effective in today's widely dispersed integrated
healthcare delivery networks.
The growth of the managed care environment and the rise of integrated
healthcare delivery networks has created an opportunity for new healthcare
information technology products and services. Healthcare providers are
increasingly demanding integrated solutions that offer all of the core functions
required to manage the entire healthcare delivery process. These core functions
include clinical management, access management and patient financial management
functions. In addition, large and widely spread healthcare delivery networks
require data warehouse and analysis tools that permit them to effectively
extract and analyze data located throughout the enterprise, both to measure
clinical results and return on investment and to support process improvement.
These solutions must also allow providers to preserve their investment in
existing legacy applications and technologies, which often are significant and
vary from facility to facility. Finally, physician utilization is necessary for
a healthcare information technology solution to improve clinical outcomes.
Eclipsys believes that physician utilization will increase as information
technology solutions provide greater functionality, including alerts, reminders,
sub-second response times, just-in-time clinical decision support, an intuitive
graphical user interface and the ability to log on to the system remotely.
Historically, the healthcare industry has invested relatively less in
technology compared to certain other industries. Eclipsys believes that
healthcare providers are realizing that a relatively small investment in
healthcare information technology can significantly reduce variable costs. As a
result of industry trends, healthcare providers are making significant
investments in healthcare information technology solutions that capitalize on
evolving information management technologies. Industry analysts estimate that
healthcare organizations spent approximately $17 billion in 1997 for information
technology solutions, and anticipate that such expenditures will increase to
approximately $28 billion annually by 2002.
STRATEGY
Eclipsys' objective is to become the leading provider of healthcare
information technology solutions to meet the needs of the healthcare industry as
it consolidates and evolves. Key elements of Eclipsys' strategy to achieve this
objective include:
Provide Comprehensive, Integrated Healthcare Information Technology
Solutions. Eclipsys is focusing on providing a full suite of clinical
management, access management, patient financial management and enterprise data
warehouse and analysis solutions. Eclipsys' products are designed to be:
- responsive to physicians' needs for alerts, reminders, sub-second
response times, continuous event monitoring and practice-specific
clinical information, rules, and protocols which provide just-in-time
clinical decision support;
- outcomes-oriented, so customers can easily determine clinical benefits
and return on investment; and
- user-friendly through an intuitive graphical user interface.
Eclipsys believes that its healthcare information technology solutions
facilitate the clinical and business decision process, enabling its customers to
improve their overall work processes, clinical outcomes and return on
investment.
Further Penetrate Existing Customer Base. Eclipsys believes there is a
significant opportunity to sell its integrated healthcare technology solutions
to its existing customers. Eclipsys has at least one of its products installed
or being installed at over 350 facilities. Of these customers, only a few have
an
82
<PAGE> 91
enterprise-wide healthcare information system. Eclipsys believes that it is
well-positioned to capitalize on the growth opportunity within its existing
customer base as a result of several factors:
- its broad, integrated product suite;
- the ability of its products to work with a customer's existing
information systems;
- the ability to document clinical benefits and return on investment;
- management's industry experience and relationships;
- alignment of its pricing and payment schedule with the value received by
its customers; and
- its ongoing customer support and service programs.
Employ a Targeted Marketing Approach. Eclipsys' target market primarily
includes large hospitals, integrated healthcare delivery networks and academic
medical centers. Eclipsys believes that these entities are the first to adopt
new technology and are the drivers of industry consolidation. As the size and
complexity of these customers grow, their need for integrated information
technology solutions increases. Eclipsys has identified potential new customers,
including those who are currently relying on legacy systems that lack the
functions and features such customers require, and is targeting decision makers
within these entities. In particular, Eclipsys believes that physicians are
becoming increasingly involved in the information technology selection process
as recent technological developments and the impact of managed care have
increased the utility of information systems to physicians. Eclipsys believes
that its clinically oriented, physician-designed products provide it with an
advantage as it competes for business. Eclipsys also leverages the extensive
industry experience of its senior management and sales force, as well as its
strategic relationships with leading institutions such as Brigham and MGH, to
pursue this opportunity.
Continue to Enhance and Develop New Solutions. Eclipsys intends to
continue upgrading existing products and developing new solutions to meet the
evolving healthcare information needs of its customers. For example, Eclipsys is
currently focusing on migrating its products to its new SOLA architecture, which
is designed to facilitate the integration of new and existing applications as
they are developed or acquired by Eclipsys with legacy systems of its customers.
Eclipsys has a team of more than 300 internal research, development and
technical support professionals dedicated to developing, enhancing, supporting
and commercializing new and enhanced healthcare information technology products.
Eclipsys also has an exclusive right of first offer to commercialize new
information technologies developed in connection with Partners. In addition,
Eclipsys' relationship with Partners allows it to test new and existing products
in a potential forum that provides feedback from medical and administrative
users, which Eclipsys believes gives it a competitive advantage in developing
new products.
Pursue Selected Acquisitions and Investments. Eclipsys intends to continue
pursuing selected acquisitions and investments that will enhance its product
line, customer base, technological capabilities and management team.
Historically, Eclipsys has experienced significant growth through acquisitions,
and intends to continue to target acquisitions and investments that will help it
achieve its overall strategic goals. Eclipsys also believes that such
transactions will provide it with the opportunity to leverage its existing
sales, marketing and development teams and offer the potential to achieve
operating synergies across the organization.
PRODUCTS
Eclipsys' products perform the core information technology functions
required by integrated healthcare delivery networks and other healthcare
providers across the entire continuum of healthcare. These functions include (i)
clinical management, (ii) access management, (iii) patient financial management
and (iv) enterprise data warehouse and analysis.
- Clinical Management products assist the physician and other clinicians in
making clinical decisions throughout the care process. These systems give
physicians and other clinicians immediate access to
83
<PAGE> 92
complete and up-to-date patient records at all stages, enable physicians
to enter on-line orders for specialized services, such as radiology or
laboratory testing and prescriptions, provide clinical rules to
facilitate clinical decisions and alert the physician to potential
adverse reactions.
- Access Management products provide access to patient information from any
point in the healthcare delivery system and coordinate the gathering of
additional patient data at each stage of the patient encounter. Access
management also coordinates the scheduling of patient appointments
throughout the treatment process.
- Patient Financial Management products coordinate compliance with
managed-care contract reimbursement terms, patient billing and collection
and third-party reimbursement. These products support the growing trend
toward the centralized business office, which manages compliance with
managed-care contracts across the entire healthcare enterprise and for
all stages of the healthcare continuum.
- Enterprise Data Warehouse and Analysis products facilitate the extraction
and analysis of all data collected throughout the organization to support
reporting, strategic planning and decision-making functions.
Eclipsys offers products under the Sunrise name in each of these four core
areas. These products enable Eclipsys to offer a comprehensive line of core
applications that can be purchased individually or combined to form a fully
integrated single-source information technology solution. Most of Eclipsys'
products are functional in several different healthcare settings, including
ambulatory care, critical care and acute care.
The Sunrise Access Management suite, the Sunrise Patient Financial
Management suite and the Sunrise Enterprise Data Warehouse are generally
available to Eclipsys' customers. Most of the key functionalities of the Sunrise
Clinical Management suite are currently available in Eclipsys' heritage
products. Eclipsys is in the process of integrating these key functionalities
into the Sunrise Clinical Management suite, which is currently in field trials
and is expected to be generally available to customers in 1999.
SUNRISE CLINICAL MANAGEMENT
Sunrise Clinical Management is a physician-oriented application that
provides patient information to the physician and other clinicians at the
point-of-care anywhere in the healthcare continuum, allows a physician to
quickly and efficiently enter orders directly into the system and provides
clinical decision support at the time of order entry. The functionality of the
Sunrise Clinical Management suite is derived from the Alltel TDS 7000 Series,
Emtek's Continuum 2000 application and the BICS program developed at Brigham and
licensed from Partners. Eclipsys has selected the best features of these
heritage programs to integrate into its Sunrise Clinical Management suite.
Eclipsys continues to enhance and support these heritage products for its
installed customer base in order to allow these customers to make the transition
to the Sunrise Clinical Management suite over time. Sunrise Clinical Management
includes the following features:
- Clinical Data Repository, which permanently stores clinical and financial
information into patient care records that are easily and quickly
accessible in ambulatory, acute care and other healthcare settings.
- Clinical View, which provides physicians with access to patient
information, such as complete patient records covering treatments at both
ambulatory and acute care facilities, whether they are accessing the
records from within the healthcare facility or a remote location.
- Clinical Documentation, which gathers and presents organized, accurate
and timely patient information. The application creates an electronic
patient chart, accepting and arranging input from caregivers,
laboratories or monitoring equipment.
84
<PAGE> 93
- Order Entry, Communication and Management, which enables physicians to
enter on-line prescriptions and orders for laboratory or diagnostic tests
or procedures. The application also routes the order to the appropriate
department or party within the organization for fulfillment.
- SOLAssistant, which is a clinical decision support system that is
activated automatically during the order entry process. This
sophisticated system provides real-time guidance to physicians by
alerting them to possible problems with or conflicts between newly
entered orders and existing patient information using the system's rules
database. A comprehensive set of clinical rules developed by physicians
is available with SOLAssistant. Customers can modify these existing rules
or can develop their own clinical rules.
- SOLAsentry, which is a continuous event monitoring system. SOLAsentry
triggers alerts, which can include e-mail or pager notification, upon the
occurrence of a specified change in a patient's condition or any other
physician-designated event, such as the delivery of unfavorable
laboratory results. The application tracks new patient data, relates it
to information already in the system for that patient, identifies
significant new relationships, alerts the physician to the changed
relationship and prompts corrective actions on a real-time basis.
- Clinical Pathways and Scheduled Activities List, which provide access to
standardized patient care profiles and assist in the scheduling and
monitoring of procedures. These applications provide listings of clinical
treatment procedures for individual patient care and generates scheduled
activities lists in each department based on information from those
lists. This allows the resources of a department to be deployed in the
most effective and efficient manner.
Eclipsys is currently developing a clinical reporting application, which
will provide periodic reports to physicians enabling them to identify their
practice group's clinical performance. Eclipsys is also developing referral and
medical management features, which will allow a physician to refer a patient
instantly to another healthcare provider with appropriate patient information
attached to the referral.
Eclipsys' heritage clinical management products are installed or in the
process of being installed at more than 250 facilities.
SUNRISE ACCESS MANAGEMENT
Sunrise Access Management enables the healthcare provider to identify the
patient at any point in the healthcare delivery system and to collect and
maintain patient information throughout the entire continuum of patient care on
an enterprise-wide basis. The single database structure of Sunrise Access
Management permits simultaneous access to the entire patient record from any
terminal on the system. The Sunrise Access Management suite is based primarily
on the products acquired in the SDK Acquisition, which Eclipsys has integrated
with its other product offerings and has continued to enhance. The elements of
Sunrise Access Management include:
- Patient Registration/ADT, which is used to register a patient in an
ambulatory setting, and to admit, discharge and transfer patients in an
acute care setting. Patient information -- such as demographics, personal
contacts, primary-care provider, allergies or medications, health
history, employment and insurance coverage -- is taken at the patient's
initial visit and is immediately accessible on-line to all authorized
personnel across the enterprise. Subsequent visits require only
confirmation and updates as necessary. Visit-specific information, such
as the date and the reason for the visit, the care provided and the
caregivers providing service, is collected at each visit.
- Patient Scheduling and Resource Management, which is used to schedule
patient appointments across an organization from any location within the
enterprise. The application has the flexibility to provide for patient
preferences and resource availability.
- Enterprise Master Person Index, which is a single index of all patients
and healthcare plan members within a healthcare provider's system.
Records can be accessed from the index by searching a
85
<PAGE> 94
variety of characteristics, such as name, Social Security number or other
demographic data, including a combination of several characteristics.
Sunrise Access Management also includes managed care support features such
as verifying insurance eligibility on-line and compliance with managed care plan
rules and procedures, as well as medical records abstracting, which compiles
patient data into statistical information. The integrated nature of Sunrise
Access Management allows healthcare providers to complete pre-registration as
part of the scheduling process and view patient records from multiple sites
within an enterprise. This eliminates the generation of redundant records,
thereby saving both patient and caregiver time, and permits the efficient
scheduling of resources throughout the organization.
Eclipsys' access management products are installed or in the process of
being installed at over 70 facilities.
SUNRISE PATIENT FINANCIAL MANAGEMENT
Sunrise Patient Financial Management uses a single, integrated database for
patient accounting processes, including the automatic generation of patient
billing and accounts receivable functions, a system of reimbursement management
to monitor receivables, the automation of collection activities and contract
compliance analysis, as well as follow-up processing and reporting functions.
Billing and receivables management activities are automated through rules-based
processing and can be customized to reflect each organization's specific
procedures. This product suite supports the growing trend toward the centralized
business offices for multiple entities, which improves compliance with managed
care contracts across the entire enterprise and at all stages of the healthcare
delivery continuum. The Sunrise Patient Financial Management suite is based
primarily on the products acquired in the SDK Acquisition, which Eclipsys has
integrated with its other product offerings and has continued to enhance.
Sunrise Patient Financial Management includes the following functions:
- Patient Accounting, which automates the patient billing and accounts
receivable functions. For bill generation, the application incorporates
rules-based calculations of expected reimbursement and provides users
with the option for automatic generation of contractual allowances at the
time of billing or the time of payment. Rules may be generated for each
insurance plan accepted by an organization. Receivables management
functions include account write-offs, on-line work lists of accounts
requiring follow-up, extensive account comments and standard and ad hoc
reporting. Paperless processing is achieved through real-time inquiry,
editing, sorting, reporting, commenting and updating from other
applications, including modules in Sunrise Access Management and Sunrise
Clinical Management.
- Contract Management, which includes a repository for the payment terms,
restrictions, approval requirements and other rules and regulations of
each insurance plan and managed care contract accepted by an
organization. Contract Management is used in conjunction with other
Sunrise products to ensure that patient care complies with these rules
and regulations.
- Reimbursement Management, which facilitates monitoring receivables,
performing collection activity, reconciling with third parties and
analyzing contract compliance and performance.
- Executive Information System, which provides immediate access to the data
contained in the Patient Financial Management database. Executive
Information System provides reports in tabular or graphic formats.
Eclipsys' patient financial management products are installed or in the
process of being installed at over 75 facilities.
SUNRISE ENTERPRISE DATA WAREHOUSE
Sunrise Enterprise Data Warehouse, which consolidates data from different
systems, including all of a client's legacy and third-party systems, into a
single database to facilitate and support data gathering and
86
<PAGE> 95
analysis throughout an organization. This application enables users to analyze
collected data, identify sources of the data, automate data extraction, map and
load data into relational tables for detailed analysis, assure the consistency
of data across systems and support timely, accurate analysis and reporting of
data for specific applications. Enterprise Data Warehouse is able to house data
from other systems and supports data-mining techniques, allowing a customer to
gather data from all of the organization's systems. Customers can build
customized reports using the collected data, reducing the need for additional
software and training. Sunrise Enterprise Data Warehouse is an important
component of the customers' ability to measure and document improved clinical
outcomes and return on investment.
OTHER PRODUCTS
Eclipsys' other products include OpenHUB and Orion, both of which Eclipsys
distributes under a license. OpenHUB is Eclipsys' interface engine, which
provides a fast, flexible means of integrating systems and data, allowing an
organization to select the best data processing solution regardless of the
hardware or software platforms. Orion is an electronic document and workflow
management product that permits providers to reduce their dependency on paper
communications, thereby improving workflow processes and reducing the risk of
lost or inaccurate records.
In connection with Eclipsys' investment in Simione, Eclipsys and Simione
have entered into a Remarketing Agreement pursuant to which Eclipsys has the
right to distribute certain Simione software products designed for home
healthcare providers. See "Management's Discussion and Analysis of
Eclipsys -- Overview."
In connection with providing healthcare information technology solutions,
Eclipsys also sells hardware to its customers.
SOLA ARCHITECTURE
Eclipsys has recently announced the development of, and has commenced
migrating its products to, its new SOLA architecture, which Eclipsys believes
will facilitate integration, enhance automation, increase reliability and
improve security and workflow processes. SOLA draws on a thin-client
architecture to integrate business logic with an intuitive graphical user
interface thereby enhancing automation and reducing the cost of ownership. This
thin-client architecture enables the user interface to be improved without
disturbing the core application set and facilitates integration of Eclipsys'
products with new operating systems, display environments and devices. SOLA also
features a high performance rules engine to implement a sizable portion of the
business logic for Eclipsys' products. These rules guide clinical and business
workflow, clinical decision support for order entry, clinical and financial
event monitoring and screen logic, enabling structured development of new
applications while maintaining consistency across applications. Because the
rules are managed and stored as data, customers are able to update the business
logic without modifying and distributing new code. This enables customers to
reduce programming expenses, while enhancing the flexibility of Eclipsys'
applications and facilitating their rapid adoption. SOLA features a seamless and
consistent architecture which promotes reliability for mission-critical
applications and fault tolerance. The SOLA architecture also uses advanced
technology to maintain security across the Internet and organization Intranets.
This ability to support secure communications and incorporate reliable protocols
for authenticating users and services permits the confidentiality of patient
information to be maintained. Certain products being migrated to the SOLA
architecture are currently undergoing field trials in several locations.
SERVICES
Drawing on the functionality and flexibility of its software products,
Eclipsys offers a range of professional services as part of its healthcare
information technology solutions. These services include outsourcing, remote
processing and network services.
87
<PAGE> 96
OUTSOURCING SERVICES
Outsourcing Services typically involve Eclipsys assuming the management of
the customer's entire information technology function on-site using Eclipsys'
employees. Outsourcing Services include Facilities Management, Network
Outsourcing and Transition Management.
Facilities Management enables customers to improve their information
technology operations by having Eclipsys assume responsibility for all aspects
of the customer's information technology operations, from equipment to human
resources.
Network Outsourcing provides customers with total healthcare information
network support, relieving the customer of the need to secure and maintain
expensive resources in a rapidly changing technological environment.
Transition Management offers customers a solution for migrating their
information technology to new processes, technologies or platforms without
interfering with the existing rules and initiatives critical to the delivery of
healthcare.
REMOTE PROCESSING SERVICES
Remote Processing Services include complete processing of an enterprise's
applications from Eclipsys' site using Eclipsys' equipment and personnel. This
service frees an organization from having to maintain the environment, equipment
and technical staff required for systems processing and offers support for an
organization's fault management, configuration management and utilization
management processes.
NETWORK SERVICES
Network Services is a comprehensive package of services allowing Eclipsys'
customers to receive critical data quickly and accurately without incurring a
substantial increase in cost. Eclipsys assesses changes in network utilization
and function, forecasts any necessary upgrades to accommodate growth of the
customer and designs any changes necessary to provide the customer with the
required performance and functionality.
Eclipsys offers its services in various forms ranging from on-site
assistance on a time and expense basis to complete turnkey project deliveries
with guaranteed fixed price rates and outcomes.
IMPLEMENTATION, PRODUCT SUPPORT AND TRAINING
Eclipsys believes that a high level of service and support is critical to
its success. Furthermore, Eclipsys believes that a close and active service and
support relationship is important to customer satisfaction and provides Eclipsys
with important information regarding evolving customer requirements and
additional sales opportunities. To facilitate successful product implementation,
Eclipsys' consultants assist customers with initial installation of a system,
conversion of a customer's historical data and ongoing training and support.
This also includes Year 2000 consulting, programming and conversion services to
help customers prepare for transition and to address Year 2000 compliance and
performance issues. In addition, 24-hour telephone support is available and
Eclipsys offers electronic distribution to provide clients the latest
information regarding Eclipsys' products. Eclipsys also provides regular
maintenance releases to its customers. Eclipsys' service and support activities
are supplemented by comprehensive training programs, including introductory
training courses for new customers and seminars for existing customers, to
educate them about the capabilities of Eclipsys' systems.
PRICING
Historically, Eclipsys has employed a traditional software pricing and
payment model in which the entire software license fee is payable upon
commencement of the license, service fees are paid as performed and maintenance
fees, typically equal to a fixed percentage of the license fee, are paid over
the life of the license. More recently, Eclipsys has begun to offer a variety of
creative pricing models in
88
<PAGE> 97
furtherance of its philosophy that pricing and payment schedules should be
closely aligned with the value received by the customer. Eclipsys encourages
customers to elect a payment schedule that spreads software license payments,
together with service fees and maintenance fees on a bundled basis, regularly
over the life of the license. In addition, Eclipsys has commenced offering
software license and maintenance fees that vary with the amount of patient
traffic serviced by the customer, enabling the customer to analyze the cost on a
per-case basis. Eclipsys also encourages customers to consider pricing models in
which Eclipsys' primary compensation takes the form of sharing in cost savings
or other performance benefits realized by the customer. The pricing of Eclipsys'
contracts can vary significantly, depending upon the pricing model, product
configuration and features, and implementation.
CUSTOMERS, MARKETING AND SALES
Eclipsys' marketing and sales efforts focus on large hospitals, integrated
healthcare delivery networks and academic medical centers. Eclipsys sells its
products and services in North America exclusively through its direct sales
force. To provide direct and sustained customer contact, management of the sales
force is decentralized, with the five Regional Presidents having primary
responsibility for sales and marketing within their regions. Some multi-region
accounts are managed by national account representatives. Within each region,
the direct sales force is generally organized into two groups, one focused
principally on generating sales to new customers and the other focused on
additional sales to existing customers. The direct sales force works closely
with Eclipsys' implementation and product line specialists. Eclipsys' field
sales force has an average of 18 years of experience in the healthcare industry.
A significant component of compensation for all direct sales personnel is
performance based, although Eclipsys bases quotas and bonuses on a number of
factors in addition to actual sales, including customer satisfaction and
accounts receivable performance.
Eclipsys has customers in Belgium, France, the Netherlands, the United
Kingdom and Japan. International sales representatives generally report to the
Regional President of the International Region and are responsible for all
customers within their sales regions. Eclipsys may also use sales agents to
market its products internationally.
RESEARCH AND DEVELOPMENT
Eclipsys believes that its future success depends in large part on its
ability to maintain and enhance its current product line, develop new products,
maintain technological competitiveness and meet an expanding range of customer
requirements. A significant portion of Eclipsys' research and development and
product testing effort is performed in conjunction with physicians at Brigham,
MGH and other academic medical centers. Eclipsys' current development efforts
are focused on the migration of its products to the SOLA architecture and the
development of additional functionality and applications for its existing
products. Eclipsys believes that the open, integrated nature of its SOLA
architecture will facilitate the development of applications without the need
for major rewriting or reconfiguration of code. As of October 31, 1998,
Eclipsys' research, development and technical support organization consisted of
more than 271 employees. Eclipsys' research and development expenses were $29.3
million for 1997, on the pro forma basis described herein.
COMPETITION
The market for Eclipsys' products and services is intensely competitive and
is characterized by rapidly changing technology, evolving user needs and the
frequent introduction of new products. Eclipsys' principal competitors include
Cerner Corp., HBO & Company, IDX Systems Corp. and SMS. Eclipsys also faces
competition from providers of practice management systems, general decision
support and database systems and other segment-specific applications, as well as
from healthcare technology consultants. A number of Eclipsys' competitors are
more established, benefit from greater name recognition and have substantially
greater financial, technical and marketing resources than Eclipsys. Eclipsys
also expects that competition will continue to increase as a result of
consolidation in both the information technology and healthcare industries.
Eclipsys believes that the principal factors affecting competition in the
healthcare
89
<PAGE> 98
information technology market include product functionality, performance,
flexibility and features, use of open standards technology, quality of service
and support, company reputation, price and overall cost of ownership. See "Risk
Factors -- Competition."
PROPRIETARY RIGHTS
Eclipsys is dependent upon its proprietary information and technology.
Eclipsys relies primarily on a combination of copyright, trademark and trade
secret laws and license agreements to establish and protect its rights in its
software products and other proprietary technology. Eclipsys requires
third-party consultants and contractors to enter into nondisclosure agreements
to limit use of, access to and distribution of its proprietary information. In
addition, Eclipsys currently requires employees who receive option grants under
any of its stock plans to enter into nondisclosure agreements. There can be no
assurance that Eclipsys' means of protecting its proprietary rights will be
adequate to prevent misappropriation. The laws of some foreign countries may not
protect Eclipsys' proprietary rights as fully or in the same manner as do the
laws of the United States. Also, despite the steps taken by Eclipsys to protect
its proprietary rights, it may be possible for unauthorized third parties to
copy aspects of Eclipsys' products, reverse engineer such products or otherwise
obtain and use information that Eclipsys regards as proprietary. In certain
limited instances, customers can access source code versions of Eclipsys'
software, subject to contractual limitations on the permitted use of such source
code. Although Eclipsys' license agreements with such customers attempt to
prevent misuse of the source code, the possession of Eclipsys' source code by
third parties increases the ease and likelihood of potential misappropriation of
such software. Furthermore, there can be no assurance that others will not
independently develop technologies similar or superior to Eclipsys' technology
or design around the proprietary rights owned by Eclipsys.
EMPLOYEES
As of October 31, 1998, Eclipsys employed 1,005 people, including 271 in
research, development and technical support, 528 in operations, 122 in marketing
and sales, 68 in finance and administration and 16 in international operations.
The success of Eclipsys depends on its continued ability to attract and retain
highly skilled and qualified personnel. Competition for such personnel is
intense in the information technology industry, particularly for talented
software developers, service consultants, and sales and marketing personnel.
There can be no assurance that Eclipsys will be able to attract and retain
qualified personnel in the future.
Eclipsys' employees are not represented by any labor unions. Eclipsys
considers its relations with its employees to be good.
FACILITIES
Eclipsys is headquartered in Delray Beach, Florida, where it leases office
space under two separate leases expiring in March 2000 and July 2002. In
addition, Eclipsys maintains leased office space in Little Rock, Arkansas;
Newport Beach, California; San Jose, California; Atlanta, Georgia; Oak Brook,
Illinois; Boston, Massachusetts; Albany, New York; Saratoga Springs, New York;
Roseland, New Jersey; Malvern, Pennsylvania; and Pittsburgh, Pennsylvania within
the United States and Brussels, Belgium; Paris, France; and London, United
Kingdom. These leases expire at various times ranging from June 1998 to June
2009. Aggregate rental payments under all of Eclipsys' leases were $4.1 million
in 1997.
LEGAL PROCEEDINGS
Eclipsys is involved from time to time in routine litigation that arises in
the ordinary course of its business, but is not currently involved in any
litigation that Eclipsys believes could reasonably be expected to have a
material adverse effect on Eclipsys.
90
<PAGE> 99
ECLIPSYS MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The current executive officers and directors of Eclipsys, their respective
ages as of October 31, 1998 and their positions with Eclipsys are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Harvey J. Wilson........... 59 President, Chief Executive Officer and Chairman of the
Board of Directors
James E. Hall.............. 65 Senior Vice President, Field Operations and Chief
Operating Officer
Robert J. Vanaria.......... 52 Senior Vice President, Administration, Chief Financial
Officer and Treasurer
T. Jack Risenhoover, II.... 33 Vice President, General Counsel and Secretary
Steven A. Denning(1)....... 50 Director
G. Fred DiBona(1).......... 47 Director
Eugene Fife(1)............. 58 Director
William E. Ford(2)......... 37 Director
Jay B. Pieper(2)........... 55 Director
Richard D. Severns(2)...... 52 Director
</TABLE>
- ---------------
(1) Member of the Executive Development and Compensation Committee.
(2) Member of the Audit Committee.
Harvey J. Wilson, Eclipsys' founder, has served as President, Chief
Executive Officer and Chairman of the Eclipsys Board since Eclipsys was formed
in December 1995. From January 1993 to December 1995, Mr. Wilson invested
privately in software and technology companies. Mr. Wilson was a co-founder of
SMS, a healthcare information systems provider. Mr. Wilson is a director of
Philadelphia Suburban Corporation, a water utility company.
James E. Hall has served as Senior Vice President, Field Operations and
Chief Operating Officer since January 1997. From August 1995 to January 1997,
Mr. Hall was Senior Vice President of Sales and Marketing for Multimedia Medical
Systems, Inc., a telemedicine company ("MMS"). From January 1991 to August 1995,
Mr. Hall was President of Asia Pacific Partners Ltd., a consulting firm.
Robert J. Vanaria has served as Senior Vice President, Administration,
Chief Financial Officer and Treasurer since December 1997. From March 1995 to
December 1997, Mr. Vanaria was Senior Vice President and Chief Financial Officer
of Greenwich Air Services, Inc., an aviation services subsidiary of General
Electric Company. From September 1994 to February 1995, Mr. Vanaria was a
self-employed business consultant. From March 1982 to August 1994, Mr. Vanaria
was Senior Vice President and Chief Financial Officer of Foamex International,
Inc., a manufacturing company.
T. Jack Risenhoover, II has served as Vice President and General Counsel
since February 1997. From May 1994 to January 1997, Mr. Risenhoover was general
counsel for The Right Angle, Inc., a marketing firm. Mr. Risenhoover was awarded
his J.D. from Vanderbilt University School of Law in April 1994.
Steven A. Denning has served on the Eclipsys Board since March 1997. Mr.
Denning is a Managing Member of General Atlantic Partners, LLC, an equity fund
that invests worldwide in software and information technology companies, and has
been with General Atlantic since 1980. Mr. Denning is also a director of GT
Interactive Software Corp., an interactive entertainment software development
company.
G. Fred DiBona has served on the Eclipsys Board since May 1996. Since 1990,
Mr. DiBona has been the President and Chief Executive Officer of Independence
Blue Cross and its subsidiaries. Mr. DiBona is also a director of Magellan
Health Services, Inc., a specialized managed healthcare company; PECO Energy
Company, a public energy company; Philadelphia Suburban Corporation, a water
utility company; Tasty Baking Company, a packaged foods company; and the
Pennsylvania Savings Bank.
91
<PAGE> 100
Eugene Fife has served on the Eclipsys Board since May 1997. Since
September 1996, Mr. Fife has been the President and Chief Executive Officer of
MMS. Mr. Fife was a general partner in Goldman Sachs & Co. from June 1970 to
November 1995, at which time he became a limited partner. Mr. Fife remains a
limited partner in Goldman Sachs & Co. Mr. Fife is also a director of Baker,
Fentress Company, an investment company.
William E. Ford has served on the Eclipsys Board since May 1996. Mr. Ford
is a Managing Member of General Atlantic Partners, LLC and has been with General
Atlantic since 1991. Mr. Ford also serves as a director of GT Interactive
Software Corp., an interactive entertainment software company; MAPICS, Inc., a
resources planning software applications company; Envoy Corporation, an
electronic data processing company; LHS Group Inc., a billing solutions company;
and E-Trade Group, Inc., an on-line discount broker.
Jay B. Pieper has served on the Eclipsys Board since May 1996. Since May
1995, Mr. Pieper has served as Vice President of Corporate Development and
Treasury Affairs for Partners. From March 1986 to May 1995, Mr. Pieper was
Senior Vice President and Chief Financial Officer for Brigham.
Richard D. Severns has served on the Eclipsys Board since January 1998. Mr.
Severns has been Senior Vice President and Director of Finance for the GM
Network Services and Strategy Group of Motorola since August 1991.
Each officer of Eclipsys serves at the discretion of the Eclipsys Board and
holds office until his or her successor is elected and qualified or until his or
her earlier resignation or removal. There are no family relationships among any
of the directors or executive officers of Eclipsys.
TSI DESIGNATED DIRECTORS
The Eclipsys Board has voted to expand the size of the Board so that,
following the Merger, the Board will consist of nine directors. The Board has
appointed the following two current directors of TSI to fill the two vacancies
on the Eclipsys Board, subject to completion of the Merger:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert F. Raco..................... 61 Director
Patrick T. Hackett................. 36 Director
</TABLE>
Robert F. Raco has been nominated for election to the Eclipsys Board of
Directors of the Eclipsys Special Stockholders' Meeting, subject to completion
of the Merger. Mr. Raco has been President and Chief Executive Officer of
Transition Systems, Inc. since 1990 and has served as a director of TSI since
1986. Mr. Raco joined TSI at its inception and served as Executive Vice
President and Chief Operating Officer from 1986 to 1989. Mr. Raco previously
served as Vice President of Information Services at New England Medical Center,
Inc. until 1990. Mr. Raco has more than twenty years of experience in the
information processing field.
Patrick T. Hackett has been nominated for election to the Eclipsys Board of
Directors of the Eclipsys Special Stockholders' Meeting, subject to completion
of the Merger. Mr. Hackett has been a Managing Director of Warburg, Pincus & Co.
since 1994. Mr. Hackett was an Associate at Warburg, Pincus & Co. from 1990 to
1991 and a Vice President from 1991 to 1993. Mr. Hackett has served as a
director of TSI since January 1996. He is also a director of Coventry
Corporation, a managed healthcare company, VitalCom Inc., a healthcare computer
networking company and several private companies.
CLASSIFIED BOARD
The Eclipsys Board is divided into three classes, each of whose members
will serve for a staggered three-year term. The Eclipsys Board currently
consists of two Class I Directors (Messrs. Fife and Ford), two Class II
Directors (Messrs. Pieper and Severns) and three Class III Directors (Messrs.
Denning, DiBona and Wilson). If the merger is completed, the Eclipsys Board will
consist of three Class I Directors (the existing Class I Directors plus Mr.
Raco), three Class II Directors (the existing Class II Directors plus Mr.
Hackett) and three Class III Directors. At each annual meeting of stockholders,
a class of directors is elected for a three-year term to succeed the directors
of the same class whose terms are then
92
<PAGE> 101
expiring. The terms of the Class I Directors, Class II Directors and Class III
Directors expire upon the election and qualification of successor directors at
the annual meeting of Eclipsys stockholders held during the calendar years 1999,
2000 and 2001, respectively.
OBSERVER RIGHTS
Subject to certain conditions, Motorola has the right under the Second
Amended and Restated Stockholders' Agreement dated January 24, 1998, by and
among Eclipsys and certain stockholders of Eclipsys (the "Stockholders
Agreement") to have an observer present at all regular and special meetings of
the Eclipsys Board so long as it owns at least 3.5% of the total number of
shares of Eclipsys Voting Common Stock outstanding (on an as converted and as
exercised basis).
COMMITTEES OF THE BOARD OF DIRECTORS
The Eclipsys Board has an Executive Development and Compensation Committee
composed of Messrs. Denning (Chairman), DiBona and Fife, which makes
recommendations concerning salaries and incentive compensation for executive
officers of Eclipsys and administers and grants stock options and awards
pursuant to the Eclipsys' stock option plans, and an Audit Committee composed of
Messrs. Pieper (Chairman), Ford and Severns, which reviews the results and scope
of the audit and other services provided by the Eclipsys' independent public
accountants. Mr. Harvey J. Wilson is an ex-officio member of both the Audit
Committee and the Executive Development and Compensation Committee.
DIRECTOR COMPENSATION
Directors of Eclipsys are reimbursed for any expenses incurred in
connection with attendance at meetings of the Eclipsys Board or any committee of
the Eclipsys Board, but are not otherwise compensated for such service. On April
8, 1998, the seven non-employee directors of Eclipsys were each granted a
non-qualified stock option to purchase 13,333 shares of Eclipsys Voting Common
Stock at a purchase price of $13.50 per share under the Eclipsys' 1998 Stock
Incentive Plan. These options vest annually over a four year period. See "--
Stock Plans."
EXECUTIVE COMPENSATION
The following table set forth the total compensation paid or accrued for
the year December 31, 1997 for Eclipsys' Chief Executive Officer and its two
other executive officers whose total annual salary and bonus exceeded $100,000
for 1997 (together, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION SECURITIES
------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS(1)
--------------------------- ------ ----- ----------
<S> <C> <C> <C>
Harvey J. Wilson........................................... $150,000(2) -- --
Chairman of the Board, President and Chief Executive
Officer
James E. Hall.............................................. 177,971 $ 50,000 50,000
Senior Vice President, Field Operations and Chief
Operating Officer
Robert J. Vanaria.......................................... 7,692(3) 150,000 99,999
Senior Vice President, Administration and Chief Financial
Officer
</TABLE>
- ---------------
(1) Represents the number of shares covered by options to purchase shares of
Eclipsys Voting Common Stock granted during 1997.
(2) Includes $84,000 of deferred compensation.
(3) Mr. Vanaria joined Eclipsys in December 1997.
93
<PAGE> 102
Stock Option Grants
The following table sets forth grants of stock options to each of the Named
Executive Officers during the year ended December 31, 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------- POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
NUMBER OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(1)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION -------------------------
NAME GRANTED FISCAL YEAR PER SHARE DATE 5% 10%
---- ---------- ------------ ----------- ---------- -- ---
<S> <C> <C> <C> <C> <C> <C>
Harvey J. Wilson........... -- -- -- -- -- --
James E. Hall.............. 4,000 0.3% $0.20 1/20/07 $ 491 $ 1,243
46,000 3.5 6.50 1/25/07 187,895 976,162
Robert J. Vanaria.......... 99,999 7.6 7.50 2/8/07 471,671 1,195,307
</TABLE>
- ---------------
(1) Amounts reported in these columns represent amounts that may be realized
upon exercise of the options immediately prior to the expiration of their
term assuming the specified compound rates of appreciation (5% and 10%) on
the market value of the Eclipsys Voting Common Stock on the date of option
grant over the term of the options. These numbers are calculated based on
rules promulgated by the Securities and Exchange Commission and do not
reflect Eclipsys' estimate of future stock price growth. Actual gains, if
any, on stock option exercises and Eclipsys Voting Common Stock holdings are
dependent on the timing of such exercise and the future performance of the
Eclipsys Voting Common Stock. There can be no assurance that the rates of
appreciation assumed in this table can be achieved or that the amounts
reflected will be received by the individuals.
Year-End Option Values
The following table sets forth certain information concerning the number
and value of unexercised options held by each of the Named Executive Officers on
December 31, 1997. None of the Named Executive Officers exercised any stock
options during the year ended December 31, 1997.
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
FISCAL YEAR END AT FISCAL YEAR END(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Harvey J. Wilson................................ -- -- -- --
James E. Hall................................... -- 50,000 -- $75,450
Robert J. Vanaria............................... 33,333 66,666 -- --
</TABLE>
- ---------------
(1) Represents the difference between the exercise price and the fair market
value of the Eclipsys Voting Common Stock at fiscal year end as determined
by the Eclipsys Board.
EMPLOYMENT ARRANGEMENTS
On May 1, 1996, Harvey J. Wilson entered into an Employment Agreement with
Eclipsys. Eclipsys agreed to employ Mr. Wilson as its Chief Executive Officer
until May 1, 1999, with an annual salary of $150,000, subject to deferral until
Eclipsys has reached certain milestones and subject to adjustment from time to
time thereafter. In January 1998, Mr. Wilson's annual salary was increased to
$200,000. Upon termination of his employment, unless terminated for cause, Mr.
Wilson shall be entitled to payment of his salary and continuation of his
benefits for a period of months determined by the Eclipsys Board which is
consistent with its practice for senior executives. Mr. Wilson has agreed not to
compete with Eclipsys during his term of employment and for three years
thereafter.
94
<PAGE> 103
STOCK PLANS
A total of 4,333,333 shares of Eclipsys Voting Common Stock have been
reserved for issuance in the aggregate under Eclipsys' three stock plans
described below.
The Eclipsys 1996 Stock Plan (the "1996 Stock Plan") provided for grants of
stock options and awards of restricted and unrestricted Eclipsys Voting Common
Stock. As of October 31, 1998, options to purchase 1,822,472 shares of Eclipsys
Voting Common Stock were outstanding and 126,666 restricted shares of Eclipsys
Voting Common Stock had been granted under the 1996 Stock Plan. The Eclipsys
Board has provided that no additional grants or awards will be made under the
1996 Stock Plan.
Under the Eclipsys 1998 Stock Incentive Plan (the "Incentive Plan"), a
variety of awards, including incentive stock options intended to qualify under
Section 422 of the Code, nonstatutory stock options, stock appreciation rights,
restricted and unrestricted stock awards and other stock-based awards, may be
granted to officers, employees, directors, consultants and advisors of Eclipsys
and its subsidiaries. The Eclipsys Board has authorized the Executive
Development and Compensation Committee to administer the Incentive Plan. While
Eclipsys currently anticipates that most grants under the Incentive Plan will
consist of stock options, it may also grant stock appreciation rights, which
represent the right to receive any excess in value of the shares of Eclipsys
Voting Common Stock over the exercise price; restricted stock awards, which
entitle recipients to acquire shares of Eclipsys Voting Common Stock, subject to
the right of Eclipsys to repurchase all or part of such shares at their purchase
price in the event that the conditions specified in the award are not satisfied;
or unrestricted stock awards, which represent grants of shares to participants
free of any restrictions under the Incentive Plan. Options or other awards that
are granted under the Incentive Plan but expire unexercised are available for
future grants. As of October 31, 1998, options to purchase 489,986 shares of
Eclipsys Voting Common Stock have been granted under the Incentive Plan,
including a nonstatutory option to purchase up to 333,333 shares of Eclipsys
Voting Common Stock granted to Harvey J. Wilson on April 8, 1998. Mr. Wilson's
option covers (i) 66,666 shares at a purchase price of $15.00 per share, vesting
over three years following the grant date, (ii) 66,667 shares at a purchase
price of $30.00 per share, vesting over four years, (iii) 100,000 shares at a
purchase price of $45.00 per share, vesting over five years, and (iv) 100,000
shares at a purchase price of $60.00, vesting over five years. Vesting under Mr.
Wilson's option is subject to acceleration at the discretion of the Eclipsys
Board under certain circumstances.
Under the Eclipsys 1998 Employee Stock Purchase Plan (the "Eclipsys
Purchase Plan"), employees of Eclipsys, including directors who are also
employees, are eligible to participate in quarterly plan offerings in which
payroll deductions may be used to purchase shares of Eclipsys Voting Common
Stock. As of October 31, 1998, 14,152 shares of Eclipsys Voting Common Stock
have been purchased pursuant to the Eclipsys Purchase Plan. The purchase price
of such shares is the lower of 85% of the fair market value of Eclipsys Voting
Common Stock on the day the offering commences and 85% of the fair market value
of Eclipsys Voting Common Stock on the day the offering terminates.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Denning, Mr. DiBona and Mr. Fife served during the year ended December
31, 1997 as members of the Executive Development and Compensation Committee of
the Eclipsys Board. Mr. Harvey J. Wilson, an executive officer of Eclipsys, was
an ex-officio member of the Executive Development and Compensation Committee and
in such capacity participated in certain deliberations of the Committee. Mr.
Wilson was a director of MMS during the year ended December 1997. Mr. Fife, one
of Eclipsys' directors and a member of the Executive Development and
Compensation Committee, is, and was during 1997, the President and Chief
Executive Officer of MMS. None of Mr. Denning, Mr. DiBona or Mr. Fife was at any
time during the year ended December 31, 1997, or at any other time, an officer
or employee of Eclipsys. See "Certain Transactions" for a description of certain
relationships and transactions between Eclipsys and affiliates of Mr. Denning
and Mr. Wilson.
95
<PAGE> 104
PRINCIPAL STOCKHOLDERS OF ECLIPSYS
The following table sets forth certain information regarding the beneficial
ownership of the shares of Eclipsys Voting Common Stock as of October 31, 1998,
by (i) each person or entity known to Eclipsys to own beneficially more than 5%
of the Eclipsys Voting Common Stock, (ii) each current director of Eclipsys,
(iii) Eclipsys' Chief Executive Officer and the other Named Executive Officers
and (iv) all current directors and executive officers as a group. Unless
otherwise indicated, each person or entity named in the table has sole voting
power and investment power (or shares such power with his or her spouse) with
respect to all shares of capital stock listed as owned by such person or entity.
<TABLE>
<CAPTION>
NUMBER OF SHARES APPROXIMATE
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) PERCENTAGE OWNED
------------------------ --------------------- ----------------
<S> <C> <C>
General Atlantic Partners, LLC(2)........................ 6,855,255 35.3%
c/o General Atlantic Service Corporation
Three Pickwick Plaza
Greenwich, CT 06830
Steven A. Denning(2)..................................... 6,855,255 35.3
c/o General Atlantic Service Corporation
Three Pickwick Plaza
Greenwich, CT 06830
William E. Ford(2)....................................... 6,855,255 35.3
c/o General Atlantic Service Corporation
Three Pickwick Plaza
Greenwich, CT 06830
Wilfam Ltd.(3)........................................... 2,126,288 10.9
c/o Eclipsys Corporation
777 East Atlantic Avenue, Suite 200
Delray Beach, FL 33483
Alltel Information Services, Inc.(4)..................... 2,077,497 10.7
4001 Rodney Parham Road
Little Rock, AR 72212
First Union Corporation(5)............................... 1,199,392 6.2
One First Union Center, Floor 18
Charlotte, NC 28288
Motorola, Inc............................................ 1,000,000 5.1
1303 East Algonquin Road
Schaumburg, IL 60190
Partners HealthCare System, Inc.......................... 988,290 5.1
Prudential Tower, Suite 1150
800 Boylston Street
Boston, MA 02199
Harvey J. Wilson(6)...................................... 2,626,963 13.5
James E. Hall(7)......................................... 19,166 *
Robert J. Vanaria(8)..................................... 49,999 *
T. Jack Risenhoover, II(9)............................... 8,809 *
G. Fred DiBona........................................... 31,666 *
Eugene Fife(10).......................................... 31,666 *
Jay B. Pieper(11)........................................ 988,290 5.1
Richard D. Severns(12)................................... 1,000,000 5.1
All executive officers and directors as a group (10
persons)(13)........................................... 11,611,814 59.6
</TABLE>
- ---------------
* Less than 1%
(1) The number of shares beneficially owned by each stockholder is determined
under rules promulgated by the Securities and Exchange Commission, and the
information is not necessarily indicative of beneficial ownership for any
other purpose. Under such rules, beneficial ownership includes any shares as
to which the individual or entity has sole or shared voting power or
investment power and any
96
<PAGE> 105
shares as to which the individual or entity has the right to acquire
beneficial ownership within 60 days after June 1, 1998 through the exercise
of any stock option, warrant or other right. The inclusion herein of such
shares, however, does not constitute an admission that the named stockholder
is a direct or indirect beneficial owner of such shares.
(2) Consists of 1,052,661 shares held by General Atlantic Partners 28, L.P.
("GAP 28"), 3,768,830 shares held by General Atlantic Partners 38, L.P.
("GAP 38"), 504,674 shares held by General Atlantic Partners 47, L.P. ("GAP
47"), 403,883 shares held by General Atlantic Partners 48, L.P. ("GAP 48")
and 1,125,207 shares held by GAP Coinvestment, L.P. ("GAP Coinvestment").
The general partner of GAP 28, GAP 38, GAP 47 and GAP 48 is General Atlantic
Partners, LLC, a Delaware limited liability company. The managing members of
General Atlantic Partners, LLC are the general partners of GAP Coinvestment.
Messrs. Denning and Ford are both managing members of General Atlantic
Partners, LLC. Messrs. Denning and Ford disclaim beneficial ownership of
shares owned by GAP 28, GAP 38, GAP 47, GAP 48 and GAP Coinvestment. 60,236
shares of Eclipsys Voting Common Stock held by GAP 38 are subject to options
granted by GAP 38 to AIS, and 10,463 shares of Eclipsys Voting Common Stock
held by GAP Coinvestment are subject to options granted by GAP Coinvestment
to AIS. See footnote (4) below.
(3) Mr. Harvey J. Wilson is the managing general partner of Wilfam, Ltd.
("Wilfam") and Mr. Gregory L. Wilson, Mr. Harvey Wilson's son, is the
investment manager for Wilfam. Mr. Harvey J. Wilson and Mr. Gregory L.
Wilson share voting and dispositive control of the shares held by Wilfam.
(4) Affiliates of General Atlantic Partners, LLC and Harvey Wilson agreed in
January 1997 to grant to AIS options to purchase 103,602 shares of Eclipsys
Voting Common Stock (as converted at the time of the initial public
offering), at an exercise price of $.01 per share and pursuant to option
agreements to be entered into after the closing of the Alltel Acquisition.
Specifically, (i) GAP 38 granted to AIS an option to purchase 60,236 shares
of Eclipsys Voting Common Stock (as converted at the time of the initial
public offering) held by GAP 38, (ii) GAP Coinvestment granted to AIS an
option to purchase 10,463 shares of Eclipsys Voting Common Stock (as
converted at the time of the initial public offering) held by GAP
Coinvestment and (iii) Wilfam granted to AIS an option to purchase 32,904
shares of Eclipsys Voting Common Stock (as converted at the time of the
initial public offering) held by Wilfam. AIS may only exercise these options
if either of the holders of the Warrants exercises them to purchase shares
of Eclipsys Non-Voting Common Stock, in which case AIS may exercise the
options to purchase on an aggregate basis one share of Eclipsys Voting
Common Stock (as converted at the time of the initial public offering) for
each approximately 6.67 shares of Eclipsys Non-Voting Common Stock issued
pursuant to the Warrants. To the extent that AIS exercises the options, the
option shares will be transferred to AIS by GAP 38, GAP Coinvestment and
Wilfam on a pro rata basis.
(5) Includes 601,771 shares of Eclipsys Non-Voting Common Stock issuable upon
the exercise of a warrant, all of which Eclipsys Non-Voting Common Stock is
convertible into Eclipsys Voting Common Stock on a one-for-one basis.
(6) Includes 2,126,288 shares held by Wilfam for which Mr. Wilson is the
managing general partner. 32,903 shares of Eclipsys Voting Common Stock held
by Wilfam are subject to options granted by Wilfam to AIS.
(7) Includes 16,666 shares issuable upon exercise of stock options which are
exercisable within 60 days of October 31, 1998.
(8) Includes 16,666 shares issuable upon exercise of stock options which are
exercisable within 60 days of October 31, 1998.
(9) Includes 8,109 shares issuable upon the exercise of stock options which are
exercisable within 60 days of October 31, 1998.
(10) Includes 16,666 shares issuable upon the exercise of stock options which
are exercisable within 60 days of October 31, 1998.
97
<PAGE> 106
(11) These shares are held by Partners. Mr. Pieper is a Vice President of
Partners. Mr. Pieper disclaims beneficial ownership of these shares.
(12) These shares are held by Motorola. Mr. Severns is a Senior Vice President
of Motorola. Mr. Severns disclaims beneficial ownership of these shares.
(13) See notes (2) and (6) through (12) above.
98
<PAGE> 107
CERTAIN TRANSACTIONS RELATING TO ECLIPSYS
In May 1996, Eclipsys acquired the Partners License from Partners. In
consideration for this license, Eclipsys issued to Partners 988,290 shares of
Eclipsys Voting Common Stock and agreed to pay to Partners a royalty in
connection with sales of the BICS system until Eclipsys completed an initial
public offering of Eclipsys Voting Common Stock with a per share offering price
of $10.00 or higher. Under the terms of the Partners License, Eclipsys may
further develop, commercialize, distribute and support the original technology
and license it, as well as sell related services, to other healthcare providers
and hospitals throughout the world (with the exception of the Boston,
Massachusetts metropolitan area). No sales of the BICS system have been made
and, consequently, no royalties have been paid by Eclipsys pursuant to the
Partners License because products based on the licensed technology are still in
field trials. Eclipsys is obligated to offer to Partners and certain of its
affiliates an internal use license, granted on most favored customer terms, to
all new software applications developed by Eclipsys, whether or not derived from
the licensed technology, and major architectural changes to the licensed
technology. Beginning as of May 3, 1998, Partners and certain of its affiliates
are also entitled to receive internal use licenses for any changes to any module
or application included in the licensed technology requiring at least one person
year of technical effort. Eclipsys has an exclusive right of first offer to
commercialize new information technologies developed in connection with
Partners. If Eclipsys breaches any material term of the license, or if Mr.
Harvey J. Wilson voluntarily terminates his employment with Eclipsys prior to
May 1999, the license may become non-exclusive, at Partners' option. If Partners
converts the current license to a non-exclusive license, it must return 370,609
shares of Eclipsys Voting Common Stock to Eclipsys. As part of the Partners
License, Eclipsys provided certain development services to Partners. Fees for
these development services paid by Partners to Eclipsys totaled $2.0 million,
$2.5 million and $325,000 for 1996, 1997 and the first three months of 1998,
respectively. Mr. Jay Pieper, a director of Eclipsys, is Vice President of
Corporate Development and Treasury Affairs for Partners. Partners was not
affiliated with Eclipsys' at the time of the negotiation of the Partners
License.
In January 1998, Eclipsys completed the Emtek Acquisition for aggregate
consideration of $11.7 million (net of a $9.6 million receivable from Motorola),
consisting of 1,000,000 shares of Eclipsys Voting Common Stock issued to
Motorola and the assumption of $12.3 million in liabilities. In connection with
the Emtek Acquisition, Eclipsys entered into a software and support agreement
with Motorola pursuant to which Eclipsys agreed to provide certain software and
support services to Motorola's international customers for a minimum period of
one year in exchange for negotiated annual payments. As of October 31, 1998,
payments from Motorola totaled $4.6 million on the $9.6 million receivable owed
and $500,000 under the software and support agreement. Mr. Richard Severns, a
Senior Vice President of Motorola, is a director of Eclipsys. Neither Mr.
Severns nor Emtek was affiliated with Eclipsys at the time of the negotiation of
the Emtek Acquisition.
Mr. Harvey J. Wilson, President, Chief Executive Office and Chairman of the
Board of Eclipsys, is the managing general partner of Wilfam, a limited
partnership whose limited partners are members of the Mr. Wilson's immediate
family. Mr. Gregory L. Wilson, a general partner, is the investment manager for
Wilfam. In December 1995, upon the incorporation of Eclipsys, Wilfam purchased
2,022,700 shares of Eclipsys Voting Common Stock and Mr. Harvey Wilson purchase
505,675 shares of Eclipsys Voting Common Stock for a purchase price of $.10 per
share. In January 1997, Wilfam purchased 103,588 shares of Series D Convertible
Preferred Stock (each of which was converted on a one-for-one basis into
Eclipsys Voting Common Stock in the initial public offering) at a purchase price
of $12.55 per share.
Affiliates of General Atlantic Partners, LLC purchased (i) in May 1996, an
aggregate of $5.0 million of Series A Convertible Participating Preferred Stock
of Eclipsys, which were subsequently converted into 1,231,747 shares of Series F
Convertible Preferred Stock (each of which was converted on a one-for-one basis
into Eclipsys Voting Common Stock in the initial public offering), (ii) in
January 1997, 4,423,509 shares of Series D Convertible Preferred Stock (each of
which was converted on a one-for-one basis into Eclipsys Voting Common Stock in
the initial public offering) for an aggregate of $55.5 million, (iii) in
February 1998, an aggregate of 900,000 shares of Series G Convertible Preferred
Stock (each of which was converted on a two-for-three basis into Eclipsys Voting
Common Stock in the initial public offering)
99
<PAGE> 108
for an aggregate of $9.0 million and (iv) in August 1998, an aggregate of
600,000 shares of Eclipsys Voting Common Stock. Messrs. William Ford and Steven
Denning, both of whom are directors of Eclipsys, are Managing Members of General
Atlantic Partners, LLC.
Wilfam is a limited partner in certain affiliates of General Atlantic
Partners, LLC. As such, Wilfam participated in the May 1996 and the February
1998 investments discussed above. The Wilfam indirect investments were
approximately $12,600 in shares of Series A Convertible Participating Preferred
Stock and $185,000 in Series G Convertible Preferred Stock, both of which were
subsequently converted as discussed above.
During the year ended December 31, 1997 and the nine months ended September
30, 1998, Eclipsys from time to time chartered an airplane for corporate
purposes from an aircraft charter company. Eclipsys paid $336,000 to the charter
company during 1997 and $384,580 during the first nine months of 1998. The
aircraft provided for use by Eclipsys was leased by the charter company from
RMSC of West Palm Beach ("RMSC"), a company that is wholly owned by Mr. Harvey
J. Wilson. In connection with these charters, RMSC invoiced the charter company
$219,000 in 1997 and $226,042 in the first nine months of 1998. Mr. Wilson has
no ownership interest in the charter company. Eclipsys believes that the terms
of the charters were at least as favorable to it as those that could have been
negotiated with unaffiliated third parties.
See "Description of Eclipsys Capital Stock -- Registration Rights" for a
description of registration rights granted to certain significant stockholders
of Eclipsys.
See "Eclipsys Management -- Observer Rights" for a description of certain
observer rights granted to a significant stockholder of Eclipsys.
See "Eclipsys Management -- Employment Arrangements" for a description of
Mr. Harvey J. Wilson's employment agreement with Eclipsys.
Eclipsys has adopted a policy that future transactions between Eclipsys and
its executive officers, directors and affiliates must (i) be on terms no less
favorable to Eclipsys than could be obtained from unaffiliated third parties and
(ii) be approved by a majority of the members of the Eclipsys Board and by a
majority of the disinterested members of the Eclipsys Board.
100
<PAGE> 109
BUSINESS OF TSI
The information in this section relates to the business of TSI as it is
currently conducted, without giving effect to the Merger and the HealthVISION
Acquisition. See "-- Recent Developments" at page 107.
OVERVIEW
TSI provides management information technology to hospitals, integrated
delivery networks, physician groups and other healthcare 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.
INDUSTRY
Pressure by employers, health insurers and government payors to control
health care costs is driving a movement towards managed care and new forms of
reimbursement for health care providers. These new managed care reimbursement
models, including capitation, case rates, per diems and other fixed payment
arrangements, are shifting the financial risk of providing care from payors to
providers. Payors are also demanding that providers differentiate their services
by demonstrating quality of care. These and other pressures are leading to
industry consolidation and the formation of multi-entity provider networks,
including integrated delivery networks.
These changes have altered the information needs of health care providers
trying to compete in this new environment. Institutions must understand their
costs in order to manage the profitability of their clinical processes and their
many types of managed care contracts. Institutions also need to be able to
compare practice patterns and outcomes of different clinicians or affiliated
providers and to monitor utilization and outcomes on a continuous basis.
Further, systems must be put in place that help clinicians translate their new
understanding of improved care delivery into daily clinical operations.
Information tools are required at the point of care that help clinicians improve
their overall productivity as well as insure quality and cost effective care.
The existing information systems installed in most provider organizations
were developed to meet the needs of providers in a fee-for-service environment.
These systems are typically transaction-based departmental systems (e.g.,
laboratory, pharmacy, radiology and nursing) focused on recording billing
information for a single department. They are suitable primarily for collecting
financial data, rather than for analyzing clinical and operational information.
Existing departmental systems generally have been designed to operate as
stand-alone systems and typically are limited in their ability to share data.
Because these legacy systems do not integrate clinical, operational and
financial data across the enterprise, they do not provide the information TSI
believes is necessary for managers or clinicians to evaluate the cost of care by
patient, clinical specialty or episode of care. Further, these systems were
designed mainly to capture charges in a fee-for-service environment, rather than
to lower costs, improve utilization and demonstrate quality.
