<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): December 31, 1998
ECLIPSYS CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware
(State or Other Jurisdiction of Incorporation)
<TABLE>
<S> <C>
000-24539 65-0632092
(Commission File Number) (IRS Employer Identification No.)
</TABLE>
777 East Atlantic Avenue
Suite 200
Delray Beach, Florida
33483
(Address of principal executive offices)
(561) 243-1440
(Registrant's Telephone Number, Including Area Code)
Not Applicable
(Former Name or Address, if Changed Since Last Report)
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On December 31, 1998 (the "Closing Date"), pursuant to an Agreement and
Plan of Merger dated as of October 29, 1998 (the "Merger Agreement") by and
among Eclipsys Corporation ("Eclipsys"), Transition Systems, Inc. ("TSI"), a
Massachusetts corporation, and Exercise Acquisition Corp., a Massachusetts
corporation and a wholly owned subsidiary of Eclipsys ("Sub"), Eclipsys acquired
TSI by means of a merger (the "Merger") of Sub with and into TSI, with TSI
remaining as the surviving corporation in the Merger. As a result of the Merger,
TSI is now a wholly owned subsidiary of Eclipsys. TSI provides management
information technology to hospitals, integrated delivery networks, physician
groups and other healthcare organizations. Sub was created solely for the
purpose of effecting the Merger.
Pursuant to the Merger Agreement, each outstanding share of voting and
non-voting common stock of TSI, $.01 par value per share ("TSI Common Stock"),
was converted into the right to receive 0.525 shares of voting common stock of
Eclipsys, $.01 par value per share ("Eclipsys Common Stock"). Based on the
capitalization of TSI as of the Closing Date, TSI stockholders have the right to
receive approximately 9,477,988 shares of Eclipsys Common Stock. No fractional
shares are issuable in the Merger. TSI stockholders otherwise entitled to
receive a fractional share will receive an amount of cash equal to such fraction
multiplied by $27.206 which is the average of the last reported sales price of
Eclipsys Common Stock, as reported on the Nasdaq National Market, on each of the
ten trading days immediately prior to the Closing Date.
All options to purchase TSI Common Stock outstanding immediately prior
to the Merger were assumed by Eclipsys pursuant to the Merger Agreement.
Eclipsys also assumed an outstanding warrant to purchase TSI Common Stock,
which, pursuant to the Merger, is exercisable for approximately 156,412 shares
of Eclipsys Common Stock. Eclipsys will register on a Registration Statement on
Form S-8 approximately 1,792,869 shares of Eclipsys Common Stock for issuance
upon the exercise of stock options formerly exercisable for shares of TSI
Common Stock and approximately 14,227 shares of Eclipsys Common Stock for
issuance to participants in the TSI employee stock purchase plan at the
termination of the current offering period under such plan.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL
INFORMATION AND EXHIBITS.
(a) Financial Statements of Business Acquired.
The financial statements of TSI and HealthVISION, Inc. , a wholly owned
subsidiary of TSI, set forth at pages F-47 through F-62 and F-63 through F-81,
respectively, of the Joint Proxy Statement/Prospectus dated December 4, 1998
(the "Proxy Statement/Prospectus") filed as part of Eclipsys' Registration
Statement on Form S-4 (File No. 333-68353), which Proxy Statement/Prospectus was
filed with the Securities and Exchange Commission (the "Commission") on December
4, 1998, are
<PAGE> 3
hereby incorporated by reference herein and filed as Exhibit 99.1 hereto
pursuant to Rule 12b-23(a)(3) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act").
(b) Pro Forma Financial Information.
The Unaudited Pro Forma Condensed Combined Consolidated Financial
statements set forth at pages 60 through 70 of the Proxy Statement/Prospectus,
which Proxy Statement/Prospectus was filed with the Commission on December 4,
1998, are hereby incorporated by reference herein and filed as Exhibit 99.2
hereto pursuant to Rule 12b-23(a)(3) of the Exchange Act.
(c) Exhibits.