PRODUCTS
TSI's initial product, Transition I, was introduced in 1985. Since 1985,
TSI has developed new products on a regular basis. All TSI products extend the
core concepts of management information, accountability and control. These
products are based on the foundation of providing information technology tools
that enable healthcare organizations to: analyze past clinical, operational and
financial practices; model new approaches for the future; transform those models
into actionable plans; and measure actual practice against those plans. Recent
additions to the TSI product lines have extended these capabilities to include
disease-specific tools that focus on improving the day-to-day efficiency and
effectiveness of care
101
<PAGE> 110
providers as well as the real-time measurement of clinical protocols. TSI data
sources have also expanded to include clinical data repository technology.
The focus of TSI products is to empower the enterprise with information
that can be used to change and improve the clinical and financial performance of
the organization. More than 1,100 healthcare organizations in the United States
and abroad have chosen TSI as their information technology solution to support
their ongoing improvement efforts.
TSI's current product offerings are as follows:
Transition II. At the core of the Transition family of products is
Transition II, an integrated decision support system designed to provide the
clinical, operational and financial information that is needed to manage and
improve the delivery of care. Together, the clinical and financial components of
Transition II enable an organization to: (i) delineate responsibility and
accountability for managing costs; (ii) control resource utilization and reduce
costs; (iii) measure variances from rules-based protocols on a daily basis; (iv)
manage a mix of complex reimbursement contracts by case or member; (v) analyze
and measure quantifiable improvements in the patient care process; and (vi)
develop clinical and departmental budgets and variance analyses that adjust for
actual volume and mix.
Transition II creates a clinical and financial data repository by
integrating data from across the enterprise. The system gathers information from
the many departmental information systems within the organization through
interfaces that enable concurrent updating of distributed data. Transition II
analyzes this data in order to determine the patient-level costs of care and
identify areas for improvement. This information allows the organization to
evaluate its cost structure, make changes in clinical processes to reduce costs
and accurately price reimbursement contracts on a profitable basis. Transition
II also analyzes and measures clinical process and outcomes data, identifying
the practice patterns that most consistently result in the highest quality at
the lowest cost. In addition, the system includes capabilities for case mix,
reimbursement and utilization management, cost and profitability analysis,
strategic planning, modeling and forecasting.
Enterprise Manager Series, formerly known as Transition II for Integrated
Delivery Systems, contains several different components that meet the needs of
emerging integrated delivery networks. This product incorporates the
functionality of Transition II and extends it across multiple entities. It also
adds capabilities designed to meet the special needs of integrated delivery
networks, such as analyses focusing on groups of patient-members and their
associated health care activities. Different types of members can be
categorized, for example, by disease type, age, sex, insurance product or
employer.
Enterprise Manager Series includes tools to: (i) measure and monitor the
cost and quality of care longitudinally and determine where in a provider
network appropriate care can be provided most cost effectively; (ii) manage the
financial risks of capitation; (iii) provide risk pool accounting and management
both centrally and to physician groups; (iv) manage physician panels and
determine panel sizing; (v) centrally identify and consolidate multiple patient
identifiers across an enterprise and resolve them to a common master patient
index; (vi) manage populations by identifying detailed characteristics and
demographics, risk factors or chronic conditions, patient outcome status, and
HEDIS and HEDIS-like indicators; and (vii) link physician and hospital billing
information with the ability to view utilization, revenue and profitability by
physician only, hospital only, and combined physician and hospital.
Enterprise Person Identifier. This product is a vendor-neutral enterprise
master person index that uniquely identifies and cross-references patient,
person, or member identification numbers to link information stored in disparate
systems. This product is increasingly essential for an organization delivering
care at multiple sites to produce complete and accurate billing statements by
capturing and correctly linking all visits and related charges incurred by
patients throughout the network, regardless of the source of the data. This
capability is also a necessary foundation for enterprise clinical systems, such
as clinical data repositories and electronic patient records.
Dictionary Manager. Dictionary Manager enables users to input a change to
semi-static data tables or dictionaries just once, and have that change
immediately reflected in all designated systems
102
<PAGE> 111
automatically. Changes to the charge masters, the addition of new physicians to
the users staff, and the elimination of an insurance provider are all updated
and maintained accurately and automatically by Dictionary Manager.
Transition IV. Transition IV, TSI's next generation of decision support
solutions, extends the capabilities of Transition II by providing access to
real-time clinical information that can be used to enhance the quality of
patient care. Transition IV creates a domain of information to improve a
healthcare organization's ability to perform care analysis, care planning, care
support, and opportunity analysis. Transition IV provides a single desktop that
incorporates the HealthVISION real time clinical data repository with the
clinical and financial planning and analysis capabilities of Transition II.
Transition IV is comprised of five additive levels of packaging to enable
initial purchases or upgrades to any level. Among other benefits and features,
Transition IV:
- Provides detailed clinical information to use for process improvement
- Minimizes re-work through real-time alerts
- Provides real-time collection of clinical data through live HL7 feeds
- Improves patient outcomes through timely intervention
- Incorporates financial information in analysis and alerts
- Provides Web-enabled physician desktop
- Provides ease of access to timely data, such as laboratory test results
Transition For Quality. TSI's Transition for Quality product offers tools
that complement the analytical power of Transition II's clinical component and
provides on-line case management. With Transition for Quality, an organization
can define a broad range of quality issues and identify cases for review and
follow up based on outcome measures and variance from critical paths. Using this
information, the organization can concurrently monitor the progress and outcomes
of cases and intervene in response to automatic alerts. In addition, Transition
for Quality provides healthcare organizations with compliance tools to comply
with the Joint Commission on Accreditation of Healthcare Organizations' Oryx
initiative.
Transition Perspective and Clinical ABCs. These benchmarking products
offered in conjunction with products of Premier Inc. and HCIA, Inc.,
respectively, enable Transition II customers to use external benchmarking data
to further support their process improvement efforts.
Vital Oncology. This product, developed by TSI's subsidiary, Vital
Software, automates the clinical processes unique to medical oncology while
enhancing the quality of care. Vital Oncology significantly increases the
productivity of physicians and nurses, reduces the likelihood of error, and
improves patient care.
SERVICES AND SUPPORT
Implementation Assistance. Almost all new sales of products and many sales
of add-on products include implementation assistance. Implementation is carried
out by a team of specialists overseeing the process on-site. Implementation of
Transition II typically takes from six to twelve months.
Software Maintenance Contracts. TSI offers software maintenance contracts
for all software products. Under these contracts, TSI provides ongoing support,
including updates and enhancements to the software modules and telephone access
to a Help Desk staffed by an experienced team of support professionals.
Consulting Services. TSI also offers post-implementation consulting
services intended to assist customers in maximizing the benefits available
through the use of the Transition family of products. TSI's staff can assess
performance of the customer's system and advise the customer on its growing
needs. While these services do not currently constitute a major source of
revenue, TSI believes they have the potential to grow in importance.
103
<PAGE> 112
Integration Services. TSI offers data extraction services to develop the
conversion protocols necessary to obtain data feeds from an organization's
source systems, so as to enable data from these source systems to be integrated
with data from TSI applications. Typical extractions are from general ledger,
payroll, admission/discharge/transfer, medical records abstracting, patient
billing and various departmental systems. TSI also supports the installation of
real time HL7 interfaces.
CUSTOMERS
TSI's customers include a broad range of hospitals, integrated delivery
networks, managed care organizations and physician practices in the United
States and around the world. TSI's products are installed at more than 1,100
customer sites.
TECHNOLOGY
TSI has products deployed on both two-tier client/server and three-tier
client/server/server architectures. Each of the products utilizes the
architecture strategy best suited for the data access requirements inherent to
each product. This enables TSI to provide the power and flexibility of
distributed data and processing combined with a wide range of user platforms.
For example, each of Transition II, the Enterprise Manager Series and Transition
IV comprises a broad range of integrated applications that draw from a central
repository of patient-level clinical and financial data. They feature an open,
three-tiered client/server/server architecture that includes, at the client
level, a Microsoft Windows-compliant point-and-click interface. TSI believes
these features differentiate these products from other available decision
support products.
Multiple Platforms. TSI's products are designed to operate with a variety
of hardware platforms, operating systems and database management systems. This
strategy enables TSI to provided a practical and affordable solution for small
and mid-size group health plans and community hospitals as well as large
teaching hospitals and vertically-integrated health care delivery networks.
Microsoft Windows (3.1, 95, 98 and NT) is the client standard for all products.
Transition II host tier options include IBM 370/390 mainframes running the Model
204 DBMS, IBM AS/400s with DB2/400 and UNIX servers (Hewlett-Packard HP9000 and
IBM RS/6000) running the Oracle DBMS. The application tier requires an Intel
based processor. The Enterprise Manager Series of products utilizes the
Transition II architecture with a SQL Server component for specific population
studies. Transition for Quality is offered on both the HP9000 and the RS/6000
running either Oracle or Sybase. Transition IV repository options include UNIX
servers (HP9000, RS/6000) running either the Oracle, Sybase or Informix DBMS.
The Transition IV application tier is an Intel processor running NT with the SQL
Server DBMS. Vital Oncology utilizes an Intel processor running NT with the SQL
Server DBMS.
Three-Tiered Client/Server/Server Architecture. Transition II and
Transition IV, together with the Enterprise Manager Series, employ a
three-tiered computing architecture in which workstations (clients) and
host-servers share the work of managing and processing information. This
client/server environment allows a user to realize greater processing efficiency
at a lower cost than traditional terminal/ host or PC-LAN configurations.
The Data Server tier pulls data from an organization's disparate
transaction system databases and other data sources and batch processes it daily
into a value-added data repository. This tier performs the processing necessary
to calculate unit costs, reimbursement, quality indicators and critical path
variances. The system incorporates a variety of communications protocols,
together with data interfaces developed during the system implementation
process, to extract data from the disparate databases throughout an organization
in which transnational cost, process and outcomes information is stored,
allowing the organization to preserve its existing investment in information
technology.
The Application Server, the middle tier, performs the value-added data
integration, storage and access required to support the clinical and financial
analysis of the data. This tier runs on Windows NT and requires the SQL Server
DBMS. The Application Server relies on direct data feeds from the Data Server
104
<PAGE> 113
tier and provides SQL-compliant database structures to integrate other data
sources and to handle ad-hoc queries among all tiers of the architecture.
The Client tier performs on-line clinical and financial analysis through a
Microsoft Windows-compliant point-and-click interface. The Transition II,
Enterprise Manager Series and Transition IV applications were developed using
Microsoft's Visual Basic and Visual C++ development environments and are
compatible with Windows 3.1, 3.11, Windows '95, Windows '98, Windows NT and
other operating environments supported by the Microsoft Foundation Classes. The
architecture has been expanded to incorporate a Visual Basic rapid development
strategy exploiting Microsoft's ActiveX, COM/DCOM and Web enabling directions.
With Transition II, the Enterprise Manager Series and Transition IV, there is no
need to layer a separate executive information system on top of the application.
Instead, the product includes a graphical, mouse-driven user interface which
allows even inexperienced users to navigate through intuitive screens and
windows of information, to select the information to be reviewed at various
levels of detail and to transform numerical data into charts and graphs. The
system can be customized to set user preferences, display styles and sorting
parameters, enabling users to develop their own objects and applications.
The system provides tightly coupled interfaces to CCA Model 204, DB2/400,
Oracle and Microsoft SQL Server databases. Additionally, each of Transition II,
the Enterprise Manager Series and Transition IV system integrates external data
through compliance with the ODBC (Open Database Connectivity) and OLE 2.0
(Object Linking and Embedding) protocols. ODBC provides standard SQL
connectivity to a variety of SQL-compliant relational and non-relational
databases, while the OLE 2.0 protocol provides a display, update and editing
environment for Windows programs such as Microsoft Excel, Microsoft Word and PC
SAS. As a result, additional data from a customer's legacy systems can be used
in its native form without the need for data import.
SALES AND MARKETING
At September 30, 1998, TSI had a direct sales force of 23, consisting of 19
direct sales persons and four sales management executives organized in two
geographic regions covering the United States and Canada. TSI's direct sales and
sales management personnel are compensated through salaries plus commissions
based on quarterly and annual quotas. TSI also sells through distributors based
in New Zealand, Australia and the Netherlands. Distributors provide local
support for implementations and ongoing maintenance support.
TSI uses periodic newsletters and press releases, participation in trade
shows, direct mail and telemarketing to generate and pursue leads. Company
employees also speak at health care industry conferences and publish case
studies and articles. TSI sponsors annual user group conferences at which
customers can learn about TSI's new product offerings and exchange information
about their own experiences with TSI's products. TSI's May 1998 user group
conference attracted approximately 1,300 attendees.
COMPETITION
The market for health care information systems and services is intensely
competitive and rapidly evolving. TSI competes directly with other vendors of
decision support systems to health care providers. Other vendors of health care
information systems, including vendors currently targeting decision support
systems for payors, may enter the markets in which TSI competes. TSI also faces
competition from internal management information systems departments of large
hospital networks, many of which have developed or may develop financial and
clinical outcomes management systems or other cost control solutions. TSI
believes that the principal competitive factors influencing the market for its
products include vendor and product reputation, product architecture,
functionality and features, ease of use, rapidity of implementation, quality of
customer support, product performance and price. Competition may result in
significant price reductions, decreased gross margins, loss of market share and
lack of acceptance of TSI's products. There can be no assurance that TSI will be
able to compete successfully in the future or that
105
<PAGE> 114
competition will not have a material adverse effect on TSI's business, financial
condition and results of operations.
RESEARCH AND PRODUCT DEVELOPMENT
TSI's products consist primarily of internally-developed software. In
addition, TSI has incorporated in its products DBMSs, graphical user interfaces,
and other software developed by third-party vendors. TSI believes that the
timely development of new products and enhancements to existing products is
essential to maintaining its competitive position in the market and positioning
itself as an innovator. Since TSI's inception in 1985, TSI has developed and
released functionality upgrades as well as new products on a yearly basis.
TSI's current research and development efforts include expanding the
capabilities of Transition IV and extending the Vital Oncology product to
additional disease-specific applications. In addition, enhancements are planned
for the Enterprise Person Identifier, Dictionary Manager and Transition for
Quality products.
TSI's research and development activities are conducted in its Boston
office. As of September 30, 1998, its research and development staff consisted
of 63 employees. TSI's total research and development expenditures were $4.6
million in fiscal 1997.
INTELLECTUAL PROPERTY
TSI's ability to compete effectively depends to a significant extent on its
ability to protect its proprietary information. TSI relies primarily on trade
secret laws, confidentiality procedures and licensing arrangements to protect
its intellectual property rights.
TSI generally enters into confidentiality agreements with its consultants,
key employees and sales representatives and generally controls access to and
distribution of its software and other proprietary information. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use TSI's products or technology without authorization or to develop similar
technology independently. Although TSI intends to defend its intellectual
property, there can be no assurance that the steps taken by TSI to protect its
proprietary information will be adequate to prevent misappropriation of its
intellectual property or that TSI's competitors will not independently develop
software that is substantially equivalent or superior to TSI's software.
TSI is subject to the risk of alleged infringement by it of the
intellectual property rights of others. Although TSI is not currently aware of
any material infringement claims with respect to TSI's current or future
products, there can be no assurance that third parties will not assert such
claims or that any such claims will not require TSI to enter into license
arrangements or result in protracted and costly litigation, regardless of the
merits of such claims. No assurance can be given that any necessary licenses
will be available or that, if available, such licenses can be obtained on
commercially reasonable terms. Furthermore, litigation may be necessary to
enforce TSI's intellectual property rights, to protect TSI's trade secrets, to
determine the validity and scope of the proprietary rights of others or to
defend against claims of infringement. Such litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on TSI's business, financial condition and results of operations.
EMPLOYEES
As of September 30, 1998, TSI had 216 full-time employees, including 98 in
operations, 63 in research and development, 36 in sales and marketing and 19 in
general administration and finance.
TSI believes its future success will depend in large part upon the
continued service of its key technical and senior management personnel and upon
TSI's continuing ability to attract and retain highly-qualified technical and
managerial personnel. Competition for highly-qualified personnel is intense and
there can be no assurance that TSI will be able to retain its key managerial and
technical employees or that it will be able to attract and retain additional
highly-qualified technical and managerial personnel in
106
<PAGE> 115
the future. None of the Company's employees is represented by a labor union. TSI
has not experienced any work stoppage and considers its relationships with its
employees to be good.
PROPERTIES
TSI's principal offices occupy approximately 27,000 square feet of office
space in Boston, Massachusetts under a lease expiring in August 2000. TSI also
leases space for offices in Arizona, California, Georgia, Illinois, Pennsylvania
and Texas. TSI believes that its existing facilities will be adequate to meet
its currently anticipated requirements and that, if additional space is needed,
such space will be available on acceptable terms.
LEGAL PROCEEDINGS
TSI is not a party to any material litigation, and is not aware of any
pending or threatened litigation that would have a material adverse effect on
TSI or its business.
RECENT DEVELOPMENTS
On December 3, 1998, TSI completed its acquisition of the approximately
80.5% of the capital stock of HealthVISION not already owned by TSI for cash in
the amount of $25.6 million, 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, reflecting an estimated aggregate purchase price, including TSI's
initial 1997 investment, of $40.7 million, which includes $6.4 million
previously paid by TSI and $9.3 million of assumed liabilities, net of cash
acquired.
HealthVISION is a Santa Rosa, California 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 TSI'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.
107
<PAGE> 116
PRINCIPAL STOCKHOLDERS OF TSI
The following table sets forth certain information regarding the beneficial
ownership of the shares of TSI Voting Common Stock as of November 10, 1998, by
(i) each person or entity known to TSI to own beneficially more than 5% of the
TSI Voting Common Stock, (ii) each current director of TSI, (iii) TSI's Chief
Executive Officer and the four other most highly compensated executive officers
of TSI during the fiscal year ended September 30, 1998 and (iv) all current
directors and executive officers as a group. Unless otherwise indicated, each
person or entity named in the table has sole voting power and investment power
(or shares such power with his or her spouse) with respect to all shares of
capital stock listed as owned by such person or entity.
<TABLE>
<CAPTION>
NUMBER OF SHARES APPROXIMATE
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) PERCENTAGE OWNED
------------------------ ---------------------- ----------------
<S> <C> <C>
Warburg, Pincus Ventures, L.P.(2)......................... 6,125,000 34.0%
466 Lexington Avenue
New York, New York 10017
Patrick T. Hackett(2)..................................... 6,125,000 34.0
c/o Warburg, Pincus Ventures, L.P.
466 Lexington Avenue
New York, New York 10017
NationsBank Corporation(3)................................ 1,114,673 6.2
101 South Tryon Street
Charlotte, North Carolina 28255
Amvescap P.L.C.(4)........................................ 936,955 5.2
11 Devonshire Square
London EC2M 4YR England
Robert F. Raco(5)......................................... 868,766 4.6
Christine Shapleigh(6).................................... 532,429 2.9
Donald C. Cook(7)......................................... 552,400 2.9
Thomas H. Zajac(8)........................................ 290,650 1.6
Peter W. Van Etten(9)..................................... 28,700 *
Allen F. Wise(9).......................................... 28,700 *
Robert S. Hillas.......................................... -- --
Anthony R. Fonze(10)...................................... 35,000 *
All directors and executive officers as a group (10
persons)(11)............................................ 8,534,180 42.1
</TABLE>
- ---------------
* Less than one percent.
(1) The number of shares beneficially owned by each stockholder is determined
under rules promulgated by the Commission, and the information is not
necessarily indicative of beneficial ownership for any other purpose. Under
such rules, beneficial ownership includes any shares as to which the
individual or entity has the right to acquire beneficial ownership within
60 days after the date of this table through the exercise of any stock
option, warrant or other right. The inclusion herein of shares, however,
does not constitute an admission that the named stockholder is a direct or
indirect beneficial owner of such shares.
(2) Represents shares held by Warburg, Pincus Ventures, L.P. ("WP Ventures"),
of which Mr. Hackett may be deemed to have beneficial ownership. The number
of shares beneficially owned by WP Ventures is based on information
contained in a Schedule 13G filed with the Commission on February 14, 1997
by WP Ventures, Warburg, Pincus & Co. ("W.P & Co.") E.M. Warburg, Pincus &
Co., LLC ("E.M. Warburg"). Each of WP Ventures, WP & Co. and E.M. Warburg
has shared voting power and shared dispositive power with respect to
6,125,000 shares of Common Stock. WP & Co., as the sole general partner of
WP Ventures, has a 20% interest in the profits of WP Ventures. E.M. Warburg
manages WP Ventures. Lionel I. Pincus is the managing partner of WP & Co.
and the managing member of E.M. Warburg and may be deemed to control both
WP & Co. and E.M. Warburg. Mr. Hackett disclaims beneficial ownership of
the shares held by WP Ventures.
(3) Includes 356,262 shares of TSI Voting Common Stock issuable upon exchange
of outstanding shares of TSI Non-Voting Common Stock and 297,928 shares of
TSI Voting Common Stock issuable upon
108
<PAGE> 117
exchange of 297,928 shares of TSI Non-Voting Common Stock issuable upon
exercise of a warrant. The number of shares beneficially owned by
NationsBank Corporation ("NationsBank") is based on information contained
in Schedule 13G/A filed with the Commission on February 18, 1998 by
NationsBank as a parent holding company for NB Holdings Corporation ("NB
Holdings"), which is a holding company of its subsidiaries, NationsBank,
N.A. ("NB") and NationsBanc Investment Corporation ("NIC"). Each of
NationsBank and NB Holdings has reported sole voting power with respect to
1,114,673 shares of TSI Voting Common Stock and sole dispositive power with
respect to 1,114,663 shares of TSI Voting Common Stock. NIC has reported
sole voting power and sole dispositive power with respect to 1,114,663
shares of TSI Voting Common Stock. NB has reported sole voting power with
respect to 10 shares of TSI Voting Common Stock.
(4) The number of shares beneficially owned by Amvescap P.L.C. ("Amvescap") is
based on a Schedule 13G/A filed with the Commission on February 12, 1998 by
Amvescap, AVZ, Inc. ("AVZ"), AIM Management Group, Inc. ("AIM"), Amvescap
Group Services ("AGS"), Invesco, Inc. ("Invesco"), Invesco Capital
Management, Inc. ("ICM"), Invesco PLC ("IP") and Invesco Realty Advisors,
Inc. ("IRA"). Each of Amvescap, AVZ, AIM, AGS, Invesco, ICM, INAH, IFG,
IMG, IP and IRA have shared voting power and shared dispositive power with
respect to 937,355 shares of TSI Voting Common Stock.
(5) Represents shares subject to stock options exercisable within 60 days of
the date of this table. Does not include 150,468 shares subject to options
not exercisable within 60 days of the date of this table.
(6) Includes 2,000 shares held in custody by Dr. Shapleigh for the benefit of
her two minor children and 529,429 shares subject to stock options
exercisable within 60 days of the date of this table. Does not include
55,777 shares subject to options not exercisable within 60 days of the date
of this table.
(7) Includes 1,250 shares held in custody by the spouse of Mr. Cook for the
benefit of Mr. Cook's two minor children and 467,817 shares subject to
stock options exercisable within 60 days of the date of this table. Does
not include 116,900 shares subject to options not exercisable within 60
days of the date of this table.
(8) Represents 290,650 shares subject to stock options exercisable within 60
days of the date of this table. Does not include 100,000 shares subject to
options not exercisable within 60 days of the date of this table.
(9) Represents shares subject to stock options exercisable within 60 days of
the date of this table.
(10) Mr. Fonze tendered his resignation from his office as Vice President and
General Manager of TSI's Vital Software subsidiary on October 27, 1998.
Represents options Mr. Fonze had the right to exercise through November 30,
1998, the date on which his employment with TSI, and his right to exercise
options, ended.
(11) See Notes (2) and (5) through (10). Does not include Mr. Fonze.
109
<PAGE> 118
DESCRIPTION OF ECLIPSYS CAPITAL STOCK
Under Eclipsys' Third Amended and Restated Certificate of Incorporation
(the "Eclipsys Charter"), Eclipsys is authorized to issue 200,000,000 shares of
Eclipsys Voting Common Stock, 5,000,000 shares of Eclipsys Non-Voting Common
Stock and 5,000,000 shares of Preferred Stock, $.01 par value per share
("Eclipsys Preferred Stock").
COMMON STOCK AND NON-VOTING COMMON STOCK
Holders of Eclipsys Voting Common Stock are entitled to one vote for each
share held on all matters submitted to a vote of stockholders and do not have
cumulative voting rights. Holders of Eclipsys Non-Voting Common Stock do not
have voting rights other than as provided by statute. Accordingly, holders of a
majority of the shares of Eclipsys Voting Common Stock entitled to vote in any
election of directors may elect all of the directors standing for election.
Holders of Eclipsys Voting Common Stock and Eclipsys Non-Voting Common Stock are
entitled to receive ratably such dividends, if any, as may be declared by the
Eclipsys Board out of funds legally available therefor, subject to any
preferential dividend rights of outstanding Eclipsys Preferred Stock. Upon the
liquidation, dissolution or winding up of Eclipsys, the holders of Eclipsys
Voting Common Stock and Eclipsys Non-Voting Common Stock are entitled to receive
ratably the net assets of Eclipsys available after the payment of all debts and
other liabilities and subject to the prior rights of any outstanding Eclipsys
Preferred Stock. Holders of Eclipsys Voting Common Stock and Eclipsys Non-Voting
Common Stock have no preemptive, subscription or redemption rights. The
outstanding shares of Eclipsys Voting Common Stock and Eclipsys Non-Voting
Common Stock are fully paid and nonassessable. The rights, preferences and
privileges of holders of Eclipsys Voting Common Stock are subject to, and may be
adversely affected by, the rights of the holders of shares of any series of
Preferred Stock which Eclipsys may designate and issue in the future. Certain
holders of Eclipsys Voting Common Stock and Eclipsys Non-Voting Common Stock
have the right to require Eclipsys to effect the registration of their shares of
Eclipsys Voting Common Stock, or the Eclipsys Voting Common Stock into which the
Eclipsys Non-Voting Common Stock is convertible, as the case may be, in certain
circumstances.
Shares of Eclipsys Non-Voting Common Stock may be converted, at the
holder's option, into shares of Eclipsys Voting Common Stock at the rate of one
share of Eclipsys Voting Common Stock for each share of Eclipsys Non-Voting
Common Stock surrendered for conversion, subject to certain adjustments. The
holder can elect to convert all or any part of its Eclipsys Non-Voting Common
Stock at any time, except that, if the holder is subject to certain federal
banking regulations, the holder may only convert in connection with specified
sales of the Eclipsys Voting Common Stock to be issued upon the conversion.
PREFERRED STOCK
Under the terms of the Eclipsys Charter, the Eclipsys Board is authorized,
subject to any limitations prescribed by law, without stockholder approval, to
issue up to 5,000,000 shares of Eclipsys Preferred Stock in one or more series.
Each such series of Eclipsys Preferred Stock shall have such rights,
preferences, privileges and restrictions, including voting rights, dividend
rights, conversion rights, redemption privileges and liquidation preferences, as
shall be determined by the Eclipsys Board. The purpose of authorizing the
Eclipsys Board to issue Eclipsys Preferred Stock and determine its rights and
preferences is to eliminate delays associated with a stockholder vote on
specific issuances. The issuance of Eclipsys Preferred Stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from acquiring, a
majority of the outstanding voting stock of Eclipsys. Eclipsys has no present
plans to issue any shares of Eclipsys Preferred Stock.
WARRANTS
In January 1997, Eclipsys issued two warrants (the "Eclipsys Warrants"),
each exercisable at a purchase price of $.01 per share, to purchase up to
1,124,822 and up to 674,893 shares of Eclipsys Non-
110
<PAGE> 119
Voting Common Stock, respectively, to First Union Corporation and BT Investment
Partners L.P. The number of shares purchasable pursuant to each Eclipsys Warrant
was subject to adjustment based on the timing of the redemption of the Series B
Redeemable Preferred Stock, which occurred upon the closing of the Eclipsys IPO.
Because the Eclipsys IPO closed prior to December 31, 1998, the Eclipsys
Warrants are exercisable for an aggregate of 962,833 shares of Eclipsys
Non-Voting Common Stock. In lieu of payment of the exercise price, each
warrantholder may elect to convert its Eclipsys Warrant, in whole or in part,
into shares of Eclipsys Non-Voting Common Stock having a value equal to the
value of the shares issuable at the time of the conversion less the aggregate
exercise price for such shares under the Eclipsys Warrant. Both Eclipsys
Warrants expire on August 6, 2001.
REGISTRATION RIGHTS
Pursuant to a Second Amended and Restated Registration Rights Agreement
(the "Registration Rights Agreement") dated January 28, 1998 among Eclipsys and
certain of its stockholders (the "Rightsholders"), such Rightsholders will be
entitled, commencing February 6, 1999, to certain rights with respect to the
registration under the Securities Act of a total of approximately 17,890,233
shares of Eclipsys Voting Common Stock (the "Registrable Shares"), including
shares issuable upon exercise of the Warrants. In general, the Registration
Rights Agreement provides that Rightsholders with demand and incidental
registration rights beginning no earlier than February 6, 1999, six months after
the effective date of the Eclipsys IPO.
In connection with the Merger, Eclipsys has agreed to use its reasonable
efforts to amend the Registration Rights Agreement to add Warburg as a party to
the agreement. In the event that Eclipsys is unable to amend the Registration
Rights Agreement, Eclipsys will enter into a separate registration rights
agreement with Warburg containing terms that are substantially identical to the
Registration Rights Agreement.
Certain of the Rightsholders, holding approximately 16,589,691 Registrable
Shares, may require Eclipsys to prepare and file a registration statement under
the Securities Act with respect to their Registrable Shares if such registration
would result in an offering with net proceeds to the requesting Rightsholder or
Rightsholders of at least $5.0 million. In addition, one of the Rightsholders
may compel registration for a smaller amount if the offering is to include all
the shares of Eclipsys stock then owned by such Rightsholder, none of which are
then available for sale pursuant to Rule 144 under the Securities Act. Two of
the Rightsholders may each require Eclipsys to prepare and file two registration
statements. Each of five other Rightsholders are entitled to one such
registration request. After the merger, Warburg will be entitled to one
registration request, but may not require Eclipsys to prepare and file a
registration statement prior to January 1, 2000. Eclipsys is not required to
file a demand registration statement for six months after the effective date of
its initial public offering or within three months after the effective date of
any other registration statement, subject to certain restrictions.
If Eclipsys proposes to register any of its securities under the Securities
Act, the Rightsholders will be entitled to include Registrable Shares in such
offering, subject to the right of the managing underwriter of any underwritten
public offering to limit for marketing reasons the number of shares of
Registrable Shares included in the offering.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for Eclipsys Voting Common Stock is
BankBoston, N.A.
111
<PAGE> 120
COMPARISON OF STOCKHOLDERS' RIGHTS
At the Effective Time, the stockholders of TSI will become stockholders of
Eclipsys, a corporation governed by Delaware law and a Certificate of
Incorporation and Bylaws adopted thereunder. The following discussion summarizes
the material differences between the rights of holders of TSI Voting Common
Stock and holders of Eclipsys Voting Common Stock, based on a comparison of the
Delaware and Massachusetts corporation laws and differences between the charters
and bylaws of TSI and Eclipsys. The Restated Articles of Organization and the
Amended and Restated Bylaws of TSI are referred to herein as the "TSI Charter"
and the "TSI Bylaws," respectively, and the Third Amended and Restated
Certificate of Incorporation and the Amended and Restated Bylaws of Eclipsys are
referred to herein as the "Eclipsys Charter" and the "Eclipsys Bylaws,"
respectively. This summary does not purport to be complete and is qualified in
its entirety by reference to the TSI Charter and TSI Bylaws, the Eclipsys
Charter and Eclipsys Bylaws and the relevant provisions of the Delaware General
Corporation Law (the "Delaware Law") and the Massachusetts Business Corporation
Law (the "Massachusetts Law").
MEETINGS OF STOCKHOLDERS
The Delaware Law provides that special meetings of stockholders may be
called only by the directors or by any other person authorized by a
corporation's certificate of incorporation or bylaws. The Eclipsys Charter and
the Eclipsys Bylaws provide that a special meeting of stockholders may only be
called by the president, the chairman of the board or the Eclipsys Board.
The Massachusetts Law provides that special meetings of stockholders of a
corporation with a class of voting stock registered under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), may be called by the
president or the directors of such corporation, and unless otherwise provided in
the corporation's charter or bylaws shall be called by the clerk or other
officer upon the written application of the owners of not less than 40% in
interest of the corporation's stock entitled to vote at such meeting. The TSI
Bylaws authorize the president, the chairman of the board, or the TSI Board to
call special meetings of the stockholders and require that the Clerk or any
other officer call a special meeting of the stockholders upon written
application by the owners of not less than 20% in interest of the corporation's
stock entitled to vote at such meeting.
INSPECTION RIGHTS
Inspection rights under the Delaware Law are more extensive than under the
Massachusetts Law. Under the Delaware Law, stockholders demonstrating a proper
purpose have the right to inspect a corporation's stock ledger, stockholder
list, and other books and records.
Under the Massachusetts Law, a corporation's stockholders have the right
for a proper purpose to inspect the corporation's articles of organization,
bylaws, records of all meetings of incorporators and stockholders, and stock and
transfer records, including the stockholder list. In addition, stockholders of a
Massachusetts business corporation have a qualified common law right under
certain circumstances to inspect other books and records of the corporation.
ACTION BY CONSENT OF STOCKHOLDERS
Under the Delaware Law, unless otherwise provided in a corporation's
certificate of incorporation, any action required or permitted to be taken at an
annual or special meeting of stockholders may be taken without such a meeting,
without prior notice and without a vote, if a consent in writing, setting forth
the action to be taken is signed by the holders of outstanding stock
representing the number of shares necessary to take such action at a meeting at
which all shares entitled to vote were present. However, the Eclipsys Charter
prohibits stockholders from taking any action by written consent in lieu of a
meeting.
112
<PAGE> 121
Under the Massachusetts Law and the TSI Bylaws, any action required or
permitted to be taken at any meeting of stockholders may be taken without a
meeting if all stockholders entitled to vote consent to the action in writing.
CUMULATIVE VOTING
Under the Delaware Law, a corporation may provide in its certificate of
incorporation for cumulative voting by stockholders in elections of directors
(i.e., each stockholder casts as many votes for directors as he has shares of
stock multiplied by the number of directors to be elected). The Eclipsys Charter
does not provide for cumulative voting rights.
The Massachusetts Law does not authorize or provide for cumulative voting
rights. Neither the TSI Charter nor the TSI Bylaws provide for cumulative
voting.
ISSUANCE OF STOCK; PREFERRED STOCK
Shares of Eclipsys Voting Common Stock may be issued from time to time, in
such amounts and for such consideration, as may be determined by the Eclipsys
Board. No holder of Eclipsys Voting or Non-Voting Common Stock has any
preemptive or preferential rights to purchase or to subscribe for any shares of
capital stock or other securities that may be issued by Eclipsys. Eclipsys has
5,000,000 authorized shares of Eclipsys Preferred Stock. None of such shares is
outstanding. The Eclipsys Preferred Stock is issuable in one or more series. The
Eclipsys Board is empowered to authorize without stockholder approval the
issuance of each series of Eclipsys Preferred Stock and is empowered to fix the
voting rights, if any (in addition to those prescribed by law), dividend rights,
liquidation preferences, redemption provisions, if any, conversion rights, if
any, and other rights of each such series, any of which rights could adversely
affect the voting and other rights of the holders of Eclipsys Voting Common
Stock.
Shares of TSI Voting Common Stock may be issued by TSI from time to time as
approved by the TSI Board without stockholder approval. Holders of the capital
stock of TSI are not entitled to preemptive or preferential rights to purchase
or to subscribe for any shares of capital stock or other securities that may be
issued by TSI. TSI has 1,000,000 authorized shares of Preferred Stock, par value
$.01 per share (the "TSI Preferred Stock"). None of such shares is outstanding.
The TSI Preferred Stock is issuable in one or more series. The TSI Board can
authorize, without stockholder approval, the issuance of each series of TSI
Preferred Stock and can fix the voting rights, if any, dividend rights,
liquidation preferences, redemption provisions, if any, conversion rights, if
any, and other rights of each such series, any of which rights could adversely
affect the voting and other rights of the holders of TSI Voting Common Stock.
DIVIDENDS AND REPURCHASES OF STOCK
Under the Delaware Law, a corporation generally is permitted to declare and
pay dividends out of surplus or out of net profits for the current and/or
preceding fiscal year, provided that such dividends will not reduce capital
below the amount of capital represented by all classes of stock having a
preference upon the distribution of assets. Also under the Delaware Law, a
corporation may generally redeem or repurchase shares of its stock if such
redemption or repurchase will not impair the capital of the corporation. The
directors of a Delaware corporation may be jointly and severally liable to the
corporation for a willful or negligent violation of such provisions of Delaware
law. The Eclipsys Charter provides that the declaration and payment of any
dividend is within the discretion of the Eclipsys Board and subject to the
rights of the holders of any Eclipsys Preferred Stock.
Under the Massachusetts Law, the payment of dividends and the repurchase of
the corporation's stock are generally permissible if such actions are not taken
when the corporation is insolvent, do not render the corporation insolvent, and
do not violate the corporation's articles of organization. The directors of a
Massachusetts corporation may be jointly and severally liable to the corporation
to the extent that a dividend authorized by the directors exceeds such
permissible amounts and is not repaid to the
113
<PAGE> 122
corporation. The TSI Charter provides that the declaration and payment of any
dividend is within the discretion of the TSI Board and subject to the rights of
the holders of any TSI preferred stock.
CLASSIFICATION OF THE BOARD OF DIRECTORS
The Delaware Law permits (but does not require) classification of a
corporation's board of directors into one, two or three classes. The Eclipsys
Charter provides that the Eclipsys Board is divided into three classes with no
one class having more than one director more than any other class, elected for
staggered three year terms.
The Massachusetts Law generally requires that publicly held Massachusetts
corporations have a classified board of directors consisting of three classes as
nearly equal in size as possible, unless those corporations elect to opt out of
the statute's coverage. The TSI Bylaws divide the TSI Board into three classes,
with no one class having more than one director more than any other class, for
staggered three year terms.
REMOVAL OF DIRECTORS
Under the Delaware Law, stockholders may remove directors with or without
cause by a majority vote unless otherwise provided in the certificate of
incorporation. The Eclipsys Charter provides that directors may be removed only
for cause by the holders of at least 75% of the then issued and outstanding
shares of capital of the corporation. Unlike Massachusetts law, Delaware law
does not permit directors to remove other directors.
Under the Massachusetts Law, except as otherwise provided in the
corporation's charter or bylaws, directors of a public company subject to that
section may be removed from office with or without cause by the holders of a
majority of the shares outstanding and entitled to vote in the election of
directors or with cause by a majority of the directors then in office, provided
that the directors elected by a particular class of stockholders may be removed
only by the vote of the holders of a majority of the shares of the particular
class entitled to vote for the election of such directors. The TSI Bylaws
provide that any director may be removed with or without cause by the vote of
the holders of a majority of the shares issued, then outstanding and entitled to
vote in the election of directors, or with cause by the majority of the Board of
Directors.
VACANCIES ON THE BOARD OF DIRECTORS
Under the Delaware Law, unless otherwise provided in the charter or bylaws,
vacancies on the board of directors and newly created directorships resulting
from any increase in the authorized number of directors may be filled by the
remaining directors. The Eclipsys Charter and Bylaws provide that only a vote of
the majority of the directors in office, even if less than a quorum, shall fill
any vacancy on the Eclipsys Board.
Under the Massachusetts Law, unless otherwise provided in a corporation's
articles of organization, any vacancy in the board of directors may be filled in
the manner prescribed in the bylaws or in the absence of such a bylaw, by the
directors. The TSI Charter does not address the manner in which vacancies on the
board of directors may be filled. The TSI Bylaws provide that any vacancy may be
filled by a vote of the majority of the directors in office (even if less than a
quorum) or, in the absence of such election by the directors, by the
stockholders.
LIMITATION ON DIRECTORS' LIABILITY; INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Delaware Law allows a corporation to include in its certificate of
incorporation a provision that limits or eliminates the personal liability of
directors to the corporation and its shareholders for monetary damages for
breach of fiduciary duty as a director. The Delaware Law does not, however,
permit a
114
<PAGE> 123
corporation to limit or eliminate the personal liability of a director for (i)
any breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) intentional or
negligent payment of unlawful dividends or stock purchase or redemption, or (iv)
any transaction from which the director derived an improper personal benefit.
The Eclipsys Charter provides for limitations on directors' liability as
permitted by this statute.
The Delaware Law also provides that a corporation may indemnify any of its
officers and directors party to any action, suit or proceeding by reason of the
fact that he or she was a director, officer, employee or agent of the
corporation by, among other things, a majority vote consisting of directors who
were not parties to such action, suit or proceeding, provided that such officer
or director acted in good faith and in a manner he or she reasonably believed to
be in or not opposed to the best interests of the corporation. The Eclipsys
Charter and the Eclipsys Bylaws provide for indemnification of officers and
directors of Eclipsys to the fullest extent permitted by this statute.
The Massachusetts Law allows a corporation to include in its charter a
provision that limits or eliminates the personal liability of directors to the
corporation and its shareholders for monetary damages for breach of fiduciary
duty as a director. The Massachusetts Law does not, however, permit a
corporation to limit or eliminate the personal liability of a director for (i)
any breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) payment of dividends
or stock purchase or redemption, except a distribution of stock of the
corporation, in violation of the corporation's charter, or (iv) any loans to any
officer or director of the corporation. The TSI Charter provides for limitations
on directors' liability as permitted by this statute.
The Massachusetts Law provides that indemnification of directors, officers,
employees and other agents of a corporation, and persons who serve at its
request as directors, officers, employees and other agents of another
organization, may be provided by it to whatever extent specified in or
authorized by (i) the charter, (ii) a bylaw adopted by the stockholders, or
(iii) a vote adopted by the holders of a majority of the shares of stock
entitled to vote on the election of directors. The TSI Bylaws provide that TSI
will indemnify its directors or officers (including persons who serve at its
request as directors, officers or trustees of any organization in which TSI has
an interest as a stockholder, creditor or otherwise), to the fullest extent
permitted by the Massachusetts Law, against liabilities and expenses arising out
of legal proceedings brought or threatened against them by reason of their
status as directors or officers. Under this provision each director and officer
is entitled to indemnification even if not successful on the merits, if such
director or officer acted in good faith in the reasonable belief that his or her
action was in the best interest of TSI.
INTERESTED DIRECTOR TRANSACTIONS
The Delaware Law and each of the Eclipsys and TSI Bylaws provide that no
transaction between a corporation and one or more of its directors or officers
or an entity in which one or more of its directors or officers are directors or
officers or have a financial interest, shall be void or voidable solely for that
reason. In addition, no such transaction shall be void or voidable solely
because the director or officer is present at, participates in, or votes at the
meeting of the board of directors, or committee thereof, which authorizes the
transaction. In order that such a transaction not be found void or voidable, it
must, after disclosure of material facts, be approved by a majority of the
disinterested directors, a committee of disinterested directors, or the
stockholders, or the transaction must be fair as to the corporation. The
Massachusetts Law has no comparable provision.
SALE, LEASE OR EXCHANGE OF ASSETS AND MERGERS
The Delaware Law requires the approval of the directors and the vote of the
holders of a majority of the outstanding stock entitled to vote thereon for the
sale, lease, or exchange of all or substantially all of a
115
<PAGE> 124
corporation's property and assets or a merger or consolidation of the
corporation into any other corporation, although the certificate of
incorporation may require a higher stockholder vote. The Massachusetts Law
provides that a vote of two-thirds of the shares of each class of stock
outstanding and entitled to vote thereon is required to authorize the sale,
lease, or exchange of all or substantially all of a corporation's property and
assets or a merger or consolidation of the corporation into any other
corporation, except that the articles of organization may provide that the vote
of a greater or lesser proportion, but not less than a majority of the
outstanding shares of each class, is required. Neither the Eclipsys Charter or
Bylaws nor the TSI Charter or Bylaws address this issue.
AMENDMENTS TO CHARTER
Under the Delaware Law, charter amendments require the approval of the
directors and the vote of the holders of a majority of the outstanding stock and
a majority of each class of stock outstanding and entitled to vote thereon as a
class, unless the certificate of incorporation requires a greater proportion.
The Eclipsys Charter does not require a greater proportion except with respect
to amendment, repeal or modification of the following provisions, which require
a vote of at least 75% of the issued and outstanding shares entitled to vote
thereon: the provisions regarding indemnification and exculpation of directors;
the provisions regarding classification, number, election, nomination and
removal of directors; the provisions prohibiting actions by the unanimous
written consent of stockholders in lieu of a meeting; and the provisions
regarding the calling of special stockholders meetings. In addition, Delaware
law requires a class vote when, among other things, an amendment will adversely
affect the powers, preferences or special rights of a class of stock.
Under the Massachusetts Law, amendments to a corporation's articles of
organization relating to certain changes in capital or in the corporate name
require the vote of at least a majority of each class of stock outstanding and
entitled to vote thereon. Amendments relating to other matters require a vote of
at least two-thirds of each class outstanding and entitled to vote thereon or,
if the articles of organization so provide, a greater or lesser proportion but
not less than a majority of the outstanding shares of each class. Under
Massachusetts law, the articles of organization or bylaws may provide that all
outstanding classes of stock vote as a single class, but a separate vote of any
class of stock adversely affected by the amendment also is required. The TSI
Charter does not address this issue.
APPRAISAL RIGHTS
Dissenting stockholders have the right to obtain the fair value of their
shares ("appraisal rights") in more circumstances under the Massachusetts Law
than under the Delaware Law. Under the Delaware Law, a stockholder is entitled
to appraisal rights in the event of certain mergers or consolidations, but not
in the event of the sale, lease, or exchange of all or substantially all of a
corporation's assets or the adoption of an amendment to its certificate of
incorporation, unless such rights are granted in the corporation's certificate
of incorporation. The Eclipsys Charter does not grant such rights. The Delaware
and Massachusetts Laws further provide that a dissenting stockholder must not
vote in favor of the proposal in order to preserve his or her appraisal rights.
In order to perfect his or her appraisal rights, both jurisdictions require a
dissenting stockholder to notify the company in writing, prior to the vote on
the proposal, of his or her intention to demand payment for his or her shares if
the action is taken. The Delaware Law does not grant appraisal rights to a
holder of securities listed on a national securities exchange or designated as
national market system securities if the stockholder receives such securities in
exchange.
Under the Massachusetts Law, a properly dissenting stockholder is entitled
to receive the appraised value of his shares when the corporation votes (i) to
sell, lease, or exchange all or substantially all of its property and assets,
(ii) to adopt an amendment to its articles of organization which adversely
affects the rights of the stockholder or (iii) to merge or consolidate with
another corporation. The TSI Charter does not address this issue.
116
<PAGE> 125
ANTI-TAKEOVER PROVISIONS
The Charters and Bylaws of both Eclipsys and TSI contain provisions that
could discourage potential takeover attempts and prevent stockholders from
changing the company's management, including provisions authorizing the Eclipsys
Board to issue shares of preferred stock in series and restrictions on the
ability of stockholders to call a special meeting of stockholders.
The Delaware Law is substantially similar to the Massachusetts Law.
However, while the Delaware Law provides that, if a person acquires 15% or more
of the stock of a Delaware corporation without the approval of its board of
directors (an "interested stockholder"), such person may not engage in certain
transactions with the corporation for a period of three years, the Massachusetts
Law lowers the 15% threshold to 5% (except in the case of certain stockholders
eligible to file Schedule 13G under the Exchange Act). Both the Delaware Law and
the Massachusetts Law include certain exceptions to this prohibition; for
example, if the board of directors approves the acquisition of stock or the
transaction prior to the time that the person became an interested stockholder,
or if the interested stockholder acquires 85% (in the Delaware Law) or 90% (in
the Massachusetts Law) of the voting stock of the corporation (excluding voting
stock owned by directors who are also officers and certain employee stock plans)
in one transaction, or if the transaction is approved by the board of directors
and by the affirmative vote of two-thirds of the outstanding voting stock which
is not owned by the interested stockholder, the prohibition does not apply. The
Eclipsys Board has approved the Merger pursuant to the Delaware Law, and TSI is
currently subject to the Massachusetts Law.
117
<PAGE> 126
LEGAL MATTERS
The validity of the shares of Eclipsys Voting Common Stock offered hereby
will be passed upon for Eclipsys by Hale and Dorr LLP. Certain legal matters in
connection with the Merger will be passed upon for TSI by Foley, Hoag & Eliot
LLP.
EXPERTS
The financial statements of Eclipsys Corporation as of December 31, 1997
and 1996 and for each of the two years in the period ended December 31, 1997
included in this Joint Proxy Statement/Prospectus have been so included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
The financial statements of Transition Systems, Inc. as of September 30,
1998 and 1997 and for each of the three years in the period ended September 30,
1998 included in this Joint Proxy Statement/ Prospectus have been so included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
The consolidated balance sheets of HealthVISION, Inc. as of December 31,
1996 and 1997 and the consolidated statements of operations, stockholders'
equity and cash flows for the years then ended appearing in this Joint Proxy
Statement/Prospectus have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given on the authority of such firm as
experts in accounting and auditing.
The financial statements of ALLTEL Healthcare Information Services, Inc. as
of January 23, 1997, December 31, 1996 and 1995 and for the period from January
1, 1997 through January 23, 1997 and each of the two years in the period ended
December 31, 1996 included in this Joint Proxy Statement/ Prospectus have been
so included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The financial statements of SDK Healthcare Information Systems as of April
30, 1997 and 1996 and for each of the years in the two-year period ended April
30, 1997 included in this Joint Proxy Statement/ Prospectus have been examined
by KPMG Peat Marwick LLP, independent certified public accountants. Such
financial statements have been included in the registration statement in
reliance upon the reports with respect thereto of KPMG Peat Marwick LLP,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
FUTURE STOCKHOLDER PROPOSALS
Stockholder proposals intended for inclusion in the proxy statement for the
next Eclipsys annual stockholders' meeting should be sent to the Secretary of
Eclipsys at 777 East Atlantic Ave., Suite 200, Delray Beach, Florida 33483.
Under the Eclipsys Bylaws, notice of any stockholder proposal to be made at an
annual meeting of stockholders of Eclipsys must be received no less than 60 days
nor more than 90 days prior to the date of the annual meeting of stockholders of
Eclipsys. If public notice of the annual meeting of stockholders of Eclipsys is
not given at least 70 days before the meeting date, any stockholder proposal
must be received by Eclipsys within 10 days after such public notice. A copy of
the current Bylaws may be obtained from the Secretary of Eclipsys. The
provisions in the Bylaws relevant to the foregoing will be continued unchanged
after the Merger.
TSI expects to consummate the Merger prior to its annual meeting in 1999
and, accordingly, does not currently intend to call the 1999 annual meeting. If
the Merger is not completed and TSI calls the 1999 annual meeting to be held on
or before March 12, 1999, stockholders of TSI will not be entitled to include
any proposals in TSI's proxy statement for that meeting. All such proposals were
required to have been submitted to the Clerk of TSI on or before September 8,
1998. If TSI calls the 1999 annual meeting to be held after March 12, 1999, TSI
stockholders must submit any proposals to be included in TSI's proxy statement
to the Clerk of TSI a reasonable time before TSI begins to print its proxy
materials.
118
<PAGE> 127
In addition, the TSI Bylaws provide that a TSI stockholder must give
written notice to TSI not less than sixty days prior to the scheduled annual
meeting describing any proposal to be brought before such meeting, even if the
item is not to be included in TSI's proxy statement relating to such meeting.
Such procedural requirements are fully set forth in Article III of the TSI
Bylaws. To bring an item of business before the 1999 annual meeting, a
stockholder must deliver the requisite notice of such item to the Clerk of TSI
no later than Friday, December 11, 1998.
WHERE YOU CAN FIND MORE INFORMATION
Eclipsys filed a Registration Statement on Form S-4 to register with the
Commission the Eclipsys Voting Common Stock to be issued to TSI stockholders in
the Merger. This Joint Proxy Statement/ Prospectus is a part of that
Registration Statement and constitutes a prospectus of Eclipsys in addition to a
proxy statement of Eclipsys and TSI for their respective Special Stockholders'
Meetings. As allowed by Commission rules, this Joint Proxy Statement/Prospectus
does not contain all the information you can find in the Registration Statement
or the exhibits to the Registration Statement.
Eclipsys and TSI file annual, quarterly and special reports, proxy
statements and other information with the Commission. You may read and copy any
reports, statements or other information we file at the Commission's public
reference rooms in Washington, D.C., New York, New York and Chicago, Illinois.
Please call the Commission at 1-800-SEC-0330 for further information on the
public reference rooms. Our Commission filings are also available to the public
from commercial document retrieval services and at the web site maintained by
the Commission at http://www.sec.gov.
FORWARD-LOOKING STATEMENTS
This Joint Proxy Statement/Prospectus includes various statements
concerning possible future events or circumstances for Eclipsys, TSI or the
combined company that are subject to risks and uncertainties that could cause
actual results or events to differ significantly from the results or events
stated in this Joint Proxy Statement/Prospectus, such as those set forth under
the caption "Risk Factors". These forward-looking statements include information
and projections concerning future results of, operations of Eclipsys, TSI and
the combined company, and statements elsewhere in this document using words such
as "believes," "expects," "anticipates," "plans," "intends" or similar
expressions.
119
<PAGE> 128
WHERE TO FIND CERTAIN DEFINED TERMS
<TABLE>
<CAPTION>
TERM PAGE
---- ----
<S> <C>
AIS......................................................... 22
AIS Settlement.............................................. 60
Alltel...................................................... 17
Alltel Acquisition.......................................... 18
Alltel Renegotiation........................................ 30
Antitrust Division.......................................... 58
Brigham..................................................... 11
BT Alex. Brown.............................................. 43
Code........................................................ 57
Commission.................................................. 39
Delaware Law................................................ 112
EBIT........................................................ 53
EBITDA...................................................... 18
EPS......................................................... 54
Eclipsys.................................................... 1
Eclipsys Acquisitions....................................... 22
Eclipsys Board.............................................. 39
Eclipsys Bylaws............................................. 112
Eclipsys Charter............................................ 110
Eclipsys Covenant Condition................................. 76
Eclipsys IPO................................................ 30
Eclipsys Non-Voting Common Stock............................ 7
Eclipsys Preferred Stock.................................... 110
Eclipsys Purchase Plan...................................... 96
Eclipsys Representation Bringdown Condition................. 76
Eclipsys Termination Fee.................................... 78
Eclipsys Voting Common Stock................................ 7
Eclipsys Voting Proposal.................................... 39
Eclipsys Warrants........................................... 110
Effective Time.............................................. 71
Emtek....................................................... 18
Emtek Acquisition........................................... 18
Exchange Act................................................ 112
Exchange Agent.............................................. 71
Exchange Ratio.............................................. 7
FDA......................................................... 12
FDC Act..................................................... 12
Foley Hoag.................................................. 44
FTC......................................................... 58
GAAP........................................................ 18
GAP 28...................................................... 97
GAP 38...................................................... 97
GAP 47...................................................... 97
GAP 48...................................................... 97
GAP Coinvestment............................................ 97
General Atlantic............................................ 43
Hale and Dorr............................................... 43
HealthVISION................................................ 1
HealthVISION Acquisition.................................... 45
HIPAA....................................................... 13
HSR Act..................................................... 58
Incentive Plan.............................................. 96
</TABLE>
120
<PAGE> 129
<TABLE>
<CAPTION>
TERM PAGE
---- ----
<S> <C>
IRS......................................................... 57
Massachusetts Law........................................... 112
Material Adverse Change..................................... 76
Merger...................................................... 7
Merger Agreement............................................ 7
MGH......................................................... 11
Morgan Stanley.............................................. 44
Morgan Stanley Opinion...................................... 48
Motorola.................................................... 22
MSA......................................................... 18
MSA Buyout.................................................. 18
1996 Stock Plan............................................. 95
1998 Preferred Stock Issuance............................... 60
Named Executive Officers.................................... 93
Outside Date................................................ 77
Partners.................................................... 11
Partners License............................................ 22
Record Date................................................. 39
Registrable Shares.......................................... 111
Registration Rights Agreement............................... 111
Registration Statement...................................... 65
Reorganization.............................................. 57
Revolver.................................................... 30
Rightsholder................................................ 111
Securities Act.............................................. 59
SDK......................................................... 18
SDK Acquisition............................................. 18
SDK Notes................................................... 22
SDK Partial Repayment....................................... 60
Simione..................................................... 23
Simione Investment.......................................... 23
SMS......................................................... 11
Stockholders Agreement...................................... 93
Sub......................................................... 7
Surviving Corporation....................................... 7
Tax Opinions................................................ 58
Term Loan................................................... 30
TSI......................................................... 1
TSI Board................................................... 41
TSI Bylaws.................................................. 112
TSI Charter................................................. 112
TSI Covenant Condition...................................... 76
TSI Non-Voting Common Stock................................. 7
TSI Preferred Stock......................................... 113
TSI Representation Bringdown Condition...................... 76
TSI Stock Option............................................ 74
TSI Stock Purchase Plan..................................... 75
TSI Termination Fee......................................... 78
TSI Voting Common Stock..................................... 7
TSI Warrant................................................. 74
U.S. GAAP................................................... 18
Warburg..................................................... 43
Wilfam...................................................... 97
</TABLE>
121
<PAGE> 130
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Eclipsys Corporation........................................ F-2
Report of Independent Accountants......................... F-2
Consolidated Balance Sheets as of December 31, 1996 and
1997, and September 30, 1998 (unaudited)............... F-3
Consolidated Statements of Operations for the years ended
December 31, 1996 and 1997 and the nine months ended
September 30, 1997 and 1998 (unaudited)................ F-4
Consolidated Statements of Shareholders' Equity (Deficit)
for the years ended December 31, 1996 and 1997 and the
nine months ended September 30, 1998 (unaudited)....... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996 and 1997 and the nine months ended
September 30, 1997 and 1998 (unaudited)................ F-6
Notes to Consolidated Financial Statements................ F-7
ALLTEL Healthcare Information Services, Inc................. F-25
Report of Independent Accountants......................... F-25
Consolidated Balance Sheets as of December 31, 1995 and
1996................................................... F-26
Consolidated Statements of Operations for the years ended
December 31, 1995 and 1996 and for the period from
January 1, 1997 through January 23, 1997............... F-27
Consolidated Statements of Shareholder's Deficit for the
years ended December 31, 1995 and 1996 and for the
period from January 1, 1997 through January 23, 1997... F-28
Consolidated Statements of Cash Flows for the years ended
December 31, 1995 and 1996 and for the period from
January 1, 1997 through January 23, 1997............... F-29
Notes to Consolidated Financial Statements................ F-30
SDK Healthcare Information Systems.......................... F-37
Independent Auditors' Report.............................. F-37
Balance Sheets as of April 30, 1997 and 1996.............. F-38
Statements of Operations and Retained Earnings for the
years ended April 30, 1997 and 1996.................... F-39
Statements of Cash Flows for the years ended April 30,
1997 and 1996.......................................... F-40
Notes to Financial Statements............................. F-41
Transition Systems, Inc..................................... F-47
Report of Independent Accountants......................... F-47
Consolidated Balance Sheets as of September 30, 1997 and
1998, and June 30, 1998 (unaudited).................... F-48
Consolidated Statements of Operations for the years ended
September 30, 1996, 1997 and 1998 and the nine months
ended June 30, 1997 and 1998 (unaudited)............... F-49
Consolidated Statements of Cash Flows for the years ended
September 30, 1996, 1997 and 1998 and the nine months
ended June 30, 1997 and 1998 (unaudited)............... F-50
Consolidated Statements of Stockholders' Equity for the
years ended September 30, 1996, 1997 and 1998.......... F-51
Notes to Consolidated Financial Statements................ F-52
HealthVISION, Inc. ......................................... F-63
Report of Independent Auditors............................ F-63
Consolidated Balance Sheets as of December 31, 1996 and
1997................................................... F-64
Consolidated Statements of Operations for the years ended
December 31, 1996 and 1997............................. F-65
Consolidated Statements of Changes in Stockholders' Equity
(Deficit) for the years ended December 31, 1996 and
1997................................................... F-66
Consolidated Statement of Cash Flows for the years ended
December 31, 1996 and 1997............................. F-67
Notes to Consolidated Financial Statements................ F-68
Condensed Consolidated Balance Sheet as of September 30,
1998 (unaudited)....................................... F-77
Condensed Consolidated Statements of Operations for the
nine months ended September 30, 1997 and 1998
(unaudited)............................................ F-78
Condensed Consolidated Statement of Changes in
Stockholders' Equity (Deficit) for the nine months
ended September 30, 1998 (unaudited)................... F-79
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1997 and 1998
(unaudited)............................................ F-80
Notes to the Condensed Consolidated Financial
Statements............................................. F-81
</TABLE>
F-1
<PAGE> 131
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of Eclipsys Corporation
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of changes in shareholders'
equity (deficit) and of cash flows present fairly, in all material respects, the
financial position of Eclipsys Corporation and its subsidiaries at December 31,
1996 and 1997, and the results of their operations and their cash flows for the
years then ended 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
Atlanta, Georgia
April 20, 1998, except as to Note 13,
which is as of June 9, 1998
F-2
<PAGE> 132
ECLIPSYS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1996 1997 1998
------- --------- --------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,589 $ 4,786 $ 12,309
Accounts receivable, net of allowance for doubtful
accounts of $0, $1,739, $2,088.......................... 190 30,969 40,443
Inventory................................................. -- 866 539
Other current assets...................................... 59 1,114 9,757
------- --------- ---------
Total current assets.................................... 4,838 37,735 63,048
Property and equipment, net................................. 322 9,517 10,530
Capitalized software development costs...................... -- 1,591 4,277
Acquired technology, net.................................... -- 25,802 18,798
Intangible assets, net...................................... -- 28,288 15,559
Other assets................................................ 580 3,832 9,479
------- --------- ---------
Total assets............................................ $ 5,740 $ 106,765 $ 121,691
======= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt...................... $ -- $ 12,794 --
Deferred revenue.......................................... -- 25,295 $ 39,211
Other current liabilities................................. 882 31,150 32,411
------- --------- ---------
Total current liabilities............................... 882 69,239 71,622
Deferred revenue............................................ 6,966 7,789
Other long-term liabilities................................. 57 9,480 3,713
Long-term debt.............................................. -- 3,794 --
------- --------- ---------
Total liabilities....................................... 939 89,479 83,124
------- --------- ---------
Mandatorily redeemable preferred stock (Note 5)............. -- 35,607 --
------- --------- ---------
Commitments and contingencies (Note 11)
Shareholders' equity (deficit)
Preferred stock:..........................................
Series A, $.01 par value, 1,000,000 shares authorized,
issued and outstanding 1,000,000, $6 per share
liquidation preference, 1996; no shares authorized,
issued or outstanding, 1997 and 1998................... 10 -- --
Series D, $.01 par value, 7,200,000 shares authorized,
issued and outstanding 7,058,786, $12.55 per share
liquidation preference, 1997; no shares authorized,
issued or outstanding, 1996 and 1998................... -- 71 --
Series E, $.01 par value, 920,000 shares authorized,
issued and outstanding 896,431, $12.55 per share
liquidation preference, 1997; no shares authorized,
issued or outstanding, 1996 and 1998................... -- 9 --
Series F, $.01 par value, 1,530,000 shares authorized,
issued and outstanding 1,478,097, $6 per share
liquidation preference, 1997; no shares authorized,
issued or outstanding, 1996 and 1998................... -- 15 --
Common stock:
Voting, $.01 par value, 30,000,000 and 50,000,000
authorized; issued and outstanding 3,626,662, 4,198,730
and 19,418,685......................................... 36 42 193
Non-Voting, $.01 par value, 3,000,000 shares authorized;
issued and outstanding 0, 0 and 896,431................ -- -- 9
Additional paid-in capital................................ 7,974 115,777 189,341
Unearned compensation..................................... (266) (250) (196)
Accumulated deficit....................................... (2,953) (134,013) (150,841)
Accumulated other comprehensive income.................... -- 28 61
------- --------- ---------
Total shareholders' equity (deficit).................... 4,801 (18,321) 38,567
------- --------- ---------
Total liabilities and shareholders' equity (deficit).... $ 5,740 $ 106,765 $ 121,691
======= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 133
ECLIPSYS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------- ----------------------
1996 1997 1997 1998
--------- ---------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Systems and services.......................... $ -- $ 89,722 $ 64,470 $ 88,541
Hardware...................................... -- 4,355 3,009 9,202
--------- ---------- ---------- ---------
Total revenues............................. -- 94,077 67,479 97,743
--------- ---------- ---------- ---------
Costs and expenses:
Cost of systems and services revenues......... -- 77,083 56,168 53,196
Cost of hardware revenues..................... -- 2,953 2,055 7,825
Marketing and sales........................... 770 13,662 9,881 13,945
Research and development...................... 1,704 15,714 11,991 19,267
General and administrative.................... 603 5,672 4,143 4,580
Depreciation and amortization................. 32 9,710 7,292 7,937
Write-off of in-process research and
development (Note 6)....................... -- 99,189 99,189 --
Write-off of MSA.............................. -- -- -- 7,193
--------- ---------- ---------- ---------
Total costs and expenses................... 3,109 223,983 190,719 113,943
--------- ---------- ---------- ---------
Loss from operations............................ (3,109) (129,906) (123,240) (16,200)
Interest (income) expense, net.................. (156) 1,154 727 628
--------- ---------- ---------- ---------
Net loss........................................ (2,953) (131,060) (123,967) (16,828)
Dividends and accretion on mandatorily
redeemable preferred stock.................... -- (5,850) (4,199) (10,928)
Preferred stock conversion...................... -- (3,105) (3,105) --
--------- ---------- ---------- ---------
Net loss available to common shareholders....... $ (2,953) $ (140,015) $ (131,271) $ (27,756)
========= ========== ========== =========
Basic and diluted net loss per common share..... $ (.98) $ (39.73) $ (38.28) $ (3.41)
========= ========== ========== =========
Weighted average common shares outstanding...... 3,022,660 3,524,313 3,429,385 8,133,275
========= ========== ========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 134
ECLIPSYS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PREFERRED STOCK
---------------------------------------------------------------
COMMON STOCK SERIES A SERIES D SERIES E
------------------- --------------------- ------------------- -----------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------ ---------- -------- ---------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Capital contribution at December 22,
1995
(inception date)...................... 520,000 $ 5
---------- ---- ---------- -------- ---------- ---- -------- ---
Balance at December 31, 1995............. 520,000 5
Capital contribution.................... 2,008,373 20
Stock grants............................ 109,999 1
Issuance of Series A Preferred stock.... 1,000,000 $ 10
Issuance of common stock................ 988,290 10
Issuance of stock options...............
Compensation expense recognized.........
Net loss................................
---------- ---- ---------- -------- ---------- ---- -------- ---
Balance at December 31, 1996............. 3,626,662 36 1,000,000 10
Issuance of Series D Preferred stock.... 4,981,289 $ 50
Acquisition of Alltel................... 2,077,497 21
Issuance of Series E Preferred stock.... 896,431 $ 9
Issuance of common stock warrants.......
Exchange of Series A for Series F....... (1,000,000) (10)
Acquisition of SDK...................... 499,997 5
Stock option exercises.................. 57,071 1
Stock grants............................ 15,000
Dividends and accretion on mandatorily
redeemable preferred stock............
Issuance of stock options...............
Compensation expense recognized.........
Comprehensive income:
Net loss..............................
Foreign currency translation
adjustment...........................
Other comprehensive income............
Comprehensive income....................
---------- ---- ---------- -------- ---------- ---- -------- ---
Balance at December 31, 1997............. 4,198,730 42 -- -- 7,058,786 71 896,431 9
---------- ---- ---------- -------- ---------- ---- -------- ---
EMTEK Acquisition....................... 1,000,000 10
Sale of common stock.................... 4,830,000 48
Conversion of preferred stock........... 10,033,313 100 (7,058,786) (71) (896,431) (9)
Issuance of Series G Preferred Stock....
Stock option exercises.................. 253,073 2
Dividends, accretion and redemption
related to mandatorily redeemable
preferred stock ......................
Compensation expense recognized.........
Comprehensive income:
Net loss................................
Foreign currency translation
adjustment............................
Other comprehensive income..............
Comprehensive income....................
---------- ---- ---------- -------- ---------- ---- -------- ---
BALANCE AT SEPTEMBER 30, 1998
(UNAUDITED)............................. 20,315,116 $202 -- $ -- -- $ -- -- $--
========== ==== ========== ======== ========== ==== ======== ===
<CAPTION>
PREFERRED STOCK
---------------------------------------
SERIES F SERIES G ADDITIONAL
------------------- ----------------- PAID-IN UNEARNED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT
---------- ------ -------- ------ ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Capital contribution at December 22,
1995
(inception date)...................... $ 45
---------- ---- -------- --- -------- ----- ---------
Balance at December 31, 1995............. 45
Capital contribution.................... 178
Stock grants............................
Issuance of Series A Preferred stock.... 5,991
Issuance of common stock................ 1,472
Issuance of stock options............... 288 $(288)
Compensation expense recognized......... 22
Net loss................................ $ (2,953)
---------- ---- -------- --- -------- ----- ---------
Balance at December 31, 1996............. 7,974 (266) (2,953)
Issuance of Series D Preferred stock.... 62,464
Acquisition of Alltel................... 26,051
Issuance of Series E Preferred stock.... 11,241
Issuance of common stock warrants....... 10,501
Exchange of Series A for Series F....... 1,478,097 $ 15 (5)
Acquisition of SDK...................... 3,243
Stock option exercises.................. 6
Stock grants............................ 97
Dividends and accretion on mandatorily
redeemable preferred stock............ (5,850)
Issuance of stock options............... 55 (55)
Compensation expense recognized......... 71
Comprehensive income:
Net loss.............................. (131,060)
Foreign currency translation
adjustment...........................
Other comprehensive income............
Comprehensive income....................
---------- ---- -------- --- -------- ----- ---------
Balance at December 31, 1997............. 1,478,097 15 115,777 (250) (134,013)
---------- ---- -------- --- -------- ----- ---------
EMTEK Acquisition....................... 9,050
Sale of common stock.................... 65,897
Conversion of preferred stock........... (1,478,097) (15) (900,000) $(9) 4
Issuance of Series G Preferred Stock.... 900,000 9 8,991
Stock option exercises.................. 550
Dividends, accretion and redemption
related to mandatorily redeemable
preferred stock ...................... (10,928)
Compensation expense recognized......... 54
Comprehensive income:
Net loss................................ (16,828)
Foreign currency translation
adjustment............................
Other comprehensive income..............
Comprehensive income....................
---------- ---- -------- --- -------- ----- ---------
BALANCE AT SEPTEMBER 30, 1998
(UNAUDITED)............................. -- $ -- -- $-- $189,341 (196) $(150,841)
========== ==== ======== === ======== ===== =========
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE COMPREHENSIVE
INCOME INCOME TOTAL
------------- ------------- ---------
<S> <C> <C> <C>
Capital contribution at December 22,
1995
(inception date)...................... $ 50
--- ---------
Balance at December 31, 1995............. 50
Capital contribution.................... 198
Stock grants............................ 1
Issuance of Series A Preferred stock.... 6,001
Issuance of common stock................ 1,482
Issuance of stock options............... --
Compensation expense recognized......... 22
Net loss................................ (2,953)
--- ---------
Balance at December 31, 1996............. 4,801
Issuance of Series D Preferred stock.... 62,514
Acquisition of Alltel................... 26,072
Issuance of Series E Preferred stock.... 11,250
Issuance of common stock warrants....... 10,501
Exchange of Series A for Series F....... --
Acquisition of SDK...................... 3,248
Stock option exercises.................. 7
Stock grants............................ 97
Dividends and accretion on mandatorily
redeemable preferred stock............ (5,850)
Issuance of stock options............... --
Compensation expense recognized......... 71
Comprehensive income:
Net loss.............................. $(131,060) (131,060)
Foreign currency translation
adjustment........................... 28 $28 28
---------
Other comprehensive income............ 28
---------
Comprehensive income.................... (131,032)
--------- --- ---------
Balance at December 31, 1997............. 28 (18,321)
--- ---------
EMTEK Acquisition....................... 9,060
Sale of common stock.................... 65,945
Conversion of preferred stock........... --
Issuance of Series G Preferred Stock.... 9,000
Stock option exercises.................. 552
Dividends, accretion and redemption
related to mandatorily redeemable
preferred stock ...................... (10,928)
Compensation expense recognized......... 54
Comprehensive income:
Net loss................................ (16,828) (16,828)
Foreign currency translation
adjustment............................ 33 33 33
---------
Other comprehensive income.............. 33
---------
Comprehensive income.................... (16,795)
--------- --- ---------
BALANCE AT SEPTEMBER 30, 1998
(UNAUDITED)............................. $ -- $61 $ 38,567
========= === =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 135
ECLIPSYS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------- --------------------
1996 1997 1997 1998
------- --------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Operating activities:
Net loss......................................... $(2,953) $(131,060) $(123,967) $(16,828)
------- --------- --------- --------
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization................. 32 31,622 23,156 20,155
Provision for bad debts....................... -- 600 450 750
Loss on disposal of property and equipment.... -- 557 570 8
Write off of in-process research and
development................................. -- 99,189 99,189 --
Write-off of MSA intangible asset............. -- -- -- 7,193
Write-off of contributed technology........... 1,482 -- -- --
Stock compensation expense.................... 22 168 151 54
Changes in operating assets and liabilities,
net of acquisitions:
Accounts receivable......................... (190) (816) (505) (5,295)
Inventory................................... -- 655 137 327
Other current assets........................ (59) (276) (475) 1,025
Other assets................................ (34) (71) 681 (81)
Deferred revenue............................ -- (2,044) (1,772) 9,689
Other current liabilities................... 882 2,196 3,986 (1,756)
Other long-term liabilities................. 57 348 1,691 (65)
------- --------- --------- --------
Total adjustments........................ 2,192 132,128 127,259 32,004
------- --------- --------- --------
Net cash provided (used) by operating
activities.................................. (761) 1,068 3,292 15,176
------- --------- --------- --------
Investing activities:
Purchase of property and equipment, net of
acquisitions.................................. (354) (3,096) (2,097) (3,573)
Capitalized software development costs........... -- (1,591) (698) (2,686)
Acquisitions, net of cash acquired............... -- (108,983) (108,983) --
Changes in other assets.......................... (546) -- -- (21,565)
------- --------- --------- --------
Net cash used in investing activities......... (900) (113,670) (111,778) (27,824)
------- --------- --------- --------
Financing activities:
Borrowings....................................... -- 10,000 10,000 18,500
Payments on borrowings........................... -- (1,000) -- (35,088)
Exercise of stock options........................ 199 7 -- 453
Sale of common stock............................. -- -- -- 66,044
Sale of convertible preferred stock.............. 6,001 73,764 73,764 9,000
Sale/(redemption) of mandatorily redeemable
preferred stock............................... -- 30,000 30,000 (38,771)
------- --------- --------- --------
Net cash provided by financing activities..... 6,200 112,771 113,764 20,138
------- --------- --------- --------
Effect of exchange rate changes on cash and cash
equivalents...................................... -- 28 21 33
------- --------- --------- --------
Net increase in cash and cash equivalents..... 4,539 197 5,299 7,523
Cash and cash equivalents, beginning of year....... 50 4,589 4,589 4,786
------- --------- --------- --------
Cash and cash equivalents, end of year............. $ 4,589 $ 4,786 $ 9,888 $ 12,309
======= ========= ========= ========
Cash paid for interest............................. $ -- $ 978 $ 493 $ 1,275
======= ========= ========= ========
Cash paid for income taxes......................... $ -- $ -- $ -- $ --
======= ========= ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 136
ECLIPSYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997 AND SEPTEMBER 30, 1998 (UNAUDITED)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Eclipsys Corporation ("Eclipsys") and its subsidiaries (collectively, the
"Company") is a healthcare information technology solutions provider which was
formed in December 1995 and commenced operations in January 1996. The Company
provides, on an integrated basis, enterprise-wide, clinical patient care and
financial software solutions to healthcare organizations. Additionally, Eclipsys
provides other information technology solutions including outsourcing, remote
processing, networking technologies and other related services.
Subsequent to December 31, 1996, the Company made the following
acquisitions (Note 6):
Effective January 24, 1997, ALLTEL Healthcare Information Services, Inc.
("Alltel"), a wholly-owned subsidiary of ALLTEL Information Services,
Inc. ("AIS")
Effective June 26, 1997, SDK Healthcare Information Systems ("SDK")
Effective January 30, 1998, the Company acquired the net assets of the
North American operations of the Emtek Healthcare Division of Motorola,
Inc. ("Emtek").
These acquisitions have been accounted for as purchases and accordingly the
accompanying financial statements reflect the results of operations of these
businesses from the date acquired.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The financial statements include the accounts of Eclipsys and its
wholly-owned subsidiaries. All significant intercompany transactions have been
eliminated in consolidation.
FINANCIAL STATEMENT PRESENTATION
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses and disclosures of contingent assets and liabilities. The
estimates and assumptions used in the accompanying consolidated financial
statements are based upon management's evaluation of the relevant facts and
circumstances as of the date of the financial statements. Actual results could
differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statement of cash flows, the Company
considers all highly liquid investments with an original maturity of three
months or less to be cash equivalents.
REVENUE RECOGNITION
The Company's products are sold to customers based on long-term contractual
agreements. Revenues are derived from the licensing of computer software,
software and hardware maintenance, remote processing and outsourcing, training,
implementation assistance, consulting, and the sale of computer hardware.
SYSTEMS AND SERVICES
For contracts in which the Company is required to make significant
production, modification, or customization changes, revenues from software
license fees are recognized using the percentage-of-
F-7
<PAGE> 137
ECLIPSYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997 AND SEPTEMBER 30, 1998 (UNAUDITED) -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
completion method over the implementation period of the contracts based on
implementation hours incurred. Other software license fees are generally
recognized on a straight-line basis over the term of the licensing and
maintenance agreements, which range from five to seven years. Remote processing
and outsourcing services are marketed under long-term agreements generally over
periods from five to seven years and revenues are recognized monthly as the work
is performed. Software maintenance fees are marketed under annual and multi-year
agreements and are recognized ratably over the term of the agreements.
Implementation revenues are recognized as the services are performed or on a
percentage-of-completion basis for fixed fee arrangements. Hardware maintenance
revenues are billed and recognized monthly over the term of agreements. Revenues
related to other support services, such as training, consulting, and
implementation, are recognized when the services are performed.
The Company warrants its products will perform in accordance with
specifications as outlined in the respective customer contracts. The Company
records a reserve for warranty costs at the time it recognizes revenue.
Historically, warranty costs have been minimal.
The Company accrues for product returns at the time it recognizes revenue,
based on actual experience. Historically, product return costs have been
minimal.
HARDWARE SALES
Hardware sales are recognized upon shipment of the product to the customer.
UNBILLED ACCOUNTS RECEIVABLE
Unbilled accounts receivable represent amounts owed to the Company under
noncancelable agreements for software license fees with extended payment terms
and computer hardware purchases which have been financed over extended payment
terms. The current portion of unbilled accounts receivable of $3.9 million as of
December 31, 1997 is included in accounts receivable in the accompanying
financial statements. The non-current portion of unbilled accounts receivable of
$1.8 million as of December 31, 1997 is included in other assets in the
accompanying financial statements. The non-current portion of unbilled accounts
receivable provides for payment terms that generally range from three to five
years and carry annual interest rates ranging from 7% to 10%. The Company
recognizes revenue in advance of billings under certain of its non-cancelable
long-term contracts that contain extended payment terms. The Company does not
have any obligation to refund any portion of its fees and has a history of
enforcement and collection of amounts due under such arrangements. Payments owed
under contracts with extended payment terms are due in accordance with the terms
of the respective contract. Historically, the Company has had minimal write-offs
of amounts due under such arrangements.
Additionally, included in unbilled accounts receivable are costs and
earnings in excess of billings related to certain software license fee
arrangements which are being recognized on a percentage-of-completion basis.
These amounts totaled approximately $1.0 million as of December 31, 1997.
INVENTORY
Inventory consists of computer parts and peripherals and is stated at the
lower of cost or market. Cost is determined using the first-in, first-out
method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization
are provided using the straight-line method over the estimated useful lives,
which range from two to ten years. Computer
F-8
<PAGE> 138
ECLIPSYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997 AND SEPTEMBER 30, 1998 (UNAUDITED) -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
equipment is depreciated over two to five years. Office equipment is depreciated
over two to ten years. Purchased software for internal use is amortized over
three to five years. Leasehold improvements are amortized over the shorter of
the useful lives of the assets or the remaining term of the lease. When assets
are retired or otherwise disposed of, the related costs and accumulated
depreciation are removed from the accounts and any resulting gain or loss is
reflected in income. Expenditures for repairs and maintenance not considered to
substantially lengthen the property and equipment lives are charged to expense
as incurred.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
The Company capitalizes a portion of its internal computer software
development costs incurred. Salaries, benefits, and other directly related costs
incurred in connection with programming and testing software products are
capitalized subsequent to establishing technological feasibility. Capitalization
ceases when the products are generally released for sale to customers.
Management monitors the net realizable value of all capitalized software
development costs to ensure that the investment will be recovered through
margins from future sales. These costs are amortized over the greater of the
ratio that current revenues bear to total and anticipated future revenues for
the applicable product or the straight line method over three to five years.
Capitalized costs related to software development were approximately $1.6
million for the year ended December 31, 1997.
ACQUIRED TECHNOLOGY AND INTANGIBLE ASSETS
The intangible assets arose from the Company's acquisitions (Note 6) and
consist of the following as of December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
ACCUMULATED NET BOOK USEFUL
GROSS AMORTIZATION VALUE LIFE
------- ------------ -------- ------------
<S> <C> <C> <C> <C>
Acquired Technology........................ $45,517 $19,715 $25,802 3 - 5 Years
Ongoing customer relationships............. 10,846 1,988 8,858 5 Years
Management and services agreement.......... 9,543 2,197 7,346 4 Years
Goodwill................................... 13,550 1,466 12,084 5 - 12 Years
------- ------- -------
$79,456 $25,366 $54,090
======= ======= =======
</TABLE>
The carrying value of the excess of cost over fair value of net assets
acquired is reviewed if the facts and circumstances suggest that it may be
impaired. This review indicates if the assets will not be recoverable as
determined based on future expected cash flows. Based on its review, the Company
does not believe that an impairment of its excess of cost over fair value of net
assets acquired has occurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, including cash
and cash equivalents, accounts receivable, and other current liabilities,
approximate fair value. The recorded amount of long-term debt approximates fair
value as the debt bears interest at a floating market rate.
INCOME TAXES
The Company accounts for income taxes utilizing the liability method, and
deferred income taxes are determined based on the estimated future tax effects
of differences between the financial reporting and income tax basis of assets
and liabilities and tax carryforwards given the provisions of the enacted tax
laws.
F-9
<PAGE> 139
ECLIPSYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997 AND SEPTEMBER 30, 1998 (UNAUDITED) -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
The Company has chosen to continue to account for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees", and related
Interpretations and to elect the disclosure option of Statement of Financial
Accounting Standards ("FAS") No. 123, "Accounting for Stock-Based Compensation".
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the estimated market price of the Company's stock at the date of the
grant over the amount an employee must pay to acquire the stock.
BASIC AND DILUTED NET LOSS PER SHARE
For all periods presented, basic net loss per common share is presented in
accordance with FAS 128, "Earnings per Share", which provides for new accounting
principles used in the calculation of earnings per share and was effective for
financial statements for both interim and annual periods ended after December
15, 1997. Basic net loss per common share is based on the weighted average
number of shares of common stock outstanding during the period. Stock options to
acquire 657,500 and 1,831,652 shares of common stock in 1996 and 1997,
respectively, warrants to acquire up to 1,799,715 shares of common stock in
1997, and convertible preferred stock (convertible into 1,000,000 and 9,433,314
shares of common stock in 1996 and 1997, respectively) were the only securities
issued which would have been included in the diluted earnings per share
calculation had they not been antidilutive due to the net loss reported by the
Company. The Company has excluded 370,609 contingently returnable shares of
common stock from basic and diluted earnings per share computations (Notes 4 and
5).
CONCENTRATION OF CREDIT RISK
The Company's customers operate primarily in the healthcare industry. The
Company sells its products and services under contracts with varying terms. The
accounts receivable amounts are unsecured. Management believes the allowance for
doubtful accounts is sufficient to cover credit losses.
FOREIGN CURRENCY TRANSLATION
The financial position and results of operations of foreign subsidiaries
are measured using the currency of the respective countries as the functional
currency. Assets and liabilities are translated at the foreign exchange rate in
effect at the balance sheet date, while revenue and expenses for the year are
translated at the average exchange rate in effect during the year. Translation
gains and losses are not included in determining net income or loss but are
accumulated and reported as a separate component of shareholders' equity
(deficit). The Company has not entered into any hedging contracts during the two
year period ended December 31, 1997.
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company implemented Statement of Financial
Accounting Standards No. 130 "Reporting Comprehensive Income." This standard
requires that the total changes in equity resulting from revenue, expenses, and
gains and losses, including those which do not affect the accumulated deficit,
be reported. Accordingly, those amounts which are comprised solely of foreign
currency translation adjustments, are included in other comprehensive income in
the consolidated statement of shareholders' equity (deficit).
F-10
<PAGE> 140
ECLIPSYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997 AND SEPTEMBER 30, 1998 (UNAUDITED) -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
UNAUDITED INFORMATION
The interim financial information as of September 30, 1998 and for the nine
months ended September 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 issued FAS 131,
"Disclosure about Segments of an Enterprise and Related Information". In October
1997, the American Institute of Certified Public Accountants issued Statement of
Position 97-2 ("SOP 97-2"), "Software Revenue Recognition". All these statements
are effective for fiscal years beginning after December 15, 1997, and are not
expected to have a material impact on the Company's financial statements.
Effective January 1, 1998, the Company adopted SOP 97-2.
3. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1997
---- -------
<S> <C> <C>
Computer equipment.......................................... $107 $ 8,467
Office equipment and other.................................. 199 1,834
Purchased software.......................................... -- 3,382
Leasehold improvements...................................... 48 2,122
---- -------
354 15,805
Less: Accumulated depreciation and amortization............. (32) (6,288)
---- -------
$322 $ 9,517
==== =======
</TABLE>
Depreciation of property and equipment totaled approximately $32,000 and
$6.3 million in 1996 and 1997, respectively.
4. LICENSING ARRANGEMENT
In May 1996, the Company entered into an exclusive licensing arrangement
with Partners HealthCare System, Inc. ("Partners") to further develop,
commercialize, distribute and support certain intellectual property which was
being developed at Partners. In consideration for the license, the Company
issued 988,290 shares of Common Stock of the Company and agreed to pay royalties
to Partners on sales of the developed product until the Company completes an
initial public offering of common stock with a per share offering price of
$10.00 or higher. There was no revenue recognized by the Company or royalties
paid to Partners under the arrangement in 1996 or 1997. Under the terms of the
license, the Company may further develop, market, distribute and support the
original technology and license it, as well as market related services, to other
healthcare providers and hospitals throughout the world (other than in the
Boston, Massachusetts metropolitan area). The Company is obligated to offer to
Partners and certain of their affiliates an internal use license, granted on
most favored customer terms, to any new software applications developed by the
Company, whether or not derived from the licensed technology, and major
F-11
<PAGE> 141
ECLIPSYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997 AND SEPTEMBER 30, 1998 (UNAUDITED) -- (CONTINUED)
4. LICENSING ARRANGEMENT (CONTINUED)
architectural changes to the licensed software. After May 3, 1998, Partners and
certain of their affiliates are entitled to receive internal use licenses for
any changes to any modules or applications included in the licensed technology,
as defined. The Company has an exclusive right of first offer to commercialize
new information technologies developed in connection with Partners. If the
Company fails to pay the required royalties, breaches any material term under
the licensing arrangement or if the current Chairman of the Board, President and
Chief Executive Officer of the Company voluntarily terminates his employment
with the Company prior to May 1999, the license may become non-exclusive, at the
option of Partners. If Partners elects to convert the license to non-exclusive,
it must return 370,609 shares of Common Stock to the Company. The Company has
the option to purchase the technology it licenses from Partners upon the
completion of an IPO.
At the time the license arrangement was consummated, the licensed
technology had not reached technological feasibility and had no alternative
future use. The licensed technology being developed consisted of
enterprise-wide, clinical information software. It is expected that the Company
will release certain commercial products derived from the licensed technology in
late 1998. The Company accounted for the license arrangement with Partners by
recording a credit to additional paid-in capital of $1.5 million (representing
the estimated fair value of the licensed technology) and a corresponding charge
to its statement of operations for the year ended December 31, 1996. The charge
was taken because the technology had not reached technological feasibility and
had no alternative future use.
As part of the agreement, the Company has provided development services to
Partners related to commercializing the intellectual property; fees for these
development services totaled $2.0 million, and $2.5 million for the years ended
December 31, 1996 and 1997, respectively, and are included as a reduction in
research and development expenses in the accompanying consolidated statements of
operations.
5. SHAREHOLDERS' EQUITY AND MANDATORILY REDEEMABLE PREFERRED STOCK
STOCK SPLIT
In May 1997, the Company declared a three-for-two split for all Common
Stock and Non-Voting Common Stock issued and outstanding. In addition, the
shareholders approved an increase in the number of authorized shares of Common
Stock from 30,000,000 to 50,000,000. In June 1998, the Company effected a
two-for-three reverse stock split of all Common Stock and Non-Voting Common
Stock outstanding. The accompanying consolidated financial statements give
retroactive effect to the May 1997 and June 1998 stock splits as if they had
occurred at inception of the Company.
MANDATORILY REDEEMABLE PREFERRED STOCK
In connection with its acquisition of Alltel (Note 6), the Company sold
30,000 shares of Series B 8.5% Cumulative Redeemable Preferred Stock ("Series
B") and warrants to purchase up to 1,799,715 shares of Non-Voting Common Stock
at $.01 per share for total consideration of $30.0 million. The number of
warrants to be issued is subject to adjustment in the event the Company redeems
all or a portion of the Series B prior to its mandatory redemption date. The
Series B is non-voting and is entitled to a liquidation preference of $1,000 per
share plus any unpaid dividends. Dividends are cumulative and accrue at an
annual rate of 8.5%. In the event that dividends are not paid when due for
quarters ending after December 31, 1999, the dividend rate will increase to
12.5%.
The Series B is redeemable by the Company at its redemption price at any
time on or before the mandatory redemption date of December 31, 2001. The
redemption price, as defined, equals the
F-12
<PAGE> 142
ECLIPSYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997 AND SEPTEMBER 30, 1998 (UNAUDITED) -- (CONTINUED)
5. SHAREHOLDERS' EQUITY AND MANDATORILY REDEEMABLE PREFERRED STOCK (CONTINUED)
liquidation preference amount plus all accrued and unpaid dividends. With
respect to liquidation preferences, the Series B ranks equal to the Series C
8.5% Cumulative Redeemable Preferred Stock ("Series C") and senior to all other
equity instruments. In the event that certain shareholders cease to continue to
own a specified percentage of common or convertible preferred stock of the
Company, the holders of the Series B may elect to put the securities back to the
Company at their redemption price, as defined. Additionally, the Series B may be
put back to the Company at their redemption value in the event of a change of
control, as defined.
In January 1997, 20,000 shares of the Series C were issued to AIS as part
of the consideration paid for Alltel (Note 6). The Series C contains
substantially the same terms, including voting rights, ability to redeem and
liquidation preferences as the Series B. The Series B has preferential rights in
the event of a change of ownership percentages of certain of the Company's
stockholders; the Series C does not have these preferential rights. The Series C
redemption price is determined the same as Series B.
The Series C must be redeemed on or before December 31, 2001. The Series C
may be put back to the Company at their redemption value in the event of a
change in control, as defined.
The Company has accounted for the Series B and C as mandatorily redeemable
preferred stock. Accordingly, the Company is accruing dividends and amortizing
any discount over the redemption period with a charge to additional paid-in
capital ("APIC"). The Company recorded a discount on the Series B at the time of
its issuance for the estimated fair value of the warrants ($10.5 million). The
Company valued the maximum amount of warrants that would be issued up to the
mandatory redemption date of the Series B as of the acquisition date and
December 31, 1997. The Company recorded the Series C on the date of acquisition
of Alltel at $10.3 million (after adjustment for the 4,500 shares returned by
AIS (Note 6)), which included a discount from its face amount of $5.2 million.
The amount charged to APIC related to the Series B and C for the year ended
December 31, 1997 was $4.1 million and $1.8 million, respectively.
The Series B and Series C consist of the following (in thousands):
<TABLE>
<CAPTION>
DATE OF ISSUE DECEMBER 31, 1997
-------------------------------------- --------------------------------------
FACE VALUE DISCOUNT CARRYING VALUE FACE VALUE DISCOUNT CARRYING VALUE
---------- -------- -------------- ---------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Series B.................... $30,000 $10,501 $19,499 $30,000 $6,476 $23,524
Series C.................... 15,500 5,242 10,258 15,500 3,417 12,083
------- ------- ------- ------- ------ -------
$45,500 $15,743 $29,757 $45,500 $9,893 $35,607
======= ======= ======= ======= ====== =======
</TABLE>
SERIES A CONVERTIBLE PREFERRED STOCK
In May 1996, concurrent with entering into the Partners' licensing
arrangement, the Company sold 1,000,000 shares of Series A Convertible Preferred
Stock ("Series A") for $6.0 million to outside investors. The Series A was
convertible on a one-to-one basis to shares of Common Stock of the Company at
the discretion of the outside investors. The Series A had voting rights
equivalent to Common Stock on an as converted basis and a liquidation preference
of $6 per share. The Company did not declare or pay any dividends on Series A.
In January 1997, the Company issued 1,478,097 shares of Series F Convertible
Preferred Stock ("Series F") in exchange for the cancellation of Series A. The
Company accounted for the transaction analogously to an extinguishment of debt
with a related party and, accordingly, recorded a charge of $3.1 million to
additional paid-in capital at the date of this transaction. In addition, the
charge is recorded as an increase to net loss available to common shareholders
in the accompanying statement of operations.
F-13
<PAGE> 143
ECLIPSYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997 AND SEPTEMBER 30, 1998 (UNAUDITED) -- (CONTINUED)
5. SHAREHOLDERS' EQUITY AND MANDATORILY REDEEMABLE PREFERRED STOCK (CONTINUED)
SERIES D CONVERTIBLE PREFERRED STOCK
In January 1997, the Company sold 4,981,289 shares of the Series D
Convertible Preferred Stock ("Series D") for $62.5 million to private investors
and issued 2,077,497 shares to AIS in connection with the acquisition of Alltel.
Each share of Series D is convertible into one share of Common Stock. The Series
D contains voting rights as if it were converted into Common Stock and has a
liquidation preference of $12.55 per share plus any declared but unpaid
dividends. The Series D is equivalent to Series E Convertible Preferred Stock
("Series E") with respect to liquidation preference and rank.
Both the Series D and E rank junior to the Series B and C and senior to
Series F. To date, the Company has not declared or paid any dividends on the
Series D.
SERIES E CONVERTIBLE PREFERRED STOCK
In January 1997, the Company sold 896,431 shares of Series E for $11.3
million. The Series E is non-voting and is identical to the Series D with
respect to liquidation preference and rank. Each share of Series E is
convertible into one share of Non-Voting Common Stock. To date, the Company has
not declared or paid any dividends on the Series E.
SERIES F CONVERTIBLE PREFERRED STOCK
As described above, in January 1997, 1,478,097 shares of Series F were
issued in exchange for the cancellation of the outstanding shares of Series A.
The Series F contains a liquidation preference of $6 per share. The Series F
ranks junior to the Company's other classes of preferred stock with respect to
liquidation preferences. Each share of Series F is convertible into one share of
Common Stock. To date, the Company has not declared or paid any dividends on the
Series F.
COMMON STOCK AND NON-VOTING COMMON STOCK
Holders of Common Stock are entitled to one vote per share. Holders of
Non-Voting Common Stock do not have voting rights other than as provided by
statute.
UNDESIGNATED PREFERRED STOCK
The Company has available for issuance, 1,000,000 shares of undesignated
preferred stock (the "Undesignated Preferred"). The liquidation, voting,
conversion and other related provisions of the Undesignated Preferred will be
determined by the Board at the time of issuance. Currently, there are no
outstanding shares.
6. ACQUISITIONS
Effective January 24, 1997, Eclipsys completed the acquisition of Alltel.
As consideration for this transaction, Eclipsys paid AIS $104.8 million cash,
issued 15,500 (after consideration of the return of 4,500 shares by AIS in
October 1997) shares of Series C valued at approximately $10.3 million and
2,077,497 shares of Series D valued at approximately $26.1 million. Concurrent
with the acquisition, the Company and Alltel entered into the Management and
Services Agreement ("MSA") whereby Alltel agreed to provide certain services to
the Company and its customers together with certain non-compete provisions. In
exchange, the Company agreed to pay Alltel $11.0 million in varying installments
through December 2000. The obligation and equivalent corresponding asset were
recorded at its net present value of $9.5 million at the date of signing. To
finance the transaction, the Company sold, for $30.0 million, 30,000 shares of
Series B and warrants to purchase up to 1,799,715 shares of Non-Voting Common
Stock to private investors. Additionally, the Company sold 4,981,289 shares of
Series D and 896,431 shares of Series E for total proceeds of $73.8 million.
F-14
<PAGE> 144
ECLIPSYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997 AND SEPTEMBER 30, 1998 (UNAUDITED) -- (CONTINUED)
6. ACQUISITIONS (CONTINUED)
The transaction was accounted for as a purchase and accordingly, the
purchase price was allocated based on the fair value of the net assets acquired.
The purchase price is composed of and allocated as follows (in thousands):
<TABLE>
<S> <C>
Cash, net of cash acquired.................................. $104,814
Issuance of Series D........................................ 26,072
Issuance of Series C........................................ 10,258
Transaction costs........................................... 2,008
Liabilities assumed......................................... 58,397
--------
201,549
--------
Current assets.............................................. 31,803
Property and equipment...................................... 12,242
Other assets................................................ 3,148
Identifiable intangible assets:
In-process research and development.................... 92,201
Acquired technology.................................... 42,312
Ongoing customer relationships......................... 10,846
--------
192,552
--------
Goodwill.................................................... $ 8,997
========
</TABLE>
The acquisition agreement contains certain provisions whereby the purchase
price could be adjusted within twelve months from the acquisition date based on
certain criteria defined in the agreement. Based on these provisions, in October
1997, AIS returned 4,500 shares of Series C to Eclipsys. In December 1997, the
Company presented its final analysis to AIS of items for which, under the
agreement, the Company believed it was entitled to consideration. In March 1998,
the Company negotiated an agreement with AIS, which settled these issues related
to any adjustments that could be made pursuant to the provisions in the
acquisition agreement (Note 13). After accounting for this adjustment, the
Company's total consideration paid for this acquisition was $201.5 million,
including liabilities assumed, net of cash acquired.
In connection with the recording of the acquisition of Alltel, the Company
reduced the predecessor's reported deferred revenue by $7.3 million to the
amount that reflects the estimated fair value of the contractual obligations
assumed. This adjustment results from the Company's requirement, in accordance
with generally accepted accounting principles, to record the fair value of the
obligation assumed with respect to arrangements for which the related revenue
was previously collected by the predecessor company. The Company's liability at
acquisition includes its estimated costs in fulfilling those contract
obligations.
Effective June 26, 1997, the Company acquired all of the common stock of
SDK in exchange for 499,997 shares of Common Stock valued at approximately $3.2
million, $2.2 million in cash and acquisition debt due to SDK shareholders
totaling $7.6 million. The transaction was accounted for as a purchase and,
accordingly, the purchase price was allocated based on the estimated fair value
of the net assets acquired.
F-15
<PAGE> 145
ECLIPSYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997 AND SEPTEMBER 30, 1998 (UNAUDITED) -- (CONTINUED)
6. ACQUISITIONS (CONTINUED)
The purchase price is composed of and allocated as follows (in thousands):
<TABLE>
<S> <C>
Cash, net of cash acquired.................................. $ 2,161
Issuance of Common Stock.................................... 3,248
SDK acquisition debt........................................ 7,588
Liabilities assumed......................................... 3,514
-------
16,511
-------
Current assets.............................................. 1,061
Property and equipment...................................... 671
Other assets................................................ 33
Identifiable intangible assets:
In-process research and development.................... 6,988
Acquired technology.................................... 3,205
-------
11,958
-------
Goodwill.................................................... $ 4,553
=======
</TABLE>
The Company is using the acquired in-process research and development to
create new clinical, patient financial, access management and data warehousing
products which will become part of its Sunrise product suite over the next
several years. The Company anticipates that certain products will be generally
released during 1998, with additional product releases in subsequent periods
through 2001. It is management's expectation that the acquired in-process
research and development will be successfully developed, however there can be no
assurance that commercial viability of these products will be achieved. In the
event that these products are not generally released in a timely manner, the
Company may experience fluctuations in future earnings as a result of such
delays.
In connection with the Alltel and SDK acquisitions, the Company wrote off
in-process research and development charges of $92.2 million and $7.0 million,
respectively, related to the appraised values of certain in-process research and
development acquired in these acquisitions.
Unaudited pro forma results of operations for the years ended December 31,
1996 and 1997, as if the aforementioned acquisitions had occurred on January 1,
1996 is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1996 1997
-------- ---------
<S> <C> <C>
Revenues.................................................... $115,606 $ 103,786
Net loss.................................................... (5,696) (132,159)
Basic and diluted loss per share............................ $ (1.62) $ (37.39)
</TABLE>
Effective January 30, 1998, the Company acquired the net assets of Emtek
for an aggregate purchase price of approximately $11.7 million, including
1,000,000 shares of Common Stock valued at $9.1 million and liabilities assumed
of approximately $12.3 million. In addition, Motorola agreed to pay the Company
$9.6 million in cash due within one year for working capital purposes.
F-16
<PAGE> 146
ECLIPSYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997 AND SEPTEMBER 30, 1998 (UNAUDITED) -- (CONTINUED)
6. ACQUISITIONS (CONTINUED)
The purchase price is composed of and allocated as follows:
<TABLE>
<S> <C>
Issuance of Common Stock.................................... $ 9,060
Receivable from Motorola.................................... (9,600)
Liabilities assumed......................................... 12,275
-------
$11,735
-------
Current assets.............................................. 5,033
Property and equipment...................................... 2,629
-------
$ 7,662
-------
Identifiable intangible assets (acquired technology)........ $ 4,073
=======
</TABLE>
7. LONG-TERM DEBT
Long-term debt consists of the following as of December 31, 1997 (in
thousands):
<TABLE>
<S> <C>
Term Loan................................................... $ 9,000
SDK acquisition debt, interest payable quarterly at 9.5%,
principal due in two annual installments of $3,794,
commencing April 1998..................................... 7,588
--------
16,588
Less current portion........................................ (12,794)
--------
Long-term debt.............................................. $ 3,794
========
</TABLE>
In connection with the Alltel acquisition, the Company entered into a $30
million credit facility (the "Facility"). The Facility included a $10 million
term loan (the "Term Loan") and a $20 million revolving credit facility (the
"Revolver"). Borrowings under the Facility are secured by substantially all of
the assets of the Company. The Term Loan was payable in varying quarterly
installments through January 2000. As more fully discussed in Note 13, the Term
Loan was repaid in full with the proceeds of the sale of Series G Convertible
Preferred Stock in February 1998. As such, the entire balance of the Term Loan
is classified as current in the accompanying financial statements.
Borrowings under the Facility bear interest, at the Company's option, at
(i) LIBOR plus 1% to 3% or (ii) the higher of a) the banks prime lending rate or
b) the Federal Funds Rate plus 0.5%; plus 0% to 1.75%. The interest rates vary
based on the Company's ratio of earnings to consolidated debt, as defined. At
December 31, 1997, the Company's borrowing rate under the Facility was 6.85%.
Under the terms of the Facility, the Company is required to maintain certain
financial covenants related to consolidated debt to earnings, consolidated
earnings to interest expense and consolidated debt to capital. In addition, the
Company has limitations on the amounts of certain types of expenditures and is
required to obtain certain approvals related to mergers and acquisitions, as
defined. The Company was in compliance with all provisions of the Facility as of
December 31, 1997.
As of December 31, 1997, the Company has $20 million available for future
borrowings under the Revolver. The Revolver expires on the third anniversary of
the Facility. Under the terms of the Revolver, the Company pays an annual
commitment fee of .375% for any unused balance, as defined. Additionally, the
Company pays a fee of .125% for any Letters of Credit issued under the
agreement. As of December 31, 1997, unused Letters of Credit totaling
approximately $5.0 million were outstanding against
F-17
<PAGE> 147
ECLIPSYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997 AND SEPTEMBER 30, 1998 (UNAUDITED) -- (CONTINUED)
7. LONG-TERM DEBT (CONTINUED)
the Revolver. As discussed in Note 13, in May 1998 the Company increased its
borrowings under the Revolver.
8. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1997
---- -------
<S> <C> <C>
Accounts payable............................................ $120 $ 4,606
Accrued compensation and incentive.......................... 237 7,847
Customer deposits........................................... -- 7,959
Payment due AIS under MSA................................... -- 2,000
Accrued acquisition costs................................... 501 --
Accrued interest............................................ -- 672
Other....................................................... 24 8,066
---- -------
$882 $31,150
==== =======
</TABLE>
9. INCOME TAXES
The Company has no current or deferred income tax provision due to the net
losses reported by the Company.
A reconciliation of the federal statutory rate and the effective income tax
rate follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------
1996 1997
-------- --------
<S> <C> <C>
Statutory federal income tax rate (34%)..................... $(500) $(45,481)
SDK in-process research and development..................... -- 2,376
Meals and entertainment..................................... 8 460
State income taxes.......................................... (58) (5,163)
Non-deductible amortization................................. -- 747
Valuation allowance......................................... 550 46,976
Other....................................................... -- 85
----- --------
Income tax benefit (provision).............................. $ -- $ --
===== ========
</TABLE>
F-18
<PAGE> 148
ECLIPSYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997 AND SEPTEMBER 30, 1998 (UNAUDITED) -- (CONTINUED)
9. INCOME TAXES (CONTINUED)
The significant components of the Company's net deferred tax asset were as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Alltel in-process research and development.................. $ -- $ 34,969
Intangible assets........................................... -- 5,353
Deferred revenue............................................ -- 3,990
Allowance for doubtful accounts............................. -- 660
Compensation related accrued liabilities.................... 58 249
Accrued expenses............................................ -- 3,569
Depreciation and amortization............................... -- 1,257
Net operating loss carryforwards............................ 504 5,220
----- --------
562 55,267
----- --------
Deferred tax liabilities:
Capitalization of software development costs.............. -- 604
Depreciation and amortization............................. 12 --
Other..................................................... -- --
----- --------
Net deferred tax asset...................................... 550 54,663
----- --------
Valuation allowance......................................... (550) (54,663)
----- --------
$ -- $ --
===== ========
</TABLE>
At December 31, 1997, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $20.1 million. The carryforwards
expire in varying amounts through 2012.
In addition, under the Tax Reform Act of 1986, the amounts of, and the
benefits from, net operating loss carryforwards may be impaired or limited in
certain circumstances. The Company experienced an ownership change as defined
under Section 382 of the Internal Revenue Code in January, 1997. As a result of
the ownership change, net operating loss carryforwards of approximately $1.5
million, which were incurred prior to the date of change, are subject to annual
limitation on their future use. As of December 31, 1997, a valuation allowance
has been established against the deferred tax assets which the Company does not
believe are more likely than not to be realized. The future reduction of the
valuation allowance, up to $7.2 million, will be reflected as a reduction of
goodwill.
10. EMPLOYEE BENEFIT PLANS
STOCK OPTION PLAN
In April 1996, the Board of Directors of the Company (the "Board") adopted
the 1996 Stock Plan (the "1996 Stock Plan"). The 1996 Stock Plan, as amended,
provides for grants of stock options, awards of Company stock free of any
restrictions and opportunities to make direct purchases of restricted stock of
the Company. The 1996 Stock Plan allows for the issuance of options or other
awards to purchase up to 2,500,000 shares of Common Stock. Pursuant to the terms
of the 1996 Stock Plan, a committee of the
F-19
<PAGE> 149
ECLIPSYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997 AND SEPTEMBER 30, 1998 (UNAUDITED) -- (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
Board is authorized to grant awards to employees and non employees and establish
vesting terms. The options expire ten years from the date of grant. The
following table summarizes activity under the Plan:
<TABLE>
<CAPTION>
1996 1997
------------------------- ---------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- --------------- --------- ---------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year......... -- $ -- 657,500 $ .11
Granted................................ 657,500 .11 1,309,889 6.52
Exercised.............................. -- (57,071) .11
Forfeited.............................. -- (78,666) 4.81
------- ---- --------- -----
Outstanding at end of year............... 657,500 .11 1,831,652 4.49
------- ---- --------- -----
Options exercisable at end of year....... -- 197,978
------- ---------
Weighted average fair value of options
granted during the year................ $.45 $1.75
==== =====
</TABLE>
<TABLE>
<CAPTION>
1996 1997
------------------------------ ------------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE EXERCISE FAIR MARKET AVERAGE EXERCISE FAIR MARKET
OPTIONS GRANTED DURING THE YEAR PRICE VALUE PRICE VALUE
- ------------------------------------ ---------------- ----------- ---------------- -----------
<S> <C> <C> <C> <C>
Option price > fair market value $.10 $ -- $6.73 $1.76
Option price = fair market value -- -- -- --
Option price < fair market value .15 1.39 .20 1.35
</TABLE>
During 1996 and 1997, pursuant to the 1996 Stock Plan, the Board issued
109,999 and 15,000 shares of Common Stock, respectively, to employees and
nonemployees for services. Compensation expense of approximately $1,000 and
$97,000 was recorded in 1996 and 1997, respectively, related to these
transactions.
In addition, during 1996 and 1997, the Company recorded compensation
expense of $22,000 and $71,000, respectively, related the granting of certain
stock options to employees with exercise prices below the estimated fair market
value of the Common Stock at the date of grant.
The Company has adopted the disclosure only provision of FAS 123. Had
compensation cost for the Company's stock option grants described above been
determined based on the fair value at the grant date for awards in 1996 and 1997
consistent with the provisions of FAS 123, the Company's net loss and loss per
share would have been increased to the pro forma amounts indicated below (in
thousands, except share data):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------
1996 1997
-------- ---------
<S> <C> <C>
Net loss:
As reported............................................... $(2,953) $(131,060)
Pro forma................................................. (2,954) (131,324)
Basic and diluted net loss per share:
As reported............................................... $ (.98) $ (39.73)
Pro forma................................................. (.98) (39.80)
</TABLE>
F-20
<PAGE> 150
ECLIPSYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997 AND SEPTEMBER 30, 1998 (UNAUDITED) -- (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1997, respectively: dividend yield of 0%
for all years, risk-free interest rate of 5.90% and 6.06% and expected life of
5.0 years and 5.2 years. As a nonpublic entity, the Company used the minimum
value method which does not incorporate a volatility assumption.
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICE AT 12/31/97 LIFE PRICE 12/31/97 PRICE
- --------------------------------- ----------- ----------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$0.10 to $0.20................... 621,929 8.36 $ .12 160,789 $ .11
$6.50 to $7.50................... 1,209,723 9.54 $6.74 37,189 $7.52
</TABLE>
EMPLOYEE SAVINGS PLAN
During 1997, the Company established a Savings Plan (the "Plan") pursuant
to Section 401(k) of the Internal Revenue Code (the "Code"), whereby employees
may contribute a percentage of their compensation, not to exceed the maximum
amount allowable under the Code. At the discretion of the Board, the Company may
elect to make matching contributions, as defined in the Plan. For the year end
December 31, 1997, the Board authorized matching contributions totaling
$780,000.
11. COMMITMENTS AND CONTINGENCIES
NONCANCELABLE OPERATING LEASES
The Company leases its office space and certain equipment under
noncancelable operating leases. Rental expense under operating leases was
approximately $70,000 and $6.2 million for the years ended December 31, 1996 and
1997, respectively. Future minimum rental payments for noncancelable operating
leases as of December 31, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1998........................................................ $ 5,801
1999........................................................ 4,930
2000........................................................ 2,616
2001........................................................ 1,877
2002........................................................ 1,632
Thereafter.................................................. 4,575
-------
$21,431
=======
</TABLE>
LITIGATION
The Company is involved in litigation incidental to its business. In the
opinion of management, after consultation with legal counsel, the ultimate
outcome of such litigation will not have a material adverse effect on the
Company's financial position or results of operations or cash flows.
F-21
<PAGE> 151
ECLIPSYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997 AND SEPTEMBER 30, 1998 (UNAUDITED) -- (CONTINUED)
12. RELATED PARTY TRANSACTIONS
During 1997, the Company paid AIS $1.7 million for certain transition
services provided by AIS related to accounting services, computer processing and
other various activities.
During 1997, Eclipsys paid a total of $348,000 to certain subsidiaries of
AIS and Alltel Corporation related to the purchase of various goods and
services.
The Company leases office space from the former owner of SDK. During the
year ended December 31, 1997 the Company paid $178,000 under this lease. The
lease is noncancelable and expires in 2009.
In 1997, the Company paid $336,000 to a charter company for the use of an
aircraft for corporate purposes. The aircraft provided for the Company's use was
leased by the charter company from a company owned by the Chairman of the Board,
President and Chief Executive Officer of the Company (the "Chairman"). The
Chairman's company received $219,000 for these transactions. The Chairman has no
interest in the charter company. In the opinion of management, the Company
believes that the terms of charters were comparable to rates that would be
charged by unaffiliated parties.
The Company has an employment agreement with the Chairman through May 1,
1999. Under the provisions of the agreement, the Chairman earns an annual salary
of $150,000, subject to adjustment from time to time. The payment of amounts
earned under the agreement were to be deferred until certain earnings were
attained by the Company. During 1997, $66,000 was paid under the agreement.
Effective January 1, 1998, the Chairman's annual salary was increased to
$200,000.
13. SUBSEQUENT EVENTS
SHAREHOLDERS' EQUITY (DEFICIT)
In January 1998, the Company amended its Certificate of Incorporation (the
"Certificate"). Under the amended Certificate, the Company increased the number
of authorized shares of Undesignated Preferred to 1,100,000 and created Series G
Convertible Preferred Stock ("Series G"). There are 900,000 authorized shares of
Series G. The Series G is convertible on a two-for-three basis to shares of
Common Stock. The conversion rate is subject to adjustment in certain
circumstances. The Series G has a liquidation preference of $10 per share. In
the event of an involuntary liquidation of the Company, the Series G will
participate on a pro rata basis with the Series D and E. In February 1998, the
Company sold 900,000 shares of Series G to outside investors for total
consideration of $9 million. The proceeds were utilized to repay the outstanding
Term Loan balance.
In addition, the Company amended the terms of (i) all of its convertible
preferred stock to require that it automatically be converted into Common Stock
or Non-Voting Common Stock, as applicable, upon a qualifying IPO and (ii) all of
its Mandatorily Redeemable Preferred Stock to require that it be mandatorily
redeemed upon a qualifying IPO.
In June 1998, the Company effected a two-for-three reverse stock split of
all Common Stock and Non-Voting Common Stock outstanding.
CREDIT FACILITY
In March 1998, the Company borrowed $9.0 million under the Revolver to pay
a portion of the AIS settlement, described herein.
On May 29, 1998, the Company entered into an agreement to increase the
available borrowings under the Revolver (Note 7) from $20.0 million to $50.0
million (unaudited).
F-22
<PAGE> 152
ECLIPSYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997 AND SEPTEMBER 30, 1998 (UNAUDITED) -- (CONTINUED)
13. SUBSEQUENT EVENTS (CONTINUED)
1998 STOCK INCENTIVE PLAN
In January 1998, the Board adopted the 1998 Stock Incentive Plan (the
"Incentive Plan"). The Incentive Plan provides for the granting of stock
options, stock appreciation rights, restricted stock awards or unrestricted
stock awards. Under the provisions of the Incentive Plan, no options or other
awards may be granted after April 2008. There are currently 4,333,333 shares of
common stock reserved under the Incentive Plan, together with the 1996 Stock
Plan and the 1998 Employee Stock Purchase Plan. Options granted under the
Incentive Plan will be granted at the fair market value of the stock as of the
date of grant.
1998 EMPLOYEE STOCK PURCHASE PLAN
Under the Company's 1998 Employee Stock Purchase Plan (the "Purchase Plan")
(implemented in April 1998), employees of the Company, including directors of
the Company who are employees are eligible to participate in quarterly plan
offerings in which payroll deductions may be used to purchase shares of Common
Stock. The purchase price of such shares is the lower of 85% of the fair market
value of the Common Stock on the day the offering commences and 85% of the fair
market value of the Common Stock on the day the offering terminates. The first
offering period under the Purchase Plan will not commence until after the
completion of the Eclipsys IPO.
ALLTEL SETTLEMENT
In the first quarter of 1998, the Company and AIS renegotiated, in two
separate transactions, certain matters relating to the acquisition of Alltel. In
one transaction, AIS returned to the Company, for cancellation, 11,000 shares of
Series C in exchange for resolving certain open issues in connection with the
Alltel acquisition, and the Company agreed, at AIS' option, to redeem the
remaining 4,500 shares of Series C held by AIS for an aggregate price of $4.5
million at the time of the IPO and for a period of 30 days thereafter. The
Company will use a portion of the net proceeds of the IPO to redeem the
remaining Series C held by AIS. In the second transaction, the Company paid AIS
an aggregate of $14.0 million in exchange for terminating all of the rights and
obligations of both parties under the MSA. The Company recorded a charge of
approximately $7.2 million related to the write-off of the MSA intangible asset.
In addition, the Company recorded a reduction to goodwill of approximately $7.8
million related to the final settlement of certain issues related to the Alltel
acquisition resulting in the return of the 11,000 shares of Series C.