See Exhibit Index attached hereto. The exhibits listed in the
Exhibit Index filed as part of this report are filed as part of or are included
in this report.
<PAGE> 4
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
Date: January 12, 1999 ECLIPSYS CORPORATION
By: /s/ ROBERT J. VANARIA
-----------------------------
Name: Robert J. Vanaria
Title: Senior Vice President and
Chief Financial Officer
<PAGE> 5
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. Description
----------- -----------
<S> <C>
2.1* Agreement and Plan of Merger dated as of June 21, 1998, by and
among Eclipsys, TSI and Sub
23.1 Consent of Ernst & Young LLP
23.2 Consent of PricewaterhouseCoopers LLP
99.1 Financial Statements of TSI and HealthVISION, Inc.
99.2 Unaudited Pro Forma Condensed Combined Consolidated Financial
Statements of Eclipsys and TSI
99.3 Press Release dated December 31, 1998
99.4 Amendment to the Second Amended and Restated Registration Rights
Agreement, dated December 31, 1998, by and among Eclipsys and
certain of its stockholders
* Incorporated by reference from the Registration Statement on Form
S-4 (File No. 333-68353) of Eclipsys
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Form 8-K of Eclipsys
Corporation of our report dated March 13, 1998, except for Note 12 as to which
the date is October 28, 1998, with respect to our audits of the consolidated
financial statements of Health VISION, Inc. for the years ended December 31,
1996 and 1997 included in Eclipsys' Form S-4 (333-68353) filed with the
Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
---------------------
Walnut Creek, California
January 7, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Form 8-K dated
January 12, 1999, 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.
/s/ PricewaterhouseCoopers LLP
--------------------------
Boston, Massachusetts
January 12, 1999
<PAGE> 1
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> 2
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> 3
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> 4
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> 5
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> 6
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> 7
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> 8
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> 9
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> 10
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> 11
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> 12
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> 13
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> 14
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> 15
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> 16
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> 17
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> 18
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> 19
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> 20
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> 21
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> 22
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> 23
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> 24
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> 25
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> 26
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> 27
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> 28
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> 29
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> 30
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> 31
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> 32
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> 33
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> 34
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> 35
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> 1
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> 2
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> 3
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> 4
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> 5
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> 6
- ---------------
(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> 7
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> 8
(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> 9
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> 10
(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> 11
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> 1
EXHIBIT 99.3
[ECLIPSYS CORPORATION LETTERHEAD]
Contact:
Stephanie P. Massengill, Corporate Development & Communications (media)
(561)243-1457 - [email protected]
Bob Vanaria, CFO (investors)
(561)266-2324 - [email protected]
ECLIPSYS COMPLETES ACQUISITION OF TRANSITION SYSTEMS
DELRAY BEACH, FL -- DEC. 31, 1998 -- Eclipsys Corporation (Nasdaq:ECLP)
announces the completion of the acquisition of Transition Systems, Inc. (TSI,
Nasdaq:TSIX), effective today. Shareholders of both companies approved the
transaction on Dec. 30, 1998.
Eclipsys is a leading provider of outcomes-focused healthcare information
technology solutions, while TSI is the leading provider of healthcare
outcomes-enhancement software and services.
Prior to Eclipsys completing the TSI acquisition, TSI completed its
acquisition of HealthVISION, a Santa Rosa, CA-based leading developer of
integrated but separable clinical modules for healthcare providers.
"This acquisition enables Eclipsys to continue to build on our
accomplishments as "The Outcomes Company(TM), and take a dramatic leap forward
in helping our customers balance and improve their integrated clinical,
financial and customer-satisfaction outcomes," said Eclipsys President and CEO
Harvey J. Wilson. "The acquired products complement our Sunrise(TM) product line
and help us move forward the general availability of clinical products currently
in development."
Measured by customer base and revenues, this latest acquisition makes
Eclipsys one of the top healthcare information technology companies in the
industry. Eclipsys has one or more of its products in over 1,300 integrated
health networks, medical centers and hospitals in North America, the United
Kingdom, Western Europe, the Eastern Rim and Australia.