SIMIONE INVESTMENT
In April 1998, the Company made a strategic investment in Simione Central
Holdings, Inc. ("Simione"), a publicly traded company, purchasing 420,000 shares
of restricted common stock from certain stockholders of Simione for $5.6
million. At the time of the transaction, the common stock represented 4.9% of
Simione's outstanding common stock. The Company accounts for its investment in
these shares using the cost method.
Concurrent with the investment, the Company and Simione entered into a
remarketing agreement pursuant to which the Company has certain rights to
distribute Simione software products.
14. EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE REPORT OF INDEPENDENT
ACCOUNTANTS
INITIAL PUBLIC OFFERING
Effective August 6, 1998, the Company completed an initial public offering.
Net proceeds from the offering were $66.0 million, including proceeds from the
exercise of the underwriters' overallotment option.
F-23
<PAGE> 153
ECLIPSYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997 AND SEPTEMBER 30, 1998 (UNAUDITED) -- (CONTINUED)
14. EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE REPORT OF INDEPENDENT
ACCOUNTANTS (CONTINUED)
The Company used the net proceeds from the offering to redeem the outstanding
shares of the Company's Mandatorily Redeemable Preferred Stock, repay the
principal balance and accrued interest on acquisition related debt and to repay
amounts outstanding under the Revolver. In connection with the redemption of the
Mandatorily Redeemable Preferred Stock, the Company recorded an increase to net
loss available to common shareholders of $10.9 million reflecting the difference
between the carrying value and redemption value of the stock.
Concurrent with the initial public offering, all Series of Convertible
Preferred Stock were automatically converted into Common Stock or Non-Voting
Common Stock.
TSI MERGER AGREEMENT
On October 29, 1998, the Company entered into a merger agreement to acquire
Transition Systems, Inc. ("TSI") for approximately $270.0 million in stock.
Under the terms of the agreement, each share of TSI stock will be converted
using a fixed exchange rate of .525 shares of the Company's stock, with no
collar. 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
anticipated to close by the end of December 1998.
F-24
<PAGE> 154
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of Eclipsys Corporation
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of changes in shareholder's
deficit and of cash flows present fairly, in all material respects, the
financial position of ALLTEL Healthcare Information Services, Inc. (the Company)
(a Delaware corporation, wholly-owned by ALLTEL Information Services, Inc., an
Arkansas corporation) and its subsidiaries at December 31, 1995 and 1996, and
the results of their operations and their cash flows for the years then ended
and for the period from January 1, 1997 through January 23, 1997 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.
As discussed in Note 10, effective January 24, 1997, the Company was acquired by
Eclipsys Corporation.
PRICEWATERHOUSECOOPERS LLP
Atlanta, Georgia
June 27, 1997
F-25
<PAGE> 155
ALLTEL HEALTHCARE INFORMATION SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,599 $ 2,022
Accounts receivable, net of allowance for doubtful
accounts of $749 and $1,274 at December 31, 1995 and
1996, respectively..................................... 29,435 29,713
Inventory................................................. 2,081 1,576
Deferred tax asset........................................ 3,676 3,682
Other current assets...................................... 678 634
-------- --------
Total current assets................................... 38,469 37,627
Property and equipment, net................................. 10,168 10,739
Purchased software, net of accumulated amortization of
$2,985 and $4,453 at December 31, 1995 and 1996,
respectively.............................................. 4,098 2,882
Capitalized software development costs, net of accumulated
amortization of $4,671 and $11,880 at December 31, 1995
and 1996, respectively.................................... 27,632 35,306
Intangible assets, net of accumulated amortization of $1,129
and $2,101 at December 31, 1995 and 1996, respectively.... 5,670 4,698
Other assets................................................ 2,344 9,191
-------- --------
Total assets........................................... $ 88,381 $100,443
======== ========
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Deferred revenue.......................................... $ 24,724 $ 26,807
Other current liabilities................................. 17,668 20,378
-------- --------
Total current liabilities.............................. 42,392 47,185
Deferred revenue............................................ 15,913 10,148
Other long-term liabilities................................. 1,250
Deferred income taxes....................................... 7,002 9,294
Intercompany payable to parent.............................. 46,085 57,953
-------- --------
Total liabilities...................................... 111,392 125,830
Shareholder's deficit:
Common stock, $.01 par value, 1,000 shares authorized,
issued and outstanding................................. 1 1
Additional paid-in capital................................ 15,678 15,678
Accumulated deficit....................................... (38,236) (40,432)
Cumulative foreign currency translation adjustment........ (454) (634)
-------- --------
Total shareholder's deficit............................ (23,011) (25,387)
-------- --------
Total liabilities and shareholder's deficit....... $ 88,381 $100,443
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE> 156
ALLTEL HEALTHCARE INFORMATION SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED PERIOD FROM
DECEMBER 31, JANUARY 1, 1997
------------------- THROUGH
1995 1996 JANUARY 23, 1997
-------- -------- ----------------
<S> <C> <C> <C>
Revenues:
Service and systems..................................... $ 90,737 $ 99,213 $ 6,064
Hardware................................................ 9,377 9,587 122
-------- -------- -------
Total revenues....................................... 100,114 108,800 6,186
-------- -------- -------
Costs and expenses:
Cost of service and systems revenues.................... 53,385 63,572 4,277
Cost of hardware revenues............................... 7,950 7,911 104
Marketing and sales..................................... 11,128 11,091 660
Research and development................................ 8,522 10,271 794
General and administrative.............................. 8,168 7,101 621
Depreciation and amortization........................... 6,735 8,135 568
-------- -------- -------
Total costs and expenses............................. 95,888 108,081 7,024
-------- -------- -------
Income (loss) from operations............................. 4,226 719 (838)
Interest expense, net..................................... (2,733) (3,758) (379)
-------- -------- -------
Income (loss) before income taxes......................... 1,493 (3,039) (1,217)
Income tax benefit (provision)............................ (887) 843 437
-------- -------- -------
Net income (loss)......................................... $ 606 $ (2,196) $ (780)
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE> 157
ALLTEL HEALTHCARE INFORMATION SERVICES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S DEFICIT
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
EQUITY
ADJUSTMENT
FROM
COMMON STOCK ADDITIONAL FOREIGN
--------------- PAID-IN ACCUMULATED CURRENCY
SHARES AMOUNT CAPITAL DEFICIT TRANSLATION TOTAL
------ ------ ---------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994........ 1,000 $1 $15,678 $(38,842) $(470) $(23,633)
Net income.......................... 606 606
Foreign translation adjustment...... 16 16
----- -- ------- -------- ----- --------
Balance at December 31, 1995........ 1,000 1 15,678 (38,236) (454) (23,011)
Net loss............................ (2,196) (2,196)
Foreign translation adjustment...... (180) (180)
----- -- ------- -------- ----- --------
Balance at December 31, 1996........ 1,000 1 15,678 (40,432) (634) (25,387)
Net loss............................ (780) (780)
Foreign translation adjustment...... 3 3
----- -- ------- -------- ----- --------
Balance at January 23, 1997......... 1,000 $1 $15,678 $(41,212) $(631) $(26,164)
===== == ======= ======== ===== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE> 158
ALLTEL HEALTHCARE INFORMATION SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED PERIOD FROM
DECEMBER 31, JANUARY 1, 1997
------------------- THROUGH
1995 1996 JANUARY 23, 1997
-------- -------- ----------------
<S> <C> <C> <C>
Operating activities:
Net income (loss)....................................... $ 606 $ (2,196) $ (780)
-------- -------- -------
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization........................ 13,205 15,344 945
Deferred income taxes................................ 6,040 2,286 (52)
Changes in assets and liabilities
Accounts receivable................................ (6,574) (278) 325
Inventory.......................................... 566 505 55
Other current assets............................... (74) 44 10
Deferred revenue................................... 1,090 (3,682) 1,951
Other current liabilities.......................... 906 2,710 2,351
Other long term liabilities........................ -- 1,250 (1,250)
Other assets....................................... 162 (43) (81)
-------- -------- -------
Total adjustments............................... 15,321 18,136 4,254
-------- -------- -------
Net cash provided by operating activities..... 15,927 15,940 3,474
-------- -------- -------
Investing activities:
Purchase of property, equipment and software............ (7,716) (9,231) (323)
Capitalized software development costs.................. (12,905) (12,170) (661)
Changes in other assets................................. 96 (6,804) 27
-------- -------- -------
Net cash used in investing activities................ (20,525) (28,205) (957)
-------- -------- -------
Financing activities:
Net change in intercompany payable to parent............ 5,509 11,868 (1,855)
-------- -------- -------
Effect of exchange rate changes on cash and cash
equivalents............................................. 16 (180) 3
-------- -------- -------
Net (decrease) increase in cash and cash equivalents...... 927 (577) 665
Cash and cash equivalents, beginning of year.............. 1,672 2,599 2,022
-------- -------- -------
Cash and cash equivalents, end of year.................... $ 2,599 $ 2,022 $ 2,687
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE> 159
ALLTEL HEALTHCARE INFORMATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Alltel Healthcare Information Services, Inc. ("AHIS") and its subsidiaries
(collectively, the "Company") are engaged in one business segment primarily
providing enterprise-wide clinical, patient care and financial software
solutions, as well as outsourcing, remote processing, networking technologies
and other services to healthcare organizations throughout the United States and
Western Europe.
The Company is a wholly owned subsidiary of Alltel Information Services,
Inc. ("AIS") which is a wholly owned subsidiary of Alltel Corporation
("Alltel").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The financial statements include the accounts of AHIS and its wholly owned
subsidiaries. All significant intercompany transactions have been eliminated in
consolidation.
FINANCIAL STATEMENT PRESENTATION
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses and disclosure of contingent assets and liabilities. The
estimates and assumptions used in the accompanying consolidated financial
statements are based upon management's evaluation of the relevant facts and
circumstances as of the date of the financial statements. Actual results could
differ from those estimates.
The consolidated statements of operations include all revenues and costs
directly attributable to the operations of AHIS, including the costs of
facilities, administration, and other various costs. As more fully described in
Notes 8 and 11, certain costs related to interest, benefits, and other costs
were allocated to AHIS based on usage and other defined criteria.
All of the allocations utilized in the consolidated financial statements
are based on assumptions that AHIS management believes are reasonable under the
circumstances. However, these allocations are not necessarily indicative of the
costs which would have resulted had AHIS been a separate entity.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statement of cash flows, the Company
considers all highly liquid investments with an original maturity of three
months or less to be cash equivalents.
REVENUE RECOGNITION
The Company's products are sold to customers based on contractual
agreements. Revenues are derived from the licensing of computer software, the
sale of computer hardware, hardware and software maintenance, remote processing
and outsourcing, training, implementation assistance, custom development, and
consulting.
SERVICE AND SYSTEMS
Revenues from software license fees are recognized using the
percentage-of-completion method for contracts in which the Company is required
to make significant production, modification, or customization changes over the
implementation period of the contracts based on implementation hours incurred.
Other software license fees are generally recognized on a monthly basis over the
term of the licensing and maintenance agreements which are generally five years.
Remote processing and outsourcing services are
F-30
<PAGE> 160
ALLTEL HEALTHCARE INFORMATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996 -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
marketed under long-term agreements generally over periods from five to seven
years and revenues are recognized monthly as the work is performed. Software
maintenance fees are marketed under annual and multiyear agreements and are
recognized ratably over the term of the agreements. Implementation revenues are
recognized as the services are performed or on a percentage-of-completion basis
for fixed fee arrangements. Hardware maintenance revenues are billed and
recognized monthly over the term of the agreements. Revenues related to other
support services, such as training, consulting, and custom development, are
recognized when the services are performed.
The Company warrants its products will perform in accordance with
specifications as outlined in the respective customer contracts. The Company
records a reserve for warranty costs at the time it recognizes revenue.
Historically, warranty costs have been minimal.
The Company accrues for product returns at the time it recognizes revenue,
based on actual experience. Historically, product return costs have been
minimal.
HARDWARE SALES
Hardware sales are recognized upon shipment of the product to the customer.
UNBILLED ACCOUNTS RECEIVABLE
Unbilled accounts receivable represent amounts owed to the Company under
noncancelable agreements for software license fees with extended payment terms
and computer hardware purchases which have been financed over extended payment
terms. The current portion of unbilled accounts receivable of $4,883,000 and
$3,245,000 as of December 31, 1995 and 1996, respectively, is included in
accounts receivable in the accompanying financial statements. The non-current
portion of unbilled accounts receivable of $2,109,000 and $2,151,000 as of
December 31, 1995 and 1996, respectively, is included in other assets in the
accompanying financial statements. The non-current portion of unbilled accounts
receivable provides for payment terms that generally range from three to five
years and carry annual interest rates ranging from 7% to 10%. The Company
recognizes revenue in advance of billings under certain of its non-cancelable
long-term contracts that contain extended payment terms. The Company does not
have any obligation to refund any portion of its fees and has a history of
enforcement and collection of amounts due under such arrangements. Payments owed
under contracts with extended payment terms are due in accordance with the terms
of the respective contract. Historically, the Company has had minimal write-offs
of amounts due under such arrangements.
Additionally, included in unbilled accounts receivable are costs and
earnings in excess of billings related to certain software license fee
arrangements which are being recognized on a percentage-of-completion basis.
These amounts totaled approximately $1,572,000 and $1,240,000 as of December 31,
1995 and 1996, respectively.
INVENTORY
Inventory consists of computer parts and peripherals and is stated at the
lower of cost or market. Cost is determined using the first-in, first-out
method.
FOREIGN CURRENCY TRANSLATION
The financial position and results of operations of foreign subsidiaries
are measured using the currency of the respective countries as the functional
currency. Assets and liabilities are translated at the foreign exchange rate in
effect at the balance sheet date, while revenues and expenses for the year are
translated at the average exchange rate in effect during the year. Translation
gains and losses are not included in
F-31
<PAGE> 161
ALLTEL HEALTHCARE INFORMATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996 -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
determining net income or loss but are accumulated and reported as a separate
component of shareholder's deficit. The Company has not entered into any hedging
contracts during the two year period ended December 31, 1996.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. For financial reporting
purposes, depreciation and amortization are provided using the straight-line
method over the estimated useful lives, which range from two to ten years.
Computer equipment is depreciated over useful lives which range from two to five
years. Office furniture and equipment is depreciated over two to ten years.
Leasehold improvements are amortized over the shorter of the useful lives of the
assets or the remaining term of the lease. When assets are retired or otherwise
disposed of, the related costs and accumulated depreciation are removed from the
accounts and any resulting gain or loss is reflected in income. Expenditures for
repairs and maintenance not considered to substantially lengthen the property
lives are charged to expense as incurred.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
The Company capitalizes a portion of the internal computer software
development costs incurred. Salaries, overhead, and other related costs incurred
in connection with programming and testing software products are capitalized
subsequent to establishing technological feasibility. Management monitors the
net realizable value of all capitalized software development costs to ensure
that the investment will be recovered through margins from future sales. These
costs are amortized utilizing the straight-line method over periods of 36-60
months. Capitalized costs related to software development were approximately
$12,905,000 and $12,170,000, for the years ended December 31, 1995 and 1996,
respectively and $750,000 for the period from January 1, 1997 through January
23, 1997. Amortization of capitalized software development costs amounted to
approximately $6,470,000 and $7,209,000 for the years ended December 31, 1995
and 1996, respectively, and $377,000 for the period from January 1, 1997 through
January 23, 1997 and is included in operating expenses in the accompanying
statements of operations.
INTANGIBLE ASSETS
The intangible assets arose from the acquisition of Medical Data
Technology, Inc. (see Note 5), are stated at cost less accumulated amortization,
and consist of contracts and the excess of cost over fair value of net assets
acquired. The intangible assets are being amortized using the straight-line
method over seven years.
The carrying value of the excess of cost over fair value of net assets
acquired is reviewed if the facts and circumstances suggest that it may be
impaired. This review indicates if the asset will not be recoverable as
determined based on future expected cash flows. Based on its review, the Company
does not believe that an impairment of its excess of cost over fair value of net
assets acquired has occurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, including cash
and cash equivalents, accounts receivable, and other current liabilities
approximate fair value. The carrying amount of the intercompany payable to
parent balance approximates fair value based on current rates of interest
available to Alltel, and accordingly, the Company, for loans of similar
maturities.
F-32
<PAGE> 162
ALLTEL HEALTHCARE INFORMATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996 -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1995 and
1996 (in thousands):
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Computer equipment.......................................... $ 21,106 $ 25,093
Office furniture and equipment.............................. 2,815 4,198
Leasehold improvements and other............................ 2,407 3,461
-------- --------
26,328 32,752
Less: Accumulated depreciation and amortization............. (16,160) (22,013)
-------- --------
$ 10,168 $ 10,739
======== ========
</TABLE>
4. OTHER ASSETS
During 1996, the Company entered into a marketing agreement with Integrated
Medical Networks, Inc. ("IMN") for the marketing rights of certain software
which will provide financial and managed care applications for entities within
the healthcare industry. Under the terms of the agreement, IMN will perform
significant enhancements to existing technology over a three year period. AHIS
will retain worldwide, perpetual marketing rights, as defined, for the resulting
technology. For the year ended December 31, 1996, AHIS made payments totaling
approximately $5,811,000 under this agreement and is included in other assets in
the accompanying financial statements. As discussed in Note 12, this agreement
and related asset was transferred to Alltel in conjunction with the sale of the
Company.
5. OTHER CURRENT LIABILITIES
Included in other current liabilities were the following as of December 31,
1995 and 1996 (in thousands):
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Accrued compensation and incentives......................... $ 6,434 $ 6,603
Accrued hardware costs...................................... 3,700 3,326
Accrued royalty costs....................................... 1,045 648
Current portion of long-term debt........................... 260 86
Other....................................................... 6,229 9,715
------- -------
$17,668 $20,378
======= =======
</TABLE>
6. INCOME TAXES
The Company files its income tax return with AIS which files as part of the
consolidated Alltel group. Income tax expense and related balances shown in the
accompanying financial statements have been determined as if the Company filed
its tax return on a separate company basis.
F-33
<PAGE> 163
ALLTEL HEALTHCARE INFORMATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996 -- (CONTINUED)
6. INCOME TAXES (CONTINUED)
The income tax benefit (provision) consists of the following (in
thousands):
<TABLE>
<CAPTION>
PERIOD ENDED
1995 1996 JANUARY 23, 1997
------- ------- ----------------
<S> <C> <C> <C>
Current
Federal........................................ $ 4,123 $ 2,503 $ --
State and other................................ 1,030 626 --
------- ------- ----
Deferred......................................... 5,153 3,129 --
------- ------- ----
Federal........................................ (4,833) (1,829) 377
State and other................................ (1,207) (457) 69
------- ------- ----
(6,040) (2,286) 446
------- ------- ----
$ (887) $ 843 $446
======= ======= ====
</TABLE>
A reconciliation of the federal statutory rate and the effective income tax
rate follows (in thousands):
<TABLE>
<CAPTION>
PERIOD ENDED
1995 1996 JANUARY 23, 1997
----- ------ ----------------
<S> <C> <C> <C>
Statutory federal income tax rate (34%)......... $(508) $1,033 $413
Meals and entertainment....................... (128) (164) (14)
State income taxes............................ (141) 76 46
Non-deductible amortization................... (91) (101) (8)
Other......................................... (19) (1) --
----- ------ ----
Income tax benefit (provision)................ $(887) $ 843 $437
===== ====== ====
</TABLE>
The significant components of the Company's net deferred tax liability were
as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Deferred tax assets
Deferred revenue.......................................... $ 4,009 $ 3,596
Inventory and accounts receivable allowances.............. 710 846
Compensation related accrued expenses..................... 584 806
Accrued expenses.......................................... 1,627 1,624
Deferred rent............................................. 660 484
Other..................................................... 1,949 844
-------- --------
9,539 8,200
-------- --------
Deferred tax liabilities
Capitalization of software development costs.............. (10,298) (11,475)
Depreciation.............................................. (1,039) (856)
Other..................................................... (1,528) (1,481)
-------- --------
(12,865) (13,812)
-------- --------
Net deferred tax liability.................................. $ (3,326) $ (5,612)
======== ========
</TABLE>
F-34
<PAGE> 164
ALLTEL HEALTHCARE INFORMATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996 -- (CONTINUED)
7. EMPLOYEE BENEFIT PLANS
Effective January 1, 1995, through Alltel, employees of the Company may
participate in a noncontributory, trusteed profit-sharing plan which covers
substantially all employees who meet certain length-of-service requirements.
Company contributions are determined annually by the Board of Directors of
Alltel. Contributions to the plan approximated $1,516,000 and $1,781,000 for the
years ended December 31, 1995 and 1996, respectively. During 1994, the Company
maintained a defined contribution profit-sharing plan. This plan was merged into
the Alltel trusteed thrift plan, discussed below during 1995.
Also, effective January 1, 1995, through Alltel, substantially all
employees of the Company may participate in the Alltel trusteed thrift plan.
Employees may contribute up to 10% of the employee's salary and the employer's
matching contribution is the lesser of 25% of the employee's contribution or
1.5% of the employee's salary. The trusteed thrift plan is intended to meet all
requirements of qualifications under Section 401(k) of the Internal Revenue
Code. Company contributions to the trusteed thrift plan were approximately
$412,000 and $452,000 for the years ended December 31, 1995 and 1996,
respectively.
During 1995, employees of the Company became eligible to participate in the
AIS Employee Stock Purchase Plan (the "ESPP") which has reserved for issuance
1,000,000 shares of Alltel common stock. The ESPP provides for the purchase of
shares of common stock by employees through payroll deductions which may not
exceed five percent of employee compensation, as defined. The employee
contributes 85% of the prevailing market price of the shares, which are
purchased on the open market. The remaining 15% is expensed by the Company in
the period the contribution is made. Company contributions to the ESPP were
approximately $104,000 and $48,000 for the years ended December 31, 1995 and
1996, respectively. On June 30, 1996, the ESPP was terminated.
During 1995, the employees of the Company became eligible to participate in
various benefit plans which were administered by Alltel. In addition to the
trusteed profit-sharing plan and trusteed thrift plan, employees were also
eligible to participate in certain benefit plans including group medical, dental
and other various plans. Total expenses related to these plans were
approximately $2,196,000 and $2,328,000 for the years ended December 31, 1995
and 1996, respectively and $194,000 for the period from January 1, 1997 through
January 23, 1997.
8. COMMITMENTS AND CONTINGENCIES
NONCANCELABLE OPERATING LEASES
The Company leases offices and certain equipment under noncancelable
operating leases. Rental expense under operating leases was approximately
$7,014,000 and $5,531,000 for the years ended December 31, 1995 and 1996,
respectively, and $461,000 for the period from January 1, 1997 through January
23, 1997. Future minimum rental payments for noncancelable operating leases as
of December 31, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1997................................................... $ 4,877
1998................................................... 4,818
1999................................................... 3,625
2000................................................... 1,535
2001................................................... 1,414
Thereafter............................................. 1,798
-------
$18,067
=======
</TABLE>
F-35
<PAGE> 165
ALLTEL HEALTHCARE INFORMATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996 -- (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LITIGATION
The Company is involved in litigation incidental to its business. In the
opinion of management, after consultation with legal counsel, the ultimate
outcome of such litigation will not have a material adverse effect on the
Company's financial position or results of operations or cash flows.
9. RELATED PARTY TRANSACTIONS
The intercompany payable to parent balance represents amounts owed to
Alltel related to cash disbursements and receipts activity and certain other
transactions. All vendor related invoices are charged to this account at the
time an invoice is processed and, consequently, the accompanying financial
statements do not reflect an accounts payable balance. The intercompany balance
is reduced upon the posting of cash receipts. Intercompany interest of
approximately $2,833,000 and $3,858,000 for the years ended December 31, 1995
and 1996, respectively, and $379,000 for the period from January 1, 1997 through
January 23, 1997 was charged to this account at interest rates which ranged from
3.5% to 8.0% which represented the incremental borrowing rates of Alltel. As
more fully discussed in Note 12, the intercompany payable balance was converted
to equity on January 24, 1997 in connection with the sale of the Company.
For the years ended December 31, 1995 and 1996, Alltel charged the Company
approximately $2,277,000 and $2,100,000, respectively, and $175,000 for the
period January 1, 1997 through January 24, 1997 for costs related to providing
certain data center charges in conjunction with an outsourcing contract between
the Company and one of its customers.
During 1995 and 1996, legal services and external fees were provided and
paid by Alltel. These costs were approximately $1,869,000 and $964,000 for the
years ended December 31, 1995 and 1996, respectively, and are reflected in
general and administrative expenses in the accompanying financial statements.
During 1996 certain administrative services were performed by AIS, the cost
of which was estimated to be approximately $585,000 and is reflected in general
and administrative expenses in the accompanying financial statements. Prior to
1996, these functions were performed directly by employees of the Company and,
accordingly, the related costs are reflected in the accompanying financial
statements.
10. SUBSEQUENT EVENT
On January 24, 1997, the Company was purchased by Eclipsys Corporation
(formerly Integrated Healthcare Solutions, Inc.) for cash and other
consideration totaling approximately $201,500,000, including liabilities
assumed. Pursuant to the acquisition agreement, Alltel will retain the rights to
certain assets of the Company. These assets include the IMN marketing rights
(Note 4) with a balance of approximately $5,811,000 as of December 31, 1996 and
one of the Company's software products with related net capitalized software
costs as of December 31, 1996 of approximately $6,543,000.
F-36
<PAGE> 166
INDEPENDENT AUDITORS' REPORT
The Board of Directors
SDK Healthcare Information Systems:
We have audited the accompanying balance sheets of SDK Healthcare
Information Systems as of April 30, 1997 and 1996, and the related statements of
operations and retained earnings, and cash flows for the years then ended. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SDK Healthcare Information
Systems at April 30, 1997 and 1996, and the results of its operations and its
cash flows for the years then ended, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
June 12, 1997 (except for note 10 which is as of June 26, 1997)
F-37
<PAGE> 167
SDK HEALTHCARE INFORMATION SYSTEMS
BALANCE SHEETS
APRIL 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 674,047 $ 384,920
Accounts receivable, trade, less allowance for doubtful
accounts of $148,522 in 1997 and 1996 (note 9)......... 1,038,868 1,314,429
Revenue in excess of billings............................. 230,456 473,264
Current portion of notes receivable....................... 72,236 85,836
Prepaid expenses.......................................... 14,480 13,998
---------- ----------
Total current assets.............................. 2,030,087 2,272,447
---------- ----------
Property, plant and equipment (notes 3 and 5)............... 5,268,787 5,210,881
Less accumulated depreciation and amortization............ 4,444,571 4,236,990
---------- ----------
Net property, plant and equipment...................... 824,216 973,891
---------- ----------
Software production costs, net (note 2c).................... 780,829 719,367
Notes receivable, net of current portion.................... 14,264 86,500
Other assets................................................ 32,766 32,356
---------- ----------
Total assets...................................... $3,682,162 $4,084,561
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current capital lease obligation, building (note 5)....... $ 182,499 $ 149,705
Accounts payable.......................................... 285,665 310,275
Accrued expenses.......................................... 332,951 295,467
Income taxes payable...................................... 164,703 232,504
Deferred revenue............................................ 525,186 263,320
Deferred income taxes (note 6).............................. 60,236 47,344
---------- ----------
Total current liabilities......................... 1,551,240 1,298,615
---------- ----------
Capital lease obligation, building, excluding current
installment (note 5)...................................... 264,035 446,534
Deferred income taxes (note 6).............................. 144,210 279,001
---------- ----------
Total liabilities................................. 1,959,485 2,024,150
---------- ----------
Stockholders' equity (note 7):
Preferred stock, $6 noncumulative, no par. Authorized,
issued and outstanding 2,500 shares ($100 per share
liquidation preference)................................ 250,000 250,000
Common stock, voting, no par. Authorized 10,000; issued
and outstanding 5,000 shares........................... 10,000 10,000
Common stock, nonvoting, $.01 par. Authorized 700,000
shares; issued and outstanding 505,500 shares.......... 5,055 5,055
Additional paid-in capital................................ 52,046 52,046
Retained earnings......................................... 1,405,576 1,743,310
---------- ----------
Total stockholders' equity........................ 1,722,677 2,060,411
---------- ----------
Total liabilities and stockholders' equity... $3,682,162 $4,084,561
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-38
<PAGE> 168
SDK HEALTHCARE INFORMATION SYSTEMS
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
YEARS ENDED APRIL 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Revenues (note 9)........................................... $6,801,412 $9,545,114
Operating expenses:
Cost of revenues.......................................... 4,624,029 5,775,035
Sales and marketing....................................... 916,891 1,013,875
General and administrative................................ 1,334,808 1,270,825
Research and development.................................. 308,570 378,574
---------- ----------
Total operating expenses............................... 7,184,298 8,438,309
---------- ----------
Income (loss) from operations.......................... (382,886) 1,106,805
---------- ----------
Other (income) expense:
Interest income........................................... (24,825) (14,077)
Interest expense -- capital leases........................ 105,871 132,773
Interest expense -- other................................. 866 8,144
---------- ----------
Total other expense.................................... 81,912 126,840
---------- ----------
Income (loss) before income taxes...................... (464,798) 979,965
---------- ----------
Income tax expense (benefit) (note 6):
Current................................................... (5,165) 287,315
Deferred.................................................. (121,899) 119,867
---------- ----------
(127,064) 407,182
---------- ----------
Net income (loss)...................................... (337,734) 572,783
Retained earnings at beginning of year...................... 1,743,310 1,170,527
---------- ----------
Retained earnings at end of year............................ $1,405,576 $1,743,310
========== ==========
Earnings (loss) per common share............................ $ (.66) $ 1.12
========== ==========
Weighted average common shares outstanding.................. 510,500 510,500
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-39
<PAGE> 169
SDK HEALTHCARE INFORMATION SYSTEMS
STATEMENTS OF CASH FLOWS
YEARS ENDED APRIL 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
--------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $(337,734) $ 572,783
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization.......................... 609,405 644,518
Recovery of losses on accounts receivable.............. -- (20,971)
Deferred income taxes.................................. (121,899) 86,855
Changes in operating assets and liabilities:
Accounts receivable, trade........................... 275,561 400,350
Prepaid expenses..................................... (482) 72
Other current assets................................. 242,808 (445,347)
Accounts payable..................................... (24,610) (159,748)
Accrued expenses..................................... 37,484 36,312
Income taxes payable................................. (67,801) 232,504
Deferred revenue..................................... 261,866 85,350
--------- ----------
Net cash provided by operating activities......... 874,598 1,432,678
--------- ----------
Cash flows from investing activities:
Additions to property, plant and equipment................ (65,737) (155,817)
Additions to software production costs.................... (455,455) (448,031)
Other assets.............................................. (410) (988)
--------- ----------
Net cash used for investing activities............ (521,602) (604,836)
--------- ----------
Cash flows from financing activities:
Net repayments under line-of-credit agreement............. -- (633,114)
Payments on obligations under capital leases.............. (149,705) (122,803)
Decrease in notes receivable.............................. 85,836 86,491
--------- ----------
Net cash used for financing activities............ (63,869) (669,426)
--------- ----------
Net increase in cash and cash equivalents................... 289,127 158,416
Cash and cash equivalents at beginning of year.............. 384,920 226,504
--------- ----------
Cash and cash equivalents at end of year.................... $ 674,047 $ 384,920
========= ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest............................................... $ 106,737 $ 140,917
========= ==========
Income taxes........................................... $ 19,725 $ 88,118
========= ==========
</TABLE>
See accompanying notes to financial statements.
F-40
<PAGE> 170
SDK HEALTHCARE INFORMATION SYSTEMS
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1997 AND 1996
(1) NATURE OF BUSINESS
The Company designs, markets, installs and supports a totally integrated
Patient Financial Management System. This turnkey software solution provides
single facility and multi-entity organizations with the ability to track and
process billing for traditional and managed care patients from initial patient
scheduling through final account resolution. The Company additionally offers
complete installation and training services, as well as facilities management
and remote processing from its corporate based data center. The Company does
business as SDK Healthcare Information Systems; however, its legal name is SDK
Medical Computer Services Corporation. The Company has offices in Boston,
Massachusetts (corporate headquarters) and Albany, New York.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Revenue Recognition
Revenue from software licensing fees is recognized: (a) upon delivery of
the software, if no significant obligations remain; (b) when the software has
been delivered and the obligations have been performed, if significant
obligations are required; and (c) under the percentage-of-completion method of
accounting, if significant production, modification or customization of the
software is required.
The Company recognizes service revenue from its remote data processing
services upon delivery of the service.
Revenues from maintenance agreements are recognized over the term of the
agreement. Advance billings to customers are recorded as deferred revenue until
earned. The Company recognizes revenues from hardware sales upon shipment of the
hardware.
(b) Property, Plant and Equipment
Property, plant and equipment is stated at cost. Property under capital
leases is stated at the lower of the present value of minimum lease payments at
the beginning of the lease term or fair value at the inception of the lease.
Depreciation on property, plant and equipment is calculated using
straight-line and accelerated methods over the estimated useful lives of the
assets. Property held under capital lease and leasehold improvements are
amortized on the straight-line method over the shorter of the lease term or
estimated useful life of the asset.
In accordance with Financial Accounting Standards Board Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of, the Company reviews its long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. If it is determined that the carrying amount of
an asset cannot be fully recovered, an impairment loss is recognized.
(c) Software Production Costs
The Company capitalizes the costs of producing software product masters,
which include coding and testing. Direct costs of establishing technological
feasibility (planning and designing, including detailed program design) are
charged to research and development expense as incurred.
The total amount of software production costs capitalized during fiscal
1997 and 1996 amounted to $445,455 and $448,031, respectively. Such costs are
amortized on a product-by-product basis at the greater of the amount computed
using (a) the ratio that current revenues for the product bear to the total of
current and anticipated future revenues for that product or (b) the
straight-line method over the estimated
F-41
<PAGE> 171
SDK HEALTHCARE INFORMATION SYSTEMS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
APRIL 30, 1997 AND 1996
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
economic life of the product, generally three years. The recoverability of such
costs is reviewed on an ongoing basis. Amortization totaled $393,993 and
$450,251 for 1997 and 1996, respectively.
(d) Research and Development Costs
Research and development costs are charged to operations as incurred. For
the years ended April 30, 1997 and 1996, research and development costs incurred
were $308,570 and $378,574, respectively.
(e) Cash and Cash Equivalents
For purposes of the statement of cash flows, all highly liquid debt
instruments with an original maturity of three months or less are considered to
be cash equivalents.
(f) Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(g) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(h) Fair Value of Financial Instruments
Financial instruments of the Company consist of cash and cash equivalents,
accounts receivable, notes receivable, accounts payable and notes payable. The
carrying amount of these financial instruments approximates their fair value.
(i) Earnings per share
Net income (loss) per share is computed based on the weighted average
number of equivalent shares of the Company's common stock outstanding during
each period. Fully diluted net income (loss) per share is not significantly
different from primary net income (loss) per share amounts.
(j) Reclassifications
Certain reclassifications were made to the 1996 financial statements to
conform to the 1997 presentation.
F-42
<PAGE> 172
SDK HEALTHCARE INFORMATION SYSTEMS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
APRIL 30, 1997 AND 1996
(3) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at April 30:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Land and buildings.......................................... $1,101,702 $1,101,702
Building improvements....................................... 730,370 730,370
Equipment................................................... 3,113,776 3,071,653
Furniture and fixtures...................................... 236,263 220,480
Motor vehicles.............................................. 86,676 86,676
---------- ----------
$5,268,787 $5,210,881
========== ==========
</TABLE>
(4) FINANCING ARRANGEMENT
The Company has available a bank line-of-credit which provides for
unsecured borrowings of up to $1,250,000. There were no borrowings outstanding
at April 30, 1997 or 1996. Interest is payable monthly at an annual rate equal
to the prime rate plus .75%. At April 30, 1997 and 1996, this rate was 8.5% and
9.0%, respectively.
(5) LEASE OBLIGATIONS
The Company leases its principal operating facilities from a trust, the
beneficiaries of which are certain stockholders of the Company. The original
lease, entered into in June 1984, called for expiration in July 1989 and allowed
for renewal of three five-year terms. In April 1990, the lease was revised to
extend the expiration date through July 1999 and reduce the monthly rental
payments. In addition to the basic annual rent, as adjusted for changes in the
Consumer Price Index, the Company is obligated to pay all real estate taxes. The
lease has been accounted for as a capital lease.
The Company leased computer equipment under capital leases which expired at
various dates through 1996. The Company also leases equipment under leases
expiring through 1999, which have been accounted for as operating leases.
The present value of future minimum capital lease payments and the future
minimum lease payments under noncancelable operating leases as of April 30,
1997, are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- ---------
<S> <C> <C>
Year ending April 30:
1998...................................................... $ 255,576 $26,270
1999...................................................... 255,576 3,160
2000...................................................... 42,596 --
--------- -------
Minimum future lease payments.......................... 553,748 $29,430
=======
Less amounts representing interest.......................... (107,214)
---------
Present value of minimum future lease payments......... 446,534
Less current installments................................... (182,499)
---------
Obligations under capital leases, excluding current
installments......................................... $ 264,035
=========
</TABLE>
Rent expense under operating leases amounted to $33,787 in 1997 and $61,825
in 1996.
F-43
<PAGE> 173
SDK HEALTHCARE INFORMATION SYSTEMS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
APRIL 30, 1997 AND 1996
(5) LEASE OBLIGATIONS (CONTINUED)
The related assets and accumulated amortization thereon under capital lease
obligations are included in property, plant and equipment at April 30, 1997, as
follows:
<TABLE>
<S> <C>
Building.................................................... $ 1,101,702
Equipment................................................... 148,157
-----------
1,249,859
Less accumulated amortization............................... (1,087,775)
-----------
$ 162,084
===========
</TABLE>
(6) INCOME TAXES
Income tax expense (benefit) consists of the following at April 30:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
-------- --------- ---------
<S> <C> <C> <C>
1997:
Federal........................................... $ 3,668 $ (93,221) $ (89,553)
State............................................. (8,833) (28,678) (37,511)
-------- --------- ---------
$ (5,165) $(121,899) $(127,064)
======== ========= =========
1996:
Federal........................................... $195,370 $ 117,104 $ 312,474
State............................................. 91,945 2,763 94,708
-------- --------- ---------
$287,315 $ 119,867 $ 407,182
======== ========= =========
</TABLE>
Total income tax expense (benefit) differs from the amounts computed by
applying the U.S. federal income tax rate of 34% as a result of the following:
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Computed "expected" tax expense (benefit)................... $(136,611) $333,188
State and local income taxes (benefit), net of federal tax
benefit................................................... (23,539) 62,507
Research and development credit............................. -- --
Nondeductible expenses...................................... 8,968 5,765
Other....................................................... 24,118 5,722
--------- --------
$(127,064) $407,182
========= ========
</TABLE>
F-44
<PAGE> 174
SDK HEALTHCARE INFORMATION SYSTEMS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
APRIL 30, 1997 AND 1996
(6) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at April 30 are
presented below:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Current deferred tax assets (liabilities):
Deferred revenues......................................... $ 16,315 $ 45,634
Accounts receivable due to allowance for doubtful
accounts............................................... 59,810 45,716
Cash basis adjustment..................................... (153,438) (153,438)
Other..................................................... 17,077 14,744
--------- ---------
Total net current deferred tax liabilities............. (60,236) (47,344)
--------- ---------
Noncurrent deferred tax assets (liabilities):
Capital lease treated as operating lease for tax
purposes............................................... 117,141 147,302
State net operating loss carryforward..................... 7,176 --
Research credit and alternative minimum tax credits....... 45,119 21,539
Cash basis adjustment..................................... -- (153,438)
Software capitalized for books, expensed for tax
purposes............................................... (314,440) (289,688)
Property, plant and equipment, principally depreciation... 794 (4,716)
--------- ---------
Total net noncurrent deferred tax liabilities.......... (144,210) (279,001)
--------- ---------
Net deferred tax liabilities........................... $(204,446) $(326,345)
========= =========
</TABLE>
The Company has research credit carryovers of approximately $45,000
expiring in various amounts through the year 2010 which can be used to offset
future federal taxable income and income taxes.
(7) COMMON STOCK
At April 30, 1986, options to purchase 7,500 shares of nonvoting common
stock of the Company were held by certain key employees under Nonqualified Stock
Option Agreements. The options were exercised in 1987 at prices of $.99-1.39 per
share, the fair market value at the date of grant. Shares issued under these
agreements must be offered to the Company for repurchase at the then current
book value as of the immediately preceding April 30 upon termination of
employment or upon the occurrence of certain other events. There was no activity
during 1996 or 1997 under the agreements.
(8) PROFIT-SHARING PLAN
The Company maintains a profit-sharing plan for the benefit of eligible
employees. The Plan provides that the Company's contribution be determined by a
resolution of the board of directors, and there is no minimum contribution
required. The Company incurred profit-sharing expense of $137,921 and $100,000
in 1997 and 1996, respectively.
(9) BUSINESS AND CREDIT CONCENTRATION
Substantially all of the Company's sales for 1997 and 1996 were to medical
facilities. Accordingly, all of the Company's accounts receivable at April 30,
1997 and 1996, are due from medical facilities.
F-45
<PAGE> 175
SDK HEALTHCARE INFORMATION SYSTEMS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
APRIL 30, 1997 AND 1996
(9) BUSINESS AND CREDIT CONCENTRATION (CONTINUED)
The following table summaries sales to major customers as a percentage of
total sales for the period:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Customer A.................................................. 15% --
Customer B.................................................. 13% 21%
Customer C.................................................. 10% 17%
Customer D.................................................. -- 12%
</TABLE>
(10) SUBSEQUENT EVENT
On June 26, 1997, the Company was acquired by Eclipsys Corporation.
F-46
<PAGE> 176
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
F-47
<PAGE> 177
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.
F-48
<PAGE> 178
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.
F-49
<PAGE> 179
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.
F-50
<PAGE> 180
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.
F-51
<PAGE> 181
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.
F-52
<PAGE> 182
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.
F-53
<PAGE> 183
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
------------------------------------ -----------------------------------
PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
---------- ----------- --------- ---------- ---------- ---------
<S> <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
EFFECT OF DILUTIVE
SECURITIES
Warrants............... 251,781 220,749
Dilutive stock
options.............. 2,670,941 2,321,616
----------- ----------
DILUTED EPS
Income to common
stockholders......... $3,545,000 16,137,155 $0.22 $5,319,000 19,977,094 $0.27
---------- ----------- ----- ---------- ---------- -----
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
-----------------------------------
1998
-----------------------------------
PER SHARE
INCOME SHARES AMOUNT
---------- ---------- ---------
<S> <C> <C> <C>
BASIC EPS
Net income............. $8,857,000 18,210,050 $0.49
EFFECT OF DILUTIVE
SECURITIES
Warrants............... 231,291
Dilutive stock
options.............. 1,952,551
----------
DILUTED EPS
Income to common
stockholders......... $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.
F-54
<PAGE> 184
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>
F-55
<PAGE> 185
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
F-56
<PAGE> 186
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
F-57
<PAGE> 187
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
F-58
<PAGE> 188
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.
F-59
<PAGE> 189
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.
F-60
<PAGE> 190
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.
F-61
<PAGE> 191
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.
F-62
<PAGE> 192
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
HealthVISION, Inc.
We have audited the accompanying consolidated balance sheets of
HealthVISION, Inc. as of December 31, 1996 and 1997, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the years then ended. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
HealthVISION, Inc. as of December 31, 1996 and 1997 and the consolidated results
of its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Walnut Creek, California
March 13, 1998, except for Note 12
as to which the date is October 28, 1998
F-63
<PAGE> 193
HEALTHVISION, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,316,324 $ 644,317
Accounts receivable, less allowance for doubtful accounts
of $300,000 and $617,407 at December 31, 1996 and 1997,
respectively........................................... 1,744,231 1,417,358
Unbilled receivables...................................... 920,303 201,963
Prepaid expenses.......................................... 720,046 879,578
----------- ------------
Total current assets.............................. 5,700,904 3,143,216
Equipment and furniture, net................................ 1,641,181 1,122,834
Capitalized and purchased software, net of accumulated
amortization.............................................. 591,745 101,744
Deposits.................................................... 329,185 95,795
----------- ------------
Total assets...................................... $ 8,263,015 $ 4,463,589
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 769,995 $ 288,619
Accrued compensation and related liabilities.............. 1,030,661 701,499
Deferred revenue.......................................... 2,710,878 3,101,132
Other accrued liabilities................................. 786,233 1,262,402
Current portion of long-term debt......................... 542,190 421,630
Notes payable to stockholder.............................. -- 1,005,753
----------- ------------
Total current liabilities......................... 5,839,957 6,781,035
Long-term debt, less current portion........................ 466,356 44,725
Commitments and contingencies
Redeemable senior preferred stock, $.01 par value;
designated -- 60,000 shares; issued and
outstanding -- 60,000 shares at December 31, 1997
(aggregate liquidation preference $6,384,329)............. -- 6,384,329
Stockholders' equity (deficit):
Preferred stock, 118,678 shares authorized; 7% preferred
stock, $.01 par value; designated -- 58,678 shares;
issued and outstanding -- 58,678 shares at December 31,
1996 and 1997 (aggregate liquidation preference
$6,440,151)............................................ 587 587
Common stock, $.01 par value; authorized -- 10,000,000
shares; issued and outstanding -- 5,735,392 and
5,757,630 shares at December 31, 1996 and 1997,
respectively........................................... 57,354 57,576
Additional paid-in capital................................ 5,806,283 5,432,964
Accumulated deficit....................................... (3,903,361) (14,255,193)
Cumulative translation adjustment......................... (4,161) 17,566
----------- ------------
Total stockholders' equity (deficit)........................ 1,956,702 (8,746,500)
----------- ------------
Total liabilities and stockholders' equity (deficit)........ $ 8,263,015 $ 4,463,589
=========== ============
</TABLE>
See accompanying notes.
F-64
<PAGE> 194
HEALTHVISION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Revenue:
Software licenses, maintenance and services............... $ 7,996,395 $ 8,607,541
Hardware.................................................. 635,584 546,792
------------ ------------
Total revenue..................................... 8,631,979 9,154,333
Cost of revenue:
Software licenses, maintenance and services............... 8,331,227 5,654,084
Hardware.................................................. 556,933 397,874
------------ ------------
Total cost of revenue............................. 8,888,160 6,051,958
------------ ------------
Gross profit................................................ (256,181) 3,102,375
Operating expenses:
Product development....................................... 6,192,610 6,657,470
Sales and marketing....................................... 5,066,466 4,689,598
General and administration................................ 4,407,792 2,018,936
------------ ------------
Total operating expenses.......................... 15,666,868 13,366,004
------------ ------------
Loss from operations........................................ (15,923,049) (10,263,629)
Other income (expense), net................................. (56,465) (13,203)
Net loss before foreign taxes............................... (15,979,514) (10,276,832)
Foreign taxes............................................... -- (75,000)
------------ ------------
Net loss.................................................... (15,979,514) (10,351,832)
Preferred stock dividend.................................... 161,605 795,075
------------ ------------
Net loss applicable to common stockholders.................. $(16,141,119) $(11,146,907)
============ ============
</TABLE>
See accompanying notes.
F-65
<PAGE> 195
HEALTHVISION, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SERIES A-1 SERIES A-2
7% CONVERTIBLE CONVERTIBLE ADDITIONAL
PREFERRED PREFERRED PREFERRED COMMON PAID-IN
STOCK STOCK STOCK STOCK CAPITAL
--------- ----------- ----------- ------- ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995............................ $2,570 $ 52,785 $ 28,838 $45,884 $ 48,546,696
Issuance of 90,000 shares of 7% preferred stock at
$100 per share...................................... 900 -- -- -- 8,999,100
Translation adjustment................................ -- -- -- -- --
Net loss from January 1, 1996 through July 14, 1996... -- -- -- -- --
------ -------- -------- ------- ------------
Balance at July 14, 1996................................ 3,470 52,785 28,838 45,884 57,545,796
Reorganization of company as of July 15, 1996
(issuance of common stock in exchange for assets and
liabilities distributed by the shareholders of the
Predecessor Company)................................ (3,470) (52,785) (28,838) 11,440 (57,607,976)
Issuance of 58,678 shares of 7% preferred stock at
$100 per share...................................... 587 -- -- -- 5,867,213
Exercise of stock options............................. -- -- -- 30 1,250
Translation adjustment................................ -- -- -- -- --
Net loss from July 15, 1996 through December 31,
1996................................................ -- -- -- -- --
------ -------- -------- ------- ------------
Balance at December 31, 1996............................ 587 -- -- 57,354 5,806,283
Issuance of shares of common stock upon exercise of
options............................................. -- 222 11,010
Accretion of redeemable senior preferred stock........ -- -- -- -- (384,329)
Net loss.............................................. -- -- --
Translation adjustment................................ -- -- --
------ -------- -------- ------- ------------
Balance at December 31, 1997............................ $ 587 $ -- $ -- $57,576 $ 5,432,964
====== ======== ======== ======= ============
<CAPTION>
CUMULATIVE TOTAL
ACCUMULATED TRANSLATION STOCKHOLDER'S
DEFICIT ADJUSTMENT EQUITY
------------ ----------- -------------
<S> <C> <C> <C>
Balance at December 31, 1995............................ $(29,252,891) $(319,690) $ 19,104,192
Issuance of 90,000 shares of 7% preferred stock at
$100 per share...................................... -- -- 9,000,000
Translation adjustment................................ -- (54,712) (54,712)
Net loss from January 1, 1996 through July 14, 1996... (12,076,153) -- (12,076,153)
------------ --------- ------------
Balance at July 14, 1996................................ (41,329,044) (374,402) 15,973,327
Reorganization of company as of July 15, 1996
(issuance of common stock in exchange for assets and
liabilities distributed by the shareholders of the
Predecessor Company)................................ 41,329,044 374,402 (15,978,183)
Issuance of 58,678 shares of 7% preferred stock at
$100 per share...................................... -- -- 5,867,800
Exercise of stock options............................. -- -- 1,280
Translation adjustment................................ -- (4,161) (4,161)
Net loss from July 15, 1996 through December 31,
1996................................................ (3,903,361) -- (3,903,361)
------------ --------- ------------
Balance at December 31, 1996............................ (3,903,361) (4,161) 1,956,702
Issuance of shares of common stock upon exercise of
options............................................. -- -- 11,232
Accretion of redeemable senior preferred stock........ -- -- (384,329)
Net loss.............................................. (10,351,832) -- (10,351,832)
Translation adjustment................................ -- 21,727 21,727
------------ --------- ------------
Balance at December 31, 1997............................ $(14,255,193) $ 17,566 $ (8,746,500)
============ ========= ============
</TABLE>
See accompanying notes.
F-66
<PAGE> 196
HEALTHVISION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................... $(15,979,514) $(10,351,832)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 941,005 1,019,765
Amortization of intangible assets......................... 3,224,425 591,745
(Gain) loss on disposal of equipment...................... -- 29,255
Changes in operating assets and liabilities:
Accounts and unbilled receivables...................... (870,741) 1,045,213
Prepaid expenses....................................... (198,095) 73,858
Accounts payable....................................... (510,227) (481,376)
Accrued compensation and related liabilities........... (49,983) (329,162)
Accrued interest on notes payable to stockholders...... -- 5,753
Deferred revenue....................................... 1,533,520 390,254
Other accrued liabilities.............................. (348,407) 476,169
------------ ------------
Net cash used in operating activities....................... (12,258,017) (7,530,358)
INVESTING ACTIVITIES:
Purchase of equipment and furniture......................... (204,469) (530,672)
Purchase of capitalized software development costs.......... (607,389) (101,745)
Deposits.................................................... (329,185) --
------------ ------------
Net cash provided by (used in) investing activities......... (1,141,043) (632,417)
FINANCING ACTIVITIES:
Proceeds from issuance of redeemable senior preferred
stock..................................................... -- 6,000,000
Proceeds from issuance of notes payable to stockholder...... -- 1,000,000
Proceeds from issuance of common stock...................... 1,280 11,232
Proceeds from issuance of 7% preferred stock................ 14,867,800 --
Principal payments made on long-term debt................... (684,279) (542,191)
------------ ------------
Net cash provided by financing activities................... 14,184,801 6,469,041
Effect of exchange rate changes on cash..................... (58,874) 21,727
------------ ------------
Net increase (decrease) in cash and equivalents............. 726,867 (1,672,007)
Cash and equivalents, beginning of period................... 1,589,457 2,316,324
------------ ------------
Cash and equivalents, end of period......................... $ 2,316,324 $ 644,317
============ ============
SUPPLEMENTAL DISCLOSURE:
Cash paid for interest...................................... $ 100,000 $ 107,507
============ ============
</TABLE>
See accompanying notes.
F-67
<PAGE> 197
HEALTHVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
1. THE COMPANY, ORGANIZATION AND BASIS OF PRESENTATION
HealthVISION, Inc. develops, markets and supports healthcare information
products focused on lowering costs of health care and improving clinical
processes for integrated delivery systems, hospitals and office-based
physicians.
HealthVISION, Inc. (the "Predecessor Company") was organized as a Delaware
corporation on February 2, 1994, began operations on February 15, 1994 and was
incorporated to acquire HVC Holdings Canada Ltd., HealthVISION corporation and
their subsidiaries.
On August 8, 1996, the shareholders of the Predecessor Company merged the
stock of HealthVISION, Inc. and its subsidiary LBA Health Care Management, Inc.
("LBA") with HCIA, Inc. in exchange for $130,000,000 in cash and stock.
Immediately prior to the transaction, all of the assets, liabilities and
subsidiaries of HealthVISION, Inc., other than certain assets identified, were
distributed to a newly formed Company, HVISION II, Inc. which was incorporated
as a Delaware corporation on July 15, 1996. These assets and liabilities were
recorded at their historical cost, which was a net book deficit of $4,856, as
both companies were under common control and there was no change in ownership.
On August 10, 1996, HVISION II, Inc. changed its name to HealthVISION, Inc. (the
"Company").
On January 29,1997, the Company entered into an agreement, the "Stock
Purchase Agreement," with Transition Systems Inc.("TSI") under which the Company
granted TSI the option to acquire all of the capital stock of the Company. In
addition, the Company issued $6,000,000 of redeemable senior preferred stock to
TSI (see Note 6).
The consolidated financial statements include the accounts of HealthVISION,
Inc. and its subsidiary companies, all of which are wholly owned. The
consolidated financial statements include the operations of the Predecessor
Company prior to the merger with HCIA, Inc. combined with the operations of
HealthVISION, Inc. relating only to the reporting entity which exists subsequent
to the merger which excludes all operations of LBA. All intercompany
transactions and balances have been eliminated in consolidation.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company incurred a significant net
loss of $10,351,832 for the year ended December 31, 1997. Management expects the
Company to incur additional losses and recognizes that the Company may need to
raise additional debt or equity capital during 1998 in order to continue
operations. The Company has obtained representation from a major shareholder as
to its intent and ability to fund operations of the Company through at least
January 1, 1999.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Software licenses, maintenance and services -- Revenue from license and
service contracts is recognized on the percentage-of-completion method with
progress-to-completion measured based upon labor costs incurred. Services
include revenue derived from implementation and professional services related to
project management, training, and hardware support. Revenue from maintenance is
recognized over the period the customer support services are provided.
Hardware revenue -- Hardware revenues represent revenue from sales of
computers and related network equipment. Revenue from hardware sales is
recognized at the later of shipment of the product or completion of significant
obligations to the customer.
F-68
<PAGE> 198
HEALTHVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred revenue -- Deferred revenues result from advance billings for
which revenues have not been recognized.
Unbilled receivables -- Unbilled receivables result from differences
between revenue recognized and amounts invoiced to customers under the terms of
the contracts.
The Company's revenue recognition policy is in accordance with the
provisions of the American Institute of Certified Public Accountant's Statement
of Position 91-1, "Software Revenue Recognition," ("SOP 91-1").
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2, "Software Revenue Recognition," ("SOP 97-2")
which supersedes 91-1. The Company will be required to adopt this standard for
the year ended December 31, 1998. Restatement of prior financial statements is
prohibited. The Company does not expect the adoption of SOP 97-2 to adversely
affect its financial position or results of operations for the year ending
December 31, 1998.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of demand deposits and commercial paper
which are highly liquid short-term investments with original maturities from
date of purchase of 90 days or less. Such investments are stated at cost, which
approximates fair value.
ACCOUNTS RECEIVABLE
Accounts receivable are primarily from health care organizations in the
United States and Canada. The Company conducts ongoing credit evaluations of its
customers, maintains reserves for potential credit losses and does not require
collateral. An allowance for doubtful accounts is maintained to provide for
estimated uncollectible receivables. Actual uncollectible amounts could differ
from such estimates.
EQUIPMENT AND FURNITURE
Equipment and furniture are recorded at cost less accumulated depreciation.
Depreciation is computed using rates calculated to amortize the cost of the
assets less their residual values over their estimated useful lives of three to
five years. Leasehold improvements are amortized over the terms of the
respective leases, or useful lives of the assets, whichever is shorter.
SOFTWARE DEVELOPMENT COSTS
Costs to develop the Company's products are expensed as incurred in
accordance with Statement of Financial Accounting Standards No. 2, "Accounting
for Research and Development Costs," which establishes accounting and reporting
standards for research and development.
In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed," costs to complete a software product once technological feasibility
has been established are capitalized and amortized over the estimated economic
life of the software product on the straight-line basis, generally over three
years. At each balance sheet date, the Company performs an evaluation assessing
the recoverability of the unamortized capitalized costs by comparing such costs
to the net realizable value of the related product. Costs related to the
development of new software products incurred prior to establishing
technological feasibility are expensed as incurred. The write-off and
amortization of capitalized software development costs for the years ended
December 31, 1996 and 1997, was $109,738 and $591,745, respectively.
F-69
<PAGE> 199
HEALTHVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("FAS 109"), "Accounting for Income
Taxes." Under FAS 109, the liability method is used to account for income taxes.
Under this method, deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies are translated
into U.S. dollars at the exchange rate as of the balance sheet date. Income and
expense items are translated at average rates of exchange prevailing during the
period. Translation adjustments are accumulated and reported as a separate
component of stockholders' equity. Foreign exchange transaction adjustments are
recorded in other income/expense in the period in which they occur.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
STOCK-BASED COMPENSATION
The Company accounts for employee stock options in accordance with
Accounting Principles Board Opinion No. 25 and has adopted the disclosure only
option of Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," ("FAS 123"). The effect of applying the fair value
method under FAS 123 to the Company's stock options would result in pro forma
net losses that are not materially different from the historical amounts
reported.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
The Company accounts for long-lived assets in accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which requires
impairment losses to be recorded on long-lived assets used in operations, such
as property, equipment and improvements, and intangible assets, when indicators
of impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amount of the assets.
COMPREHENSIVE INCOME
In 1997, the FASB issued Statement of Financial Accounting Standards No.
130 ("FAS 130"), "Reporting Comprehensive Income," which requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income (revenues, expenses, gains, and losses) be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The Company will comply with the requirements of FAS 130
for the year ending December 31, 1998.
F-70
<PAGE> 200
HEALTHVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. EQUIPMENT AND FURNITURE
Equipment and furniture consist of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
---------- -----------
<S> <C> <C>
Equipment.................................................. $1,641,833 $ 1,991,971
Furniture, fixtures and leasehold improvements............. 378,558 383,007
---------- -----------
2,020,391 2,374,978
Less accumulated depreciation and amortization............. (379,210) (1,252,144)
---------- -----------
$1,641,181 $ 1,122,834
========== ===========
</TABLE>
4. INDEBTEDNESS
On December 10, 1997, the Company issued a promissory note to its majority
shareholder for $1,000,000. The note bears annual interest at 10% and is payable
on demand. Accrued interest was $5,753 at December 31, 1997.
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
---------- ---------
<S> <C> <C>
Loan from Western Diversification Fund, noninterest
bearing................................................... $ 105,054 $ --
Capital lease obligations, bearing interest at rates ranging
from 8% to 15.5% per annum, payable in varying monthly
installments plus interest through 1999................... 903,492 466,355
---------- ---------
1,008,546 466,355
Less current portion........................................ (542,190) (421,630)
---------- ---------
$ 466,356 $ 44,725
========== =========
</TABLE>
Scheduled maturities of long-term debt as of December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
CAPITAL LEASE
OBLIGATIONS
-------------
<S> <C>
1998........................................................ $454,275
1999........................................................ 45,962
--------
Total minimum payments...................................... 500,237
Less amount representing interest........................... (33,881)
--------
Present value of minimum payments........................... $466,356
========
</TABLE>
Equipment and furniture and the related accumulated depreciation under
capital leases at December 31, 1996 were $982,473 and $152,150, respectively,
and at December 31, 1997 were $982,473 and $609,762, respectively.
F-71
<PAGE> 201
HEALTHVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES
Significant components of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1997
----------- ------------
<S> <C> <C>
Net operating loss and research credit carryforwards..... $ 6,400,000 $ 9,100,000
Other.................................................... -- 900,000
----------- ------------
Total deferred tax assets................................ 6,400,000 10,000,000
Valuation allowance...................................... (6,400,000) (10,000,000)
----------- ------------
Net deferred tax assets.................................. $ -- $ --
=========== ============
</TABLE>
The valuation allowance increased by $6,400,000 and $3,600,000 for the
years ended December 31, 1996 and 1997, respectively.
At December 31, 1997, the Company has total U.S. and foreign (primarily
Canada) net operating loss carryforwards of approximately $20,000,000 for income
tax purposes. The December 31, 1997 balance consists of approximately $7,000,000
of Canadian loss carryforwards which expire in tax years 1998 through 2004 and
approximately $11,000,000 of U.S. loss carryforwards which expire in tax years
2011 through 2012.
Due to various limitations concerning utilization of net operating loss
carryforwards, these loss carryforwards could expire prior to the statutory
expiration dates.
6. STOCKHOLDERS' EQUITY
REDEEMABLE SENIOR PREFERRED STOCK
On January 29, 1997, the Company entered into an agreement, the "Stock
Purchase Agreement," with a third party, TSI, under which the Company issued
60,000 shares of redeemable senior preferred stock at $100 per share for total
cash proceeds of $6,000,000.
The redeemable senior preferred stock has a par value of $.01, is
convertible into common stock and has a cumulative dividend rate of 7% per
annum. The holder of the redeemable senior preferred stock is entitled to voting
rights equivalent to the number of common shares into which the preferred stock
is convertible. The holder may convert any or all of the redeemable senior
preferred stock into shares of common stock at a price equal to $100 per share
plus an amount equal to any and all dividends accrued and unpaid. Each share of
redeemable senior preferred stock shall be automatically converted into shares
of common stock at the then effective conversion price upon the closing of an
initial public offering. In the event of any liquidation, dissolution or winding
up of the Company, and before any distribution or payment shall be made to the
holders of the 7% preferred stock, the holders of redeemable senior preferred
stock shall be entitled to an amount equal to $100 per share plus any and all
dividends accrued and unpaid as of the date of such distribution or payment.
So long as any shares of the redeemable senior preferred stock remain
outstanding, in no event shall any dividend, whether in cash or other property,
be paid or declared, or any distribution be made on the 7% preferred stock or
the common stock. If liquidation occurs, redeemable senior preferred
stockholders are entitled to receive a distribution of their liquidation
preference first, followed by distributions to 7% preferred stockholders, and
thereafter, any remaining assets will be distributed to common stockholders.
Cumulative dividends earned but undeclared were $384,329 at December 31, 1997.
At the written election of any holder of senior preferred stock made not
less than 30 days prior to each of January 1, 2000, 2001, and 2002, the Company
shall call for redemption, and shall redeem from
F-72
<PAGE> 202
HEALTHVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
such holder not later than 60 days after whichever January 1 shall be
applicable, on each of the first two such redemption dates, up to one-third of
the shares of senior preferred stock held by such holder on January 1, 2000, and
on the last such redemption date up to the balance of senior preferred stock
held by such holder, at a redemption price per share equal to the sum of the
stated value thereof, plus an amount equal any and all dividends accrued or
declared but unpaid on, and any and all other amounts owing with respect to,
such shares on the redemption date. After March 31, 1998 or, if later, the
option expiration date specified in the Stock Purchase Agreement, the Company
shall have the right at its option to redeem as a whole, or from time to time in
part, shares of senior preferred stock at a price equal to the stated value
thereof per share, plus an amount equal to any and all dividends accrued and
unpaid thereon, through the date of redemption.
7% PREFERRED STOCK
The Company's 7% preferred stock consists of 58,678 designated shares of
$.01 par preferred stock of which 58,678 shares were issued in August 1996 at
$100 per share for cash proceeds totaling $5,867,800. The 7% preferred stock is
non-voting and is entitled to a cumulative dividend rate of 7% per annum. The 7%
preferred stock shares are not convertible into common stock. The Company may
redeem any or all of the 7% preferred stock, at any time, at a price equal to
$100 per share plus an amount equal to any and all dividends accrued and unpaid.
Cumulative dividends earned but undeclared were $161,605 and $572,351 at
December 31, 1996 and December 31, 1997, respectively.
WARRANTS
In connection with its capital leases, the Company issued to the lessor a
warrant to purchase 39,670 shares of its common stock at a price of $5.04 per
share (the "Warrant"). The Warrant expires at the earlier of ten years after the
date of grant, July 2005, or five years after the closing of an initial public
offering of the Company's common stock. The holder also has the right to convert
the Warrant into a number of shares of the Company's common stock based on the
value of the warrant given the then-current fair market value of the Company's
common stock.
7. STOCK OPTIONS
1996 STOCK OPTION PLAN
The Company's 1996 Stock Option Plan (the "Stock Option Plan") was
established effective August 10, 1996. The maximum number of shares authorized
to be issued under the Stock Option Plan, as amended, is 1,400,000 shares of
common stock. The Compensation Committee of the Company designated 362,583 of
the shares authorized to be issued under the Stock Option Plan as bonus options
(the "Bonus Options"). As of December 31, 1997, options to purchase 69,478
shares of common stock outstanding were Bonus Options.
In order to protect all of the rights of Bonus Option holders in the event
of a Liquidity Event (as defined below), Bonus Option agreements provide for the
acceleration of vesting of all or a portion of outstanding Bonus Options upon
the occurrence of a Liquidity Event. A Liquidity Event is defined as either (i)
the consummation of an underwritten initial public offering of the Company's
common stock, which has been registered under the Securities Act of 1933, as
amended, or (ii) a Change of Control, as defined.
During the year ended December 31, 1997, the Compensation Committee of the
Company granted options to purchase 764,438 shares of common stock under the
Plan which become vested at the rate of 30% 18 months after the grant date of
the options and at the rate of 10% each six months thereafter. In addition, if
TSI, a related party, exercises its purchase option, then these options shall
vest in full.
F-73
<PAGE> 203
HEALTHVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The outstanding options granted under the Plan generally vest and become
exercisable at a rate of 30% 18 months after the date of grant and an additional
10% every 6 months thereafter, subject to continued service as an employee;
however, Bonus Options vest and become exercisable 10 days prior to the
termination date of the Bonus Option, subject to continued service as an
employee. Generally, the term of each outstanding option is 10 years. The
exercise price for options granted under the Stock Option Plan is at least equal
to 100% of the fair market value of the common stock of the Company on the date
of grant. The Stock Option Plan permits the granting of stock options, including
incentive stock options ("ISOs") as defined under Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), and non-qualified stock options
("NQSOs") which do not qualify as ISOs.
Stock option transactions are summarized as follows:
<TABLE>
<CAPTION>
SHARES UNDER EXERCISE WEIGHTED-AVERAGE
OPTIONS PRICE EXERCISE PRICE
------------ ----------- ----------------
<S> <C> <C> <C>
Outstanding at July 15, 1996....................... -- $ -- $ --
Granted.......................................... 1,169,066 .43 - 2.10 .59
Exercised........................................ (2,975) .43 .43
Canceled......................................... (269,240) .43 - 2.10 .52
--------- ----------- -----
Outstanding at December 31, 1996................... 896,851 43 - 2.10 .64
Granted.......................................... 769,438 2.10 2.10
Exercised........................................ (21,238) .43 .43
Canceled......................................... (626,692) .43 - 2.10 .59
--------- ----------- -----
Outstanding at December 31, 1997................... 1,018,359 $.43 - 2.10 $1.78
========= =========== =====
</TABLE>
Of the shares under options granted, 92,718 shares at a weighted-average
exercise price of $.82 are exercisable and 331,644 shares are available for
future option grants as of December 31, 1997.
The weighted-average remaining contractual life for options outstanding at
December 31, 1997 is nine years and the weighted-average grant date fair value
of options granted during 1997 was $.53.
1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
On July 15, 1996, the Company adopted the 1996 Non-Employee Director Stock
Option Plan (the "Director Stock Option Plan"). The Director Stock Option Plan
provides for an automatic grant of NQSOs to purchase 3,000 shares of common
stock to non-employee directors on the date such individuals are first appointed
directors of the Company, and an automatic grant of an option to purchase an
additional 1,000 shares of common stock on the day after each subsequent annual
meeting of the Company's stockholders. The option price is equal to the fair
market value of the common stock on the date of grant. Initial option grants
vest and become exercisable as to one-third of the shares covered by the option
on each annual anniversary of the date of grant if the holder remains a director
on such date, provided that such options may become fully exercisable upon a
director's resignation from the Board of Directors or death of the holder.
Annual option grants vest and become exercisable as to 100% of the shares
covered by the option on the six-month anniversary of the date of grant if the
holder remains a director on such date, provided that such options may become
fully exercisable upon a director's resignation from the Board of Directors or
death of the holder. The Company has reserved 50,000 shares of common stock for
issuance under the Director Stock Option Plan. All options granted under the
Plan were either exercised or expired and no options were outstanding at
December 31, 1997.
F-74
<PAGE> 204
HEALTHVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
Future minimum payments, under noncancellable office and equipment
operating leases with initial terms of one year or more, consist of the
following for the periods ended December 31:
<TABLE>
<S> <C>
1998........................................................ $ 836,778
1999........................................................ 771,660
2000........................................................ 152,930
2001........................................................ 31,952
2002........................................................ --
----------
$1,793,320
==========
</TABLE>
Total rent expense under all operating leases was approximately $1,113,000
and $1,160,000 for the years ended December 31, 1996 and 1997, respectively.
LEGAL PROCEEDINGS
A subsidiary of the Company is currently a defendant to a civil complaint
filed on July 6, 1995, in the Supreme Court of British Columbia, Canada, by
Stratford General Hospital. The complaint alleges that Stratford General
Hospital entered into a contract with the subsidiary for the maintenance and
support of an integrated hospital management information system and that the
subsidiary has refused to perform its obligations under such alleged contract.
Stratford General Hospital is seeking unspecified compensatory damages from the
subsidiary. The subsidiary has filed a defense denying that it entered into such
an alleged contract with Stratford General Hospital. The Company believes that
the suit is totally without merit and intends to defend its position vigorously.
In the opinion of management, resolution of this matter is not expected to have
a material adverse effect on the financial position of the Company. However,
depending on the amount and timing, an unfavorable resolution of this matter
could materially affect the Company's future results of operations or cash flows
in a particular period.
9. DEFINED CONTRIBUTION PENSION PLAN
The Company has a deferred compensation plan for all full-time employees
which qualifies under Section 401(k) of the Internal Revenue Code. Under the
terms of the 401(k) Plan, member employees may contribute varying amounts of
their annual compensation (to a maximum of $9,500). The Plan provides for
discretionary employer contributions to the Plan. As of December 31, 1997, there
have been no employer contributions to the Plan.
10. RELATED PARTY TRANSACTIONS
In July 1997, the Company entered into a marketing assistance and value
added remarketer agreement with TSI, a related party and shareholder. This
agreement requires the Company to pay from 5% to 20% of the software license fee
for any contracts in which TSI was involved in the marketing efforts on the
Company's behalf. The Company had an outstanding payable at December 31, 1997 of
$399,770 to TSI for marketing and consulting services performed for various
customers on behalf of the Company. These marketing and consulting fees were
incurred and expensed during 1997.
F-75
<PAGE> 205
HEALTHVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. INFORMATION BY GEOGRAPHIC AREA
Information regarding the Company's operations by geographic area for the
years ended December 31, 1996 and 1997 is as follows:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Revenues:
Canada................................................ $ 5,433,695 $ 4,222,950
United States......................................... 1,986,585 3,815,613
Other................................................. 1,211,699 1,115,770
------------ ------------
Total......................................... $ 8,631,979 $ 9,154,333
============ ============
Operating income (losses):
Canada................................................ $ (4,623,713) $ (4,468,669)
United States......................................... (11,824,893) (6,452,996)
Other................................................. 469,092 658,036
------------ ------------
Total......................................... $(15,979,514) $(10,263,629)
============ ============
Total assets:
Canada................................................ $ 3,416,642 $ 1,702,319
United States......................................... 4,441,670 2,691,569
Other................................................. 404,703 69,701
------------ ------------
Total......................................... $ 8,263,015 $ 4,463,589
============ ============
</TABLE>
12. SUBSEQUENT EVENTS
ISSUANCE OF PROMISSORY NOTES
In February, August and September 1998, the Company issued promissory notes
aggregating approximately $2,600,000 to certain stockholders in exchange for
cash. The notes bear an annual interest rate of 10% and are payable on demand.
MERGER WITH TSI
On October 28, 1998, the Company entered into an agreement and plan of
reorganization with TSI, under the terms of which the Company will be merging
with a subsidiary of TSI subject to customary closing conditions. The purchase
price consists of $25.6 million of cash and contingent payments based upon
future sales milestones of up to an additional $10.8 million of cash.
F-76
<PAGE> 206
The unaudited interim condensed consolidated financial statements as of
September 30, 1998 and for the nine month periods ended September 30, 1997 and
1998, include all adjustments, consisting of normal recurring accruals, which
the Company considers necessary for a fair presentation of the financial
position and results of operations for these periods. Ernst & Young LLP has not
compiled, reviewed or performed any audit procedures relating to the unaudited
interim financial information as of September 30, 1998 or for the nine month
periods ended September 30, 1997 and 1998.
HEALTHVISION, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998
-------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 562,318
Accounts receivable, net.................................. 3,046,806
Unbilled receivables...................................... 649,373
Prepaid expenses.......................................... 801,919
------------
Total current assets.............................. 5,060,416
Equipment and furniture, net................................ 667,824
Capitalized and purchased software, net..................... 101,744
------------
Total assets...................................... $ 5,829,984
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 400,749
Accrued compensation and related liabilities.............. 750,201
Deferred revenue.......................................... 6,660,022
Other accrued liabilities................................. 1,328,360
Current portion of long-term debt......................... 114,170
Notes to stockholders..................................... 3,818,079
------------
Total current liabilities......................... 13,071,581
Redeemable preferred stock.................................. 6,000,000
Stockholders' deficit:
Preferred stock........................................... 587
Common stock.............................................. 57,627
Additional paid-in capital................................ 6,219,918
Cumulative foreign currency adjustment.................... 80,990
Accumulated deficit....................................... (19,600,719)
------------
Total stockholders' deficit....................... (13,241,597)
------------
Total liabilities and stockholders' deficit..... $ 5,829,984
============
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements
F-77
<PAGE> 207
HEALTHVISION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1997 1998
------------- -------------
<S> <C> <C>
Revenues:
Software licenses, maintenance and services............... $ 6,395,282 $ 9,415,809
Hardware.................................................. 557,085 --
----------- -----------
Total revenues.................................... 6,952,367 9,415,809
----------- -----------
Costs and expenses:
Cost of systems and services revenues..................... 3,812,476 3,796,015
Cost of hardware revenues................................. 405,364 --
Product development....................................... 4,799,639 5,274,155
Sales and marketing....................................... 3,276,834 3,348,979
General and administrative................................ 1,576,560 2,052,328
----------- -----------
Total costs and expenses.......................... 13,870,873 14,471,477
----------- -----------
Loss from operations............................ (6,918,506) (5,055,668)
Other income (expense):
Interest income........................................... 95,498 15,610
Interest expense.......................................... (83,859) (191,322)
Foreign currency transaction loss......................... (12,409) (27,724)
----------- -----------
Total other income (expense) net.................. (770) (203,436)
----------- -----------
Net loss before foreign taxes............................... (6,919,276) (5,259,104)
Foreign taxes............................................... (75,000) (86,422)
----------- -----------
Net loss.................................................... (6,994,276) (5,345,526)
Preferred stock dividend.................................... (585,681) (621,352)
----------- -----------
Net loss available to common stockholders................... $(7,579,957) $(5,966,878)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements
F-78
<PAGE> 208
HEALTHVISION, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL CUMULATIVE TOTAL
7% PREFERRED COMMON PAID-IN ACCUMULATED TRANSLATION STOCKHOLDER'S
STOCK STOCK CAPITAL DEFICIT ADJUSTMENT DEFICIT
------------ ------- ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1997..................... $587 $57,576 $5,817,293 $(14,255,193) $17,566 $ (8,362,171)
Issuance of shares of
common stock upon
exercise of options...... 51 2,625 2,676
Equity contribution........ 400,000 400,000
Translation adjustment..... 63,424 63,424
Net loss................... (5,345,526) (5,345,526)
---- ------- ---------- ------------ ------- ------------
Balance at September 30,
1998..................... $587 $57,627 $6,219,918 $(19,600,719) $80,990 $(13,241,597)
==== ======= ========== ============ ======= ============
</TABLE>
F-79
<PAGE> 209
HEALTHVISION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1997 1998
----------- -----------
<S> <C> <C>
Operating activities:
Net loss.................................................... $(6,994,276) $(5,345,526)
----------- -----------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 980,566 596,881
Capitalized software development costs.................... (250,000) --
Loss on disposal of equipment............................. 29,307 2,823
Changes in operating assets and liabilities:
Accounts receivable.................................... (549,474) (1,629,448)
Unbilled receivables................................... 170,498 (447,410)
Prepaid expenses....................................... (193,024) 173,454
Accounts payable....................................... (18,743) 112,130
Accrued compensation and related liabilities........... (306,684) 48,702
Accrued interest on notes payable to stockholders...... -- 159,938
Deferred revenue....................................... 601,214 3,558,890
Other accrued liabilities.............................. 211,659 65,958
----------- -----------
Total adjustments to reconcile net loss to net
cash provided by operating activities........... 675,319 2,641,918
----------- -----------
Net cash used in operating activities........ (6,318,957) (2,703,608)
----------- -----------
Investing activities:
Proceeds from sale of equipment............................. 1,708 125
Purchase of equipment and furniture......................... (454,282) (144,819)
Purchase of capitalized software development costs.......... (99,142) --
----------- -----------
Net cash used in investing activities................ (551,716) (144,694)
----------- -----------
Financing activities:
Proceeds from issuance of redeemable senior preferred
stock..................................................... 6,000,000 --
Proceeds from issuance of notes payable to stockholder...... -- 2,652,388
Proceeds from issuance of common stock...................... 4,666 2,676
Sale of common stock........................................ -- --
Equity contribution......................................... -- 400,000
Principal payments on long-term debt........................ (427,540) (352,185)
----------- -----------
Net cash provided by financing activities............ 5,577,126 2,702,879
----------- -----------
Effect of exchange rate changes on cash and cash
equivalents............................................... 27,021 63,424
----------- -----------
Net increase in cash and cash equivalents................... (1,266,526) (81,999)
Cash and cash equivalents, beginning of period.............. 2,316,324 644,317
----------- -----------
Cash and cash equivalents, end of period.................... $ 1,049,798 $ 562,318
=========== ===========
Supplemental disclosure:
Cash paid for interest...................................... $ 83,859 $ 31,384
=========== ===========
</TABLE>
The accompanying notes are an integral part to these unaudited condensed
consolidated financial statements.
F-80
<PAGE> 210
HEALTHVISION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1998
1. BASIS OF PRESENTATION
The condensed consolidated financial statements include all adjustments
that, in the opinion of management, are necessary for a fair presentation of the
results for the periods indicated. All such adjustments are considered of normal
recurring nature. Quarterly results of operations are not necessarily indicative
of annual results.
Certain financial information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and the notes thereto included in this Joint Proxy
Statement/Prospectus.
2. SUBSEQUENT EVENT
On October 28, 1998, the Company entered into a definitive agreement to be
acquired by TSI. The purchase price will consist of $25.6 million cash and the
assumption of certain liabilities totalling $9.3 million. The acquisition will
be accounted for as a purchase, reflecting an estimated aggregate purchase
price, including TSI's initial 1997 investment, of $40.7 million, which includes
$6.4 million previously paid by TSI and $9.3 million of assumed liabilities, net
of cash acquired. The acquisition is expected to be completed in early December
1998.
F-81
<PAGE> 211
ANNEX A
EXECUTION COPY
AGREEMENT AND PLAN OF MERGER
AMONG
ECLIPSYS CORPORATION
EXERCISE ACQUISITION CORP.
AND
TRANSITION SYSTEMS, INC.
October 29, 1998
<PAGE> 212
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I
THE MERGER................................................ A-1
Section 1.01 Effective Time of the Merger................. A-1
Section 1.02 Closing...................................... A-1
Section 1.03 Effects of the Merger........................ A-1
Section 1.04 Directors of Eclipsys........................ A-1
ARTICLE II
CONVERSION OF SECURITIES.................................. A-2
Section 2.01 Conversion of Capital Stock.................. A-2
Section 2.02 Exchange of Certificates..................... A-3
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF TSI..................... A-5
Section 3.01 Organization of TSI.......................... A-5
Section 3.02 TSI Capital Structure........................ A-5
Section 3.03 Authority; No Conflict; Required Filings and
Consents............................................... A-6
Section 3.04 SEC Filings; Financial Statements............ A-7
Section 3.05 No Undisclosed Liabilities................... A-7
Section 3.06 Absence of Certain Changes or Events......... A-7
Section 3.07 Taxes........................................ A-8
Section 3.08 Properties................................... A-9
Section 3.09 Intellectual Property........................ A-9
Section 3.10 Agreements, Contracts and Commitments........ A-10
Section 3.11 Litigation................................... A-11
Section 3.12 Environmental Matters........................ A-11
Section 3.13 Employee Benefit Plans....................... A-11
Section 3.14 Compliance With Laws......................... A-12
Section 3.15 Accounting and Tax Matters................... A-12
Section 3.16 Registration Statement; Proxy
Statement/Prospectus................................... A-12
Section 3.17 Labor Matters................................ A-13
Section 3.18 Insurance; Risk Management................... A-13
Section 3.19 No Existing Discussions...................... A-13
Section 3.20 Opinion of Financial Advisor................. A-13
Section 3.21 Anti-Takeover Laws........................... A-13
Section 3.22 Insider Trading Policies and Practices....... A-13
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF ECLIPSYS AND SUB........ A-14
Section 4.01 Organization of Eclipsys and Sub............. A-14
Section 4.02 Eclipsys Capital Structure................... A-14
Section 4.03 Authority; No Conflict; Required Filings and
Consents............................................... A-15
Section 4.04 SEC Filings; Financial Statements............ A-16
Section 4.05 No Undisclosed Liabilities................... A-16
Section 4.06 Absence of Certain Changes or Events......... A-16
Section 4.07 Taxes........................................ A-16
Section 4.08 Properties................................... A-17
Section 4.09 Intellectual Property........................ A-17
</TABLE>
A-i
<PAGE> 213
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Section 4.10 Agreements, Contracts and Commitments........ A-18
Section 4.11 Litigation................................... A-18
Section 4.12 Environmental Matters........................ A-18
Section 4.13 Employee Benefit Plans....................... A-19
Section 4.14 Compliance With Laws......................... A-19
Section 4.15 Accounting and Tax Matters................... A-19
Section 4.16 Registration Statement; Proxy
Statement/Prospectus................................... A-19
Section 4.17 Labor Matters................................ A-20
Section 4.18 Insurance; Risk Management................... A-20
Section 4.19 No Existing Discussions...................... A-20
Section 4.20 Opinion of Financial Advisor................. A-20
Section 4.21 Anti-Takeover Laws........................... A-20
Section 4.22 Insider Trading Policies and Practices....... A-20
Section 4.23 Interim Operations of Sub.................... A-20
ARTICLE V
CONDUCT OF BUSINESS....................................... A-21
Section 5.01 Covenants of TSI............................. A-21
Section 5.02 Covenants of Eclipsys........................ A-22
Section 5.03 Cooperation.................................. A-23
Section 5.04 HealthVISION Acquisition..................... A-23
Section 5.05 Voting Agreements............................ A-23
Section 5.06 Eclipsys Permitted Acquisitions.............. A-23
ARTICLE VI
ADDITIONAL AGREEMENTS..................................... A-24
Section 6.01 No Solicitation.............................. A-24
Section 6.02 Proxy Statement/Prospectus; Registration
Statement.............................................. A-24
Section 6.03 Nasdaq Quotation............................. A-25
Section 6.04 Access to Information........................ A-25
Section 6.05 Stockholders' Meetings....................... A-25
Section 6.06 Legal Conditions to Merger................... A-25
Section 6.07 Public Disclosure............................ A-26
Section 6.08 Tax-Free Reorganization...................... A-26
Section 6.09 Pooling Accounting........................... A-26
Section 6.10 Affiliate Agreements......................... A-27
Section 6.11 Nasdaq Quotation............................. A-27
Section 6.12 Stock Plans and Warrants..................... A-27
Section 6.13 Brokers or Finders........................... A-28
Section 6.14 Indemnification.............................. A-28
Section 6.15 Letter of Eclipsys' Accountants.............. A-29
Section 6.16 Letter of TSI's Accountants.................. A-29
Section 6.17 Warburg Registration Rights Agreement........ A-29
ARTICLE VII
CONDITIONS TO MERGER...................................... A-29
Section 7.01 Conditions to Each Party's Obligation To
Effect the Merger...................................... A-29
Section 7.02 Additional Conditions to Obligations of
Eclipsys and Sub....................................... A-30
Section 7.03 Additional Conditions to Obligations of
TSI.................................................... A-31
</TABLE>
A-ii
<PAGE> 214
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE VIII
TERMINATION AND AMENDMENT................................. A-31
Section 8.01 Termination.................................. A-31
Section 8.02 Effect of Termination........................ A-32
Section 8.03 Fees and Expenses............................ A-32
Section 8.04 Amendment.................................... A-34
Section 8.05 Extension; Waiver............................ A-34
ARTICLE IX
MISCELLANEOUS............................................... A-35
Section 9.01 Nonsurvival of Representations, Warranties
and Agreements......................................... A-35
Section 9.02 Notices...................................... A-35
Section 9.03 Interpretation............................... A-35
Section 9.04 Counterparts................................. A-36
Section 9.05 Entire Agreement; No Third Party
Beneficiaries.......................................... A-36
Section 9.06 Governing Law................................ A-36
Section 9.07 Assignment................................... A-36
Exhibit A -- Voting Agreement............................... A-38
Exhibit B -- Affiliate Agreement............................ A-48
</TABLE>
A-iii
<PAGE> 215
<TABLE>
<CAPTION>
PAGE
----
TABLE OF DEFINED TERMS
<S> <C>
Acquisition Proposal........................................ Section 6.01(a)
Affiliate................................................... Section 6.10
Affiliate Agreement......................................... Section 6.10
Agreement................................................... Preamble
Alternative Transaction..................................... Section 8.03(g)
Antitrust Laws.............................................. Section 6.06(b)
Articles of Merger.......................................... Section 1.01
Bankruptcy and Equity Exception............................. Section 3.03(a)
Certificates................................................ Section 2.02(b)
Closing..................................................... Section 1.02
Closing Date................................................ Section 1.02
Code........................................................ Preamble
Confidentiality Agreement................................... Section 6.01(a)
Constituent Corporations.................................... Section 1.03
Costs....................................................... Section 6.14(a)
Dissenting Shares........................................... Section 2.01(d)
Effective Time.............................................. Section 1.01
Environmental Law........................................... Section 3.12(a)
ERISA....................................................... Section 3.13(a)
ERISA Affiliate............................................. Section 3.13(a)
Exchange Act................................................ Section 3.03(c)
Exchange Agent.............................................. Section 2.02(a)
Exchange Fund............................................... Section 2.02(a)
Exchange Ratio.............................................. Section 2.01(c)
Eclipsys.................................................... Preamble
Eclipsys Affiliated Group................................... Section 4.07(a)
Eclipsys Affiliated Period.................................. Section 4.07(a)
Eclipsys Balance Sheet...................................... Section 4.04(b)
Eclipsys Common Stock....................................... Section 4.02(a)
Eclipsys Disclosure Schedule................................ Article IV
Eclipsys Employee Plans..................................... Section 4.13(a)
Eclipsys Intellectual Property Rights....................... Section 4.09(a)
Eclipsys Material Adverse Effect............................ Section 4.01
Eclipsys Material Contracts................................. Section 4.10
Eclipsys Material Covenants................................. Section 8.03(d)
Eclipsys Non-Voting Common Stock............................ Section 4.02(a)
Eclipsys Permitted Acquisition.............................. Section 5.02(d)
Eclipsys Possible Acquisition............................... Section 4.19
Eclipsys Preferred Stock.................................... Section 4.02(a)
Eclipsys SEC Reports........................................ Section 4.04(a)
Eclipsys Stock Plans........................................ Section 4.02(a)
Eclipsys Stockholders' Meeting.............................. Section 3.16
Eclipsys Termination Fee Event.............................. Section 8.03(c)
Eclipsys Third Party Intellectual Property Rights........... Section 4.09(b)
Eclipsys Voting Common Stock................................ Section 2.01(b)
Eclipsys Voting Proposals................................... Section 6.05(a)
Eclipsys Warrants........................................... Section 4.02(a)
</TABLE>
A-iv
<PAGE> 216
<TABLE>
<S> <C>
GAAP........................................................ Section 3.04(b)
Governmental Entity......................................... Section 3.03(c)
Hazardous Substance......................................... Section 3.12(c)
HealthVISION................................................ Section 3.19
HealthVISION Acquisition.................................... Section 3.19
IISR ACT.................................................... Section 3.03(a)
Indemnified Parties......................................... Section 6.14(a)
IRS......................................................... Section 3.07(b)
Joint Proxy Statement....................................... Section 3.16
Material Adverse Change..................................... Section 3.06
MBCL........................................................ Section 1.01
Merger...................................................... Preamble
Off-the-Shelf Software...................................... Section 3.09(a)
Order....................................................... Section 7.01(e)
Outside Date................................................ Section 8.01(b)
Registration Rights Agreement............................... Section 6.17
Registration Statement...................................... Section 3.16
Rule 145.................................................... Section 6.10
SEC......................................................... Section 3.03(c)
Second Request.............................................. Section 6.06(b)
Securities Act.............................................. Section 3.04(a)
Stock Purchase Plan......................................... Section 6.12(f)
Sub......................................................... Preamble
Subsidiary.................................................. Section 3.01
Superior Proposal........................................... Section 6.01(a)
Surviving Corporation....................................... Section 1.03
Tax......................................................... Section 3.07(a)
Taxes....................................................... Section 3.07(a)
Tax Returns................................................. Section 3.07(a)
Third Party................................................. Section 8.03(g)
TSI......................................................... Preamble
TSI Affiliated Group........................................ Section 3.07(b)
TSI Affiliated Period....................................... Section 3.07(b)
TSI Balance Sheet........................................... Section 3.04(b)
TSI Common Stock............................................ Section 2.01(b)
TSI Designees............................................... Section 1.04(a)
TSI Disclosure Schedule..................................... Article III
TSI Employee Plans.......................................... Section 3.13(a)
TSI Intellectual Property Rights............................ Section 3.09(a)
TSI Material Adverse Effect................................. Section 3.01
TSI Material Contracts...................................... Section 3.10
TSI Material Covenants...................................... Section 8.03(b)
TSI Non-Voting Common Stock................................. Section 2.01(b)
TSI Preferred Stock......................................... Section 3.02(a)
TSI SEC Reports............................................. Section 3.04(a)
TSI Stock Option............................................ Section 6.12(a)
TSI Stock Plans............................................. Section 3.02(a)
TSI Stockholders' Meeting................................... Section 3.16
TSI Termination Fee Event................................... Section 8.03(e)
</TABLE>
A-v
<PAGE> 217
<TABLE>
<S> <C>
TSI Third Party Intellectual Property....................... Section 3.09(b)
TSI Voting Common Stock..................................... Section 2.01(b)
TSI Warrants................................................ Section 3.02(a)
Warburg..................................................... Section 5.05
Warburg Registration Rights Agreement....................... Section 6.17
Year 2000 Compliant......................................... Section 3.09(d)
</TABLE>
A-vi
<PAGE> 218
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (the "Agreement"), dated as of October 29,
1998, by and among Eclipsys Corporation, a Delaware corporation ("Eclipsys"),
Exercise Acquisition Corp., a Massachusetts corporation and a direct,
wholly-owned subsidiary of Eclipsys ("Sub"), and Transition Systems, Inc., a
Massachusetts corporation ("TSI").
WHEREAS, the Boards of Directors of Eclipsys and TSI deem it advisable and
in the best interests of each corporation and its respective stockholders that
Eclipsys and TSI combine in order to advance the long-term business interests of
Eclipsys and TSI;
WHEREAS, the combination of Eclipsys and TSI shall be effected by the terms
of this Agreement through a merger in which the stockholders of TSI will become
stockholders of Eclipsys (the "Merger");
WHEREAS, for Federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, for accounting purposes, it is intended that the Merger shall be
accounted for as a pooling of interests;
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth below, the
parties agree as follows:
ARTICLE I
THE MERGER
SECTION 1.01 Effective Time of the Merger. Subject to the provisions of
this Agreement, articles of merger in such form as shall be required by the
relevant provisions of the Massachusetts Business Corporation Law ("MBCL") (the
"Articles of Merger") shall be duly prepared, executed and acknowledged by the
Surviving Corporation (as defined in Section 1.03) and thereafter delivered to
the Secretary of State of the Commonwealth of Massachusetts, for filing, as
provided in the MBCL, as soon as practicable on or after the Closing Date (as
defined in Section 1.02). The Merger shall become effective upon the filing of
the Articles of Merger with the Secretary of State of the Commonwealth of
Massachusetts or at such time thereafter as shall be provided in the Articles of
Merger (the "Effective Time").
SECTION 1.02 Closing. The closing of the Merger (the "Closing") will take
place at 10:00 a.m., Eastern Time, on a date to be specified by Eclipsys and
TSI, which shall be no later than the second business day after satisfaction of
the latest to occur of the conditions set forth in Sections 7.01, 7.02 and 7.03
(the "Closing Date"), at the offices of Hale and Dorr LLP, 60 State Street,
Boston, Massachusetts, unless another date, place or time is agreed to in
writing by Eclipsys and TSI.
SECTION 1.03 Effects of the Merger. At the Effective Time (i) the separate
existence of Sub shall cease and Sub shall be merged with and into TSI (Sub and
TSI are sometimes referred to below as the "Constituent Corporations" and TSI is
sometimes referred to herein as the "Surviving Corporation"), (ii) the Articles
of Organization of Sub immediately prior to the Effective Time shall be the
Articles of Organization of the Surviving Corporation, except that the name of
the corporation set forth therein shall be changed to the name of TSI, (iii) the
Bylaws of the Sub as in effect immediately prior to the Effective Time shall be
the Bylaws of the Surviving Corporation, except that the name of the corporation
set forth therein shall be changed to the name of TSI, and (iv) the purpose of
the Surviving Corporation shall be as set forth in Article II of the Articles of
Organization of Sub immediately prior to the Effective Date.
SECTION 1.04 Directors of Eclipsys.
(a) Prior to the Effective Time, Eclipsys shall (i) increase the number of
the members of the Board of Directors of Eclipsys to nine and (ii) take such
action as may be necessary such that Robert F. Raco
A-1
<PAGE> 219
and Patrick T. Hackett (the "TSI Designees") shall have been elected to the
Board of Directors of Eclipsys as of the Effective Time, Mr. Raco to be assigned
to Class II and Mr. Hackett to be assigned to Class III on the Eclipsys Board of
Directors. If, prior to the Effective Time, any of the TSI Designees shall
decline or be unable to serve as a TSI Designee, TSI shall designate another
person to serve in such person's stead, which person shall be reasonably
acceptable to Eclipsys.
(b) The directors of Eclipsys elected pursuant to Section 1.04(a) shall
hold their positions until their resignation or removal or the election or
appointment of their successors in the manner provided by Eclipsys' charter
documents and applicable law.
ARTICLE II
CONVERSION OF SECURITIES
SECTION 2.01 Conversion of Capital Stock. As of the Effective Time, by
virtue of the Merger and without any action on the part of the holder of any
shares of TSI Common Stock or capital stock of Sub:
(a) Capital Stock of Sub. Each issued and outstanding share of the
capital stock of Sub shall be converted into and become one fully paid and
nonassessable share of Common Stock of the Surviving Corporation.
(b) Cancellation of Treasury Stock and Eclipsys-Owned Stock. All
shares of Common Stock of TSI, $.01 par value ("TSI Voting Common Stock"),
and all shares of Non-Voting Common Stock of TSI, $.01 par value ("TSI
Non-Voting Common Stock" and, together with the TSI Voting Common Stock,
"TSI Common Stock"), that are owned by TSI as treasury stock and any shares
of TSI Common Stock owned by Eclipsys, Sub or any other wholly-owned
Subsidiary (as defined in Section 3.01) of Eclipsys shall be cancelled and
retired and shall cease to exist and no stock of Eclipsys or other
consideration shall be delivered in exchange therefor. All shares of Common
Stock, $.01 par value per share, of Eclipsys ("Eclipsys Voting Common
Stock") owned by TSI shall be unaffected by the Merger.
(c) Exchange Ratio for TSI Common Stock. Subject to Section 2.02,
each issued and outstanding share of TSI Common Stock (other than shares,
if any, as to which dissenters' rights, if any, are perfected and shares to
be cancelled in accordance with Section 2.01(b)) shall be converted into
the right to receive 0.525 shares (the "Exchange Ratio") of Eclipsys Voting
Common Stock. All such shares of TSI Common Stock, when so converted, shall
no longer be outstanding and shall automatically be cancelled and retired
and shall cease to exist, and each holder of a certificate representing any
such shares shall cease to have any rights with respect thereto, except the
right to receive the shares of Eclipsys Voting Common Stock and any cash in
lieu of fractional shares of Eclipsys Voting Common Stock to be issued or
paid in consideration therefor upon the surrender of such certificate in
accordance with Section 2.02, without interest. Notwithstanding the
foregoing, if between the date of this Agreement and the Effective Time the
outstanding shares of Eclipsys Voting Common Stock shall have been changed
into a different number of shares or a different class, by reason of any
stock dividend, subdivision, reclassification, recapitalization, split,
combination or exchange of shares, then the Exchange Ratio shall be
correspondingly adjusted to reflect such stock dividend, subdivision,
reclassification, recapitalization, split, combination or exchange of
shares.
(d) Dissenting Shares. For purposes of this Agreement, "Dissenting
Shares" means shares of TSI Common Stock held as of the Effective Time by a
stockholder of TSI who has not voted such shares in favor of the adoption
of this Agreement and the Merger and with respect to which appraisal shall
have been duly demanded and perfected in accordance with Sections 85
through 98 of the MBCL and not effectively withdrawn or forfeited prior to
the Effective Time. Dissenting Shares shall not be converted into or
represent the right to receive any shares of Eclipsys Voting Common Stock
unless such stockholder's right to appraisal shall have ceased in
accordance with Section 96 of the MBCL. If such stockholder has so
forfeited or withdrawn his right to appraisal of Dissenting Shares, then
(i) as of the occurrence of such event, such holder's Dissenting Shares
shall cease to be
A-2
<PAGE> 220
Dissenting Shares and shall thereupon be deemed to have been converted, as
of the Effective Time, into and represent shares of Eclipsys Voting Common
Stock, without interest thereon, as provided in Section 2.01(c) hereof. TSI
shall give Eclipsys (x) prompt notice of any written demands for appraisal
of any shares of TSI Common Stock, withdrawals of such demands, and any
other instruments that relate to such demands received by TSI and (y) the
opportunity to direct all negotiations and proceedings with respect to
demands for appraisal under the MBCL. TSI shall not, except with the prior
written consent of Eclipsys, make any payment with respect to any demands
for appraisal of shares of TSI Common Stock or offer to settle or settle
any such demands.
SECTION 2.02 Exchange of Certificates. The procedures for exchanging
outstanding shares of TSI Common Stock for Eclipsys Voting Common Stock pursuant
to the Merger are as follows:
(a) Exchange Agent. As of the Effective Time, Eclipsys shall deposit
with a bank or trust company designated by Eclipsys and TSI (the "Exchange
Agent"), for the benefit of the holders of shares of TSI Common Stock, for
exchange in accordance with this Section 2.02, through the Exchange Agent,
(i) certificates representing the shares of Eclipsys Voting Common Stock
(such shares of Eclipsys Voting Common Stock, together with any dividends
or distributions with respect thereto, being hereinafter referred to as the
"Exchange Fund") issuable pursuant to Section 2.01 in exchange for
outstanding shares of TSI Common Stock and (ii) an amount of cash
sufficient to fund all cash payments in lieu of fractional shares to be
paid pursuant to subsection (e) below.
(b) Exchange Procedures. As soon as reasonably practicable after the
Effective Time, the Exchange Agent shall mail to each holder of record of a
certificate or certificates which immediately prior to the Effective Time
represented outstanding shares of TSI Common Stock (the "Certificates")
whose shares were converted pursuant to Section 2.01 into the right to
receive shares of Eclipsys Voting Common Stock (i) a letter of transmittal
(which shall specify that delivery shall be effected, and risk of loss and
title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent and shall be in such form and have such
other provisions as Eclipsys and TSI may reasonably specify) and (ii)
instructions for effecting the surrender of the Certificates in exchange
for certificates representing shares of Eclipsys Voting Common Stock (plus
cash in lieu of fractional shares, if any, of Eclipsys Voting Common Stock
as provided below). Upon surrender of a Certificate for cancellation to the
Exchange Agent or to such other agent or agents as may be appointed by
Eclipsys and TSI, together with such letter of transmittal, duly executed,
the holder of such Certificate shall be entitled to receive in exchange
therefor a certificate representing that number of whole shares of Eclipsys
Voting Common Stock which such holder has the right to receive pursuant to
the provisions of this Article II, and the Certificate so surrendered shall
immediately be cancelled. In the event of a transfer of ownership of TSI
Common Stock which is not registered in the transfer records of TSI, a
certificate representing the proper number of shares of Eclipsys Voting
Common Stock may be issued to a transferee if the Certificate representing
such TSI Common Stock is presented to the Exchange Agent, accompanied by
all documents required to evidence and effect such transfer and by evidence
that any applicable stock transfer taxes have been paid. Until surrendered
as contemplated by this Section 2.02, each Certificate shall be deemed at
any time after the Effective Time to represent only the right to receive
upon such surrender the certificate representing shares of Eclipsys Voting
Common Stock and cash in lieu of any fractional shares of Eclipsys Voting
Common Stock as contemplated by this Section 2.02.
(c) Distributions with Respect to Unexchanged Shares. No dividends or
other distributions declared or made after the Effective Time with respect
to Eclipsys Voting Common Stock with a record date after the Effective Time
shall be paid to the holder of any unsurrendered Certificate with respect
to the shares of Eclipsys Voting Common Stock represented thereby and no
cash payment in lieu of fractional shares shall be paid to any such holder
pursuant to subsection (e) below until the holder of record of such
Certificate shall surrender such Certificate. Subject to the effect of
applicable laws, following surrender of any such Certificate, there shall
be paid to the record holder of the certificates representing whole shares
of Eclipsys Voting Common Stock issued in exchange therefor, without
interest, (i) at the time of such surrender, the amount of any cash payable
in lieu of a
A-3
<PAGE> 221
fractional share of Eclipsys Voting Common Stock to which such holder is
entitled pursuant to subsection (e) below and the amount of dividends or
other distributions with a record date after the Effective Time previously
paid with respect to such whole shares of Eclipsys Voting Common Stock, and
(ii) at the appropriate payment date, the amount of dividends or other
distributions with a record date after the Effective Time but prior to
surrender and a payment date subsequent to surrender payable with respect
to such whole shares of Eclipsys Voting Common Stock.
(d) No Further Ownership Rights in TSI Common Stock. All shares of
Eclipsys Voting Common Stock issued upon the surrender for exchange of
Certificates in accordance with the terms hereof (including any cash paid
pursuant to subsection (c) or (e) of this Section 2.02) shall be deemed to
have been issued in full satisfaction of all rights pertaining to such
shares of TSI Common Stock, subject, however, to the Surviving
Corporation's obligation to pay any dividends or make any other
distributions with a record date prior to the Effective Time which may have
been declared or made by TSI on such shares of TSI Common Stock in
accordance with the terms of this Agreement (to the extent permitted under
Section 5.01) prior to the date hereof and which remain unpaid at the
Effective Time, and from and after the Effective Time there shall be no
further registration of transfers on the stock transfer books of the
Surviving Corporation of the shares of TSI Common Stock which were
outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to the Surviving Corporation for
any reason, they shall be cancelled and exchanged as provided in this
Section 2.02.
(e) No Fractional Shares. No certificate or scrip representing
fractional shares of Eclipsys Voting Common Stock shall be issued upon the
surrender for exchange of Certificates, and such fractional share interests
will not entitle the owner thereof to vote or to any other rights of a
stockholder of Eclipsys. Notwithstanding any other provision of this
Agreement, each holder of shares of TSI Common Stock exchanged pursuant to
the Merger who would otherwise have been entitled to receive a fraction of
a share of Eclipsys Voting Common Stock (after taking into account all
Certificates delivered by such holder) shall receive, in lieu thereof, cash
(without interest) in an amount equal to such fractional part of a share of
Eclipsys Voting Common Stock multiplied by the average of the last reported
sales prices of Eclipsys Voting Common Stock, as reported on the Nasdaq
National Market, on each of the ten trading days immediately preceding the
Closing Date.
(f) Termination of Exchange Fund. Any portion of the Exchange Fund
which remains undistributed to the stockholders of TSI for 180 days after
the Effective Time shall be delivered to Eclipsys, upon demand, and any
stockholders of TSI who have not previously complied with this Section 2.02
shall thereafter look only to Eclipsys for payment of their claim for
Eclipsys Voting Common Stock, any cash in lieu of fractional shares of
Eclipsys Voting Common Stock and any dividends or distributions with
respect to Eclipsys Voting Common Stock.
(g) No Liability. Neither Eclipsys nor TSI shall be liable to any
holder of shares of TSI Common Stock or Eclipsys Voting Common Stock, as
the case may be, for such shares (or dividends or distributions with
respect thereto) delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law.
(h) Withholding Rights. Each of Eclipsys and the Surviving
Corporation shall be entitled to deduct and withhold from the consideration
otherwise payable pursuant to this Agreement to any holder of shares of TSI
Common Stock such amounts as it is required to deduct and withhold with
respect to the making of such payment under the Code, or any provision of
state, local or foreign tax law. To the extent that amounts are so withheld
by the Surviving Corporation or Eclipsys, as the case may be, such withheld
amounts shall be treated for all purposes of this Agreement as having been
paid to the holder of the shares of TSI Common Stock in respect of which
such deduction and withholding was made by the Surviving Corporation or
Eclipsys, as the case may be.
(i) Lost Certificates. If any Certificate shall have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the
person claiming such Certificate to be lost, stolen or destroyed and, if
required by the Surviving Corporation, the posting by such person of a bond
in such
A-4
<PAGE> 222
reasonable amount as the Surviving Corporation may direct as indemnity
against any claim that may be made against it with respect to such
Certificate, the Exchange Agent will issue in exchange for such lost,
stolen or destroyed Certificate the shares of Eclipsys Voting Common Stock
and any cash in lieu of fractional shares, and unpaid dividends and
distributions on shares of Eclipsys Voting Common Stock deliverable in
respect thereof pursuant to this Agreement.
(j) Affiliates. Notwithstanding anything herein to the contrary,
Certificates surrendered for exchange by any Affiliate (as defined in
Section 6.10) of TSI shall not be exchanged until Eclipsys has received an
Affiliate Agreement (as defined in Section 6.10) from such Affiliate.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF TSI
TSI represents and warrants to Eclipsys and Sub that the statements
contained in this Article III are true and correct except as set forth in the
disclosure schedule delivered by TSI to Eclipsys on or before the date of this
Agreement (the "TSI Disclosure Schedule"). The TSI Disclosure Schedule shall be
arranged in sections and paragraphs corresponding to the numbered and lettered
sections and paragraphs contained in this Article III and the disclosure in any
section or paragraph shall qualify other sections and paragraphs in this Article
III only to the extent that it is reasonably apparent from a reading of such
disclosure that it also qualifies or applies to such other sections and
paragraphs.
SECTION 3.01 Organization of TSI. Each of TSI and its Subsidiaries (as
defined below) is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation, has all
requisite corporate power to own, lease and operate its property and to carry on
its business as now being conducted and as proposed to be conducted, and is duly
qualified to do business and is in good standing as a foreign corporation in
each jurisdiction in which the failure to be so qualified would have a TSI
Material Adverse Effect (as defined below). Except as set forth in the TSI SEC
Reports (as defined in Section 3.04) filed prior to the date hereof, neither TSI
nor any of its Subsidiaries directly or indirectly owns any equity or similar
interest in, or any interest convertible into or exchangeable or exercisable
for, any corporation, partnership, joint venture or other business association
or entity, excluding securities in any publicly traded company held for
investment by TSI and comprising less than five percent (5%) of the outstanding
stock of such company. As used in this Agreement, the word "Subsidiary" means,
with respect to any party, any corporation or other organization, whether
incorporated or unincorporated, of which (i) such party or any other Subsidiary
of such party is a general partner (excluding partnerships, the general
partnership interests of which held by such party or any Subsidiary of such
party do not have a majority of the voting interest in such partnership) or (ii)
at least a majority of the securities or other interests having by their terms
ordinary voting power to elect a majority of the Board of Directors or others
performing similar functions with respect to such corporation or other
organization is directly or indirectly owned or controlled by such party or by
any one or more of its Subsidiaries, or by such party and one or more of its
Subsidiaries. For purposes of this Agreement, the term "TSI Material Adverse
Effect" means any effect that is, or would reasonably be expected to be,
materially adverse to the financial condition, results of operations, cash
flows, business or properties of TSI and its Subsidiaries, taken as a whole.
SECTION 3.02 TSI Capital Structure.
(a) The authorized capital stock of TSI consists of 30,000,000 shares of
TSI Voting Common Stock, $.01 par value, 1,000,000 shares of TSI Non-Voting
Common Stock, $.01 par value, and 1,000,000 shares of Preferred Stock, $.01 par
value ("TSI Preferred Stock"). As of September 30, 1998, (i) 18,035,983 shares
of TSI Voting Common Stock and 356,262 shares of TSI Non-Voting Common Stock
were issued and outstanding, all of which are validly issued, fully paid and
nonassessable, (ii) 297,928 shares of TSI Non-Voting Common Stock were reserved
for issuance upon the exercise of certain warrants (the "TSI Warrants") having
an exercise price of $.01 per share, and (iii) no shares of TSI Common Stock
were held in the treasury of TSI or by Subsidiaries of TSI. Section 3.02 of the
TSI Disclosure Schedule
A-5
<PAGE> 223
shows the number of shares of TSI Voting Common Stock reserved for future
issuance pursuant to stock options granted and outstanding as of September 30,
1998 and the plans under which such options were granted (collectively, the "TSI
Stock Plans"). No material change in such capitalization has occurred between
September 30, 1998 and the date of this Agreement. As of the date of this
Agreement, none of the shares of TSI Preferred Stock is issued and outstanding.
All shares of TSI Common Stock subject to issuance as specified above are duly
authorized and, upon issuance on the terms and conditions specified in the
instruments pursuant to which they are issuable, shall be validly issued, fully
paid and nonassessable. There are no obligations, contingent or otherwise, of
TSI or any of its Subsidiaries to repurchase, redeem or otherwise acquire any
shares of TSI Common Stock or the capital stock of any Subsidiary or to provide
funds to or make any material investment (in the form of a loan, capital
contribution or otherwise) in any such Subsidiary or any other entity other than
guarantees of bank obligations of Subsidiaries entered into in the ordinary
course of business. All of the outstanding shares of capital stock of each of
TSI's Subsidiaries are duly authorized, validly issued, fully paid and
nonassessable and all such shares (other than directors' qualifying shares in
the case of foreign Subsidiaries) are owned by TSI or another Subsidiary free
and clear of all security interests, liens, claims, pledges, agreements,
limitations in TSI's voting rights, charges or other encumbrances of any nature.
(b) Except as set forth in this Section 3.02 or as reserved for future
grants of options under the TSI Stock Plans, the TSI Warrants or the Eclipsys
Stock Option Agreement, there are no equity securities of any class of TSI or
any of its Subsidiaries, or any security exchangeable into or exercisable for
such equity securities, issued, reserved for issuance or outstanding. Except as
set forth in the TSI SEC Reports filed prior to the date hereof, in the Eclipsys
Stock Option Agreement or disclosed in Section 3.02 of the TSI Disclosure
Schedule, there are no options, warrants, equity securities, calls, rights,
commitments or agreements of any character to which TSI or any of its
Subsidiaries is a party or by which it is bound obligating TSI or any of its
Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or
sold, additional shares of capital stock of TSI or any of its Subsidiaries or
obligating TSI or any of its Subsidiaries to grant, extend, accelerate the
vesting of or enter into any such option, warrant, equity security, call, right,
commitment or agreement. No consent is required from the holders of TSI Stock
Options (as defined below) in connection with the conversion of the TSI Stock
Options into options to purchase Eclipsys Voting Common Stock as contemplated by
Section 6.12. To the best knowledge of TSI, there are no voting trusts, proxies
or other voting agreements or understandings with respect to the shares of
capital stock of TSI.
SECTION 3.03 Authority; No Conflict; Required Filings and Consents.
(a) TSI has all requisite corporate power and authority to enter into this
Agreement and to consummate the transactions contemplated by this Agreement. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated by this Agreement by TSI have been duly authorized by
all necessary corporate action on the part of TSI, subject only to the approval
of the Merger by TSI's stockholders under the MBCL. This Agreement has been duly
executed and delivered by TSI and constitutes the valid and binding obligation
of TSI, enforceable in accordance with its terms, subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and similar laws of
general applicability relating to or affecting creditors' rights and to general
equity principles (the "Bankruptcy and Equity Exception").
(b) The execution and delivery of this Agreement by TSI does not, and the
consummation of the transactions contemplated by this Agreement will not, (i)
conflict with, or result in any violation or breach of, any provision of the
Articles of Organization or Bylaws of TSI, each as amended to date, (ii) result
in any violation or breach of, or constitute (with or without notice or lapse of
time, or both) a default (or give rise to a right of termination, cancellation
or acceleration of any obligation or loss of any material benefit) under, or
require a consent or waiver under, any of the terms, conditions or provisions of
any note, bond, mortgage, indenture, lease, contract or other agreement,
instrument or obligation to which TSI or any of its Subsidiaries is a party or
by which any of them or any of their properties or assets may be bound, or (iii)
conflict with or violate any permit, concession, franchise, license, judgment,
order, decree, statute, law, ordinance, rule or regulation applicable to TSI or
any of its Subsidiaries or any of its or their
A-6
<PAGE> 224
properties or assets, except in the case of clauses (ii) and (iii) for any such
conflicts, violations, breaches, defaults, terminations, cancellations,
accelerations or losses which are not, individually or in the aggregate,
reasonably likely to have a TSI Material Adverse Effect.
(c) No consent, approval, order or authorization of, or registration,
declaration or filing with, any court, administrative agency or commission or
other governmental authority or instrumentality ("Governmental Entity") is
required by or with respect to TSI or any of its Subsidiaries in connection with
the execution and delivery of this Agreement or the consummation of the
transactions contemplated hereby, except for (i) the filing of a pre-merger
notification report under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR Act") and any other documents or information
requested by the United States Department of Justice or the United States
Federal Trade Commission in connection therewith, (ii) the filing of the
Articles of Merger with the Secretary of State of Massachusetts, (iii) the
filing of the Joint Proxy Statement (as defined in Section 3.16 below) with the
Securities and Exchange Commission (the "SEC") in accordance with the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), (iv) such consents,
approvals, orders, authorizations, registrations, declarations and filings as
may be required under applicable state securities laws and the laws of any
foreign country and (v) such other consents, authorizations, filings, approvals
and registrations which, if not obtained or made, would not be reasonably likely
to have a TSI Material Adverse Effect.
SECTION 3.04 SEC Filings; Financial Statements.
(a) TSI has filed and made available to Eclipsys all forms, reports and
documents required to be filed by TSI with the SEC since April 18, 1996 other
than registration statements on Form S-8 (collectively, the "TSI SEC Reports").
The TSI SEC Reports (i) at the time filed, complied in all material respects
with the applicable requirements of the Securities Act of 1933, as amended (the
"Securities Act"), and the Exchange Act, as the case may be, and (ii) did not at
the time they were filed (or if amended or superseded by a filing prior to the
date of this Agreement, then on the date of such filing) contain any untrue
statement of a material fact or omit to state a material fact required to be
stated in such TSI SEC Reports or necessary in order to make the statements in
such TSI SEC Reports, in the light of the circumstances under which they were
made, not misleading. None of TSI's Subsidiaries is required to file any forms,
reports or other documents with the SEC.
(b) Each of the consolidated financial statements (including, in each case,
any related notes) contained in the TSI SEC Reports complied as to form in all
material respects with the applicable published rules and regulations of the SEC
with respect thereto, was prepared in accordance with U.S. generally accepted
accounting principles ("GAAP") applied on a consistent basis throughout the
periods involved (except as may be indicated in the notes to such financial
statements or, in the case of unaudited statements, as permitted by Form 10-Q of
the SEC) and fairly presented the consolidated financial position of TSI and its
Subsidiaries as of the dates and the consolidated results of its operations and
cash flows for the periods indicated, except that the unaudited interim
financial statements were or are subject to normal and recurring year-end
adjustments which were not or are not expected to be material in amount. The
unaudited balance sheet of TSI as of June 30, 1998 is referred to herein as the
"TSI Balance Sheet."