Wilson noted that it is Eclipsys' policy to incorporate acquired
companies into the mainstream company as soon as the acquisition is final. "We
are a company founded on the principle that integration is a critical component
to success. That is just as true of us as a company as it is of our products. We
are extremely pleased to welcome these talented employees to the Eclipsys
family."
-MORE-
THE OUTCOMES COMPANY(TM)
<PAGE> 2
ECLIPSYS CORPORATION
ACQUISITION OF TSI FINALIZED
DEC. 31, 1998
PAGE 2 OF 2
Eclipsys Corporation is a Delray Beach, FL-based healthcare
information-technology company providing integrated information software and
service solutions to the healthcare industry, partnering with its customers to
help them improve clinical, administrative and financial outcomes. The company's
new Sunrise(TM) product line is a multi-tiered, browser-enabled suite of
rules-oriented applications that provide real-time clinical decision support and
emphasize direct physician knowledge-based order entry. Sunrise also supports
managed care and multi-entity processing for IHN integrated combined business
offices (CBOs). Products can be purchased in combination to provide an
enterprise-wide solution or individually to address specific needs. Eclipsys
also provides a wide range of outsourcing, remote processing and networking
services to meet the information-technology needs of its customers.
For more information, contact Eclipsys at [email protected],
(561)266-2324.
-30-
Statements in this news release concerning future results, performance or
expectations are forward-looking statements. Because such statements involve
risks and uncertainties, actual results may differ materially from those
expressed or implied by such forward-looking statements. These risks include
risks relating to integration of the combined businesses and their products,
uncertainties regarding future financial results and other risks described in
the filings of Eclipsys or TSI with the Securities and Exchange Commission.
Product and company names in this news release are trademarks or registered
trademarks of their respective companies.
<PAGE> 1
EXHIBIT 99.4
AMENDMENT TO
SECOND AMENDED AND RESTATED
REGISTRATION RIGHTS AGREEMENT
THIS AMENDMENT, dated as of December 31, 1998 (this "Amendment"), is
entered into by and among Eclipsys Corporation, a Delaware corporation (the
"Company"), Partners HealthCare Systems, Inc., a Massachusetts not-for-profit
corporation ("Partners"), General Atlantic Partners 38, L.P., a Delaware limited
partnership ("GAP 38"), General Atlantic Partners 28, L.P., a Delaware limited
partnership ("GAP 28"), GAP Coinvestment Partners, L.P., a New York limited
partnership ("GAP Coinvestment"), General Atlantic Partners 47, L.P., a Delaware
limited partnership ("GAP 47"), Harvey J. Wilson ("Wilson"), Wilfam Ltd., a
Florida limited partnership ("Wilfam"), ALLTEL Information Services, Inc., an
Arkansas corporation ("Alltel"), First Union Corporation, a North Carolina
corporation ("FUCP"), BT Investment Partners, Inc., a Delaware corporation
("BT"), Brean Murray & Co.,Inc., a Delaware corporation, A. Brean Murray (Brean
Murray & Co., Inc. and A. Brean Murray are collectively referred to herein as
"Brean Murray"), Gerald Manolovici ("Manolovici"), St. Paul Venture Capital IV,
L.L.C., a Delaware limited liability company ("St. Paul"), Peter Karmanos, Jr.
("Karmanos"), the Kaufman Stockholders (as defined in the Agreeement (as defined
below)), Motorola, Inc., a Delaware Corporation ("Motorola"), and Warburg Pincus
Ventures, L.P., a Delaware limited partnership ("Warburg").