SECTION 3.05 No Undisclosed Liabilities. Except as disclosed in the TSI
SEC Reports filed prior to the date hereof, and except for normal or recurring
liabilities incurred since June 30, 1998 in the ordinary course of business
consistent with past practices, TSI and its Subsidiaries do not have any
liabilities, either accrued, contingent or otherwise (whether or not required to
be reflected in financial statements in accordance with GAAP), and whether due
or to become due, which individually or in the aggregate are reasonably likely
to have a TSI Material Adverse Effect.
SECTION 3.06 Absence of Certain Changes or Events. Except as disclosed in
the TSI SEC Reports filed prior to the date hereof, from and after the date of
the TSI Balance Sheet, TSI and its Subsidiaries have conducted their businesses
only in the ordinary course and in a manner consistent with past practice and,
during such period, there has not been (i) any material adverse change in the
financial condition, results of operations, cash flows, business or properties,
subject to the last sentence of this
A-7
<PAGE> 225
Section 3.06 (a "Material Adverse Change") of TSI and its Subsidiaries, taken as
a whole (other than changes that are the effect or result of economic factors
affecting the economy as a whole or economic or market factors affecting the
healthcare information systems industry generally) or any development or
combination of developments of which the management of TSI is aware that,
individually or in the aggregate, has had, or is reasonably likely to have, a
TSI Material Adverse Effect (other than economic factors affecting the economy
as a whole or economic or market factors affecting the healthcare information
systems industry generally); (ii) any damage, destruction or loss (whether or
not covered by insurance) with respect to TSI or any of its Subsidiaries having
a TSI Material Adverse Effect; (iii) any material change by TSI in its
accounting methods, principles or practices to which Eclipsys has not previously
consented in writing; (iv) any revaluation by TSI of any of its assets having a
TSI Material Adverse Effect; or (v) any other action or event that would have
required the consent of Eclipsys pursuant to Section 5.01 of this Agreement had
such action or event occurred after the date of this Agreement and that, in the
case of this clause (v), individually or in the aggregate, has had or is
reasonably likely to have a TSI Material Adverse Effect. Notwithstanding the
foregoing, the failure of TSI or Eclipsys to achieve any level of revenue and
earnings at any time shall not of itself constitute a Material Adverse Change of
TSI and its Subsidiaries, taken as a whole, or Eclipsys and its Subsidiaries,
taken as a whole, as the case may be.
SECTION 3.07 Taxes.
(a) For the purposes of this Agreement, a "Tax" or, collectively, "Taxes"
means any and all material federal, state, local and foreign taxes, assessments
and other governmental charges, duties, impositions and liabilities, including
taxes based upon or measured by gross receipts, income, profits, sales, use and
occupation, and value added, ad valorem, transfer, gains, franchise,
withholding, payroll, recapture, employment, excise, unemployment insurance,
social security, business license, occupation, business organization, stamp,
environmental and property taxes, together with all interest, penalties and
additions imposed with respect to such amounts. "Tax Returns" means all reports,
returns, declarations, statements or other information required to be supplied
to a taxing authority in connection with Taxes.
(b) Each of TSI and its Subsidiaries has filed all Tax Returns that it was
required to file, and all such Tax Returns were correct and complete. Each group
of corporations with which TSI or any of its Subsidiaries has filed (or was
required to file) consolidated, combined, unitary or similar Tax Returns (a "TSI
Affiliated Group") has filed all such Tax Returns that it was required to file
with respect to any period in which TSI or one of its Subsidiaries was a member
of such TSI Affiliated Group (a "TSI Affiliated Period"), and all such Tax
Returns were correct and complete. Each of TSI and its Subsidiaries has paid all
Taxes (whether or not shown on such Tax Returns) that were due and payable, and
each TSI Affiliated Group has paid all Taxes (whether or not shown on such Tax
Returns) that were due and payable with respect to all TSI Affiliated Periods
and with respect to which TSI or any of its Subsidiaries may be liable by
operation of law or otherwise. The unpaid Taxes of TSI and its Subsidiaries for
tax periods through the date of the TSI Balance Sheet do not exceed the accruals
and reserves for Taxes set forth on the TSI Balance Sheet (exclusive of any
accruals for "deferred taxes" or similar items that reflect timing differences
between Tax and financial accounting principles). The unpaid Taxes of TSI and
its Subsidiaries for tax periods from the date of the TSI Balance Sheet through
the Closing Date are attributable solely to the conduct of their businesses in
the ordinary course and in a manner consistent with past practices. All Taxes
that TSI or any of its Subsidiaries is or was required by law to withhold or
collect have been duly withheld or collected and, to the extent required, have
been paid to the proper Governmental Entity. Each of the representations
contained in this Section 3.07(b) shall be limited in its application to items
which are reasonably likely, individually or in the aggregate, to have a TSI
Material Adverse Effect.
(c) No examination or audit by any Governmental Entity of any Tax Return of
TSI, any of its Subsidiaries or any TSI Affiliated Group with respect to a TSI
Affiliated Period is currently in progress or, to the knowledge of TSI and its
Subsidiaries, threatened or contemplated, in each case, which involve claims
that individually or in the aggregate are reasonably likely to have a TSI
Material Adverse Effect. Neither TSI nor any of its Subsidiaries has been
informed by any jurisdiction that the jurisdiction believes
A-8
<PAGE> 226
that TSI or any of its Subsidiaries was required to file any Tax Return that was
not filed which failure or failures individually, or in the aggregate, are
reasonably likely to have a TSI Material Adverse Effect.
(d) Neither TSI nor any of its Subsidiaries is a "consenting corporation"
within the meaning of Section 341(f) of the Code, and none of the assets of TSI
and its Subsidiaries is subject to an election under Section 341(f) of the Code.
(e) Neither TSI nor any of its Subsidiaries has been a United States real
property holding corporation within the meaning of Section 897(c)(2) of the Code
during the applicable period specified in Section 897(c)(l)(A)(ii) of the Code.
(f) None of TSI or any of its Subsidiaries is a party to any Tax allocation
or sharing agreement.
(g) None of TSI or any of its Subsidiaries has any material liability for
Taxes of any person (other than TSI or any of its Subsidiaries (under Treasury
Regulation Section 1.1502-6 or any similar provision of state, local or foreign
law)), as a transferee or successor, by contract, or otherwise.
SECTION 3.08 Properties.
(a) TSI does not own of record any real property.
(b) All material real property leases of TSI and its Subsidiaries are in
good standing, valid and effective in accordance with their respective terms,
and neither TSI nor any of its Subsidiaries is in default under any of such
leases, except where the lack of such good standing, validity or effectiveness
or the existence of such default would not be reasonably likely to have a TSI
Material Adverse Effect.
SECTION 3.09 Intellectual Property.
(a) TSI and its Subsidiaries own, or are licensed or otherwise possess
legally enforceable rights to use, all patents, trademarks, trade names, service
marks, copyrights and mask works, any applications for and registrations of such
patents, trademarks, trade names, service marks, copyrights and mask works, and
all processes, formulae, methods, schematics, technology, know-how, computer
software programs or applications and tangible or intangible proprietary
information or material that are necessary to conduct the business of TSI and
its Subsidiaries as currently conducted, or planned to be conducted, the absence
of which would be reasonably likely to have a TSI Material Adverse Effect (the
"TSI Intellectual Property Rights"). Section 3.09 of the TSI Disclosure Schedule
sets forth a complete and accurate list of (i) all patents, registered
copyrights, registered trademarks, registered service marks and all software
programs, other than commercial, off-the-shelf software, subject to a perpetual
license, in connection with which no future license fees or royalties are due
("Off-the-Shelf Software"), owned, used or licensed by or to TSI or any of its
Subsidiaries and (ii) all other intellectual property that is licensed by or to
TSI or any of its Subsidiaries that is used in or is necessary for the conduct
of TSI's business. TSI has promulgated and used commercially reasonable efforts
to enforce the trade secret protection program described in Section 3.09 of the
TSI Disclosure Schedule.
(b) Neither TSI nor any of its Subsidiaries is, or will as a result of the
execution and delivery of this Agreement or the performance of TSI's obligations
under this Agreement or otherwise be, in breach of any license, sublicense or
other agreement relating to the TSI Intellectual Property Rights, or any
material licenses, sublicenses and other agreements as to which TSI or any of
its Subsidiaries is a party and pursuant to which TSI or any of its Subsidiaries
is authorized to use any third party patents, trademarks or copyrights ("TSI
Third Party Intellectual Property Rights"), including software which is used in
the manufacture of, incorporated in, or forms a part of any product sold by or
expected to be sold by TSI or any of its Subsidiaries, the breach of which would
be reasonably likely to have a TSI Material Adverse Effect.
(c) All patents, registered trademarks, registered service marks and
registered copyrights which are held by TSI or any of its Subsidiaries and which
are material to the business of TSI and its Subsidiaries, taken as a whole, are
valid and subsisting. TSI (i) has not been sued in any suit, action or
proceeding, or received in writing any claim or notice, which involves a claim
of infringement of any patents, trademarks,
A-9
<PAGE> 227
service marks, copyrights or violation of any trade secret or other proprietary
right of any third party; and (ii) has no knowledge that the manufacturing,
marketing, licensing or sale of its products infringes any patent, trademark,
service mark, copyright, trade secret or other proprietary right of any third
party, which infringement would reasonably be expected to have a TSI Material
Adverse Effect.
(d) Section 3.09 of the TSI Disclosure Schedule identifies each "year 2000"
audit, report or investigation that has been performed by or on behalf of TSI
with respect to its business and operations, and TSI has provided to Eclipsys
true and correct copies of all such audits, reports or investigations. Except as
set forth in such audits, reports and investigations, TSI is not aware of any
failure to be Year 2000 Compliant of (i) any software products sold or licensed
by TSI or any of its Subsidiaries to third parties or (ii) any computer software
products used by or licensed to TSI or its Subsidiaries from third parties for
internal use by TSI or its Subsidiaries. For purposes of this Agreement, "Year
2000 Compliant" means, with respect to each software product referred to in the
prior sentence, that such system (i) will accurately receive, record, store,
provide, recognize and process all date and time data from, during, into and
between the twentieth and twenty-first centuries; (ii) will accurately perform
all date-dependent calculations and operations (including, without limitation,
mathematical operations, sorting, comparing and reporting) from, during, into
and between the twentieth and twenty-first centuries; and (iii) will not
malfunction, cease to function or provide invalid or incorrect results as a
result of (x) the change of century, (y) date data, including date data which
represents or references different centuries or more than one century or (z) the
occurrence of any particular date; in each case without human intervention,
other than original data entry; provided, in each case, that all applications,
hardware and other systems used in conjunction with such system which are not
owned or licensed by TSI correctly exchange date data with or provide data to
such system. Except as set forth in Section 3.09(d) of the TSI Disclosure
Statement, TSI has not provided any guarantee or warranty for any product sold
or licensed, or services provided, by TSI to the effect that such product or
service (i) complies with or accounts for the fact of the arrival of the year
2000 or (ii) will not be adversely affected with respect to functionally
interoperability, performance or volume capacity (including without limitation
the processing and reporting of data) by virtue of the arrival of the year 2000.
SECTION 3.10 Agreements, Contracts and Commitments. Except as set forth on
Section 3.10 of the TSI Disclosure Schedule, neither TSI nor any of its
Subsidiaries, nor any of their respective assets, businesses, or operations, is
a party to, or is bound or affected by, or receives benefits under (i) any
severance, termination or retirement agreement or any employment or consulting
agreement providing for aggregate payments to any person in any calendar year in
excess of $100,000 or continuing for more than one year, (ii) any agreement
relating to the borrowing of money by TSI or any of its Subsidiaries or the
guarantee by any TSI or any of its Subsidiaries of any such obligation (other
than agreements evidencing trade payables or relating to borrowings or
guarantees made in the ordinary course of business), (iii) any agreement which
prohibits or restricts TSI or any of its Subsidiaries from engaging in any
business activities in any geographic area, line of business or otherwise in
competition with any other person, (iv) any agreement involving TSI Intellectual
Property Rights or TSI Third Party Intellectual Property Rights (other than
Off-the-Shelf Software licenses) which provide for annual payments of $100,000
or more, (v) any agreement relating to the provision of computer software,
computer hardware, data processing systems or equipment, network communication,
transactional billing, management information or other technical systems or
services, including maintenance with respect to the foregoing matters, to or by
TSI or any of its Subsidiaries which provides for annual payments of $100,000 or
more, (vi) any agreement relating to the purchase or lease of real property, and
(vii) any other agreement or amendment thereto that would be required to be
filed as an exhibit to a Form 10-K filed by TSI with the SEC as of the date of
this Agreement (collectively, the "TSI Material Contracts"). With respect to
each TSI Material Contract and except as disclosed in Section 3.10 of the TSI
Disclosure Schedule: (i) the TSI Material Contract is in full force and effect;
(ii) neither TSI nor any of its Subsidiaries is in default or breach thereunder
in any material respect; (iii) neither TSI nor any of its Subsidiaries has
repudiated or waived any material provision of any such TSI Material Contract;
(iv) no other party to any such TSI Material Contract is, to the knowledge of
TSI, in default or breach in any material respect or has repudiated or waived
any material provision thereunder; (v) there exists no actual, or, to the
knowledge of
A-10
<PAGE> 228
TSI, threatened, cancellation, termination, or limitation of, or any amendment,
modification, or change to, any TSI Material Contract; (vi) neither TSI nor any
of its Subsidiaries has received formal notice that any party to a TSI Material
Contract will not renew such contract at the end of its existing term; and (vii)
no TSI Material Contract requires consent or notice in connection with the
transactions contemplated by this Agreement. All of the indebtedness of TSI or
any of its Subsidiaries for money borrowed is prepayable at any time without
penalty or premium.
SECTION 3.11 Litigation. Except as described in the TSI SEC Reports filed
prior to the date hereof, there is no action, suit or proceeding, claim,
arbitration or investigation against TSI or any of its Subsidiaries pending or
as to which TSI or any such Subsidiary has received any written notice of
assertion, which, individually or in the aggregate, is reasonably likely to have
a TSI Material Adverse Effect or a material adverse effect on the ability of TSI
to consummate the transactions contemplated by this Agreement.
SECTION 3.12 Environmental Matters.
(a) Except as disclosed in the TSI SEC Reports filed prior to the date
hereof and except for such matters that, individually or in the aggregate, are
not reasonably likely to have a TSI Material Adverse Effect: (i) TSI and its
Subsidiaries have complied with all applicable Environmental Laws (as defined in
Section 3.12(b)); (ii) the properties currently owned or operated by TSI and its
Subsidiaries (including soils, groundwater, surface water, buildings or other
structures) are not contaminated with any Hazardous Substances (as defined in
Section 3.12(c)); (iii) the properties formerly owned or operated by TSI or any
of its Subsidiaries were not contaminated with Hazardous Substances during the
period of ownership or operation by TSI or any of its Subsidiaries; (iv) neither
TSI nor any of its Subsidiaries are subject to liability for any Hazardous
Substance disposal or contamination on any third-party property; (v) neither TSI
nor any of its Subsidiaries has been associated with any release or threat of
release of any Hazardous Substance; (vi) neither TSI nor any of its Subsidiaries
has received any notice, demand, letter, claim or request for information
alleging that TSI or any of its Subsidiaries may be in violation of or liable
under any Environmental Law; (vii) neither TSI nor any of its Subsidiaries is
subject to any orders, decrees, injunctions or other arrangements with any
Governmental Entity or is subject to any indemnity or other agreement with any
third party relating to liability under any Environmental Law or relating to
Hazardous Substances; and (viii) there are no circumstances or conditions
involving TSI or any of its Subsidiaries that could reasonably be expected to
result in any claims, liabilities, investigations, costs or restrictions on the
ownership, use or transfer of any property of TSI pursuant to any Environmental
Law.
(b) As used herein, the term "Environmental Law" means any federal, state,
local or foreign law, regulation, order, decree, permit, authorization, opinion,
common law or agency requirement relating to: (i) the protection, investigation
or restoration of the environment, health and safety, or natural resources, (ii)
the handling, use, presence, disposal, release or threatened release of any
Hazardous Substance or (iii) noise, odor, wetlands, pollution, contamination or
any injury or threat of injury to persons or property.
(c) As used herein, the term "Hazardous Substance" means any substance that
is: (i) listed, classified or regulated pursuant to any Environmental Law; (ii)
any petroleum product or by-product, asbestos-containing material,
lead-containing paint or plumbing, polychlorinated biphenyls, radioactive
materials or radon; or (iii) any other substance which is the subject of
regulatory action by any Governmental Entity pursuant to any Environmental Law.
SECTION 3.13 Employee Benefit Plans.
(a) TSI has listed in Section 3.13 of the TSI Disclosure Schedule all
employee benefit plans (as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA")), and all bonus, stock option,
stock purchase, incentive, deferred compensation, supplemental retirement,
severance and other similar employee benefit plans, and all unexpired severance
agreements, written or otherwise, for the benefit of, or relating to, any
current or former employee of TSI or any trade or business (whether or not
incorporated) which is a member or which is under common control) within
A-11
<PAGE> 229
the meaning of Section 414 of the Code (an "ERISA Affiliate") with TSI or any
Subsidiary of TSI (collectively, the "TSI Employee Plans").
(b) With respect to each TSI Employee Plan, TSI has made available to
Eclipsys a true and correct copy of (i) the most recent annual report (Form
5500) filed with the IRS, (ii) such TSI Employee Plan, (iii) each trust
agreement and group annuity contract, if any, relating to such TSI Employee Plan
and (iv) the most recent actuarial report or valuation relating to a TSI
Employee Plan subject to Title IV of ERISA.
(c) With respect to the TSI Employee Plans, individually and in the
aggregate, no event has occurred and, to the knowledge of TSI, there exists no
condition or set of circumstances in connection with which TSI could be subject
to any liability that is reasonably likely to have a TSI Material Adverse Effect
under ERISA, the Code or any other applicable law.
(d) With respect to the TSI Employee Plans, individually and in the
aggregate, there are no funded benefit obligations for which contributions have
not been made or properly accrued and there are no unfunded benefit obligations
which have not been accounted for by reserves, or otherwise properly footnoted
in accordance with GAAP, on the financial statements of TSI, which obligations
are reasonably likely to have a TSI Material Adverse Effect.
(e) Except as disclosed in TSI SEC Reports filed prior to the date of this
Agreement, and except as provided for in this Agreement, neither TSI nor any of
its Subsidiaries is a party to any oral or written (i) agreement with any
officer or other key employee of TSI or any of its Subsidiaries, the benefits of
which are contingent, or the terms of which are materially altered, upon the
occurrence of a transaction involving TSI of the nature contemplated by this
Agreement, (ii) agreement with any officer of TSI providing any term of
employment or compensation guarantee extending for a period longer than one year
from the date hereof and for the payment of compensation in excess of $100,000
per annum, or (iii) agreement or plan, including any stock option plan, stock
appreciation right plan, restricted stock plan or stock purchase plan, any of
the benefits of which will be increased, or the vesting of the benefits of which
will be accelerated, by the occurrence of any of the transactions contemplated
by this Agreement or the value of any of the benefits of which will be
calculated on the basis of any of the transactions contemplated by this
Agreement.
SECTION 3.14 Compliance With Laws. TSI and each of its Subsidiaries has
complied with, is not in violation of, and has not received any notices of
violation with respect to, any federal, state, local or foreign statute, law or
regulation with respect to the conduct of its business, or the ownership or
operation of its business, except for failures to comply or violations which,
individually or in the aggregate, have not had and are not reasonably likely to
have a TSI Material Adverse Effect.
SECTION 3.15 Accounting and Tax Matters. To its knowledge, after
consulting with its independent auditors, neither TSI nor any of its Affiliates
(as defined in Section 6.10) has taken or agreed to take any action which would
(i) prevent Eclipsys from accounting for the business combination to be effected
by the Merger as a pooling of interests or (ii) prevent the Merger from
constituting a transaction qualifying as a reorganization under 368(a) of the
Code.
SECTION 3.16 Registration Statement; Proxy Statement/Prospectus. The
information to be supplied by TSI for inclusion in the registration statement on
Form S-4 pursuant to which shares of Eclipsys Voting Common Stock issued in the
Merger will be registered under the Securities Act (the "Registration
Statement") shall not at the time the Registration Statement is declared
effective by the SEC contain any untrue statement of a material fact or omit to
state any material fact required to be stated in the Registration Statement or
necessary in order to make the statements in the Registration Statement, in
light of the circumstances under which they were made, not misleading. The
information supplied by TSI for inclusion in the joint proxy
statement/prospectus to be sent to the stockholders of Eclipsys and TSI in
connection with the meeting of TSI's stockholders (the "TSI Stockholders'
Meeting") to consider this Agreement and the Merger and in connection with the
meeting of Eclipsys' stockholders (the "Eclipsys Stockholders' Meeting") to
consider the issuance of shares of Eclipsys Voting
A-12
<PAGE> 230
Common Stock pursuant to the Merger (the "Joint Proxy Statement") shall not, on
the date the Joint Proxy Statement is first mailed to stockholders of TSI or
Eclipsys, at the time of the TSI Stockholders' Meeting and the Eclipsys
Stockholders' Meeting and at the Effective Time, contain any statement which, at
such time and in light of the circumstances under which it shall be made, is
false or misleading with respect to any material fact, or omit to state any
material fact necessary in order to make the statements made in the Joint Proxy
Statement not false or misleading; or omit to state any material fact necessary
to correct any statement in any earlier communication with respect to the
solicitation of proxies for the TSI Stockholders' Meeting or the Eclipsys
Stockholders' Meeting which has become false or misleading. If at any time prior
to the Effective Time any event relating to TSI or any of its Affiliates,
officers or directors should be discovered by TSI which should be set forth in
an amendment to the Registration Statement or a supplement to the Joint Proxy
Statement, TSI shall promptly inform Eclipsys.
SECTION 3.17 Labor Matters. Neither TSI nor any of its Subsidiaries is a
party to or otherwise bound by any collective bargaining agreement, contract or
other agreement or understanding with a labor union or labor organization, nor,
as of the date hereof, is TSI or any of its Subsidiaries the subject of any
material proceeding asserting that TSI or any of its Subsidiaries has committed
an unfair labor practice or is seeking to compel it to bargain with any labor
union or labor organization nor, as of the date of this Agreement, is there
pending or, to the knowledge of the executive officers of TSI, threatened, any
material labor strike, dispute, walkout, work stoppage, slow-down or lockout
involving TSI or any of its Subsidiaries.
SECTION 3.18 Insurance; Risk Management. All material fire and casualty,
general liability, business interruption, product liability, and sprinkler and
water damage insurance policies maintained by TSI or any of its Subsidiaries are
with reputable insurance carriers, provide full and adequate coverage for all
normal risks incident to the business of TSI and its Subsidiaries and their
respective properties and assets, and are in character and amount at least
equivalent to that carried by persons engaged in similar businesses and subject
to the same or similar perils or hazards, except for any such failures to
maintain insurance policies that, individually or in the aggregate, are not
reasonably likely to have a TSI Material Adverse Effect. The steps taken by TSI
to manage the various risks incident to the business and operations of TSI and
its Subsidiaries and their respective properties and assets are at least
equivalent to those taken by persons engaged in similar businesses, except for
any failures to take such steps that, individually or in the aggregate, are not
reasonably likely to have a TSI Material Adverse Effect.
SECTION 3.19 No Existing Discussions. Except for discussions or
negotiations relating to the acquisition by TSI of the capital stock of
HealthVISION, Inc. ("HealthVISION") not owned, as of the date hereof, by TSI
(the "HealthVISION Acquisition") as of the date hereof, TSI is not engaged,
directly or indirectly, in any discussions or negotiations with any other party
with respect to an Acquisition Proposal (as defined in Section 6.01).
SECTION 3.20 Opinion of Financial Advisor. The financial advisor of TSI,
BT Alex. Brown Incorporated, has delivered to the Board Directors of TSI an
opinion dated the date of this Agreement to the effect that, as of the date of
such opinion, the Exchange Ratio is fair, from a financial point of view, to the
holders of TSI Common Stock.
SECTION 3.21 Anti-Takeover Laws. No "fair price", "business combination",
"moratorium", "control share acquisition" or other form of antitakeover statute
or regulation, including, without limitation, Chapter 110C of the General Laws
of the Commonwealth of Massachusetts, is or will be applicable to the execution,
delivery or performance of this Agreement or the consummation of the Merger or
the other transactions contemplated by this Agreement.
SECTION 3.22 Insider Trading Policies and Practices. Section 3.22 to the
TSI Disclosure Schedule sets forth a copy of TSI's insider trading policy as in
effect on the date hereof. TSI and each of its directors, officers and employees
who are subject to such policy have complied in all material respects with the
terms of such policy.
A-13
<PAGE> 231
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF ECLIPSYS AND SUB
Eclipsys and Sub represent and warrant to TSI that the statements contained
in this Article IV are true and correct except as set forth in the disclosure
schedule delivered by Eclipsys to TSI on or before the date of this Agreement
(the "Eclipsys Disclosure Schedule"). The Eclipsys Disclosure Schedule shall be
arranged in paragraphs and sections corresponding to the numbered and lettered
paragraphs and sections contained in this Article IV and the disclosure in any
paragraph or section shall qualify other paragraphs and sections in this Article
IV only to the extent that it is reasonably apparent from a reading of such
document that it also qualifies or applies to such other paragraphs and
sections.
SECTION 4.01 Organization of Eclipsys and Sub. Each of Eclipsys and Sub
and Eclipsys' other Subsidiaries is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation, has all requisite corporate power to own, lease and operate its
property and to carry on its business as now being conducted and as proposed to
be conducted, and is duly qualified to do business and is in good standing as a
foreign corporation in each jurisdiction in which the failure to be so qualified
would have an Eclipsys Material Adverse Effect (as defined below). Except as set
forth in the Eclipsys SEC Reports (as defined in Section 4.04) filed prior to
the date hereof, neither Eclipsys nor any of its Subsidiaries directly or
indirectly owns any equity or similar interest in, or any interest convertible
into or exchangeable or exercisable for, any corporation, partnership, joint
venture or other business association or entity, excluding securities in any
publicly traded company held for investment by Eclipsys and comprising less than
five percent (5%) of the outstanding stock of such company. For purposes of this
Agreement, the term "Eclipsys Material Adverse Effect" means any effect that is,
or would reasonably be expected to be, materially adverse to the financial
condition, results of operations, cash flows, business or properties of Eclipsys
and its Subsidiaries, taken as a whole.
SECTION 4.02 Eclipsys Capital Structure.
(a) The authorized capital stock of Eclipsys consists of 200,000,000 shares
of Eclipsys Voting Common Stock, $.01 par value, 5,000,000 shares of Non-Voting
Common Stock, $.01 par value ("Eclipsys Non-Voting Common Stock" and, together
with the Eclipsys Voting Common Stock, "Eclipsys Common Stock"), and 5,000,000
shares of Preferred Stock, $.01 par value ("Eclipsys Preferred Stock"). As of
September 30, 1998, (i) 19,393,241 shares of Eclipsys Voting Common Stock and
896,431 shares of Eclipsys Non-Voting Common Stock were issued and outstanding,
all of which are validly issued, fully paid and nonassessable, (ii) 962,833
shares of Eclipsys Non-Voting Common Stock were reserved for issuance upon the
exercise of certain warrants (the "Eclipsys Warrants") having an exercise price
of $.01 per share, and (iii) no shares of Eclipsys Common Stock were held in the
treasury of Eclipsys or by Subsidiaries of Eclipsys. Section 4.02 of the
Eclipsys Disclosure Schedule shows the number of shares of Eclipsys Voting
Common Stock reserved for future issuance pursuant to stock options granted and
outstanding as of September 30, 1998 and the plans under which such options were
granted (collectively, the "Eclipsys Stock Plans"). No material change in such
capitalization has occurred between September 30, 1998 and the date of this
Agreement. As of the date of this Agreement, none of the shares of Eclipsys
Preferred Stock is issued and outstanding. All shares of Eclipsys Common Stock
subject to issuance as specified above are duly authorized and, upon issuance on
the terms and conditions specified in the instruments pursuant to which they are
issuable, shall be validly issued, fully paid and nonassessable. There are no
obligations, contingent or otherwise, of Eclipsys or any of its Subsidiaries to
repurchase, redeem or otherwise acquire any shares of Eclipsys Common Stock or
the capital stock of any Subsidiary or to provide funds to or make any material
investment (in the form of a loan, capital contribution or otherwise) in any
such Subsidiary or any other entity other than guarantees of bank obligations of
Subsidiaries entered into in the ordinary course of business. All of the
outstanding shares of capital stock of each of Eclipsys' Subsidiaries are duly
authorized, validly issued, fully paid and nonassessable and all such shares
(other than directors' qualifying shares in the case of foreign Subsidiaries)
are owned by Eclipsys or another Subsidiary free and clear of all security
interests, liens, claims, pledges, agreements, limitations in Eclipsys' voting
rights, charges or other encumbrances of any nature.
A-14
<PAGE> 232
(b) Except as set forth in this Section 4.02 or as reserved for future
grants of options under the Eclipsys Stock Plans or the Eclipsys Warrant, there
are no equity securities of any class of Eclipsys or any of its Subsidiaries, or
any security exchangeable into or exercisable for such equity securities,
issued, reserved for issuance or outstanding. Except as set forth in the
Eclipsys SEC Reports (as defined in Section 4.04 below) filed prior to the date
hereof or disclosed in Section 4.02 of the Eclipsys Disclosure Schedule, there
are no options, warrants, equity securities, calls, rights, commitments or
agreements of any character to which Eclipsys or any of its Subsidiaries is a
party or by which it is bound obligating Eclipsys or any of its Subsidiaries to
issue, deliver or sell, or cause to be issued, delivered or sold, additional
shares of capital stock of Eclipsys or any of its Subsidiaries or obligating
Eclipsys or any of its Subsidiaries to grant, extend, accelerate the vesting of
or enter into any such option, warrant, equity security, call, right, commitment
or agreement. To the best knowledge of Eclipsys, there are no voting trusts,
proxies or other voting agreements or understandings with respect to the shares
of capital stock of Eclipsys.
SECTION 4.03 Authority; No Conflict; Required Filings and Consents.
(a) Each of Eclipsys and the Sub has all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated by this Agreement. The execution and delivery of this Agreement and
the consummation of the transactions contemplated by this Agreement by Eclipsys
have been duly authorized by all necessary corporate action on the part of each
of Eclipsys and Sub (including the approval of the Merger by Eclipsys as the
sole stockholder of Sub), subject only to the approval of the Eclipsys Voting
Proposals (as \defined in Section 6.05) by Eclipsys' stockholders. This
Agreement has been duly executed and delivered by Eclipsys and the Sub and
constitutes the valid and binding obligation of Eclipsys and the Sub,
enforceable in accordance with its terms, subject to the Bankruptcy and Equity
Exception.
(b) The execution and delivery of this Agreement by Eclipsys and the Sub
does not, and the consummation of the transactions contemplated by this
Agreement will not, (i) conflict with, or result in any violation or breach of,
any provision of the Certificate of Incorporation or Bylaws of Eclipsys or Sub,
each as amended to date, (ii) result in any violation or breach of, or
constitute (with or without notice or lapse of time, or both) a default (or give
rise to a right of termination, cancellation or acceleration of any obligation
or loss of any material benefit) under, or require a consent or waiver under,
any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, lease, contract or other agreement, instrument or obligation to which
Eclipsys or any of its Subsidiaries is a party or by which any of them or any of
their properties or assets may be bound, or (iii) conflict with or violate any
permit, concession, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to Eclipsys or any of its Subsidiaries
or any of its or their properties or assets, except in the case of clauses (ii)
and (iii) for any such conflicts, violations, breaches, defaults, terminations,
cancellations, accelerations or losses which are not, individually or in the
aggregate, reasonably likely to have an Eclipsys Material Adverse Effect.
(c) No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity is required by or with
respect to Eclipsys or any of its Subsidiaries in connection with the execution
and delivery of this Agreement or the consummation of the transactions
contemplated hereby, except for (i) the filing of a pre-merger notification
report under the HSR Act and any other documents or information requested by the
United States Department of Justice or the United States Federal Trade
Commission in connection herewith, (ii) the filing of the Registration Statement
with the SEC in accordance with the Securities Act, (iii) the filing of the
Articles of Merger with the Secretary of State of Massachusetts, (iv) the filing
of the Joint Proxy Statement with the SEC in accordance with the Exchange Act,
(v) such consents, approvals, orders, authorizations, registrations,
declarations and filings as may be required under applicable state securities
laws and the laws of any foreign country and (vi) such other consents,
authorizations, filings, approvals and registrations which, if not obtained or
made, would not be reasonably likely to have an Eclipsys Material Adverse
Effect.
A-15
<PAGE> 233
SECTION 4.04 SEC Filings; Financial Statements.
(a) Eclipsys has filed and made available to TSI all forms, reports and
documents required to be filed by Eclipsys with the SEC since July 29, 1998
other than registration statements on Form S-8 (collectively, the "Eclipsys SEC
Reports"). The Eclipsys SEC Reports (i) at the time filed, complied in all
material respects with the applicable requirements of the Securities Act and the
Exchange Act, as the case may be, and (ii) did not at the time they were filed
(or if amended or superseded by a filing prior to the date of this Agreement,
then on the date of such filing) contain any untrue statement of a material fact
or omit to state a material fact required to be stated in such Eclipsys SEC
Reports or necessary in order to make the statements in such Eclipsys SEC
Reports, in the light of the circumstances under which they were made, not
misleading. None of Eclipsys' Subsidiaries is required to file any forms,
reports or other documents with the SEC.
(b) Each of the consolidated financial statements (including, in each case,
any related notes) contained in the Eclipsys SEC Reports complied as to form in
all material respects with the applicable published rules and regulations of the
SEC with respect thereto, was prepared in accordance with GAAP applied on a
consistent basis throughout the periods involved (except as may be indicated in
the notes to such financial statements or, in the case of unaudited statements,
as permitted by Form 10-Q of the SEC) and fairly presented the consolidated
financial position of Eclipsys and its Subsidiaries as of the dates and the
consolidated results of its operations and cash flows for the periods indicated,
except that the unaudited interim financial statements were or are subject to
normal and recurring year-end adjustments which were not or are not expected to
be material in amount. The unaudited balance sheet of Eclipsys as of June 30,
1998 is referred to herein as the "Eclipsys Balance Sheet."
SECTION 4.05 No Undisclosed Liabilities. Except as disclosed in the
Eclipsys SEC Reports filed prior to the date hereof, and except for normal or
recurring liabilities incurred since June 30, 1998 in the ordinary course of
business consistent with past practices, Eclipsys and its Subsidiaries do not
have any liabilities, either accrued, contingent or otherwise (whether or not
required to be reflected in financial statements in accordance with GAAP), and
whether due or to become due, which individually or in the aggregate, are
reasonably likely to have an Eclipsys Material Adverse Effect.
SECTION 4.06 Absence of Certain Changes or Events. Except as disclosed in
the Eclipsys SEC Reports filed prior to the date hereof, from and after the date
of the Eclipsys Balance Sheet, Eclipsys and its Subsidiaries have conducted
their businesses only in the ordinary course and in a manner consistent with
past practice and, during such period, there has not been (i) any Material
Adverse Change in Eclipsys and its Subsidiaries, taken as a whole (other than
changes that are the effect or result of economic factors affecting the economy
as a whole or economic or market factors affecting the healthcare information
systems industry generally) or any development or combination of developments of
which the management of Eclipsys is aware that, individually or in the
aggregate, has had, or is reasonably likely to have, an Eclipsys Material
Adverse Effect (other than economic factors affecting the economy as a whole or
economic or market factors affecting the healthcare information systems industry
generally); (ii) any damage, destruction or loss (whether or not covered by
insurance) with respect to Eclipsys or any of its Subsidiaries having an
Eclipsys Material Adverse Effect; (iii) any material change by Eclipsys in its
accounting methods, principles or practices to which TSI has not previously
consented in writing; (iv) any revaluation by Eclipsys of any of its assets
having an Eclipsys Material Adverse Effect; or (v) any other action or event
that would have required the consent of TSI pursuant to Section 5.01 of this
Agreement had such action or event occurred after the date of this Agreement and
that, in the case of this clause (v), individually or in the aggregate, has had
or is reasonably likely to have an Eclipsys Material Adverse Effect.
SECTION 4.07 Taxes.
(a) Each of Eclipsys and its Subsidiaries has filed all Tax Returns that it
was required to file, and all such Tax Returns were correct and complete. Each
group of corporations with which Eclipsys or any of its Subsidiaries has filed
(or was required to file) consolidated, combined, unitary or similar Tax Returns
(an "Eclipsys Affiliated Group") has filed all such Tax Returns that it was
required to file with respect to any
A-16
<PAGE> 234
period in which Eclipsys or one of its Subsidiaries was a member of such
Eclipsys Affiliated Group (an "Eclipsys Affiliated Period"), and all such Tax
Returns were correct and complete. Each of Eclipsys and its Subsidiaries has
paid all Taxes (whether or not shown on such Tax Returns) that were due and
payable, and each Eclipsys Affiliated Group has paid all Taxes (whether or not
shown on such Tax Returns) that were due and payable with respect to all
Eclipsys Affiliated Periods and with respect to which Eclipsys or any of its
Subsidiaries may be liable by operation of law or otherwise. The unpaid Taxes of
Eclipsys and its Subsidiaries for tax periods through the date of the Eclipsys
Balance Sheet do not exceed the accruals and reserves for Taxes set forth on the
Eclipsys Balance Sheet (exclusive of any accruals for "deferred taxes" or
similar items that reflect timing differences between Tax and financial
accounting principles). The unpaid Taxes of Eclipsys and its Subsidiaries for
tax periods from the date of the Eclipsys Balance Sheet through the Closing Date
are attributable solely to the conduct of their businesses in the ordinary
course and in a manner consistent with past practices. All Taxes that Eclipsys
or any of its Subsidiaries is or was required by law to withhold or collect have
been duly withheld or collected and, to the extent required, have been paid to
the proper Governmental Entity. Each of the representations contained in this
Section 4.07(a) shall be limited in its application to items which are
reasonably likely, individually or in the aggregate, to have an Eclipsys
Material Adverse Effect.
(b) No examination or audit by any Governmental Entity of any Tax Return of
Eclipsys, any of its Subsidiaries or any Eclipsys Affiliated Group with respect
to an Eclipsys Affiliated Period is currently in progress or, to the knowledge
of Eclipsys and its Subsidiaries, threatened or contemplated, in each case,
which involve claims that individually or in the aggregate are reasonably likely
to have an Eclipsys Material Adverse Effect. Neither Eclipsys nor any of its
Subsidiaries has been informed by any jurisdiction that the jurisdiction
believes that Eclipsys or any of its Subsidiaries was required to file any Tax
Return that was not filed which failure or failures individually, or in the
aggregate, are reasonably likely to have an Eclipsys Material Adverse Effect.
(c) Neither Eclipsys nor any of its Subsidiaries is a "consenting
corporation" within the meaning of Section 341(f) of the Code, and none of the
assets of Eclipsys and its Subsidiaries is subject to an election under Section
341(f) of the Code.
(d) Neither Eclipsys nor any of its Subsidiaries has been a United States
real property holding corporation within the meaning of Section 897(c)(2) of the
Code during the applicable period specified in Section 897(c)(l)(A)(ii) of the
Code.
(e) None of Eclipsys or any of its Subsidiaries is a party to any Tax
allocation or sharing agreement.
(f) None of Eclipsys or any of its Subsidiaries has any material liability
for Taxes of any person (other than Eclipsys and any of its Subsidiaries (under
Treasury Regulation Section 1.1502-6 or any similar provision of state, local or
foreign law)), as a transferee or successor by contract, or otherwise.
SECTION 4.08 Properties.
(a) Eclipsys does not own of record any real property.
(b) All material real property leases of Eclipsys and its Subsidiaries are
in good standing, valid and effective in accordance with their respective terms,
and neither Eclipsys nor its Subsidiaries is in default under any of such
leases, except where the lack of such good standing, validity or effectiveness
or the existence of such default would not be reasonably likely to have an
Eclipsys Material Adverse Effect.
SECTION 4.09 Intellectual Property.
(a) Eclipsys and its Subsidiaries own, or are licensed or otherwise possess
legally enforceable rights to use, all patents, trademarks, trade names, service
marks, copyrights and mask works, any applications for and registrations of such
patents, trademarks, trade names, service marks, copyrights and mask works, and
all processes, formulae, methods, schematics, technology, know-how, computer
software programs or applications and tangible or intangible proprietary
information or material that are necessary to conduct the business of Eclipsys
and its Subsidiaries as currently conducted, or planned to be conducted, the
absence of which would be reasonably likely to have an Eclipsys Material Adverse
Effect (the "Eclipsys Intellectual Property Rights").
A-17
<PAGE> 235
(b) Neither Eclipsys nor any of its Subsidiaries is, or will as a result of
the execution and delivery of this Agreement or the performance of Eclipsys'
obligations under this Agreement or otherwise be, in breach of any license,
sublicense or other agreement relating to the Eclipsys Intellectual Property
Rights, or any material licenses, sublicenses and other agreements as to which
Eclipsys or any of its Subsidiaries is a party and pursuant to which Eclipsys or
any of its Subsidiaries is authorized to use any third party patents, trademarks
or copyrights ("Eclipsys Third Party Intellectual Property Rights"), including
software which is used in the manufacture of, incorporated in, or forms a part
of any product sold by or expected to be sold by Eclipsys or any of its
Subsidiaries, the breach of which would be reasonably likely to have an Eclipsys
Material Adverse Effect.
(c) All patents, registered trademarks, registered service marks and
registered copyrights which are held by Eclipsys or any of its Subsidiaries and
which are material to the business of Eclipsys and its Subsidiaries, taken as a
whole, are valid and subsisting. Eclipsys (i) has not been sued in any suit,
action or proceeding, or received in writing any claim or notice, which involves
a claim of infringement of any patents, trademarks, service marks, copyrights or
violation of any trade secret or other proprietary right of any third party; and
(ii) has no knowledge that the manufacturing, marketing, licensing or sale of
its products infringes any patent, trademark, service mark, copyright, trade
secret or other proprietary right of any third party, which infringement would
reasonably be expected to have an Eclipsys Material Adverse Effect.
SECTION 4.10 Agreements, Contracts and Commitments. Eclipsys has not
breached, or received in writing any claim or notice that it has breached, any
of the terms or conditions of any agreement, contract or commitment filed as an
exhibit to the Eclipsys SEC Reports (collectively, "Eclipsys Material
Contracts") in such a manner as, individually or in the aggregate, are
reasonably likely to have an Eclipsys Material Adverse Effect. Each Eclipsys
Material Contract that has not expired by its terms is in full force and effect.
SECTION 4.11 Litigation. Except as described in the Eclipsys SEC Reports
filed prior to the date hereof, there is no action, suit or proceeding, claim,
arbitration or investigation against Eclipsys or any of its Subsidiaries pending
or as to which Eclipsys or any such Subsidiary has received any written notice
of assertion, which, individually or in the aggregate, is reasonably likely to
have an Eclipsys Material Adverse Effect or a material adverse effect on the
ability of Eclipsys to consummate the transactions contemplated by this
Agreement.
SECTION 4.12 Environmental Matters. Except as disclosed in the Eclipsys
SEC Reports filed prior to the date hereof and except for such matters that,
individually or in the aggregate, are not reasonably likely to have an Eclipsys
Material Adverse Effect: (i) Eclipsys and its Subsidiaries have complied with
all applicable Environmental Laws; (ii) the properties currently owned or
operated by Eclipsys and its Subsidiaries (including soils, groundwater, surface
water, buildings or other structures) are not contaminated with any Hazardous
Substances; (iii) the properties formerly owned or operated by Eclipsys or any
of its Subsidiaries were not contaminated with Hazardous Substances during the
period of ownership or operation by Eclipsys or any of its Subsidiaries; (iv)
neither Eclipsys nor any of its Subsidiaries are subject to liability for any
Hazardous Substance disposal or contamination on any third-party property; (v)
neither Eclipsys nor any of its Subsidiaries has been associated with any
release or threat of release of any Hazardous Substance; (vi) neither Eclipsys
nor any of its Subsidiaries has received any notice, demand, letter, claim or
request for information alleging that Eclipsys or any of its Subsidiaries may be
in violation of or liable under any Environmental Law; (vii) neither Eclipsys
nor any of its Subsidiaries is subject to any orders, decrees, injunctions or
other arrangements with any Governmental Entity or is subject to any indemnity
or other agreement with any third party relating to liability under any
Environmental Law or relating to Hazardous Substances; and (viii) there are no
circumstances or conditions involving Eclipsys or any of its Subsidiaries that
could reasonably be expected to result in any claims, liabilities,
investigations, costs or restrictions on the ownership, use or transfer of any
property of Eclipsys pursuant to any Environmental Law.
A-18
<PAGE> 236
SECTION 4.13 Employee Benefit Plans.
(a) Eclipsys has listed in Section 4.13 of the Eclipsys Disclosure Schedule
all employee benefit plans (as defined in Section 3(3) of ERISA) and all bonus,
stock option, stock purchase, incentive, deferred compensation, supplemental
retirement, severance and other similar employee benefit plans, and all material
unexpired severance agreements, written or otherwise, for the benefit of, or
relating to, any current or former employee of Eclipsys or any ERISA Affiliate
of Eclipsys, or any Subsidiary of Eclipsys (collectively, the "Eclipsys Employee
Plans").
(b) With respect to each Eclipsys Employee Plan, Eclipsys has made
available to TSI, a true and correct copy of (i) the most recent annual report
(Form 5500) filed with the IRS, (ii) such Eclipsys Employee Plan, (iii) each
trust agreement and group annuity contract, if any, relating to such Eclipsys
Employee Plan and (iv) the most recent actuarial report or valuation relating to
an Eclipsys Employee Plan subject to Title IV of ERISA.
(c) With respect to the Eclipsys Employee Plans, individually and in the
aggregate, no event has occurred and, to the knowledge of Eclipsys, there exists
no condition or set of circumstances in connection with which Eclipsys could be
subject to any liability that is reasonably likely to have an Eclipsys Material
Adverse Effect under ERISA, the Code or any other applicable law.
(d) With respect to the Eclipsys Employee Plans, individually and in the
aggregate, there are no funded benefit obligations for which contributions have
not been made or properly accrued and there are no unfunded benefit obligations
which have not been accounted for by reserves, or otherwise properly footnoted
in accordance with GAAP, on the financial statements of Eclipsys, which
obligations are reasonably likely to have an Eclipsys Material Adverse Effect.
(e) Except as disclosed in Eclipsys SEC Reports filed prior to the date of
this Agreement, and except as provided for in this Agreement, neither Eclipsys
nor any of its Subsidiaries is a party to any oral or written (i) agreement with
any officer or other key employee of Eclipsys or any of its Subsidiaries, the
benefits of which are contingent, or the terms of which are materially altered,
upon the occurrence of a transaction involving Eclipsys of the nature
contemplated by this Agreement, (ii) agreement with any officer of Eclipsys
providing any term of employment or compensation guarantee extending for a
period longer than one year from the date hereof or for the payment of
compensation in excess of $100,000 per annum, or (iii) agreement or plan,
including any stock option plan, stock appreciation right plan, restricted stock
plan or stock purchase plan, any of the benefits of which will be increased, or
the vesting of the benefits of which will be accelerated, by the occurrence of
any of the transactions contemplated by this Agreement or the value of any of
the benefits of which will be calculated on the basis of any of the transactions
contemplated by this Agreement.
SECTION 4.14 Compliance With Laws. Eclipsys and each of its Subsidiaries
has complied with, is not in violation of, and has not received any notices of
violation with respect to, any federal, state, local or foreign statute, law or
regulation with respect to the conduct of its business, or the ownership or
operation of its business, except for failures to comply or violations which,
individually or in the aggregate, have not had and are not reasonably likely to
have an Eclipsys Material Adverse Effect.
SECTION 4.15 Accounting and Tax Matters. To its knowledge, after
consulting with its independent auditors, neither Eclipsys nor any of its
Affiliates has taken or agreed to take any action which would (i) prevent
Eclipsys from accounting for the business combination to be effected by the
Merger as a pooling of interests or (ii) prevent the Merger from constituting a
transaction qualifying as a reorganization under Section 368(a) of the Code.
SECTION 4.16 Registration Statement; Proxy Statement/Prospectus. The
information to be supplied by Eclipsys for inclusion in the Registration
Statement shall not at the time the Registration Statement is declared effective
by the SEC contain any untrue statement of a material fact or omit to state any
material fact required to be stated in the Registration Statement or necessary
in order to make the statements in the Registration Statement, in light of the
circumstances under which they were made, not misleading. The information
supplied by Eclipsys for inclusion in the Joint Proxy Statement shall not, on
the date the Joint Proxy Statement is first mailed to stockholders of Eclipsys
or TSI, at the time of the
A-19
<PAGE> 237
Eclipsys Stockholders' Meeting and the TSI Stockholders' Meeting and at the
Effective Time, contain any statement which, at such time and in light of the
circumstances under which it shall be made, is false or misleading with respect
to any material fact, or omit to state any material fact necessary in order to
make the statements made in the Joint Proxy Statement not false or misleading;
or omit to state any material fact necessary to correct any statement in any
earlier communication with respect to the solicitation of proxies for the
Eclipsys Stockholders' Meeting or the TSI Stockholders' Meetings which has
become false or misleading. If at any time prior to the Effective Time any event
relating to Eclipsys or any of its Affiliates, officers or directors should be
discovered by Eclipsys which should be set forth in an amendment to the
Registration Statement or a supplement to the Joint Proxy Statement, Eclipsys
shall promptly inform TSI.
SECTION 4.17 Labor Matters. Neither Eclipsys nor any of its Subsidiaries
is a party to or otherwise bound by any collective bargaining agreement,
contract or other agreement or understanding with a labor union or labor
organization, nor, as of the date hereof, is Eclipsys or any of its Subsidiaries
the subject of any material proceeding asserting that Eclipsys or any of its
Subsidiaries has committed an unfair labor practice or is seeking to compel it
to bargain with any labor union or labor organization nor, as of the date of
this Agreement, is there pending or, to the knowledge of the executive officers
of Eclipsys, threatened, any material labor strike, dispute, walkout, work
stoppage, slow-down or lockout involving Eclipsys or any of its Subsidiaries.
SECTION 4.18 Insurance; Risk Management. All material fire and casualty,
general liability, business interruption, product liability, and sprinkler and
water damage insurance policies maintained by Eclipsys or any of its
Subsidiaries are with reputable insurance carriers, provide full and adequate
coverage for all normal risks incident to the business of Eclipsys and its
Subsidiaries and their respective properties and assets, and are in character
and amount at least equivalent to that carried by persons engaged in similar
businesses and subject to the same or similar perils or hazards, except for any
such failures to maintain insurance policies that, individually or in the
aggregate, are not reasonably likely to have an Eclipsys Material Adverse
Effect. The steps taken by Eclipsys to manage the various risks incident to the
business and operations of Eclipsys and its Subsidiaries and their respective
properties and assets are at least equivalent to those taken by persons engaged
in similar businesses, except for any failures to take such steps that,
individually or in the aggregate, are not reasonably likely to have an Eclipsys
Material Adverse Effect.
SECTION 4.19 No Existing Discussions. Except for discussions or
negotiations relating to possible acquisitions by Eclipsys of those companies
previously disclosed by Eclipsys to TSI ("Eclipsys Possible Acquisitions"), as
of the date hereof, Eclipsys is not engaged, directly or indirectly, in any
discussions or negotiations with any other party with respect to an Acquisition
Proposal (as defined in Section 6.01).
SECTION 4.20 Opinion of Financial Advisor. The financial advisor of
Eclipsys, Morgan Stanley & Co. Incorporated, has delivered to the Board of
Directors of Eclipsys an opinion dated the date of this Agreement to the effect
that the Exchange Ratio is fair to Eclipsys from a financial point of view.
SECTION 4.21 Anti-Takeover Laws. No "fair price", "business combination",
"moratorium", "control share acquisition" or other form of antitakeover statute
or regulation is or will be applicable to the execution, delivery or performance
of this Agreement or the consummation of the Merger or the other transactions
contemplated by this Agreement.
SECTION 4.22 Insider Trading Policies and Practices. Section 4.22 to the
Eclipsys Disclosure Schedule sets forth a copy of Eclipsys' insider trading
policy as in effect on the date hereof. Eclipsys and each of its directors,
officers and employees who are subject to such policy have complied in all
material respects with the terms of such policy.
SECTION 4.23 Interim Operations of Sub. Sub was formed solely for the
purpose of engaging in the transactions contemplated by this Agreement, has
engaged in no other business activities and has conducted its operations only as
contemplated by this Agreement.
A-20
<PAGE> 238
ARTICLE V
CONDUCT OF BUSINESS
SECTION 5.01 Covenants of TSI. During the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
or the Effective Time, TSI agrees as to itself and its Subsidiaries (except to
the extent that Eclipsys shall otherwise consent in writing), to carry on its
business in the usual, regular and ordinary course in substantially the same
manner as previously conducted, to pay its debts and Taxes when due subject to
good faith disputes over such debts or Taxes, to pay or perform its other
obligations when due, and, to the extent consistent with such business, use all
reasonable efforts consistent with past practices and policies to preserve
intact its present business organization, keep available the services of its
present officers and key employees and preserve its relationships with
customers, suppliers, distributors and others having business dealings with it.
TSI shall promptly notify Eclipsys of any material event or occurrence not in
the ordinary course of business. Except as expressly contemplated by this
Agreement, TSI shall not (and shall not permit any of its Subsidiaries to),
without the written consent of Eclipsys:
(a) Accelerate, amend or change the period of exercisability of
options or restricted stock granted under any employee stock plan of such
party or authorize cash payments in exchange for any options granted under
any of such plans except as required by the terms of such plans or any
related agreements in effect as of the date of this Agreement;
(b) Declare or pay any dividends on or make any other distributions
(whether in cash, stock or property) in respect of any of its capital
stock, or split, combine or reclassify any of its capital stock or issue or
authorize the issuance of any other securities in respect of, in lieu of or
in substitution for shares of its capital stock, or purchase or otherwise
acquire, directly or indirectly, any shares of its capital stock except
from former employees, directors and consultants in accordance with
agreements providing for the repurchase of shares in connection with any
termination of service to such party;
(c) Issue, deliver or sell, or authorize or propose the issuance,
delivery or sale of, any shares of its capital stock or securities
convertible into shares of its capital stock, or subscriptions, rights,
warrants or options to acquire, or other agreements or commitments of any
character obligating it to issue any such shares or other convertible
securities, other than the issuance of shares of TSI Common Stock pursuant
to the exercise of options outstanding on the date of this Agreement or the
TSI Warrants;
(d) Acquire or agree to acquire by merging or consolidating with, or
by purchasing a substantial equity interest in or substantial portion of
the assets of, or by any other manner, any business or any corporation,
partnership or other business organization or division, or otherwise
acquire or agree to acquire any assets (other than inventory and other
items in the ordinary course of business), except for (i) any such
acquisitions involving aggregate consideration (including assumed
indebtedness) of not more than $1,000,000 or (ii) subject to Section 5.04,
the HealthVISION Acquisition;
(e) Sell, lease, license or otherwise dispose of any of its material
properties or assets, except for transactions in the ordinary course of
business;
(f) (i) Increase or agree to increase the compensation payable or to
become payable to its officers or employees, except for increases in salary
or wages of employees (other than officers) in accordance with past
practices, (ii) grant any additional severance or termination pay to, or
enter into any employment or severance agreements with, any employees or
officers, (iii) enter into any collective bargaining agreement (other than
as required by law or extensions to existing agreements in the ordinary
course of business), (iv) establish, adopt, enter into or amend any bonus,
profit sharing, thrift, compensation, stock option, restricted stock,
pension, retirement, deferred compensation, employment, termination,
severance or other plan, trust, fund, policy or arrangement for the benefit
of any directors, officers or employees;
A-21
<PAGE> 239
(g) Amend or propose to amend its charter or bylaws, except as
contemplated by this Agreement;
(h) Incur any indebtedness for borrowed money other than pursuant to
credit agreements in effect as of the date hereof;
(i) Initiate, compromise or settle any material litigation or
arbitration proceeding (other than as a result of a breach of this
Agreement);
(j) Except in the ordinary course of business, modify, amend or
terminate any TSI Material Contract or waive, release or assign any
material rights or claims;
(k) Change in any material respect its accounting methods, principles
or practices, except insofar as may be required by a generally applicable
change in GAAP; or
(l) Take, or agree in writing or otherwise to take, any of the actions
described in paragraphs (a) through (k) above.
SECTION 5.02 Covenants of Eclipsys. During the period from the date of
this Agreement and continuing until the earlier of the termination of this
Agreement or the Effective Time, Eclipsys agrees as to itself and its
Subsidiaries (except to the extent that TSI shall otherwise consent in writing),
to carry on its business in the usual, regular and ordinary course in
substantially the same manner as previously conducted, to pay its debts and
Taxes when due subject to good faith disputes over such debts or Taxes, to pay
or perform its other obligations when due, and, to the extent consistent with
such business, use all reasonable efforts consistent with past practices and
policies to preserve intact its present business organization, keep available
the services of its present officers and key employees and preserve its
relationships with customers, suppliers, distributors and others having business
dealings with it. Eclipsys shall promptly notify TSI of any material event or
occurrence not in the ordinary course of business. Except as expressly
contemplated by this Agreement, Eclipsys shall not (and shall not permit any of
its Subsidiaries to), without the written consent of TSI:
(a) Accelerate, amend or change the period of exercisability of
options or restricted stock granted under any employee stock plan of such
party or authorize cash payments in exchange for any options granted under
any of such plans except as required by the terms of such plans or any
related agreements in effect as of the date of this Agreement;
(b) Declare or pay any dividends on or make any other distributions
(whether in cash, stock or property) in respect of any of its capital
stock, or split, combine or reclassify any of its capital stock or issue or
authorize the issuance of any other securities in respect of, in lieu of or
in substitution for shares of its capital stock, or purchase or otherwise
acquire, directly or indirectly, any shares of its capital stock except
from former employees, directors and consultants in accordance with
agreements providing for the repurchase of shares in connection with any
termination of service to such party;
(c) Issue, deliver or sell, or authorize or propose the issuance,
delivery or sale of, any shares of its capital stock or securities
convertible into shares of its capital stock, or subscriptions, rights,
warrants or options to acquire, or other agreements or commitments of any
character obligating it to issue any such shares or other convertible
securities, other than (i) the grant of options consistent with past
practices to employees, which options represent in the aggregate the right
to acquire no more than 200,000 shares (net of cancellations) of Eclipsys
Common Stock, (ii) the issuance of shares of Eclipsys Common Stock pursuant
to the exercise of options outstanding on the date of this Agreement or the
Eclipsys Warrants or (iii) the issuance of Eclipsys Common Stock in
connection with any Eclipsys Permitted Acquisition (as defined below);
(d) Acquire or agree to acquire by merging or consolidating with, or
by purchasing a substantial equity interest in or substantial portion of
the assets of, or by any other manner, any business or any corporation,
partnership or other business organization or division, or otherwise
acquire or agree to acquire any assets (other than inventory and other
items in the ordinary course of business), except for (i) any Eclipsys
Possible Acquisition or (ii) any other such acquisitions involving
aggregate
A-22
<PAGE> 240
consideration (including assumed indebtedness) of not more than $100,000,000
(Eclipsys Possible Acquisitions and such other acquisitions being collectively
referred to as "Eclipsys Permitted Acquisitions");
(e) Sell, lease, license or otherwise dispose of any of its material
properties or assets, except for transactions in the ordinary course of
business;
(f) (i) Increase or agree to increase the compensation payable or to
become payable to its officers or employees, except for increases in salary
or wages of employees (other than officers) in accordance with past
practices, (ii) grant any additional severance or termination pay to, or
enter into any employment or severance agreements with, any employees or
officers, (iii) enter into any collective bargaining agreement (other than
as required by law or extensions to existing agreements in the ordinary
course of business), (iv) establish, adopt, enter into or amend any bonus,
profit sharing, thrift, compensation, stock option, restricted stock,
pension, retirement, deferred compensation, employment, termination,
severance or other plan, trust, fund, policy or arrangement for the benefit
of any directors, officers or employees;
(g) Amend or propose to amend its charter or bylaws, except as
contemplated by this Agreement;
(h) Take, or agree in writing or otherwise to take, any of the actions
described in paragraphs (a) through (f) above.
SECTION 5.03 Cooperation. Subject to compliance with applicable law, from
the date hereof until the Effective Time, each of Eclipsys and TSI shall confer
on a regular and frequent basis with one or more representatives of the other
party to report on the general status of ongoing operations and shall promptly
provide the other party or its counsel with copies of all filings made by such
party with any Governmental Entity in connection with this Agreement, the Merger
and the transactions contemplated hereby and thereby.
SECTION 5.04 HealthVISION Acquisition. TSI shall use its best efforts to
cause the HealthVISION Acquisition to be closed as promptly as reasonably
practicable following the execution of this Agreement upon terms at least as
favorable to TSI as those set forth in that certain Agreement and Plan of
Reorganization dated October 28, 1998 among HealthVISION, TSI and the other
parties identified therein. TSI shall keep Eclipsys reasonably apprised as to
the status of its progress toward closing the HealthVISION Acquisition.
SECTION 5.05 Voting Agreements. Concurrently with the execution of this
Agreement, and in order to induce Eclipsys and TSI, respectively, to enter into
this Agreement, (i) Eclipsys is entering into Voting Agreements, substantially
in the form attached hereto as Exhibit A-1, with Warburg, Pincus Ventures, L.P.
("Warburg"), Robert Raco, Christine Shapleigh and Donald Cook, and (ii) TSI is
entering into Voting Agreements, substantially in the form attached hereto as
Exhibit A-2, with General Atlantic Partners 28, L.P., General Atlantic Partners
38, L.P., General Atlantic Partners 47, L.P., General Atlantic Partners 48,
L.P., GAP Coinvestment Partners, L.P., Partners HealthCare System, Inc., Harvey
Wilson and Wilfam Ltd.
SECTION 5.06 Eclipsys Permitted Acquisitions. Eclipsys shall notify TSI at
any time that Eclipsys believes it has become reasonably likely that a
definitive agreement will be executed with respect to an Eclipsys Permitted
Acquisition or that an Eclipsys Permitted Acquisition will be completed, and
shall thereafter keep TSI reasonably apprised as to the status of such Eclipsys
Permitted Acquisition.
A-23
<PAGE> 241
ARTICLE VI
ADDITIONAL AGREEMENTS
SECTION 6.01 No Solicitation.
(a) TSI and Eclipsys each shall not, directly or indirectly, through any
officer, director, employee, financial advisor, representative or agent of such
party (i) solicit, initiate or encourage any inquiries or proposals that
constitute, or could reasonably be expected to lead to, a proposal or offer for
a merger, consolidation, business combination, sale of substantial assets, sale
of shares of capital stock (including without limitation by way of a tender
offer) or similar transaction involving such party or any of its Subsidiaries,
other than the transactions contemplated by this Agreement and other than, in
the case of Eclipsys, transactions constituting Eclipsys Permitted Acquisitions
(any of the foregoing inquiries or proposals being referred to in this Agreement
as an "Acquisition Proposal"), (ii) engage in negotiations or discussions
concerning, or provide any non-public information to any person or entity
relating to, any Acquisition Proposal, or (iii) agree to or recommend any
Acquisition Proposal; provided, however, that nothing contained in this
Agreement shall prevent TSI or Eclipsys, or their respective Boards of
Directors, from (A) furnishing non-public information to, or entering into
discussions or negotiations with, any person or entity in connection with an
unsolicited bona fide written Acquisition Proposal by such person or entity or
recommending an unsolicited bona fide written Acquisition Proposal by such
person or entity or recommending an unsolicited bona fide written Acquisition
Proposal to the stockholders of such party, if and only to the extent that (1)
the Board of Directors of such party believes in good faith (after consultation
with its financial advisor) that such Acquisition Proposal is reasonably capable
of being completed on the terms proposed and, after taking into account, among
other relevant factors, the strategic benefits anticipated to be derived from
the Merger and the long-term prospects of TSI and Eclipsys as a combined
company, would, if consummated, result in a transaction more favorable to the
stockholders of such party than the transactions contemplated by this Agreement
(any such more favorable Acquisition Proposal being referred to in this
Agreement as a "Superior Proposal") and the Board of Directors of such party
determines in good faith after consultation with outside legal counsel that such
action is necessary for such Board of Directors to comply with its fiduciary
duties to stockholders under applicable law and (2) prior to furnishing such
non-public information to, or entering into discussions or negotiations with,
such person or entity, such Board of Directors receives from such person or
entity an executed confidentiality agreement with terms no less favorable to
such party than those contained in that certain letter agreement dated October
2, 1998 between TSI and Eclipsys regarding the confidentiality of certain
materials (the "Confidentiality Agreement"); or (B) complying with Rule 14e-2
promulgated under the Exchange Act with regard to an Acquisition Proposal.
(b) TSI and Eclipsys shall each notify the other party immediately after
receipt by TSI or Eclipsys (or their advisors) of any Acquisition Proposal or
any request for non-public information in connection with an Acquisition
Proposal or for access to the properties, books or records of such party by any
person or entity that informs such party that it is considering making, or has
made, an Acquisition Proposal. Such notice shall be made orally and in writing
and shall indicate in reasonable detail the identity of the offeror and the
terms and conditions of such proposal, inquiry or contact. Such party shall
continue to keep the other party hereto informed, on a current basis, of the
status of any such discussions or negotiations and the terms being discussed or
negotiated.
SECTION 6.02 Proxy Statement/Prospectus; Registration Statement.
(a) As promptly as practical after the execution of this Agreement,
Eclipsys and TSI shall prepare and file with the SEC the Joint Proxy Statement,
and Eclipsys shall prepare and file with the SEC the Registration Statement, in
which the Joint Proxy Statement will be included as a prospectus, provided that
Eclipsys may delay the filing of the Registration Statement until approval of
the Joint Proxy Statement by the SEC. Eclipsys and TSI shall use all reasonable
efforts to cause the Registration Statement to become effective as soon after
such filing as practical. The Joint Proxy Statement, and any amendment or
supplement thereto, shall include the recommendation of the Board of Directors
of TSI in favor of this Agreement and the Merger and the recommendation of the
Board of Directors of Eclipsys in favor of the
A-24
<PAGE> 242
issuance of shares of Eclipsys Voting Common Stock pursuant to the Merger;
provided that the Board of Directors of either party may withdraw such
recommendation and refrain from soliciting proxies if such Board of Directors
believes in good faith after consultation with outside legal counsel that the
withdrawal of such recommendation is necessary for such Board of Directors to
comply with its fiduciary duties under applicable law.
(b) Eclipsys and TSI shall make all necessary filings with respect to the
Merger under the Securities Act, the Exchange Act, applicable state blue sky
laws and the rules and regulations thereunder.
SECTION 6.03 Nasdaq Quotation. Each of Eclipsys and TSI agrees to continue
the quotation of Eclipsys Voting Common Stock and TSI Voting Common Stock, as
the case may be, on the Nasdaq National Market during the term of this
Agreement.
SECTION 6.04 Access to Information. Upon reasonable notice, TSI and
Eclipsys shall each (and shall cause each of their respective Subsidiaries to)
afford to the officers, employees, accountants, counsel and other
representatives of the other, access, during normal business hours during the
period prior to the Effective Time, to all its properties, books, contracts,
commitments and records and, during such period, each of TSI and Eclipsys shall
(and shall cause each of their respective Subsidiaries to) furnish promptly to
the other (a) a copy of each report, schedule, registration statement and other
document filed or received by it during such period pursuant to the requirements
of federal securities laws and (b) all other information concerning its
business, properties and personnel as such other party may reasonably request.
Unless otherwise required by law, the parties will hold any such information
which is non-public in confidence in accordance with the Confidentiality
Agreement. No information or knowledge obtained in any investigation pursuant to
this Section 6.04 shall affect or be deemed to modify any representation or
warranty contained in this Agreement or the conditions to the obligations of the
parties to consummate the Merger.
SECTION 6.05 Stockholders' Meetings. TSI and Eclipsys shall each call a
meeting of its respective stockholders to be held as promptly as practicable for
the purpose of voting, in the case of TSI, upon this Agreement and the Merger
and, in the case of Eclipsys, upon (i) the issuance of shares of Eclipsys Voting
Common Stock pursuant to the Merger, and (ii) the election of directors of
Eclipsys in accordance with Section 1.04 (collectively, the "Eclipsys Voting
Proposals"). Subject to Sections 6.01 and 6.02, TSI and Eclipsys will, through
their respective Boards of Directors, recommend to their respective stockholders
approval of such matters and will coordinate and cooperate with respect to the
timing of such meetings and shall use their best efforts to hold such meetings
on the same day and as soon as practicable after the date hereof. Subject to
Section 6.02, each party shall use all reasonable efforts to solicit from
stockholders of such party proxies in favor of such matters.
SECTION 6.06 Legal Conditions to Merger.
(a) TSI and Eclipsys shall each use their best efforts to (i) take, or
cause to be taken, all appropriate action, and do, or cause to be done, all
things necessary and proper under applicable law to consummate and make
effective the transactions contemplated hereby as promptly as practicable, (ii)
obtain from any Governmental Entity any consents, licenses, permits, waivers,
approvals, authorizations or orders required to be obtained or made by TSI or
Eclipsys or any of their Subsidiaries in connection with the authorization,
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby, including, without limitation, the Merger, and
(iii) as promptly as practicable, make all necessary filings, and thereafter
make any other required submissions, with respect to this Agreement and the
Merger required under (A) the Securities Act and the Exchange Act, and any other
applicable federal or state securities laws, (B) the HSR Act and any related
governmental request thereunder, and (C) any other applicable law. TSI and
Eclipsys shall cooperate with each other in connection with the making of all
such filings, including providing copies of all such documents to the non-filing
party and its advisors prior to filing and, if requested, to accept all
reasonable additions, deletions or changes suggested in connection therewith.
TSI and Eclipsys shall use their best efforts to furnish to each other all
information required for any application or other filing to be made pursuant to
the rules and regulations of any applicable law (including all information
required to be included in the Joint Proxy Statement and the
A-25
<PAGE> 243
Registration Statement) in connection with the transactions contemplated by this
Agreement. Without limiting the generality of the foregoing, TSI shall use its
best efforts to cause HealthVISION to prepare and deliver for inclusion in the
Joint Proxy Statement and the Registration Statement any financial statements of
HealthVISION and its subsidiaries required by the rules of the SEC to be
included therein.
(b) Eclipsys and TSI agree, and shall cause each of their respective
Subsidiaries, to cooperate and to use their respective best efforts to obtain
any government clearances or approvals required for the Closing under the HSR
Act, the Sherman Act, as amended, the Clayton Act, as amended, the Federal Trade
Commission Act, as amended, and any other Federal, state or foreign law,
regulation or decree designed to prohibit, restrict or regulate actions for the
purpose or effect of monopolization or restraint of trade (collectively,
"Antitrust Laws"), to respond to any government requests for information under
any Antitrust Law, and to contest and resist any action, including any
legislative, administrative or judicial action, and to have vacated, lifted,
reversed or overturned any decree, judgment, injunction or other order (whether
temporary, preliminary or permanent) that restricts, prevents or prohibits the
consummation of the Merger or any other transactions contemplated by this
Agreement under any Antitrust Law. The parties hereto will consult and cooperate
with one another, and consider in good faith the views of one another, in
connection with any analyses, appearances, presentations, memoranda, briefs,
arguments, opinions and proposals made or submitted by or on behalf of any party
hereto in connection with proceedings under or relating to any Antitrust Law. In
the event of a challenge to the transactions contemplated by this Agreement
pursuant to the HSR Act, TSI and Eclipsys shall use their best efforts to defeat
such challenge, including by institution and defense of litigation, or to settle
such challenge on terms that permit the consummation of the Merger; provided,
however, that nothing herein shall require either party to agree to divest or
hold separate any portion of its business or otherwise take action that could
reasonably be expected to have a TSI Material Adverse Effect or an Eclipsys
Material Adverse Effect. Without limiting the foregoing, in the event that
either the Federal Trade Commission or the Antitrust Division of the United
States Department of Justice issues a Request for Additional Information or
Documentary Material under 17 C.F.R. sec. 803.20 (a "Second Request"), then TSI
and Eclipsys each agree to use their best efforts to respond fully to such
Second Request within 20 days after its receipt and shall promptly make any
further filings or information submissions and make any employee available for
interview or testimony pursuant to the foregoing (both before and after any
Second Request) that may be necessary, proper or advisable. In case at any time
after the Effective Time any further action is necessary or desirable to carry
out the purposes of this Agreement or to vest the Surviving Corporation with
full title to all properties, assets, rights, approvals, immunities and
franchises of either of the Constituent Corporations, the proper officers and
directors of each party to this Agreement shall take all such necessary or
desirable action.
(c) Each of TSI and Eclipsys shall give (and shall cause their respective
Subsidiaries to give) any notices to third parties, and use, and cause their
respective Subsidiaries to use, their best efforts to obtain any third-party
consents related to or required in connection with the Merger that are (i)
necessary to consummate the transactions contemplated hereby, (ii) disclosed or
required to be disclosed in the TSI Disclosure Schedule or the Eclipsys
Disclosure Schedule, as the case may be, or (iii) required to prevent a TSI
Material Adverse Effect or an Eclipsys Material Adverse Effect from occurring
prior to or after the Effective Time.
SECTION 6.07 Public Disclosure. Eclipsys and TSI shall consult with each
other before issuing any press release or otherwise making any public statement
with respect to the Merger or this Agreement and shall not issue any such press
release or make any such public statement prior to such consultation, except as
may be required by law or any listing agreement with a national securities
exchange or the Nasdaq National Market, and in any event in accordance with the
terms of the Confidentiality Agreement.
SECTION 6.08 Tax-Free Reorganization. Eclipsys and TSI shall each use its
best efforts to cause the Merger to be treated as a reorganization within the
meaning of Section 368(a) of the Code.
SECTION 6.09 Pooling Accounting. From and after the date hereof and until
the Effective Time, neither TSI nor Eclipsys, nor any of their respective
Subsidiaries shall knowingly take any action, or
A-26
<PAGE> 244
knowingly fail to take any action, that is reasonably likely to jeopardize the
treatment of the Merger as a pooling of interests for accounting purposes.
SECTION 6.10 Affiliate Agreements. Upon the execution of this Agreement,
Eclipsys and TSI will provide each other with a list of those persons who are,
in Eclipsys' or TSI's respective reasonable judgment, "affiliates" of Eclipsys
or TSI, respectively, within the meaning of Rule 145 promulgated under the
Securities Act ("Rule 145") (each such person who is an "affiliate" of Eclipsys
or TSI within the meaning of Rule 145 is referred to as an "Affiliate").
Eclipsys and TSI shall provide each other with such information and documents as
TSI or Eclipsys shall reasonably request for purposes of reviewing such list and
shall notify the other party in writing regarding any change in the identity of
its Affiliates prior to the Closing Date. TSI and Eclipsys shall each use its
best efforts to deliver or cause to be delivered to each other by November 20,
1998 (and in any case prior to the Effective Time) from each of its Affiliates,
an executed Affiliate Agreement, in form attached hereto as Exhibit B-1, in the
case of Affiliates of TSI, and in the form attached hereto as Exhibit B-2, in
the case of Affiliates of Eclipsys (each, an "Affiliate Agreement"). Eclipsys
shall be entitled to place appropriate legends on the certificates evidencing
any Eclipsys Voting Common Stock to be received by such Affiliates of TSI
pursuant to the terms of this Agreement, and to issue appropriate stop transfer
instructions to the transfer agent for the Eclipsys Voting Common Stock,
consistent with the terms of the Affiliate Agreements (provided that such
legends or stop transfer instructions shall be removed, two years after the
Effective Date, upon the request of any stockholder that is not then an
Affiliate of Eclipsys).
SECTION 6.11 Nasdaq Quotation. Eclipsys shall use its best efforts to
cause the shares of Eclipsys Voting Common Stock to be issued in the Merger to
be approved for quotation on the Nasdaq National Market, subject to official
notice of issuance, prior to the Closing Date.
SECTION 6.12 Stock Plans and Warrants.
(a) At the Effective Time, each outstanding option to purchase shares of
TSI Voting Common Stock (a "TSI Stock Option") under the TSI Stock Plans,
whether vested or unvested, shall be deemed to constitute an option to acquire,
but otherwise on the same terms and conditions as were applicable under such TSI
Stock Option, the same number of shares of Eclipsys Voting Common Stock as the
holder of such TSI Stock Option would have been entitled to receive pursuant to
the Merger had such holder exercised such option in full immediately prior to
the Effective Time (rounded downward to the nearest whole number), at a price
per share (rounded upward to the nearest whole cent) equal to (y) the aggregate
exercise price for the shares of TSI Voting Common Stock purchasable pursuant to
such TSI Stock Option immediately prior to the Effective Time divided by (z) the
number of full shares of Eclipsys Voting Common Stock deemed purchasable
pursuant to such TSI Voting Stock Option in accordance with the foregoing. The
adjustment pursuant to this Section 6.12(a) is intended to comply with Section
424(a) of the Code with respect to any options which are incentive stock options
and shall be construed consistent with Section 424(a) of the Code.
(b) At the Effective Time, each outstanding TSI Warrant shall be deemed to
constitute a warrant to acquire, on the same terms and conditions as were
applicable under such TSI Warrant, the number of shares of Eclipsys Voting
Common Stock at the price per share as shall be determined under the existing
terms of the respective TSI Warrant.
(c) As soon as practicable after the Effective Time, Eclipsys shall deliver
to the participants in the TSI Stock Plans appropriate notice setting forth such
participants' rights pursuant thereto and the grants pursuant to the TSI Stock
Plans shall continue in effect on the same terms and conditions (subject to the
adjustments required by this Section 6.12 after giving effect to the Merger).
(d) Eclipsys shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of Eclipsys Voting Common Stock for
delivery under the TSI Stock Plans assumed in accordance with this Section 6.12
and the TSI Warrants. As soon as practicable after the Effective Time, Eclipsys
shall file a registration statement on Form S-8 (or any successor or other
appropriate forms), or another appropriate form with respect to the shares of
Eclipsys Voting Common Stock subject to such options, and
A-27
<PAGE> 245
shall use its best efforts to maintain the effectiveness of such registration
statement or registration statements (and maintain the current status of the
prospectus or prospectuses contained therein) for so long as such options remain
outstanding.
(e) The Board of Directors of TSI shall, prior to or as of the Effective
Time, take any necessary actions, pursuant to and in accordance with the terms
of the TSI Stock Plans and the instruments evidencing the TSI Stock Options, to
provide for the conversion of the TSI Stock Options into options to acquire
Eclipsys Voting Common Stock in accordance with this Section 6.12.
(f) TSI shall terminate its Employee Stock Purchase Plan (the "Stock
Purchase Plan") as of or prior to the Effective Time; provided, however, that,
in accordance with Section 17 of the Stock Purchase Plan, said termination shall
not affect the rights of participants in the Stock Purchase Plan to purchase
shares pursuant to the current offering under the Stock Purchase Plan which
commenced on October 1, 1998 and which terminates on March 31, 1999. Eclipsys
and TSI acknowledge and agree that, assuming that the Effective Time of the
Merger occurs prior to April 1, 1999, participants in the current offering under
the Stock Purchase Plan shall have the right to purchase a number of shares of
Eclipsys Voting Common Stock determined by applying the Exchange Ratio to the
number of shares of TSI Voting Common Stock that such participants would have
been entitled to purchase had the Merger not been completed at such time and
that such purchase shall occur at an exercise price equal to 85% of the lower of
(x) the market value (determined in accordance with the Stock Purchase Plan) of
TSI Common Stock as of October 1, 1998 or (y) the product of (I) the Exchange
Ratio and (II) the market value (determined in accordance with the Stock
Purchase Plan) of Eclipsys Voting Common Stock as of March 31, 1999, all subject
to and in accordance with the terms of the Stock Purchase Plan.
SECTION 6.13 Brokers or Finders. Each of Eclipsys and TSI represents, as
to itself, its Subsidiaries and its Affiliates, that no agent, broker,
investment banker, financial advisor or other firm or person is or will be
entitled to any broker's or finder's fee or any other commission or similar fee
in connection with any of the transactions contemplated by this Agreement except
Morgan Stanley & Co. Incorporated, whose fees and expenses will be paid by
Eclipsys in accordance with Eclipsys' agreement with such firm (a copy of which
has been delivered by Eclipsys to TSI prior to the date of this Agreement), and
BT Alex. Brown Incorporated whose fees and expenses will be paid by TSI in
accordance with TSI's agreement with such firm (a copy of which has been
delivered by TSI to Eclipsys prior to the date of this Agreement). Each of
Eclipsys and TSI agrees to indemnify and hold the other harmless from and
against any and all claims, liabilities or obligations with respect to any such
fees, commissions or expenses asserted by any person on the basis of any act or
statement alleged to have been made by such party or any of its Affiliates.
SECTION 6.14 Indemnification.
(a) From and after the Effective Time, Eclipsys agrees that it will, and
will cause the Surviving Corporation to, indemnify and hold harmless each
present and former director and officer of TSI (the "Indemnified Parties"),
against any costs or expenses (including attorneys' fees), judgments, fines,
losses, claims, damages, liabilities or amounts paid in settlement
(collectively, "Costs") incurred in connection with any claim, action, suit,
proceeding or investigation, whether civil, criminal, administrative or
investigative, arising out of or pertaining to matters existing or occurring at
or prior to the Effective Time, whether asserted or claimed prior to, at or
after the Effective Time, to the fullest extent that TSI would have been
permitted under Massachusetts law and its articles of organization or bylaws in
effect on the date hereof to indemnify such Indemnified Party (and Eclipsys and
the Surviving Corporation shall also advance expenses as incurred to the fullest
extent permitted under applicable law, provided the Indemnified Party to whom
expenses are advanced provides an undertaking to repay such advances if it is
ultimately determined that such Indemnified Party is not entitled to
indemnification).
(b) For a period of three (3) years after the Effective Time, Eclipsys
shall cause the Surviving Corporation to maintain (to the extent available in
the market) in effect a directors' and officers' liability insurance policy
covering those persons who are currently covered by TSI's directors' and
officers' liability insurance policy (a copy of which has been heretofore
delivered to Eclipsys) with coverage in amount and
A-28
<PAGE> 246
scope at least as favorable as TSI's existing coverage; provided, that in no
event shall Eclipsys or the Surviving Corporation be required to expend in
excess of 200% of the annual premium currently paid by TSI for such coverage
(currently $203,500), except to the extent such excess is attributable to
Eclipsys' claims history or price increases in the market for such insurance
that is unrelated to TSI specifically; and if such premium would at any time
exceed such limitation, the Surviving Corporation shall maintain insurance
policies that provide the maximum and best coverage available at an annual
premium equal to such limitation; and provided further that, if any legal action
had been pending at any time subsequent to the second anniversary of the
Effective Time against any person currently covered by TSI's directors' and
officers' liability insurance policy that would be covered in whole or in part
by such policy, the Surviving Corporation shall thereafter continue to maintain
such policy in effect (subject to the foregoing proviso) until the fifth
anniversary of the Effective Time.
(c) The provisions of this Section 6.14 are intended to be in addition to
the rights otherwise available to the current officers and directors of TSI by
law, charter, statute, bylaw or agreement, and shall operate for the benefit of,
and shall be enforceable by, each of the Indemnified Parties, their heirs and
their representatives.
SECTION 6.15 Letter of Eclipsys' Accountants. Eclipsys shall use
reasonable efforts to cause to be delivered to TSI and Eclipsys a letter of
PricewaterhouseCoopers LLP, Eclipsys' independent auditors, dated a date within
two business days before the date on which the Registration Statement shall
become effective and addressed to TSI, in form reasonably satisfactory to TSI
and customary in scope and substance for letters delivered by independent public
accountants in connection with registration statements similar to the
Registration Statement.
SECTION 6.16 Letter of TSI's Accountants. TSI shall use reasonable efforts
to cause to be delivered to Eclipsys and TSI letters of PricewaterhouseCoopers
LLP, TSI's independent auditors, and Ernst & Young LLP, HealthVISION's auditors,
each dated a date within two business days before the date on which the
Registration Statement shall become effective and addressed to Eclipsys, in form
reasonably satisfactory to Eclipsys and customary in scope and substance for
letters delivered by independent public accountants in connection with
registration statements similar to the Registration Statement.
SECTION 6.17 Warburg Registration Rights Agreement. Eclipsys shall use its
reasonable efforts to amend its existing Second Amended and Restated
Registration Rights Agreement, dated January 1998, among Eclipsys and certain of
its stockholders (the "Registration Rights Agreement") (i) to add Warburg as a
"Designated Holder" (as defined in the Registration Rights Agreement) for all
purposes of the Registration Rights Agreement and (ii) to provide Warburg with
one demand registration pursuant to Section 3(a) of the Registration Rights
Agreement, which demand may not be exercised prior to January 1, 2000. In the
event Eclipsys is unable for any reason to amend the Registration Rights
Agreement as provided in the immediately preceding sentence, Eclipsys shall
enter into a registration rights agreement with Warburg, containing the
foregoing terms and otherwise substantially identical to the Registration Rights
Agreement, except that the only Designated Holder therein shall be Warburg (such
agreement, either as the amendment to the Registration Rights Agreement or the
separate registration rights agreement, the "Warburg Registration Rights
Agreement").
ARTICLE VII
CONDITIONS TO MERGER
SECTION 7.01 Conditions to Each Party's Obligation To Effect the
Merger. The respective obligations of each party to this Agreement to effect
the Merger shall be subject to the satisfaction prior to the Closing Date of the
following conditions:
(a) Stockholder Approval. This Agreement and the Merger shall have
been approved and adopted by the affirmative vote of the holders of
two-thirds of the outstanding shares of TSI Voting Common Stock and the
Eclipsys Voting Proposals shall have been approved by the affirmative vote
of
A-29
<PAGE> 247
the holders of a majority of the shares of Eclipsys Voting Common Stock present
or represented at the Eclipsys Stockholders' Meeting at which a quorum is
present.
(b) HSR Act. The waiting period applicable to the consummation of the
Merger under the HSR Act shall have expired or been terminated.
(c) Approvals. Other than the filing provided for by Section 1.01,
all authorizations, consents, orders or approvals of, or declarations or
filings with, or expirations of waiting periods imposed by, any
Governmental Entity the failure of which to file, obtain or occur is
reasonably likely to have an Eclipsys Material Adverse Effect or a TSI
Material Adverse Effect shall have been filed, been obtained or occurred.
(d) Registration Statement. The Registration Statement shall have
become effective under the Securities Act and shall not be the subject of
any stop order or proceedings seeking a stop order.
(e) No Injunctions. No Governmental Entity or federal, state or
foreign court of competent jurisdiction shall have enacted, issued,
promulgated, enforced or entered any order, executive order, stay, decree,
judgment or injunction (each an "Order") or statute, rule, regulation which
is in effect and which has the effect of making the Merger illegal or
otherwise prohibiting consummation of the Merger.
(f) Pooling Letters. Eclipsys and TSI shall each have received a
letter from PricewaterhouseCoopers LLP addressed to Eclipsys and TSI,
respectively, regarding its concurrence with management's conclusions as to
the appropriateness of pooling-of-interests accounting under Accounting
Principles Board Opinion No. 16 for the Merger, as contemplated to be
effected as of the date of the letter, it being agreed that Eclipsys and
TSI shall each provide reasonable cooperation to PricewaterhouseCoopers
LLP, to enable them to issue such a letter.
(g) Nasdaq. The shares of Eclipsys Voting Common Stock to be issued
in the Merger shall have been approved for quotation on the Nasdaq National
Market.
SECTION 7.02 Additional Conditions to Obligations of Eclipsys and Sub. The
obligations of Eclipsys and Sub to effect the Merger are subject to the
satisfaction of each of the following conditions, any of which may be waived in
writing exclusively by Eclipsys:
(a) Representations and Warranties. The representations and
warranties of TSI set forth in this Agreement shall be true and correct as
of the date of this Agreement and (except to the extent such
representations and warranties speak as of an earlier date) as of the
Closing Date as though made on and as of the Closing Date, except (i) for
changes contemplated by this Agreement and (ii) in the case of
representations and warranties that are not qualified as to materiality,
where the failures to be true and correct, individually or in the
aggregate, have not had and are not reasonably likely to have a TSI
Material Adverse Effect or a material adverse effect upon the consummation
of the transactions contemplated hereby; and Eclipsys shall have received a
certificate signed on behalf of TSI by the chief executive officer and the
chief financial officer of TSI to such effect.
(b) Performance of Obligations of TSI. TSI shall have performed in
all material respects all obligations required to be performed by it under
this Agreement at or prior to the Closing Date; and Eclipsys shall have
received a certificate signed on behalf of TSI by the chief executive
officer and the chief financial officer of TSI to such effect.
(c) Tax Opinion. Eclipsys shall have received a written opinion from
Hale and Dorr LLP, counsel to Eclipsys, to the effect that the Merger will
be treated for Federal income tax purposes as a tax-free reorganization
within the meaning of Section 368(a) of the Code.
(d) Dissenting Shares. The total number of Dissenting Shares shall
not be greater than 5% of the total number of shares of TSI Common Stock
outstanding immediately prior to the Effective Date.
A-30
<PAGE> 248
SECTION 7.03 Additional Conditions to Obligations of TSI. The obligation
of TSI to effect the Merger is subject to the satisfaction of each of the
following conditions, any of which may be waived in writing exclusively by TSI:
(a) Representations and Warranties. The representations and
warranties of Eclipsys and Sub set forth in this Agreement shall be true
and correct as of the date of this Agreement and (except to the extent such
representations speak as of an earlier date) as of the Closing Date as
though made on and as of the Closing Date, except (i) for changes
contemplated by this Agreement and (ii) in the case of representations and
warranties that are not qualified as to materiality, where the failures to
be true and correct, individually or in the aggregate, have not had and are
not reasonably likely to have an Eclipsys Material Adverse Effect or a
material adverse effect upon the consummation of the transactions
contemplated hereby; and TSI shall have received a certificate signed on
behalf of Eclipsys by the chief executive officer and the chief financial
officer of Eclipsys to such effect.
(b) Performance of Obligations of Eclipsys and Sub. Eclipsys and Sub
shall have performed in all material respects all obligations required to
be performed by them under this Agreement at or prior to the Closing Date,
and TSI shall have received a certificate signed on behalf of Eclipsys by
the chief executive officer and the chief financial officer of Eclipsys to
such effect.
(c) Tax Opinion. TSI shall have received the opinion of Foley, Hoag &
Eliot LLP, counsel to TSI, to the effect that the Merger will be treated
for Federal income tax purposes as a tax-free reorganization within the
meaning of Section 368(a) of the Code.
(d) Warburg Registration Rights Agreement. Eclipsys shall have
executed and delivered the Warburg Registration Rights Agreement.
ARTICLE VIII
TERMINATION AND AMENDMENT
SECTION 8.01 Termination. This Agreement may be terminated at any time
prior to the Effective Time (with respect to Sections 8.01(b) through 8.01(g),
by written notice by the terminating party to the other party), whether before
or after approval of the matters presented in connection with the Merger by the
stockholders of TSI or Eclipsys:
(a) by mutual written consent of Eclipsys and TSI; or
(b) by either Eclipsys or TSI if the Merger shall not have been
consummated by April 30, 1999 (the "Outside Date") (provided that the right
to terminate this Agreement under this Section 8.01(b) shall not be
available to any party whose failure to fulfill any obligation under this
Agreement has been the cause of or resulted in the failure of the Merger to
occur on or before such date); or
(c) by either Eclipsys or TSI if a court of competent jurisdiction or
other Governmental Entity shall have issued a nonappealable final order,
decree or ruling or taken any other nonappealable final action, in each
case having the effect of permanently restraining, enjoining or otherwise
prohibiting the Merger; or
(d) by Eclipsys, if, at the TSI Stockholders' Meeting (including any
adjournment or postponement), the requisite vote of the stockholders of TSI
in favor of this Agreement and the Merger shall not have been obtained; or
by TSI if, at the Eclipsys Stockholders' Meeting (including any adjournment
or postponement), the requisite vote of the stockholders of Eclipsys in
favor of the Eclipsys Voting Proposals shall not have been obtained; or
(e) by Eclipsys, if (i) the Board of Directors of TSI shall have
withdrawn or modified in a manner adverse to Eclipsys its recommendation of
this Agreement or the Merger; (ii) the Board of Directors of TSI shall have
recommended to the stockholders of TSI an Alternative Transaction (as
defined in Section 8.03(h)); (iii) a tender offer or exchange offer for 15%
or more of the outstanding
A-31
<PAGE> 249
shares of TSI Voting Common Stock is commenced (other than by Eclipsys or an
Affiliate of Eclipsys) and the Board of Directors of TSI recommends that the
stockholders of TSI tender their shares in such tender or exchange offer; or
(iv) for any reason (other than by reason of the Joint Proxy Statement not
having been cleared by the SEC) TSI fails to call and hold the TSI Stockholders'
Meeting by the Outside Date (provided that Eclipsys' right to terminate this
Agreement under such clause (iv) shall not be available if at such time TSI
would be entitled to terminate this Agreement under Section 8.01(h)); or
(f) by TSI, if (i) the Board of Directors of Eclipsys shall have
withdrawn or modified in a manner adverse to TSI its recommendation of this
Agreement, the Merger or the Eclipsys Voting Proposals; (ii) the Board of
Directors of Eclipsys shall have recommended to the stockholders of
Eclipsys an Alternative Transaction; (iii) a tender offer or exchange offer
for 15% or more of the outstanding shares of Eclipsys Voting Common Stock
is commenced (other than by TSI or an Affiliate of TSI) and the Board of
Directors of Eclipsys recommends that the stockholders of Eclipsys tender
their shares in such tender offer or exchange offer; or (iv) for any reason
(other than by reason of the Joint Proxy Statement not having been cleared
by the SEC) Eclipsys fails to call and hold the Eclipsys Stockholders'
Meeting by the Outside Date (provided that TSI's right to terminate this
Agreement under such clause (iv) shall not be available if at such time
Eclipsys would be entitled to terminate this Agreement under Section
8.01(h)); or
(g) by TSI, if the Board of Directors of TSI accepts or approves a
Superior Proposal, or recommends a Superior Proposal to the stockholders of
TSI; or
(h) by Eclipsys or TSI, if there has been a breach of any
representation, warranty, covenant or agreement on the part of the other
party set forth in this Agreement, any of which breaches (i) causes the
conditions set forth in Section 7.02(a) or (b) (in the case of termination
by Eclipsys) or 7.03(a), (b) or (d) (in the case of termination by TSI) not
to be satisfied, and (ii) shall not have been cured within 20 business days
following receipt by the breaching party of written notice of such breach
from the other party.
SECTION 8.02 Effect of Termination. In the event of termination of this
Agreement as provided in Section 8.01, this Agreement shall immediately become
void and there shall be no liability or obligation on the part of Eclipsys, TSI,
Sub or their respective officers, directors, stockholders or Affiliates, except
as set forth in Section 8.03; provided, that no such termination shall limit or
otherwise relieve the liability of any party for any breach of this Agreement
(except to the extent that liability may be limited by Section 8.03(c) or
Section 8.03(e) below); and provided further, that the provisions of Section
8.03 of this Agreement and the Confidentiality Agreement shall remain in full
force and effect and survive any termination of this Agreement.
SECTION 8.03 Fees and Expenses.
(a) Except as set forth in this Section 8.03, all fees and expenses
incurred in connection with this Agreement and the transactions contemplated
hereby shall be paid by the party incurring such expenses, whether or not the
Merger is consummated; provided, however, that TSI and Eclipsys shall share
equally all fees and expenses, other than attorneys' fees, incurred in relation
to the printing and filing of the Joint Proxy Statement (including any related
preliminary materials) and the Registration Statement (including financial
statements and exhibits) and any amendments or supplements.
(b) TSI shall pay Eclipsys up to $2,000,000 as reimbursement for expenses
of Eclipsys actually incurred relating to the transactions contemplated by this
Agreement prior to termination (including, but not limited to, fees and expenses
of Eclipsys' counsel, accountants and financial advisors, but excluding any
discretionary fees paid to such financial advisors), upon the termination of
this Agreement by Eclipsys pursuant to Section 8.01(d) as a result of the
failure to receive the requisite vote for approval of this Agreement and the
Merger by the stockholders of TSI at the TSI Stockholders' Meeting, Section
8.01(e), Section 8.01(g) or Section 8.01(h) as a result of a breach by TSI of
any of the covenants set forth in any
A-32
<PAGE> 250
of Sections 5.01, 5.04, 6.01, 6.02, 6.03, 6.04, 6.05, 6.06, 6.07, 6.08, 6.09,
6.10, 6.16 or 6.18 of this Agreement (collectively, the "TSI Material
Covenants").
(c) TSI shall pay Eclipsys a termination fee of $9,100,000 upon the
earliest to occur of the following events (each an "Eclipsys Termination Fee
Event"):
(i) the termination of this Agreement by Eclipsys pursuant to Section
8.01(e); or
(ii) the termination of this Agreement by Eclipsys pursuant to Section
8.01(h) after a breach by TSI of any of the TSI Material Covenants; or
(iii) consummation of an Alternative Transaction with respect to TSI
within twelve (12) months following the failure to receive the requisite
vote for approval of this Agreement and the Merger by the stockholders of
TSI at the TSI Stockholders' Meeting if, at the time of such failure, any
Alternative Transaction relating to TSI had been announced and had not been
absolutely and unconditionally withdrawn and abandoned; or
(iv) the termination of this Agreement by TSI pursuant to Section
8.01(h).
Notwithstanding the foregoing, any amount payable pursuant to this Section
8.03(c) shall be reduced, on a dollar-for-dollar basis, by any amount
theretofore paid to Eclipsys pursuant to Section 8.03(b). TSI agrees that it
will not structure any transaction or agreement for the purpose of avoiding
payment of the termination fee required by this Section 8.03(c). TSI further
acknowledges that the agreements contained in this Section 8.03(c) are an
integral part of the transactions contemplated by this Agreement, and that,
without these agreements, Eclipsys would not enter into this Agreement;
accordingly, if TSI fails to promptly pay the amount due pursuant to this
Section 8.03(c), and, in order to obtain such payment, Eclipsys commences a suit
which results in a judgment against TSI for the fee set forth in this Section
8.03(c), TSI shall pay to Eclipsys its costs and expenses (including fees and
disbursements of counsel) in connection with such suit, together with interest
on the amount of the termination fee at the prime rate of Citibank, N.A. on the
date such payment was required to be made. Eclipsys and TSI further acknowledge
and agree that it may be difficult and impractical to measure in money the
damages which will accrue by reason of the occurrence of an Eclipsys Termination
Fee Event. Therefore, Eclipsys and TSI agree that payment of the termination fee
and any other fees, costs or expenses due under this Section 8.03(c) shall
constitute liquidated damages and not a penalty and shall further constitute the
sole and exclusive remedy of Eclipsys for any losses, damages, claims, costs or
expenses arising from the occurrence of any Eclipsys Termination Fee Event.
(d) Eclipsys shall pay TSI up to $2,000,000 as reimbursement for expenses
of TSI actually incurred relating to the transactions contemplated by this
Agreement prior to termination (including, but not limited to, fees and expenses
of TSI's counsel, accountants and financial advisors, but excluding any
discretionary fees paid to such financial advisors), upon the termination of
this Agreement by TSI pursuant to Section 8.01(d) as a result of the failure to
receive the requisite vote for approval of the Eclipsys Voting Proposals by the
stockholders of Eclipsys at the Eclipsys Stockholders' Meeting, Section 8.01(f)
or Section 8.01(h) as a result of a breach by Eclipsys of any of the covenants
set forth in Sections 5.02, 6.01, 6.03, 6.04, 6.05, 6.06, 6.07, 6.08, 6.09,
6.10, 6.11, 6.12, 6.15, 6.17 or 6.18 of this Agreement (collectively, the
"Eclipsys Material Covenants").
(e) Eclipsys shall pay TSI a termination fee of $9,100,000 upon the
earliest to occur of the following events (each a "TSI Termination Fee Event"):
(i) the termination of this Agreement by TSI pursuant to Section
8.01(f), or
(ii) the termination of this Agreement by TSI pursuant to Section
8.01(g) after a breach by Eclipsys of any of the Eclipsys Material
Covenants; or
(iii) consummation of an Alternative Transaction with respect to
Eclipsys within twelve (12) months following the failure to receive the
requisite vote for approval of the Eclipsys Voting Proposals by the
stockholders of Eclipsys at the Eclipsys Stockholders' Meeting if, at the
time of such
A-33
<PAGE> 251
failure, any Alternative Transaction relating to Eclipsys had been
announced and had not been absolutely and unconditionally withdrawn and
abandoned.
Notwithstanding the foregoing, any amount payable pursuant to this Section
8.03(e) shall be reduced, on a dollar-for-dollar basis, by any amount
theretofore paid to TSI pursuant to Section 8.03(d). Eclipsys agrees that it
will not structure any transaction or agreement for the purpose of avoiding
payment of the termination fee required by this Section 8.03(e). Eclipsys
further acknowledges that the agreements contained in this Section 8.03(e) are
an integral part of the transactions contemplated by this Agreement, and that,
without these agreements, TSI would not enter into this Agreement; accordingly,
if Eclipsys fails to promptly pay the amount due pursuant to this Section
8.03(e), and, in order to obtain such payment, TSI commences a suit which
results in a judgment against Eclipsys for the fee set forth in this Section
8.03(e), Eclipsys shall pay to TSI its costs and expenses (including fees and
disbursements of counsel) in connection with such suit, together with interest
on the amount of the termination fee at the prime rate of Citibank, N.A. on the
date such payment was required to be made. Eclipsys and TSI further acknowledge
and agree that it may be difficult and impractical to measure in money the
damages which will accrue by reason of the occurrence of a TSI Termination Fee
Event. Therefore, Eclipsys and TSI agree that payment of the termination fee and
any other fees, costs or expenses due under this Section 8.03(e) shall
constitute liquidated damages and not a penalty and shall further constitute the
sole and exclusive remedy of TSI for any losses, damages, claims, costs or
expenses arising from the occurrence of any TSI Termination Fee Event.
(g) The expenses and fees, if applicable, payable pursuant to Section
8.03(b), 8.03(c), 8.03(d) and 8.03(e) shall be paid within one business day
after the first to occur of the events described in Section 8.03(b), 8.03(c),
8.03(d) or 8.03(e)(i), (ii) or (iii); provided that in no event shall Eclipsys
or TSI, as the case may be, be required to pay the expenses and fees, if
applicable, to the other, if, immediately prior to the termination of this
Agreement, the party to receive the expenses and fees, if applicable, was in
material breach of its obligations under this Agreement.
(h) As used in this Agreement, "Alternative Transaction" means any of (i) a
transaction other than an Eclipsys Permitted Acquisition pursuant to which any
person (or group of persons) other than Eclipsys or TSI or their respective
affiliates (a "Third Party"), acquires more than 15% of the outstanding shares
of TSI Voting Common Stock or Eclipsys Voting Common Stock, as the case may be,
pursuant to a tender offer or exchange offer or otherwise, (ii) a merger or
other business combination involving Eclipsys or TSI other than an Eclipsys
Permitted Acquisition pursuant to which any Third Party acquires more than 15%
of the outstanding equity securities of Eclipsys or TSI or the entity surviving
such merger or business combination, (iii) any other transaction other than an
Eclipsys Permitted Acquisition pursuant to which any Third Party acquires
control of assets (including for this purpose the outstanding equity securities
of Subsidiaries of Eclipsys or TSI, and the entity surviving any merger or
business combination including any of them) of Eclipsys or TSI having a fair
market value (as determined by the Board of Directors of Eclipsys or TSI, as the
case may be, in good faith) equal to more than 15% of the fair market value of
all the assets of Eclipsys or TSI and its Subsidiaries, taken as a whole,
immediately prior to such transaction, or (iv) any public announcement of a
proposal, plan or intention to do any of the foregoing or any agreement to
engage in any of the foregoing.
SECTION 8.04 Amendment. This Agreement may be amended by the parties
hereto, by action taken or authorized by their respective Boards of Directors,
at any time before or after approval of the matters presented in connection with
the Merger by the stockholders of TSI or of Eclipsys, but, after any such
approval, no amendment shall be made which by law requires further approval by
such stockholders without such further approval. This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties hereto.
SECTION 8.05 Extension; Waiver. At any time prior to the Effective Time,
the parties hereto, by action taken or authorized by their respective Boards of
Directors, may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties contained
herein or in any document
A-34
<PAGE> 252
delivered pursuant hereto and (iii) waive compliance with any of the agreements
or conditions contained herein. Any agreement on the part of a party hereto to
any such extension or waiver shall be valid only if set forth in a written
instrument signed on behalf of such party.
ARTICLE IX
MISCELLANEOUS
SECTION 9.01 Nonsurvival of Representations, Warranties and
Agreements. None of the representations, warranties and agreements in this
Agreement or in any instrument delivered pursuant to this Agreement shall
survive the Effective Time, except for the agreements contained in Sections
1.04, 2.01, 2.02, 6.12, 6.14, 8.03 and Article IX, and the agreements of the
Affiliates delivered pursuant to Section 6.10. The Confidentiality Agreement
shall survive the execution and delivery of this Agreement.
SECTION 9.02 Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given if delivered personally, telecopied
(which is confirmed) or mailed by registered or certified mail (return receipt
requested) to the parties at the following addresses (or at such other address
for a party as the party shall specify by like notice):
(a) if to Eclipsys or Sub, to
Eclipsys Corporation
777 East Atlantic Avenue
Suite 200
Delray Beach, FL 33483
Attn: Chief Executive Officer
Telecopy: (561) 243-8850
with a copy to:
Eclipsys Corporation
777 East Atlantic Avenue
Suite 200
Delray Beach, FL 33483
Attn: General Counsel
Telecopy: (561) 243-8850
(b) if to TSI, to
Transition Systems, Inc.
One Boston Place
Boston, MA 02108
Attn: Chief Executive Officer
Telecopy: (617) 723-8700
with a copy to:
Foley, Hoag & Eliot LLP
One Post Office Square
Boston, MA 02109
Attn: Robert W. Sweet, Jr., Esq.
Telecopy: (617) 832-7000
SECTION 9.03 Interpretation. When a reference is made in this Agreement to
Sections, such reference shall be to a Section of this Agreement unless
otherwise indicated. The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. Whenever the words "include,"
"includes" or "including" are used in this Agreement they shall be deemed to be
followed by the words "without limitation." The phrase
A-35
<PAGE> 253
"made available" in this Agreement shall mean that the information referred to
has been made available if requested by the party to whom such information is to
be made available. The phrases "the date of this Agreement," "the date hereof,"
and terms of similar import, unless the context otherwise requires, shall be
deemed to refer to October 29, 1998.
SECTION 9.04 Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
SECTION 9.05 Entire Agreement; No Third Party Beneficiaries. This
Agreement (including the documents and the instruments referred to herein) (a)
constitutes the entire agreement and supersedes all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof, and (b) except as provided in Section 6.14 is not
intended to confer upon any person other than the parties hereto any rights or
remedies hereunder; provided that the Confidentiality Agreement shall remain in
full force and effect until the Effective Time. Each party hereto agrees that,
except for the representations and warranties contained in this Agreement,
neither TSI nor Eclipsys makes any other representations or warranties, and each
hereby disclaims any other representations and warranties made by itself or any
of its officers, directors, employees, agents, financial and legal advisors or
other representatives, with respect to the execution and delivery of this
Agreement or the transactions contemplated hereby, notwithstanding the delivery
or disclosure to the other or the other's representatives of any documentation
or other information with respect to any one or more of the foregoing.
SECTION 9.06 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware without regard to
any applicable principles of conflicts of law.
SECTION 9.07 Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties. Subject to the preceding sentence, this Agreement
will be binding upon, inure to the benefit of and be enforceable by the parties
and their respective successors and assigns.
[Remainder of page intentionally left blank.]
A-36
<PAGE> 254
IN WITNESS WHEREOF, Eclipsys, Sub and TSI have caused this Agreement to be
signed by their respective officers thereunto duly authorized as of the date
first written above.
<TABLE>
<S> <C>
Eclipsys Corporation
By: /s/ HARVEY J. WILSON
[seal] ----------------------------------------------------
President
By: /s/ ROBERT J. VANARIA
----------------------------------------------------
Treasurer
Eclipsys Acquisition Corp.
[seal] By: /s/ HARVEY J. WILSON
----------------------------------------------------
President
By: /s/ ROBERT J. VANARIA
----------------------------------------------------
Treasurer
Transition Systems, Inc.
[seal] By: /s/ ROBERT F. RACO
----------------------------------------------------
President
By: /s/ PAULA J. MALZONE
----------------------------------------------------
Treasurer
</TABLE>
A-37
<PAGE> 255
EXHIBIT A-1
TSI STOCKHOLDERS' VOTING AGREEMENT
VOTING AGREEMENT
VOTING AGREEMENT (the "Agreement"), dated as of October 29, 1998, between
(the "Stockholder"), who is a stockholder of Transition Systems,
Inc., a Massachusetts corporation (the "Company"), and Eclipsys Corporation, a
Delaware corporation ("Buyer").
WHEREAS, concurrently with the execution of this Agreement, the Company,
Buyer and a wholly-owned subsidiary of Buyer ("Sub") have entered into an
Agreement and Plan of Merger (as the same may be amended from time to time, the
"Merger Agreement"), providing for the merger (the "Merger") of Sub with and
into the Company pursuant to the terms and conditions of the Merger Agreement;
and
WHEREAS, the Stockholder owns of record and beneficially the number of
shares of capital stock of the Company set forth beneath his signature below
(the "Shares") and wishes to enter into this Agreement with respect to all of
such Shares; and
WHEREAS, in order to induce Buyer to enter into the Merger Agreement, the
Stockholder has agreed, upon the terms and subject to the conditions set forth
herein, to vote the Shares and to deliver an irrevocable proxy to Buyer to vote
the Shares at a meeting of the Company's stockholders, in favor of approval and
adoption of the Merger Agreement and the Merger.
NOW THEREFORE, for good and valuable consideration, the receipt,
sufficiency and adequacy of which is hereby acknowledged, the parties hereto
agree as follows:
1. Agreement to Vote Shares. The Stockholder agrees during the term
of this Agreement to vote the Stockholder's Shares, in person or by proxy,
in favor of approval and adoption of the Merger Agreement and the Merger at
every meeting of the stockholders of the Company at which such matters are
considered and at every adjournment thereof. The Stockholder agrees to
deliver to Buyer upon request immediately prior to any vote contemplated by
clause (a) or (b) above a proxy substantially in the form attached hereto
as Annex A (a "Proxy"), which Proxy shall be irrevocable during the term of
this Agreement to the extent permitted under Massachusetts law, and Buyer
agrees to vote the Shares subject to each such Proxy in favor of approval
and adoption of the Merger Agreement and the Merger.
2. No Voting Trusts. The Stockholder agrees that the Stockholder will
not, nor will the Stockholder permit any entity under the Stockholder's
control to, deposit any of the Stockholder's Shares in a voting trust or
subject any of its Shares to any arrangement with respect to the voting of
the Shares inconsistent with this Agreement.
3. Limitation on Dispositions and Proxies. During the term of this
Agreement, the Stockholder agrees not to sell, assign, pledge, transfer or
otherwise dispose of, or grant any proxies with respect to (except as
contemplated by this Agreement) any of the Stockholder's Shares.
4. Specific Performance. Each party hereto acknowledges that it will
be impossible to measure in money the damage to the other party if a party
hereto fails to comply with the obligations imposed by this Agreement, and
that, in the event of any such failure, the other party will not have an
adequate remedy at law or in damages. Accordingly, each party hereto agrees
that injunctive relief or other equitable remedy, in addition to remedies
at law or damages, is the appropriate remedy for any such failure and will
not oppose the granting of such relief on the basis that the other party
has an adequate remedy at law. Each party hereto agrees that it will not
seek, and agrees to waive any requirement for, the securing or posting of a
bond in connection with any other party's seeking or obtaining such
equitable relief.
5. Term of Agreement; Termination. Subject to Section 9(e), the term
of this Agreement shall commence on the date hereof and such term and this
Agreement shall terminate upon the earliest to
A-38
<PAGE> 256
occur of (i) the Effective Time (as defined in the Merger Agreement), and (ii)
the date on which the Merger Agreement is terminated in accordance with its
terms. Upon such termination, no party shall have any further obligations or
liabilities hereunder; provided, that such termination shall not relieve any
party from liability for any breach of this Agreement prior to such termination.
6. Representations and Warranties of the Stockholder. The Stockholder
represents and warrants to Buyer that, as of the date hereof, (a) the
Stockholder has full legal power and authority to execute and deliver this
Agreement and the Proxy, and (b) the Stockholder's Shares are free and
clear of all proxies.
7. Entire Agreement. This Agreement supersedes all prior agreements,
written or oral, among the parties hereto with respect to the subject
matter hereof and contains the entire agreement among the parties with
respect to the subject matter hereof. This Agreement may not be amended,
supplemented or modified, and no provisions hereof may be modified or
waived, except by an instrument in writing signed by all parties hereto. No
waiver of any provisions hereof by any party shall be deemed a waiver of
any other provisions hereof by any such party, nor shall any such waiver be
deemed a continuing waiver of any provisions hereof by such party.
8. Notices. All notices, requests, claims, demands or other
communications hereunder shall be in writing and shall be deemed given when
delivered personally, upon receipt of a transmission confirmation if sent
by facsimile or like transmission (with confirmation) and on the next
business day when sent by Federal Express, Express mail or other reputable
overnight courier service to the parties at the following addresses (or at
such other address for a party as shall be specified by like notice):
If to Buyer:
Eclipsys Corporation
777 East Atlantic Avenue
Suite 200
Delray Beach, FL 33483
Attention: Chief Executive Officer
Fax: (561) 243-8850
With a copy to:
Eclipsys Corporation
777 East Atlantic Avenue
Suite 200
Delray Beach, FL 33483
Attention: General Counsel
Fax: (561) 243-8850
If to Stockholder:
With a copy to:
Foley, Hoag & Eliot LLP
One Post Office Square
Boston, MA 02109
Attention: Robert W. Sweet, Jr., Esq.
Fax: (617) 832-7000
A-39
<PAGE> 257
9. Miscellaneous.
(a) This Agreement shall be deemed a contract made under, and for all
purposes shall be construed in accordance with, the laws of The
Commonwealth of Massachusetts, without reference to its conflicts of law
principles.
(b) If any provision of this Agreement or the application of such
provision to any person or circumstances shall be held invalid or
unenforceable by a court of competent jurisdiction, such provision or
application shall be unenforceable only to the extent of such invalidity or
unenforceability, and the remainder of the provisions not held invalid or
unenforceable and the application of such provisions to persons or
circumstances other than the party as to which it is held invalid, and the
remainder of this Agreement, shall not be affected.
(c) This Agreement may be executed in one or more counterparts, each
of which shall be deemed to be an original but all of which together shall
constitute one and the same instrument.
(d) All Section headings herein are for convenience of reference only
and are not part of this Agreement, and no construction or reference shall
be derived therefrom.
(e) The obligations of the Stockholder set forth in this Agreement
shall not be effective or binding upon the Stockholder until after such
time as the Merger Agreement is executed and delivered by the Company,
Buyer and Sub, and the parties agree that there is not and has not been any
other agreement, arrangement or understanding between the parties hereto
with respect to the matters set forth herein.
[Signature page follows]
A-40
<PAGE> 258
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first written above.
Eclipsys Corporation
By:
------------------------------------
Name:
Title:
STOCKHOLDER
--------------------------------------
--------------------------------------
Signature
Shares:
----------------------------------
----------------------------------
A-41
<PAGE> 259
(ANNEX A)
PROXY
The undersigned, for consideration received, hereby appoints Eclipsys
Corporation, a Delaware corporation ("Buyer"), its proxy to vote all shares of
capital stock owned by the undersigned which the undersigned is entitled to vote
at any meeting of stockholders of Transition Systems, Inc., a Massachusetts
corporation (the "Company"), and at any adjournment thereof, to be held for the
purpose of voting upon a proposal to approve and adopt the Agreement and Plan of
Merger, dated as of October 29, 1998 (the "Merger Agreement"), by and among the
Company, Buyer and a wholly-owned subsidiary of Buyer ("Sub"), providing for the
merger (the "Merger") of Sub with and into the Company, FOR such proposal and
AGAINST any Acquisition Proposal that is not a Superior Proposal (as such terms
are defined in the Merger Agreement). This proxy is subject to the terms of the
Voting Agreement dated as of October 29, 1998 between the undersigned and Buyer,
a copy of such Agreement being attached hereto (the "Voting Agreement"), is
coupled with an interest and revokes all prior proxies granted by the
undersigned with respect to such shares, is irrevocable and shall terminate and
be of no further force or effect automatically at such time as the Voting
Agreement terminates in accordance with its terms.
Dated: October 29, 1998
STOCKHOLDER
--------------------------------------
--------------------------------------
Signature
A-42
<PAGE> 260
EXHIBIT A-2
ECLIPSYS STOCKHOLDERS' VOTING AGREEMENT
VOTING AGREEMENT
VOTING AGREEMENT (the "Agreement"), dated as of October 29, 1998, between
(the "Stockholder"), who is a stockholder of Eclipsys
Corporation, a Delaware corporation ("Buyer"), and Transition Systems, Inc., a
Massachusetts corporation (the "Company").
WHEREAS, concurrently with the execution of this Agreement, the Company,
Buyer and a wholly-owned subsidiary of Buyer ("Sub") have entered into an
Agreement and Plan of Merger (as the same may be amended from time to time, the
"Merger Agreement"), providing for the merger (the "Merger") of Sub with and
into the Company pursuant to the terms and conditions of the Merger Agreement;
and
WHEREAS, the Stockholder owns of record and beneficially the number of
shares of capital stock of Buyer set forth beneath his signature below (the
"Shares") and wishes to enter into this Agreement with respect to all of such
Shares; and
WHEREAS, in order to induce the Company to enter into the Merger Agreement,
the Stockholder has agreed, upon the terms and subject to the conditions set
forth herein, to vote the Shares and to deliver an irrevocable proxy to the
Company to vote the Shares at a meeting of Buyer's stockholders, in favor of the
Eclipsys Voting Proposals (as defined in the Merger Agreement) pursuant to the
terms of the Merger Agreement.