WHEREAS, the parties hereto (or their predecessors in interest) other
than Warburg are parties to a Second Amended and Restated Registration Rights
Agreement dated as of January, 1998 (the "Agreement"); and
WHEREAS, as contemplated by Section 6.17 of that certain Agreement and
Plan of Merger dated October 29, 1998 among the Company, Exercise Acquisition
Corp. and Transition Systems, Inc. (the "Merger Agreement"), the parties to the
Agreement desire to amend the Agreement, effective upon the closing of the
merger contemplated by the Merger Agreement (the "Merger"), to add Warburg as a
party thereto with the rights provided herein; and
WHEREAS, the Agreement can be amended by the Company and the existing
"Designated Holders" holding at least eighty-five percent (85%) of the existing
"Registrable Securities" owned by all of such Designated Holders;
NOW, THEREFORE, in consideration of the mutual promises and agreements
set forth herein, and other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto agree as follows:
<PAGE> 2
1. Effective upon the closing of the Merger, the Agreement shall
be amended as follows:
a. The definition of "Designated Holder" in Section 1 of the
Agreement shall be deleted and the following definition shall be substituted in
lieu thereof:
"'Designated Holder' means each of the Partners Stockholders, the
General Atlantic Stockholders, the Wilson Stockholders, the Alltel
Stockholders, the FUCP Stockholders, the BT Stockholders, the Brean
Murray Stockholders, the Manolovici Stockholders, the St. Paul
Stockholders, the Karmanos Stockholders, the Kaufman Stockholders, the
Motorola Stockholders and the Warburg Stockholders and any transferee
of any of them to which Registrable Securities have been transferred in
accordance with the provisions of this Agreement, other than a
transferee to whom such securities have been transferred pursuant to a
registration statement under the Securities Act or Rule 144 or
regulation S under the Securities Act."
b. The following two definitions shall be added to Section 1:
"'Warburg' means Warburg Pincus Ventures, L.P., a Delaware limited
partnership.
'Warburg Stockholders' means Warburg and any Affiliate thereof to which
Registrable Securities are transferred."
c. Section 3(a) of the Agreement shall be deleted and the
following shall be substituted in lieu thereof:
"(a) Request for Demand Registration. At any time after six
months following the IPO Effectiveness Date, the Wilson Stockholders,
the General Atlantic Stockholders, the Partners Stockholders, the
Alltel Stockholders, the FUCP Stockholders, the BT Stockholders, the
Motorola Stockholders or the Warburg Stockholders may make a written
request to the Company to register (each of such Wilson Stockholders,
General Atlantic Stockholders, Partners Stockholders, Alltel
Stockholders, FUCP Stockholders, BT Stockholders, Motorola Stockholders
or Warburg Stockholders making such request being referred to
hereinafter as the 'Initiating Holder'), under the Securities Act and
under the securities or 'blue sky' laws of any jurisdiction reasonably
designated by such holder or holders, the number of Registrable
Securities, the offer and sale of which shall result in net proceeds
(after expenses and underwriting commissions and discounts) to such
Initiating Holder of at least $5,000,000 (a 'Demand Registration'), and
the Company shall use its reasonable efforts to cause such Demand
Registration to become and remain effective not
2
<PAGE> 3
later than three (3) months after it receives a request for a Demand
Registration; provided, however, that the Company shall not be required
to effect more than one Demand Registration at the request of the
Wilson Stockholders, two Demand Registrations at the request of the
General Atlantic Stockholders, one Demand Registration at the request
of the Partners Stockholders, one Demand Registration at the request of
the Alltel Stockholders, one Demand Registration at the request of the
FUCP Stockholders, one Demand Registration at the request of the BT
Stockholders, two Demand Registrations at the request of the Motorola
Stockholders and one Demand Registration at the request of the Warburg
Stockholders, and provided further that, if (x) the Initiating Holder
is a Motorola Stockholder, (y) the Motorola Stockholders' Registrable
Securities may not then be sold pursuant to Rule 144 under the
Securities Act (whether or not subject to the volume limitations
thereof), and (z) the Motorola Stockholders request the registration of
all of their Registrable Securities, then the Company shall be required
to effect a Demand Registration at the request of the Motorola
Stockholders even if the offer and sale of all of the Motorola
Stockholders' Registrable Securities shall result in end proceeds to
the Motorola Stockholders of less than $5,000,000. For purposes of the
preceding sentence, two or more registration statements filed in
response to one demand shall be counted as one registration statement.
If at the time of any request to register Registrable Securities
pursuant to this Section 3(a), the Company is engaged in, or has fixed
plans to engage in within three months of the time of such request, a
registered public offering or is engaged in any other activity which,
in the good faith determination of the Board of Directors of the
Company, would be adversely affected by the requested registration to
the material detriment of the Company, then the Company may at its
option direct that such request be delayed for a reasonable period not
in excess of three months from the effective date of such offering or
the date of completion of such other material activity, as the case may
be, such right to delay a request to be exercised by the Company not
more than once in any one-year period. In addition, the Company shall
not be required to effect any Demand Registration within three months
after the effective date of any other Registration Statement of the
Company. Notwithstanding the foregoing, a Demand Registration may not
be initiated by:
(i) (x) the Partners Stockholders within 12 months of
the effective date of any Registration Statement of the Company in
which: (1) the Partners Stockholders were offered an opportunity to
register Registrable Securities pursuant to Section 3(b) or Section 4
and (2) none of the Registrable Securities requested by the Partners
Stockholders for inclusion in such Registration Statement were excluded
pursuant to the last sentence of Section 3(e) or Section 4(a), or (y)
the Motorola Stockholders within 12 months of the effective date of any
Registration Statement of the Company in which: (1) the
3
<PAGE> 4
Motorola Stockholders were offered an opportunity to register
Registrable Securities pursuant to Section 3(b) or Section 4 and were
eligible to participate in such registration; and (2) none of the
Registrable Securities requested by the Motorola Stockholders for
inclusion in such Registration Statement were excluded pursuant to the
last sentence of Section 3(e) or Section 4(a); or
(ii) any of the Wilson Stockholders, the General
Atlantic Stockholders, the FUCP Stockholders, the BT Stockholders or
the Warburg Stockholders within 12 months of the effective date of any
Registration Statement of the Company (x) filed in response to a
request for a Demand Registration pursuant to this Section 3(a), and
(y) in which the Designated Holders were offered an opportunity to
register Registrable Securities in such Demand Registration pursuant to
Section 3(b); or
(iii) the Motorola Stockholders before the second
anniversary of this Agreement; or
(iv) the Warburg Stockholders prior to January 1,
2000.
Each request for a Demand Registration by the Initiating Holders shall
state the amount of the Registrable Securities proposed to be sold and
the intended method of disposition thereof. Upon a request for a Demand
Registration, the Company shall promptly take such steps as are
necessary or appropriate to prepare for the registration of the
Registrable Securities to be registered."
d. Section 10(e)(xiv) of the Agreement shall be deleted in its
entirety and the following shall be substituted in lieu thereof:
"(xiv) if to Warburg:
Warburg Pincus Ventures, L.P.
466 Lexington Avenue
New York, New York 10017
Attention: Patrick T. Hackett
with a copy to:
Willkie Farr & Gallagher
787 Seventh Avenue
New York, New York 10019
Attention: Steven J. Gartner
4
<PAGE> 5
(xv) if to any other Designated Holder, at its address
as it appears on the record books of the Company."
2. Except as expressly amended herein, the Agreement is hereby
confirmed to remain in full force and effect.
3. Capitalized terms used herein and not otherwise defined herein shall
have the meaning ascribed to such terms in the Agreement.
4. The recitals set forth above are hereby incorporated herein and made
a part hereof for all purposes.
5. This Amendment may be executed in multiple counterpart signatures.
6. This Amendment shall become effective upon its execution by Warburg,
the Company, and existing Designated Holders holding at least eighty-five
percent (85%) of the existing Registrable Securities owned by all of the
existing Designated Holders; provided, however, that this Amendment shall not
become effective in any event until the closing of the Merger.
IN WITNESS WHEREOF, the undersigned have executed, or have caused to be
executed, this Amendment on the date first written above.
ECLIPSYS CORPORATION
By: /s/ HARVEY J. WILSON
----------------------------------
Harvey J. Wilson
President
PARTNERS HEALTHCARE SYSTEMS, INC.
By: /s/ JAY B. PIEPER
----------------------------------
Name: Jay B. Pieper
Title: Vice President
5
<PAGE> 6
GENERAL ATLANTIC PARTNERS, 38, L.P.