NOW THEREFORE, for good and valuable consideration, the receipt,
sufficiency and adequacy of which is hereby acknowledged, the parties hereto
agree as follows:
1. Agreement to Vote Shares. The Stockholder agrees during the term
of this Agreement to vote the Stockholder's Shares, in person or by proxy,
in favor of the Eclipsys Voting Proposals at every meeting of the
stockholders of Buyer at which such matters are considered and at every
adjournment thereof. The Stockholder agrees to deliver to the Company upon
request immediately prior to any vote contemplated by this section a proxy
substantially in the form attached hereto as Annex A (a "Proxy"), which
Proxy shall be irrevocable during the term of this Agreement to the extent
permitted under Delaware law, and the Company agrees to vote the Shares
subject to each such Proxy in favor of approval and adoption of the Merger
Agreement and the Merger.
2. No Voting Trusts. The Stockholder agrees that the Stockholder will
not, nor will the Stockholder permit any entity under the Stockholder's
control to, deposit any of the Stockholder's Shares in a voting trust or
subject any of its Shares to any arrangement with respect to the voting of
the Shares inconsistent with this Agreement.
3. Limitation on Dispositions and Proxies. During the term of this
Agreement, the Stockholder agrees not to sell, assign, pledge, transfer or
otherwise dispose of, or grant any proxies with respect to (except as
contemplated by this Agreement) any of the Stockholder's Shares.
4. Specific Performance. Each party hereto acknowledges that it will
be impossible to measure in money the damage to the other party if a party
hereto fails to comply with the obligations imposed by this Agreement, and
that, in the event of any such failure, the other party will not have an
adequate remedy at law or in damages. Accordingly, each party hereto agrees
that injunctive relief or other equitable remedy, in addition to remedies
at law or damages, is the appropriate remedy for any such failure and will
not oppose the granting of such relief on the basis that the other party
has an adequate remedy at law. Each party hereto agrees that it will not
seek, and agrees to waive any requirement for, the securing or posting of a
bond in connection with any other party's seeking or obtaining such
equitable relief.
5. Term of Agreement; Termination. Subject to Section 9(e), the term
of this Agreement shall commence on the date hereof and such term and this
Agreement shall terminate upon the earliest to
A-43
<PAGE> 261
occur of (i) the Effective Time (as defined in the Merger Agreement), and (ii)
the date on which the Merger Agreement is terminated in accordance with its
terms. Upon such termination, no party shall have any further obligations or
liabilities hereunder; provided, that such termination shall not relieve any
party from liability for any breach of this Agreement prior to such termination.
6. Representations and Warranties of the Stockholder. The Stockholder
represents and warrants to the Company that, as of the date hereof, (a) the
Stockholder has full legal power and authority to execute and deliver this
Agreement and the Proxy, and (b) the Stockholder's Shares are free and
clear of all proxies.
7. Entire Agreement. This Agreement supersedes all prior agreements,
written or oral, among the parties hereto with respect to the subject
matter hereof and contains the entire agreement among the parties with
respect to the subject matter hereof. This Agreement may not be amended,
supplemented or modified, and no provisions hereof may be modified or
waived, except by an instrument in writing signed by all parties hereto. No
waiver of any provisions hereof by any party shall be deemed a waiver of
any other provisions hereof by any such party, nor shall any such waiver be
deemed a continuing waiver of any provisions hereof by such party.
8. Notices. All notices, requests, claims, demands or other
communications hereunder shall be in writing and shall be deemed given when
delivered personally, upon receipt of a transmission confirmation if sent
by facsimile or like transmission (with confirmation) and on the next
business day when sent by Federal Express, Express mail or other reputable
overnight courier service to the parties at the following addresses (or at
such other address for a party as shall be specified by like notice):
If to the Company:
Transition Systems, Inc.
One Boston Place
Boston, MA 02108
Attention: Chief Executive Officer
Fax: (617) 723-8700
With a copy to:
Foley, Hoag & Eliot LLP
One Post Office Square
Boston, MA 02109
Attention: Robert W. Sweet, Esq.
Fax: (617) 832-7000
If to Stockholder:
With a copy to:
Eclipsys Corporation
777 East Atlantic Avenue
Suite 200
Delray Beach, FL 33483
Attention: General Counsel
Fax: (561) 243-8850
A-44
<PAGE> 262
9. Miscellaneous.
(a) This Agreement shall be deemed a contract made under, and for all
purposes shall be construed in accordance with, the laws of the State of
Delaware, without reference to its conflicts of law principles.
(b) If any provision of this Agreement or the application of such
provision to any person or circumstances shall be held invalid or
unenforceable by a court of competent jurisdiction, such provision or
application shall be unenforceable only to the extent of such invalidity or
unenforceability, and the remainder of the provisions not held invalid or
unenforceable and the application of such provisions to persons or
circumstances other than the party as to which it is held invalid, and the
remainder of this Agreement, shall not be affected.
(c) This Agreement may be executed in one or more counterparts, each
of which shall be deemed to be an original but all of which together shall
constitute one and the same instrument.
(d) All Section headings herein are for convenience of reference only
and are not part of this Agreement, and no construction or reference shall
be derived therefrom.
(e) The obligations of the Stockholder set forth in this Agreement
shall not be effective or binding upon the Stockholder until after such
time as the Merger Agreement is executed and delivered by the Company,
Buyer and Sub, and the parties agree that there is not and has not been any
other agreement, arrangement or understanding between the parties hereto
with respect to the matters set forth herein.
[Signature page follows]
A-45
<PAGE> 263
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first written above.
Transition Systems, Inc.
By:
-----------------------------------
Name:
Title:
STOCKHOLDER
--------------------------------------
--------------------------------------
Signature
Shares:
-------------------------------
----------------------------------
A-46
<PAGE> 264
(ANNEX A)
PROXY
The undersigned, for consideration received, hereby appoints Transition
Systems, Inc., a Massachusetts corporation (the "Company"), its proxy to vote
all shares of capital stock owned by the undersigned which the undersigned is
entitled to vote at any meeting of stockholders of Eclipsys Corporation, a
Delaware corporation ("Buyer"), and at any adjournment thereof, to be held for
the purpose of voting upon the Eclipsys Voting Proposals, as such term is
defined in the Agreement and Plan of Merger, dated as of October 29, 1998 (the
"Merger Agreement"), by and among the Company, Buyer and a wholly-owned
subsidiary of Buyer ("Sub"), providing for the merger (the "Merger") of Sub with
and into the Company FOR such proposals. This proxy is subject to the terms of
the Voting Agreement dated as of October 29, 1998 between the undersigned and
the Company, a copy of such Agreement being attached hereto (the "Voting
Agreement"), is coupled with an interest and revokes all prior proxies granted
by the undersigned with respect to such shares, is irrevocable and shall
terminate and be of no further force or effect automatically at such time as the
Voting Agreement terminates in accordance with its terms.
Dated: October 29, 1998
STOCKHOLDER
--------------------------------------
--------------------------------------
Signature
A-47
<PAGE> 265
EXHIBIT B-1
TSI AFFILIATE AGREEMENT
AFFILIATE AGREEMENT
, 1998
Eclipsys Corporation
777 East Atlantic Avenue
Suite 200
Delray Beach, FL 33483
Transition Systems, Inc.
One Boston Place
Boston, MA 02108
Ladies and Gentlemen:
An Agreement and Plan of Merger dated as of October 29, 1998 (the
"Agreement") has been entered into by and among Eclipsys Corporation, a Delaware
corporation ("Eclipsys"), Fitness Merger Corp., a Massachusetts corporation and
a wholly-owned subsidiary of Eclipsys (the "Sub"), and Transition Systems, Inc.,
a Massachusetts corporation ("TSI"). The Agreement provides for the merger of
the Sub with and into TSI (the "Merger"). In accordance with the Agreement,
shares of Common Stock, $.01 par value per share, and Non-Voting Common stock,
$.01 par value per share of TSI (collectively the "TSI Common Stock") shall be
converted into shares of Common Stock, $.01 par value per share, of Eclipsys
(the "Eclipsys Voting Common Stock"), as described in the Agreement.
The undersigned has been advised that as of the date of this agreement the
undersigned may be deemed to be an "affiliate" of TSI, as the term "affiliate"
is defined for purposes of paragraphs (c) and (d) of Rule 145 of the Rules and
Regulations of the Securities and Exchange Commission (the "Commission") under
the Securities Act of 1933, as amended (the "Securities Act"), and/or as such
term is used in, and for purposes of, Accounting Series Releases Nos. 130 and
135, as amended, of the Commission.
In consideration of the mutual agreements, provisions and covenants set
forth in the Agreement and hereinafter in this agreement, the undersigned
represents and agrees as follows:
1. Pooling Requirements. The undersigned will not within the 30 day
period prior to the Effective Time (as defined in the Agreement), sell,
transfer, pledge, hypothecate or otherwise dispose of, or reduce the
undersigned's interest in or risk relating to, any shares of Eclipsys
Common Stock or TSI Common Stock owned by the undersigned. In addition, the
undersigned will not sell, transfer, pledge, hypothecate or otherwise
dispose of, or reduce the undersigned's interest in or risk relating to,
any Eclipsys Voting Common Stock issued to the undersigned pursuant to the
Merger, or any other shares of Eclipsys capital stock, until after such
time as Eclipsys has published (within the meaning of Accounting Series
Release No. 135, as amended, of the Commission) financial results covering
at least 30 days of combined operations of Eclipsys and TSI.
2. Rule 145. The undersigned will not offer, sell, pledge,
hypothecate, transfer or otherwise dispose of, or reduce its interest in or
risk relating to, any of the shares of Eclipsys Voting Common Stock issued
to the undersigned in the Merger unless at such time either: (i) such
transaction is permitted pursuant to the provisions of Rule 145 under the
Securities Act; (ii) the undersigned shall have furnished to Eclipsys an
opinion of counsel, reasonably satisfactory to Eclipsys, to the effect that
such transaction is otherwise exempt from the registration requirements of
the Securities Act; or (iii) a registration statement under the Securities
Act covering the proposed offer, sale, pledge, hypothecation, transfer or
other disposition shall be effective under the Securities Act.
A-48
<PAGE> 266
3. Legend.
(a) The undersigned understands that all certificates representing
Eclipsys Voting Common Stock delivered to the undersigned pursuant to the
Merger shall bear a legend in substantially the form set forth below, until
the earlier to occur of (i) one of the events referred to in Section 2
above or (ii) the date on which the undersigned requests removal of such
legend, provided, that such request occurs at least two years from the
Effective Date (as defined in the Merger Agreement) and that the
undersigned is not at the time of such request, and has not been during the
three months period preceding to such request, an affiliate of Eclipsys.
"The shares represented by this certificate were issued in a transaction
to which Rule 145 of the Securities Act of 1933 applies and may only be
transferred in accordance with the provisions of such rule. In addition,
the shares represented by this certificate may only be transferred in
accordance with the terms of an affiliate agreement dated
, 1998 between the initial holder hereof and
Eclipsys Corporation, a copy of which agreement may be inspected by the
holder of this certificate at the principal offices of Eclipsys
Corporation, or furnished by Eclipsys Corporation to the holder of this
certificate upon written request, without charge."
(b) Eclipsys in its discretion may cause stop transfer orders to be
placed with its transfer agent with respect to the certificates for the
shares of Eclipsys Voting Common Stock that are required to bear the
foregoing legend.
4. General Provisions. This agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, without
giving effect to principles of conflicts of laws. This agreement shall be
binding on the undersigned's successors and assigns, including his or her
heirs, executors and administrators.
A-49
<PAGE> 267
The undersigned has carefully read this agreement and discussed its
requirements, to the extent the undersigned believed necessary, with its counsel
or counsel for TSI.
Very truly yours,
--------------------------------------
Signature
--------------------------------------
Print Name
Accepted:
ECLIPSYS CORPORATION
By:
-------------------------------------------------
Name:
--------------------------------------------
Title:
--------------------------------------------
Dated:
-------------------------------------------
TRANSITION SYSTEMS, INC.
By:
-------------------------------------------------
Name:
--------------------------------------------
Title:
--------------------------------------------
Dated:
-------------------------------------------
A-50
<PAGE> 268
EXHIBIT B-2
ECLIPSYS AFFILIATE AGREEMENT
AFFILIATE AGREEMENT
, 1998
Eclipsys Corporation
777 East Atlantic Avenue
Suite 200
Delray Beach, FL 33483
Transition Systems, Inc.
One Boston Place
Boston, MA 02108
Ladies and Gentlemen:
An Agreement and Plan of Merger dated as of October 29, 1998 (the
"Agreement") has been entered into by and among Eclipsys Corporation, a Delaware
corporation ("Eclipsys"), Fitness Merger Corp., a Massachusetts corporation and
a wholly-owned subsidiary of Eclipsys (the "Sub"), and Transition Systems, Inc.,
a Massachusetts corporation ("TSI"). The Agreement provides for the merger of
the Sub with and into TSI (the "Merger"). In accordance with the Agreement,
shares of Common Stock, $.01 par value per share, and Non-Voting Common Stock,
$.01 par value per share, of TSI (collectively the "TSI Common Stock") shall be
converted into shares of Common Stock, $.01 par value per share (the "Eclipsys
Voting Common Stock"), as described in the Agreement.
The undersigned has been advised that as of the date of this agreement the
undersigned may be deemed to be an "affiliate" of Eclipsys, as the term
"affiliate" is defined under the Rules and Regulations of the Securities and
Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended, and/or as such term is used in, and for purposes of, Accounting Series
Releases Nos. 103 and 135, as amended, of the Commission.
In consideration of the mutual agreements, provisions and covenants set
forth in the Agreement and hereinafter in this agreement, the undersigned
represents and agrees as follows:
1. Pooling Requirements. The undersigned will not within the 30 day
period prior to the Effective Time (as defined in the Agreement), sell,
transfer, pledge, hypothecate or otherwise dispose of, or reduce the
undersigned's interest in or risk relating to, any shares of Eclipsys
Common Stock or TSI Common Stock owned by the undersigned. In addition, the
undersigned will not sell, transfer, pledge, hypothecate or otherwise
dispose of, or reduce the undersigned's interest in or risk relating to any
shares of Eclipsys capital stock, until after such time as Eclipsys has
published (within the meaning of Accounting Series Release No. 135, as
amended, of the Commission) financial results covering at least 30 days of
combined operations of Eclipsys and TSI.
2. General Provisions. This agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, without
giving effect to principles of conflicts of laws. This agreement shall be
binding on the undersigned's successors and assigns, including his heirs,
executors and administrators.
A-51
<PAGE> 269
The undersigned has carefully read this agreement and discussed its
requirements, to the extent the undersigned believed necessary, with its counsel
or counsel for Eclipsys.
Very truly yours,
--------------------------------------
Signature
--------------------------------------
Print Name
Accepted:
ECLIPSYS CORPORATION
By:
--------------------------------------------------------
Name:
-------------------------------------------------------
Title:
------------------------------------------------------
Dated:
-------------------------------------------------------
TRANSITION SYSTEMS, INC.
By:
--------------------------------------------------------
Name:
-------------------------------------------------------
Title:
------------------------------------------------------
Dated:
-------------------------------------------------------
A-52
<PAGE> 270
ANNEX B
[LETTERHEAD OF MORGAN STANLEY & CO. INCORPORATED]
October 28, 1998
Board of Directors
Eclipsys Corporation
777 East Atlantic Avenue
Suite 200
Delray Beach, Florida 33483
Members of the Board:
We understand that Transition Systems Inc. ("TSI"), Eclipsys Corporation
("Eclipsys" or the "Company"), and Exercise Acquisition Corp. ("Merger Sub"), a
wholly owned subsidiary of Eclipsys, propose to enter into an Agreement and Plan
of Merger, substantially in the form of the draft dated October 28, 1998 (the
"Merger Agreement"), which provides, among other things, for the merger (the
"Merger") of Merger Sub with and into TSI. Pursuant to the Merger, TSI will
become a wholly-owned subsidiary of the Company and each outstanding share of
common stock, par value of $0.01 per share (the "TSI Common Stock"), of TSI,
other than shares held in treasury or by Eclipsys or any subsidiary of TSI or
Eclipsys, shall be converted into the right to receive 0.525 shares (the
"Exchange Ratio") of common stock, par value $0.01 per share, of Eclipsys (the
"Eclipsys Common Stock"). The terms and conditions of the Merger are more fully
set forth in the Merger Agreement and certain related documents.
You have asked for our opinion as to whether the Exchange Ratio pursuant to
the Merger Agreement is fair from a financial point of view to the Company.
For purposes of the opinion set forth herein, we have:
(a) reviewed certain publicly available financial statements and other
information of TSI and Eclipsys, respectively;
(b) reviewed certain internal financial statements and other financial
and operating data concerning TSI and Eclipsys prepared by the managements
of TSI and Eclipsys, respectively;
(c) discussed the past and current operations and financial condition
and the prospects of TSI with senior executives of TSI;
(d) discussed the past and current operations and financial condition
and the prospects of Eclipsys, including information relating to certain
strategic, financial and operational benefits anticipated from the Merger,
with senior executives of Eclipsys;
(e) discussed with the senior managements of TSI and Eclipsys certain
research analyst projections for TSI and Eclipsys, respectively;
(f) reviewed the pro forma impact of the Merger on Eclipsys' earnings
per share and other financial ratios;
(g) reviewed the reported prices and trading activity for the TSI
Common Stock and the Eclipsys Common Stock;
(h) compared the financial performance of TSI and Eclipsys and the
prices and trading activity of the TSI Common Stock and the Eclipsys Common
Stock with that of certain other comparable publicly-traded companies and
their securities;
(i) reviewed the financial terms, to the extent publicly available, of
certain comparable acquisition transactions;
(j) participated in discussions among representatives of TSI and
Eclipsys and their financial and legal advisors;
B-1
<PAGE> 271
(k) reviewed the draft Merger Agreement dated October 21, 1998 and
certain related documents; and
(l) performed such other analyses as we have deemed appropriate.
We have assumed and relied upon without independent verification the
accuracy and completeness of the information reviewed by us for the purposes of
this opinion. With respect to the financial projections, including information
relating to certain strategic, financial and operational benefits anticipated
from the Merger, we have assumed that they have been reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
future financial performance of Eclipsys and TSI, respectively. In addition, we
have assumed that the Merger will be consummated in accordance with the terms
set forth in the Merger Agreement, including, among other things, that the
Merger will be accounted for as a "pooling-of-interests" business combination in
accordance with U.S. Generally Accepted Accounting Principles and the Merger
will be treated as a tax-free reorganization and/or exchange, each pursuant to
the Internal Revenue Code of 1986. We have not made any independent valuation or
appraisal of the assets or liabilities of TSI, nor have we been furnished with
any such appraisals. Our opinion is necessarily based on economic, market and
other conditions as in effect on, and the information made available to us as
of, the date hereof.
We have been retained to render a financial opinion to the Board of
Directors of Eclipsys in connection with this transaction and will receive a fee
for our services. In the past, Morgan Stanley & Co. Incorporated and its
affiliates have provided financial advisory and financing services for the
Company and their affiliates and have received fees for the rendering of these
services.
It is understood that this letter is for the information of the Board of
Directors of the Company, except that this opinion may be included in its
entirety in any filing made by the Company in respect of the transaction with
the Securities and Exchange Commission. In addition, this opinion does not in
any manner address the prices at which Eclipsys Common Stock will trade
following consummation of the Merger, and Morgan Stanley expresses no opinion or
recommendation as to how the shareholders of the Company and TSI should vote at
the shareholders' meeting held in connection with the Merger.
Based upon and subject to the foregoing, we are of the opinion on the date
hereof that the Exchange Ratio pursuant to the Merger Agreement is fair from a
financial point of view to the Company.
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
By: /s/ SCOTT R. BRAKEBILL
------------------------------------
Scott R. Brakebill
Managing Director
B-2
<PAGE> 272
ANNEX C
[LETTERHEAD OF BT ALEX. BROWN INCORPORATED]
October 29, 1998
Board of Directors
Transition Systems, Inc.
One Boston Place, Suite 2700
Boston, Massachusetts 02108
Members of the Board:
BT Alex. Brown Incorporated ("BT Alex. Brown") has acted as financial
advisor to Transition Systems, Inc. ("TSI") in connection with the proposed
merger transaction involving TSI and Eclipsys Corporation ("Eclipsys") pursuant
to the Agreement and Plan of Merger, dated as of October 29, 1998 (the "Merger
Agreement"), among Eclipsys, Exercise Acquisition Corp., a wholly owned
subsidiary of Eclipsys ("Sub"), and TSI. The Merger Agreement provides, among
other things, for the merger of Sub with and into TSI (the "Merger") pursuant to
which TSI will become a wholly owned subsidiary of Eclipsys. As set forth more
fully in the Merger Agreement, as a result of the Merger, each outstanding share
of the common stock, par value $0.01 per share, of TSI ("TSI Voting Common
Stock") and each outstanding share of the non-voting common stock, par value
$0.01 per share, of TSI ("TSI Non-Voting Common Stock" and, together with the
TSI Voting Common Stock, "TSI Common Stock") will be converted into the right to
receive 0.525 of a share (the "Exchange Ratio") of the common stock, par value
$0.01 per share, of Eclipsys ("Eclipsys Voting Common Stock").
You have requested BT Alex. Brown's opinion as to the fairness, from a
financial point of view, of the Exchange Ratio to the holders of TSI Common
Stock.
In connection with BT Alex. Brown's role as financial advisor to TSI, and
in arriving at its opinion, BT Alex. Brown has reviewed certain publicly
available financial and other information concerning TSI and Eclipsys and
certain internal analyses and other information furnished to or discussed with
it by TSI, Eclipsys and their respective advisors. BT Alex. Brown has also held
discussions with members of the senior management of TSI and Eclipsys regarding
the business and prospects of their respective companies and the joint prospects
of a combined company. In addition, BT Alex. Brown has (i) reviewed the reported
prices and trading activity for TSI Voting Common Stock and Eclipsys Voting
Common Stock, (ii) compared certain financial and stock market information for
TSI and Eclipsys with similar information for certain other companies whose
securities are publicly traded, (iii) reviewed the financial terms of certain
recent business combinations which it deemed comparable in whole or in part,
(iv) reviewed the terms of the Merger Agreement, and (v) performed such other
studies and analysis and considered such other factors as it deemed appropriate.
In connection with its engagement, BT Alex. Brown was authorized to approach,
and held discussions with, certain third parties to solicit indications of
interest with respect to the acquisition of TSI.
BT Alex. Brown has not assumed responsibility for independent verification
of, and has not independently verified, any information, whether publicly
available or furnished to it, concerning TSI, Eclipsys and the combined company,
including, without limitation, any financial information, forecasts or
projections considered in connection with the rendering of its opinion.
Accordingly, for purposes of its opinion, BT Alex. Brown has assumed and relied
upon the accuracy and completeness of all such information and BT Alex. Brown
has not conducted a physical inspection of any of the properties or assets, and
has not prepared or obtained any independent evaluation or appraisal of any of
the assets or liabilities, of TSI or Eclipsys. With respect to the financial
forecasts and projections made available to BT Alex. Brown and used in its
analyses, BT Alex. Brown has assumed that they have been prepared on bases
reflecting reasonable estimates and judgments as to the matters covered thereby.
In rendering its opinion, BT Alex. Brown expresses no view as to the
reasonableness of such forecasts and projections or the assumptions on which
they are based. BT Alex. Brown's opinion is necessarily based upon economic,
market and other conditions as in effect on, and the information made available
to it as of, the date hereof.
C-1
<PAGE> 273
Board of Directors
Transition Systems, Inc.
October 29, 1998
Page 2
For purposes of rendering its opinion, BT Alex. Brown has assumed that, in
all respects material to its analysis, the representations and warranties of
TSI, Eclipsys and Sub contained in the Merger Agreement are true and correct,
TSI, Eclipsys and Sub will each perform all of the covenants and agreements to
be performed by it under the Merger Agreement and all conditions to the
obligations of each of TSI, Eclipsys and Sub to consummate the Merger will be
satisfied without any waiver thereof. BT Alex. Brown has also assumed that all
material governmental, regulatory or other approvals and consents required in
connection with the consummation of the Merger will be obtained and that in
connection with obtaining any necessary governmental, regulatory or other
approvals and consents, or any amendments, modifications or waivers to any
agreements, instruments or orders to which either TSI or Eclipsys is a party or
is subject or by which it is bound, no limitations, restrictions or conditions
will be imposed or amendments, modifications or waivers made that would have a
material adverse effect on TSI or Eclipsys or materially reduce the contemplated
benefits of the Merger to TSI. In addition, you have informed BT Alex. Brown,
and accordingly for purposes of rendering its opinion BT Alex. Brown has
assumed, that the Merger will qualify as a tax-free reorganization for federal
income tax purposes and will be accounted for as a pooling of interests. BT
Alex. Brown is expressing no opinion as to the price at which the Eclipsys
Voting Common Stock will trade at any time.
This opinion is addressed to, and for the use and benefit of, the Board of
Directors of TSI and is not a recommendation to any shareholder as to how such
shareholder should vote with respect to matters relating to the proposed Merger.
This opinion is limited to the fairness, from a financial point of view, of the
Exchange Ratio to the holders of TSI Common Stock, and BT Alex. Brown expresses
no opinion as to the merits of the underlying decision by TSI to engage in the
Merger.
BT Alex. Brown, as a customary part of its investment baking business, is
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, private placements and
valuations for estate, corporate and other purposes. We have acted as financial
advisor to TSI in connection with the Merger and will receive a fee for our
services, a significant portion of which is contingent upon the consummation of
the Merger and portion of which is payable upon delivery of this opinion. BT
Alex. Brown and its affiliates have in the past provided financial services to
TSI unrelated to the proposed Merger, for which services BT Alex. Brown and its
affiliates have received compensation. BT Alex. Brown maintains a market in TSI
Common Stock and regularly publishes research reports regarding the businesses
and securities of TSI and other publicly traded companies in the health care
information technology industry. In the ordinary course of business, BT Alex.
Brown and its affiliates may actively trade or hold the securities and other
instruments and obligations of TSI and Eclipsys for their own account and for
the accounts of customers and, accordingly, may at any time hold a long or short
position in such securities, instruments or obligations.
Based upon and subject to the foregoing, it is BT Alex. Brown's opinion
that, as of the date of this letter, the Exchange Ratio is fair, from a
financial point of view, to the holders of TSI Common Stock.
Very truly yours,
/s/BT ALEX. BROWN INCORPORATED
------------------------------
BT ALEX. BROWN INCORPORATED
C-2
<PAGE> 274
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article EIGHTH of the Registrant's Third Amended and Restated Certificate
of Incorporation provides that no director of the Registrant shall be personally
liable for monetary damages for breach of his or her fiduciary duty as a
director, except for (i) any breach of such director's duty of loyalty to the
Registrant, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) any transaction from
which such director derived an improper person benefit or (iv) actions under
Section 174 of the Delaware General Corporation Law and to the extent that the
Delaware General Corporation Law prohibits the elimination or limitation of
liability of directors.
Section 145 of the Delaware General Corporation Law provides that a
corporation has the power to indemnify a director, officer, employee or agent of
the corporation and certain other persons serving at the request of the
corporation in related capacities against amounts paid and expenses incurred in
connection with an action or proceeding to which he is or is threatened to be
made a party by reason of such position, if such person shall have acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, in any criminal proceeding, if such person
had no reasonable cause to believe his conduct was unlawful; provided that, in
the case of actions brought by or in the right of the corporation, no
indemnification shall be made with respect to any matter as to which such person
shall have been adjudged to be liable to the corporation unless and only to the
extent that the adjudicating court determines that such indemnification is
proper under the circumstances.
Messrs. Denning and Ford, the elected representatives of GAP 28, GAP 38,
GAP 47, GAP 48 and GAP Coinvestment to the Board of Directors, are indemnified
against liability they may incur in their capacity as directors of the Company
pursuant to the limited partnership agreements of each of GAP 28, GAP 38, GAP 47
and GAP 48.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
2.1* Agreement and Plan of Merger dated as of October 29, 1998 by
and among the Registrant, Exercise Acquisition Corp. and
Transition Systems, Inc.
2.2** Agreement of Merger among Alltel Healthcare Information
Services, Inc., Alltel Information Services, Inc., Eclipsys
Corporation and Eclipsys Solutions Corp. dated as of January
24, 1997
2.3** Amended and Restated Stock Purchase Agreement among Eclipsys
Corporation, SDK Medical Computer Services Corporation and
the Selling Stockholders listed therein dated June 26, 1997
2.4** Asset Purchase Agreement by and among Motorola, Inc.,
Eclipsys Corporation and Emtek Healthcare Corporation dated
January 30, 1998
3.1*** Third Amended and Restated Certificate of Incorporation of
the Registrant
3.2** Amended and Restated Bylaws of the Registrant
4.1** Specimen certificate for shares of Eclipsys Common Stock
5.1 Opinion of Hale and Dorr LLP
8.1 Opinion of Hale and Dorr LLP as to Tax Matters
</TABLE>
II-1
<PAGE> 275
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
8.2 Opinion of Foley, Hoag & Eliot LLP as to Tax Matters
10.1** Second Amended and Restated Registration Rights Agreement
10.2** Second Amended and Restated Stockholders Agreement
10.3** Warrant to Purchase Non-Voting Common Stock, dated January
24, 1997, granted to First Union Corporation
10.4** Warrant to Purchase Non-Voting Common Stock, dated January
24, 1997, granted to BT Investment Partners, Inc.
10.5**+ Information Systems Technology License Agreement, dated as
of May 3, 1996, by and among Partners Healthcare System,
Inc., Brigham and Women's Hospital, Inc. and Integrated
Healthcare Solutions, Inc.
10.6** Preferred Stock Purchase Agreement by and among Eclipsys
Corporation, General Atlantic Partners 47, L.P. and GAP
Coinvestment Partners, L.P. dated February 4, 1998
10.7** 1996 Stock Plan
10.8** 1998 Stock Incentive Plan
10.9*** Amended and Restated 1998 Employee Stock Purchase Plan
10.10** Employment Letter, dated as of May 1, 1996, to Harvey J.
Wilson from Integrated Healthcare Solutions, Inc.
10.11** First Amended and Restated Credit Agreement dated May 29,
1998, by and among Eclipsys Corporation, First Union
National Bank, f/k/a First Union National Bank of North
Carolina as Agent and BankBoston, N.A. as Co-Agent
10.12*** Letter agreement amending First Amended and Restated Credit
Agreement dated May 29, 1998, by and among Eclipsys
Corporation, First Union National Bank, f/k/a First Union
National Bank of North Carolina as Agent and BankBoston,
N.A., as Co-Agent
10.13** Settlement of Claims Agreement, dated as of March 13, 1998,
between ALLTEL Information Services, Inc. and Eclipsys
Corporation
21** Subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of PricewaterhouseCoopers LLP
23.3 Consent of KPMG Peat Marwick LLP
23.4 Consent of PricewaterhouseCoopers LLP
23.5 Consent of Ernst & Young LLP
23.6 Consent of Hale and Dorr LLP (included in Exhibit 5.1)
23.7 Consent of Hale and Dorr LLP (included in Exhibit 8.1)
23.8 Consent of Foley, Hoag & Eliot LLP (included in Exhibit 8.2)
24 Power of Attorney (included on page II-5)
99.1* Opinion of Morgan Stanley & Co. Incorporated
99.2* Opinion of BT Alex. Brown Incorporated
99.3 Form of Proxy Card of Eclipsys Corporation
99.4 Form of Proxy Card of Transition Systems, Inc.
99.5 Consent of BT Alex. Brown Incorporated
99.6 Consent of Morgan Stanley & Co.
99.7 Consent of Robert F. Raco
99.8 Consent of Patrick T. Hackett
</TABLE>
- ---------------
+ Confidential treatment granted on August 6, 1998 in connection with the
Eclipsys IPO.
* Included as an annex to the Joint Proxy Statement/Prospectus included
herein.
** Incorporated by reference to the Registrant's Registration Statement on Form
S-1, as amended (File No. 333-50781).
II-2
<PAGE> 276
*** Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998 (File No. 000-24539).
(b) Financial Statement Schedules
None
All schedules have been omitted because they are not required or because
the required information is given in the Registrant's Financial Statements or
Notes thereto.
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
The registrant undertakes that every prospectus: (i) that is filed pursuant
to the paragraph immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Securities Act and is used in connection
with an offering of securities subject to Rule 415, will be filed as a part of
an amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions contained in the Restated Certificate of
Incorporation of the Registrant and the laws of the State of Delaware, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
<PAGE> 277
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Delray Beach, Florida, on this 3rd
day of December, 1998.
ECLIPSYS CORPORATION
By: /s/ HARVEY J. WILSON
------------------------------------
Harvey J. Wilson
President and Chief Executive
Officer
II-4
<PAGE> 278
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of Eclipsys Corporation, hereby
severally constitute and appoint Harvey J. Wilson, Robert J. Vanaria, T. Jack
Risenhoover, II and Brent B. Siler, and each of them singly, our true and lawful
attorneys with full power to them, and each of them singly, to sign for us and
in our names in the capacities indicated below, the Registration Statement on
Form S-4 filed herewith and any and all pre-effective and post-effective
amendments to said Registration Statement, and generally to do all such things
in our names and on our behalf in our capacities as officers and directors to
enable Eclipsys Corporation to comply with the provisions of the Securities Act
of 1933, as amended, and all requirements of the Securities and Exchange
Commission, hereby ratifying and confirming our signatures as they may be signed
by our said attorneys, or any of them, to said Registration Statement and any
and all amendments thereto or to any subsequent Registration Statement for the
same offering.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ HARVEY J. WILSON President and Chief Executive Officer December 3, 1998
- ------------------------------------------ (Principal Executive Officer)
Harvey J. Wilson
/s/ ROBERT J. VANARIA Senior Vice President, Administration December 3, 1998
- ------------------------------------------ and Chief Financial Officer
Robert J. Vanaria (Principal Financial and Accounting
Officer)
/s/ STEVEN A. DENNING Director December 3, 1998
- ------------------------------------------
Steven A. Denning
/s/ G. FRED DIBONA Director December 3, 1998
- ------------------------------------------
G. Fred DiBona
/s/ EUGENE FIFE Director December 3, 1998
- ------------------------------------------
Eugene Fife
/s/ WILLIAM E. FORD Director December 3, 1998
- ------------------------------------------
William E. Ford
/s/ JAY B. PIEPER Director December 3, 1998
- ------------------------------------------
Jay B. Pieper
/s/ RICHARD D. SEVERNS Director December 3, 1998
- ------------------------------------------
Richard D. Severns
</TABLE>
II-5
<PAGE> 1
Exhibit 5.1
[HALE AND DORR LETTERHEAD]
December 3, 1998
Eclipsys Corporation
777 East Atlantic Avenue
Suite 200
Delray Beach, FL 33483
Re: Registration Statement on Form S-4
Ladies and Gentlemen:
This opinion is furnished to you in connection with a Registration
Statement on Form S-4 (the "Registration Statement") filed with the Securities
and Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Securities Act"), for the registration of up to 11,107,534 shares
of Common Stock, $.01 par value per share (the "Shares"), of Eclipsys
Corporation, a Delaware corporation (the "Company"), issuable pursuant to the
Agreement and Plan of Merger by and among the Company, Exercise Acquisition
Corp., a Massachusetts corporation (the "Transitory Subsidiary") and Transition
Systems, Inc., a Massachusetts corporation ("TSI") dated as of October 29, 1998
(the "Merger Agreement").
We are acting as counsel for the Company in connection with the issuance by
the Company of the Shares. We have examined signed copies of the Registration
Statement as filed with the Commission. We have also examined and relied upon
the Merger Agreement, minutes of meetings of the Board of Directors of the
Company as provided to us by the Company, record books of the Company as
provided to us by the Company, the Third Amended and Restated Certificate of
Incorporation and the Amended and Restated By-Laws of the Company, and such
other documents as we have deemed necessary for purposes of rendering the
opinions hereinafter set forth.
In our examination of the foregoing documents, we have assumed the
genuineness of all signatures, the authenticity of all documents submitted to us
as originals, the conformity to original documents of all documents submitted to
us as copies, the authenticity of the originals of such latter documents and the
legal competence of all signatories to such documents.
We assume that the appropriate action will be taken, prior to the issuance
of the Shares in accordance with the Merger Agreement, to register and qualify
the Shares for sale under all applicable state securities or "blue sky" laws.
We express no opinion herein as to the laws of any state or jurisdiction
other than the state laws of the Commonwealth of Massachusetts, the Delaware
General Corporation Law statute and the federal laws of the United States of
America. To the extent that any other laws govern the matters as to which we are
opining herein, we have assumed that such laws are identical to the state laws
of the Commonwealth of Massachusetts, and we are expressing no opinion herein as
to whether such assumption is reasonable or correct.
Based upon and subject to the foregoing, we are of the opinion that the
Shares to be issued by the Company have been duly authorized for issuance and,
when such Shares are issued in accordance with the terms and conditions of the
Merger Agreement, such Shares will be validly issued, fully paid and
nonassessable.
It is understood that this opinion is to be used only in connection with
the issuance of the Shares while the Registration Statement is in effect.
Please note that we are opining only as to the matters expressly set forth
herein, and no opinion should be inferred as to any other matters. This opinion
is based upon currently existing statutes, rules,
<PAGE> 2
regulations and judicial decisions, and we disclaim any obligation to advise you
of any change in any of these sources of law or subsequent legal or factual
developments which might affect any matters or opinions set forth herein.
We hereby consent to the filing of this opinion with the Commission as an
exhibit to the Registration Statement in accordance with the requirements of
Item 601(b)(5) of the Regulation S-K under the Securities Act and to the use of
our name therein and in the related Prospectus under the caption "Legal
Matters." In giving such consent, we do not hereby admit that we are in the
category of persons whose consent is required under Section 7 of the Securities
Act or the rules and regulations of the Commission.
Very truly yours,
/s/ Hale and Dorr LLP
HALE AND DORR LLP
<PAGE> 1
EXHIBIT 8.1
[HALE AND DORR LLP LETTERHEAD]
December 2, 1998
Eclipsys Corporation
777 East Atlantic Avenue
Suite 200
Delray Beach, FL 33483
Re: Merger pursuant to Agreement and Plan of Merger among Eclipsys
Corporation, Exercise Acquisition Corp., and Transition
Systems, Inc.
Ladies and Gentlemen:
This opinion is being delivered to you in connection with the filing
of a registration statement (the "Registration Statement") on Form S-4, which
includes the Joint Proxy Statement/Prospectus relating to the Agreement and
Plan of Merger dated as of October 29, 1998 (the "Merger Agreement"), by and
among Eclipsys Corporation, a Delaware corporation ("Parent"), Exercise
Acquisition Corp., a Massachusetts corporation and wholly owned subsidiary of
Parent ("Sub"), and Transition Systems, Inc., a Massachusetts corporation
("Target"). Pursuant to the Merger Agreement, Sub will merge with and into
Target (the "Merger"). Except as otherwise provided, capitalized terms not
defined herein have the meanings set forth in the Merger Agreement and the
exhibits thereto or in the letters delivered to Hale and Dorr LLP by Parent and
Target containing certain representations of Parent and Target relevant to this
opinion (the "Representation Letters"). All section references, unless
otherwise indicated, are to the United States Internal Revenue Code of 1986, as
amended (the "Code").
In our capacity as counsel to Parent in the Merger, and for purposes
of rendering this opinion, we have examined and relied upon the Registration
Statement, the Merger Agreement and the exhibits thereto, the Representation
Letters, and such other documents as we considered relevant to our analysis.
In our examination of documents, we have assumed the authenticity of original
documents, the accuracy of copies, the genuineness of signatures, and the legal
capacity of signatories.
<PAGE> 2
Eclipsys Corporation
December 2, 1998
Page 2
We have assumed that all parties to the Merger Agreement and to any
other documents examined by us have acted, and will act, in accordance with the
terms of such Merger Agreement and documents and that the Merger will be
consummated at the Effective Time pursuant to the terms and conditions set
forth in the Merger Agreement without the waiver or modification of any such
terms and conditions. Furthermore, we have assumed that all representations
contained in the Merger Agreement, as well as those representations contained
in the Representation Letters, are, and at the Effective Time will be, true and
complete in all material respects, and that any representation made in any of
the documents referred to herein "to the best of the knowledge and belief" (or
similar qualification) of any person or party is correct without such
qualification. We have also assumed that as to all matters for which a person
or entity has represented that such person or entity is not a party to, does
not have, or is not aware of, any plan, intention, understanding, or agreement,
there is no such plan, intention, understanding, or agreement. We have not
attempted to verify independently such representations, but in the course of
our representation, nothing has come to our attention that would cause us to
question the accuracy thereof.
The conclusions expressed herein represent our judgment as to the
proper treatment of certain aspects of the Merger under the income tax laws of
the United States based upon the Code, Treasury Regulations, case law, and
rulings and other pronouncements of the Internal Revenue Service (the "IRS") as
in effect on the date of this opinion. No assurances can be given that such
laws will not be amended or otherwise changed prior to the Effective Time, or
at any other time, or that such changes will not affect the conclusions
expressed herein. Nevertheless, we undertake no responsibility to advise you
of any developments after the Effective Time in the application or
interpretation of the income tax laws of the United States.
Our opinion represents our best judgment of how a court would decide
if presented with the issues addressed herein and is not binding upon either
the IRS or any court. Thus, no assurances can be given that a position taken
in reliance on our opinion will not be challenged by the IRS or rejected by a
court.
This opinion addresses only the specific United States federal income
tax consequences of the Merger set forth below, and does not address any other
federal, state, local, or foreign income, estate, gift, transfer, sales, use,
or other tax consequences that may result from the Merger or any other
transaction (including any transaction undertaken in connection with the
Merger). We express no opinion regarding the tax consequences of the Merger to
shareholders of Target that are subject to special tax rules, and we express no
opinion regarding the tax consequences of the Merger arising in connection with
the ownership of options or warrants for Target stock.
<PAGE> 3
Eclipsys Corporation
December 2, 1998
Page 3
On the basis of, and subject to, the foregoing, and in reliance upon
the representations and assumptions described above, we are of the opinion that
the Merger will constitute a reorganization within the meaning of Section
368(a).
In rendering this opinion, we have assumed that Foley, Hoag & Eliot
LLP has delivered, and has not withdrawn, an opinion that is substantially
similar to this one. No opinion is expressed as to any federal income tax
consequence of the Merger except as specifically set forth herein, and this
opinion may not be relied upon except with respect to the consequences
specifically discussed herein.
This opinion is intended solely for the purpose of inclusion as an
exhibit to the Registration Statement. It may not be relied upon for any other
purpose or by any other person or entity, and may not be made available to any
other person or entity without our prior written consent. We hereby consent to
the filing of this opinion as an exhibit to the Registration Statement and
further consent to the use of our name in the Registration Statement in
connection with references to this opinion and the tax consequences of the
Merger. In giving this consent, however, we do not hereby
<PAGE> 4
Eclipsys Corporation
December 2, 1998
Page 4
admit that we are in the category of persons whose consent is required under
Section 7 of the Securities Act of 1933, as amended.
Very truly yours,
HALE AND DORR LLP
<PAGE> 1
EXHIBIT 8.2
[FOLEY, HOAG & ELIOT LLP LETTERHEAD]
December 2, 1998
TRANSITION SYSTEMS, INC.
One Boston Place
Boston, MA 02108
Re: Proposed Merger of Exercise Acquisition Corp. and Transition
Systems, Inc.
Ladies and Gentlemen:
We have acted as counsel to Transition Systems, Inc., (the "Company"), a
Massachusetts corporation, in connection with the proposed merger (the
"Merger") of Exercise Acquisition Corp. ("Merger Sub"), a Massachusetts
corporation and wholly-owned subsidiary of Eclipsys Corporation ("Parent"), a
Delaware corporation, with and into the Company, in accordance with the
Agreement and Plan of Merger among Parent, Merger Sub, and the Company, dated
as of October 29, 1998 (the "Agreement"). Capitalized terms used but not
defined herein shall have the respective meanings ascribed to them in the
Agreement.
We have examined the law and such papers, including the Agreement, as
we have deemed necessary to render this opinion. As to questions of fact
material to our opinion we have relied upon representations set forth in the
Agreement (including the Exhibits), and such other documents pertaining to the
Merger as we have deemed appropriate and necessary. As to questions of fact
material to our opinion, we have relied upon representations of Parent, Merger
Sub, the Company, and certain stockholders of the Company contained in letters
of even date addressed to us (the "Letters of Representation"), without
undertaking to verify the same by independent investigation.
<PAGE> 2
December 2, 1998
Page 2
In our examination we have assumed that (i) the Merger will be
consummated in accordance with the terms of the Agreement; (ii) each entity
that is a party to any of the documents (the "Documents") described in the
preceding paragraphs has been duly organized under the laws of its state or
country of organization, is validly existing and in good standing under such
laws, and is duly qualified and in good standing in each jurisdiction in which
it is required to be qualified to engage in the transactions contemplated by
the Documents; (iii) each such entity has full power, authority, capacity and
legal right to enter into and perform the terms of the Documents and the
transactions contemplated thereby; (iv) the copies or originals of the
Documents furnished to us are authentic (if originals) or accurate (if copies),
those that are contracts or instruments are enforceable and effective in
accordance with their terms against all parties thereto, and all signatures are
genuine; (v) any representations made in the Documents are, and will continue
to be, true and complete, and no default exists under any of the Documents;
(vi) the business and affairs of each of the entities that is a party to any of
the Documents will be conducted in accordance with the Documents and all
relevant laws; (vii) no actions will be taken, no change in any of the
Documents will occur, and no other events will occur, after the date hereof,
that would have the effect of altering the facts, Documents or assumptions upon
which this opinion is based; and (viii) the business reasons for the Merger
will constitute a valid business purpose, within the meaning of Treasury
Regulation section 1.368-1(b) and (c), for the Merger.
The opinion rendered herein is based upon the provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), Treasury Department
proposed, temporary and final regulations, judicial decisions, and rulings and
administrative interpretations of the Internal Revenue Service, as each of the
foregoing exists on the date hereof. The opinion rendered below is not binding
on the Internal Revenue Service or a court of law, and no assurance can be
given that legislative or administrative action or judicial decisions that
differ from the opinion rendered below will not be forthcoming. Any such
differences could be retroactive to transactions or business operations prior
to such action or decisions.
We express no opinion as to the federal income tax consequences other
than that described below, if any, or as to the effect of the Merger on prior
transactions, or as to any state, local or foreign income or other tax
consequences with respect to the Merger.
Based on the foregoing, we are of opinion, under existing law as of the
date hereof, that, at the Effective Time, the Merger will constitute a
reorganization within the meaning of section 368(a) of the Code.
We are furnishing this letter to you solely for the purpose of
satisfying Section 6.08 of the Agreement. This letter is not to be used,
circulated, quoted or otherwise referred to for any other purpose without our
prior written consent. We hereby consent, however, to the filing with the
Securities and Exchange Commission of this opinion as an exhibit to the
registration statement on Form S-4 filed by Parent with the Securities and
Exchange Commission. In giving such consent,
<PAGE> 3
December 2, 1998
Page 3
we do not thereby admit that we are in the category of persons whose consent is
required under Section 7 of the Securities Act of 1933.
Very truly yours,
FOLEY, HOAG & ELIOT LLP
By: /s/ BRUCE A. KINN
-----------------------------------
A Partner
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of Eclipsys Corporation of our report dated
June 27, 1997 relating to the financial statements of Alltel Healthcare
Information Services, Inc. which appears in such Prospectus. We also consent to
the reference to us under the heading "Experts" in such Prospectus.
/s/ PricewaterhouseCoopers LLP
--------------------------------------
Atlanta, Georgia
December 2, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of Eclipsys Corporation of our report dated
April 20, 1998, except as to Note 13 which is as of June 9, 1998, relating to
the financial statements of Eclipsys Corporation, which appears in such
Prospectus. We also consent to the reference to us under the heading "Experts"
in such Prospectus.
/s/ PricewaterhouseCoopers LLP
--------------------------------------
Atlanta, Georgia
December 2, 1998
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Eclipsys Corporation
We consent to the inclusion of our report dated June 12, 1997 (except for
Note 10 which is as of June 26, 1997), relating to the balance sheets of SDK
Healthcare Information Systems as of April 30, 1997 and the related statements
of operations, stockholders' equity and cash flows for each of the fiscal years
in the two-year period ended April 30, 1997 in this registration statement on
Form S-4 of Eclipsys Corporation.
/s/ KPMG PEAT MARWICK LLP
-------------------------------------------------------------------------------
Boston, Massachusetts
December 2, 1998
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-4,
related to the acquisition of Transition Systems, Inc. by Eclipsys Corporation,
of our report dated November 16, 1998, on our audits of the financial statements
of Transition Systems, Inc. as of September 30, 1998 and 1997 and for the years
ended September 30, 1998, 1997 and 1996. We also consent to the reference to our
firm under the caption "Experts."
/s/ PricewaterhouseCoopers LLP
--------------------------------------
Boston, Massachusetts
December 2, 1998
<PAGE> 1
EXHIBIT 23.5
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated March 13, 1998, except for Note 12 as to which the
date is October 28, 1998, in the Registration Statement (Form S-4) and related
Joint Proxy Statement/Prospectus of Eclipsys Corporation for the registration of
its common stock.
/s/ ERNST & YOUNG LLP
------------------------------------------------------------------------
Walnut Creek, California
December 1, 1998
<PAGE> 1
Exhibit 99.3
PROXY
ECLIPSYS CORPORATION
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF ECLIPSYS
CORPORATION
FOR THE SPECIAL MEETING ON DECEMBER 30, 1998
The undersigned, having read the Notice of Special Meeting of Stockholders
of Eclipsys Corporation to be held on December 30, 1998, at 10:00 a.m. local
time (the "Special Meeting") and the related Joint Proxy Statement/Prospectus,
hereby appoints Harvey J. Wilson, Robert J. Vanaria and T. Jack Risenhoover, II,
and each of them, with full power of substitution in each, the proxies of the
undersigned to represent the undersigned and vote all shares of Eclipsys
Corporation Voting Common Stock which the undersigned may be entitled to vote at
the Special Meeting, and at any adjournment or postponement thereof, as follows
on the reverse side.
<TABLE>
<CAPTION>
<S> <C> <C>
CONTINUED AND TO BE SIGNED
SEE REVERSE SIDE ON REVERSE SIDE. SEE REVERSE SIDE
</TABLE>
[X] PLEASE MARK
VOTES AS IN
THIS EXAMPLE.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
BELOW BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS GIVEN, THIS PROXY WILL
BE VOTED FOR THE PROPOSAL.
<TABLE>
<S> <C> <C> <C>
1. Approval of the issuance of shares of Eclipsys FOR AGAINST ABSTAIN
Corporation Common Stock, par value $.01 per share [ ] [ ] [ ]
("Eclipsys Voting Common Stock"), as contemplated by the
Agreement and Plan of Merger, dated October 29, 1998 (the
"Merger Agreement") among Eclipsys Corporation (the
"Company"), Exercise Acquisition Corp., a Massachusetts
corporation and a wholly owned subsidiary of the Company
("Sub"), and Transition Systems, Inc., a Massachusetts
corporation ("TSI"). The Merger Agreement provides that,
among other things, (a) Sub will be merged with and into
TSI, with TSI being the surviving corporation and becoming a
wholly owned subsidiary of the Company, and (b) each
outstanding share of Voting and Non-Voting Common Stock of
TSI, par value $.01 per share, will be converted into the
right to receive 0.525 shares of Eclipsys Voting Common
Stock.
</TABLE>
In their discretion, the proxies are authorized to vote upon such other
matters as may properly come before the Special Meeting or any adjournment
thereof.
The undersigned hereby revokes any proxy to vote said shares previously
given and acknowledges receipt of the Notice of the Special Meeting and the
Joint Proxy Statement/Prospectus, dated December 4, 1998. Attendance of the
undersigned at the Special Meeting or at any adjournment thereof will not be
deemed to revoke this proxy unless the undersigned shall revoke this proxy in
writing.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
MARK HERE FOR [ ] MARK HERE IF [ ]
ADDRESS CHANGE YOU PLAN TO
AND NOTE AT LEFT ATTEND THE MEETING
<CAPTION>
<S> <C>
</TABLE>
NOTE: Please sign this Proxy EXACTLY as your name(s) appear(s) on it. Joint
owners must each sign personally. If you are signing in a capacity such as
Attorney, Executor, Administrator, Guardian or Trustee, please print such
title below your signature and attach evidence of your authority to sign
in such capacity. If the stockholder is a corporation, a duly authorized
officer or officers should sign the full corporate name and their name and
title, affix the corporate seal and attach a certified copy of the
resolution or bylaw evidencing authority.
Signature: ____ Date: Signature: ____ Date:
PLEASE COMPLETE AND PROMPTLY RETURN THIS PROXY USING THE ENCLOSED POSTAGE
PREPAID ENVELOPE.
<PAGE> 1
Exhibit 99.4
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
TRANSITION SYSTEMS, INC.
SPECIAL MEETING OF STOCKHOLDERS -- DECEMBER 30, 1998
The undersigned stockholder of Transition Systems, Inc. ("TSI"), hereby
appoints Robert F. Raco, Christine Shapleigh and Paula J. Malzone, or any of
them, with power of substitution, as proxies of the undersigned to attend the
Special Meeting of Stockholders of TSI to be held on December 30, 1998, at 10:00
A.M., local time, at the offices of Foley, Hoag & Eliot LLP, located at One Post
Office Square, Boston, Massachusetts, and any adjournment thereof, and to vote
the number of shares of Common Stock the undersigned would be entitled to vote
if personally present as indicated on the reverse side of this proxy card.
<TABLE>
<CAPTION>
<S> <C> <C>
PLEASE BE SURE TO COMPLETE AND SIGN
SEE REVERSE SIDE THE PROXY ON THE REVERSE SIDE. SEE REVERSE SIDE
</TABLE>
<PAGE> 2
[X] PLEASE MARK
VOTES AS IN
THIS EXAMPLE.
THIS PROXY WILL BE VOTED AS YOU SPECIFY BELOW AND AS TO OTHER MATTERS THE
UNDERSIGNED HEREBY CONFERS DISCRETIONARY AUTHORITY UPON SAID PROXIES. IF NO
SPECIFICATION IS MADE, IT WILL BE VOTED FOR APPROVAL OF THE MERGER AND THE
MERGER AGREEMENT.
<TABLE>
<S> <C> <C> <C>
To approve and adopt the Agreement and Plan of Merger FOR AGAINST ABSTAIN
(the "Merger Agreement") dated as of October 29, 1998 among [ ] [ ] [ ]
TSI, Eclipsys Corporation ("Eclipsys") and its wholly-owned
subsidiary Exercise Acquisition Corp. ("Merger Sub"),
pursuant to which Merger Sub will be merged into TSI, with
TSI becoming a wholly-owned subsidiary of Eclipsys (the
"Merger"), and to approve and adopt the Merger.
</TABLE>
The undersigned hereby revokes any proxy to vote said shares heretofore
given and acknowledges receipt of the Notice of Special Meeting of Stockholders
and the Joint Proxy Statement/Prospectus, both dated December 4, 1998.
If the address below is incorrect or the zip code is missing, please
indicate corrections or provide zip code to facilitate future mailings.
PLEASE VOTE, SIGN, DATE AND PROMPTLY
RETURN THIS PROXY USING THE ENCLOSED
ENVELOPE.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
MARK HERE FOR [ ] MARK HERE IF [ ]
ADDRESS CHANGE YOU PLAN TO
AND NOTE AT LEFT ATTEND THE MEETING
</TABLE>
NOTE: Please sign this proxy exactly
as your name or names appears hereon.
Joint owners should each sign
personally. If signing as Attorney,
Executor, Administrator, Guardian or
Trustee, please give full title and
evidence of authority to act. If a
corporation, please sign full
corporate name by duly authorized
officer or officers, affix corporate
seal and attach certified copy of
resolution or by-law evidencing
authority.
Signature: ________________________ Date: ______________ Signature: ___________
<PAGE> 1
EXHIBIT 99.5
[BT ALEX. BROWN LETTERHEAD]
[BANKERS TRUST LOGO]
December 2, 1998
The Board of Directors
Transition Systems, Inc.
One Boston Place, Suite 2700
Boston, Massachusetts 02108
Members of the Board:
We hereby consent to the inclusion of our opinion letter to the Board
of Directors of Transition Systems, Inc. ("Transition") as Annex C to the Joint
Proxy Statement/Prospectus of Transition and Eclipsys Corporation ("Eclipsys")
relating to the proposed merger transaction involving Transition and Eclipsys.
In giving such consent, we do not admit that we come within the category of
persons whose consent is required under, and we do not admit that we are
"experts" for purposes of, the Securities Act of 1933, as amended, and
the rules and regulations promulgated thereunder.
By: /s/ BT ALEX. BROWN INCORPORATED
--------------------------------
BT ALEX. BROWN INCORPORATED
<PAGE> 1
Exhibit 99.6
CONSENT OF MORGAN STANLEY & CO. INCORPORATED
We hereby consent to the use of Annex B containing our opinion letter
dated October 28, 1998 (the "Opinion") to the Board of Directors of Transition
Systems, Inc. ("TSI") in the Joint Proxy Statement/Prospectus constituting a
part of the registration statement on Form S-4 of Eclipsys Corporation
("Eclipsys") relating to the business combination of Eclipsys and TSI and to
the references to our firm name in the Joint Proxy Statement/Prospectus in
connection with references to the Opinion. In giving this consent, we do not
admit that we come within the category of persons whose consent is required
under Section 7 of the Securities act of 1933, as amended, or the rules and
regulations of the Securities Exchange Commission promulgated thereunder
(collectively, the "Act"), nor do we admit that we are experts with respect to
any part of such registration statement within the meaning of the term
"experts" as used in the Act.
Date: December 2, 1998
Morgan Stanley & Co. Incorporated
By: /s/ SCOTT R. BRAKEBILL
---------------------------
Name: Scott R. Brakebill
Title: Managing Director
<PAGE> 1
EXHIBIT 99.7
CONSENT
I hereby consent to being nominated as a director of Eclipsys Corporation and
to being named as a person who will be so nominated in the S-4 Registration
Statement to be filed by Eclipsys Corporation on behalf of Transition Systems,
Inc. and Eclipsys Corporation.
Dated December 2, 1998 /s/ ROBERT F. RACO
-------------------------------
Robert F. Raco
<PAGE> 1
EXHIBIT 99.8
CONSENT
I hereby consent to being nominated as a director of Eclipsys Corporation and
to being named as a person who will be so nominated in the S-4 Registration
Statement to be filed by Eclipsys Corporation on behalf of Transition Systems,
Inc. and Eclipsys Corporation.
Dated December 2, 1998 /s/ PATRICK T. HACKETT
-------------------------------
Patrick T. Hackett