By: GENERAL ATLANTIC PARTNERS,
LLC, its general partner
By: /s/ THOMAS J. MURPHY
-----------------------------------
Name: Thomas J. Murphy
Title: Attorney in Fact
GENERAL ATLANTIC PARTNERS, 28, L.P.
By: GENERAL ATLANTIC PARTNERS,
LLC, its general partner
By: /s/ THOMAS J. MURPHY
-----------------------------------
Name: Thomas J. Murphy
Title: Attorney in Fact
GENERAL ATLANTIC PARTNERS, 47, L.P.
By: GENERAL ATLANTIC PARTNERS,
LLC, its general partner
By: /s/ THOMAS J. MURPHY
-----------------------------------
Name: Thomas J. Murphy
Title: Attorney in Fact
GAP COINVESTMENT PARTNERS, L.P.
By: /s/ THOMAS J. MURPHY
-----------------------------------
Name: Thomas J. Murphy
Title: Attorney in Fact
6
<PAGE> 7
WILFAM, LTD.
By: /s/ HARVEY J. WILSON
-----------------------------------
Name: Harvey J. Wilson
Title: Managing General Partner
/s/ HARVEY J. WILSON
--------------------------------------------
HARVEY J. WILSON
ALLTEL INFORMATION SERVICES, INC.
By: /s/ JEFFREY H. FOX
-----------------------------------
Name: Jeffrey H. Fox
Title: President
FIRST UNION CORPORATION
By: /s/ Frederick W. Eubank, II
-----------------------------------
Name: Frederick W. Eubank, II
Title: Senior Vice President
BT INVESTMENT PARTNERS, INC.
By: /s/ Christopher Fuller
-----------------------------------
Name: Christopher Fuller
Title: Principal
7
<PAGE> 8
BREAN MURRAY & Co., Inc.
By: /s/ A. BREAN MURRAY
-----------------------------------
Name: A. Brean Murray
Title: President and Chief
Executive Officer
/s/ A. BREAN MURRAY
--------------------------------------------
A. BREAN MURRAY
/s/ GERALD MANOLOVICI
--------------------------------------------
GERALD MANOLOVICI
ST. PAUL VENTURE CAPITAL IV, L.L.C.
By: /s/ EVERETT V. COX
-----------------------------------
Name: Everett V. Cox
Title: General Partner
/s/ PETER KARMANOS, JR.
--------------------------------------------
PETER KARMANOS, JR.
/s/ MICHAEL B. KAUFMAN
--------------------------------------------
MICHAEL B. KAUFMAN
8
<PAGE> 9
/s/ CLAUDIA KAUFMAN
------------------------------------------
CLAUDIA KAUFMAN
MICHAEL B. KAUFMAN AND MICHAEL
M. DAVIS, TRUSTEES OF THE MICHAEL B.
KAUFMAN FAMILY TRUST U/T/A DATED
9/3/93
By: /s/ MICHAEL B. KAUFMAN
---------------------------------
Name: Michael B. Kaufman
Title: Trustee
MICHAEL B. KAUFMAN, TRUSTEE OF THE
AMY R. KAUFMAN 1990 TRUST U/T/A
DECEMBER 28, 1990
By: /s/ MICHAEL B. KAUFMAN
---------------------------------
Name: Michael B. Kaufman
Title: Trustee
MICHAEL B. KAUFMAN, TRUSTEE OF THE
KIM E. KAUFMAN 1990 TRUST U/T/A
DECEMBER 28, 1990
By: /s/ MICHAEL B. KAUFMAN
---------------------------------
Name: Michael B. Kaufman
Title: Trustee
9
<PAGE> 10
MOTOROLA, INC.
By: /s/ R. D. SEVERNS
---------------------------------
Name:
Title:
WARBURG PINCUS VENTURES, L.P.
By: WARBURG, PINCUS & CO., its
General Partner
By: /s/ PATRICK T. HACKETT
---------------------------------
Name: Patrick T. Hackett
Title: General Partner
10
