-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, StrThK8CBdskasbHMARborKRw3+u4UZhj+DXhtFGO96HDr4VrhMkTUtXXmA1JAZB AKPaEm5ChiXHWcm37uADeg== 0000950133-99-000063.txt : 19990113 0000950133-99-000063.hdr.sgml : 19990113 ACCESSION NUMBER: 0000950133-99-000063 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19990112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ECLIPSYS CORP CENTRAL INDEX KEY: 0001034088 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 650632092 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 000-24539 FILM NUMBER: 99504753 BUSINESS ADDRESS: STREET 1: 777 EAST ATLANTIC AVE STE 200 CITY: DELRAY BEACH STATE: FL ZIP: 33483 BUSINESS PHONE: 5612431440 MAIL ADDRESS: STREET 1: 777 EAST ATLANTIC AVE SUITE 200 CITY: DELRAY BEACH STATE: FL ZIP: 33483 8-K 1 FORM 8-K 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) 000-24539 65-0632092 (Commission File Number) (IRS Employer Identification No.)
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) 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 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. 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 5 EXHIBIT INDEX
EXHIBIT NO. Description ----------- ----------- 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
EX-23.1 2 CONSENT OF ERNST & YOUNG LLP 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 EX-23.2 3 CONSENT OF PRICEWATERHOUSECOOPERS LLP 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 EX-99.1 4 FINANCIAL STATEMENTS OF TSI AND HEALTHVISION, INC. 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 2 TRANSITION SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT SHARE DATA)
SEPTEMBER 30, ----------------------------- JUNE 30, 1997 1998 1998 ------------- ------------- ----------- (UNAUDITED) 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 ======= ======== =======
The accompanying notes are an integral part of the consolidated financial statements. F-48 3 TRANSITION SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT PER SHARE DATA)
NINE MONTHS ENDED FISCAL YEAR ENDED SEPTEMBER 30, JUNE 30, --------------------------------- ----------------- 1996 1997 1998 1997 1998 --------- --------- --------- ------- ------- (UNAUDITED) 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
The accompanying notes are an integral part of the consolidated financial statements. F-49 4 TRANSITION SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
NINE MONTHS ENDED FISCAL YEAR ENDED SEPTEMBER 30, JUNE 30, ------------------------------- ------------------- 1996 1997 1998 1997 1998 -------- -------- --------- -------- -------- (UNAUDITED) 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 -- -- -- --
The accompanying notes are an integral part of the consolidated financial statements. F-50 5 TRANSITION SYSTEMS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
NON-VOTING COMMON STOCK COMMON STOCK NON-VOTING TREASURY STOCK ------------------- ---------------- COMMON STOCK ----------------------- SHARES AMOUNT SHARES AMOUNT WARRANT SHARES AMOUNT ---------- ------ ------ ------ ------------ ----------- --------- 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 -- $ -- ========== ==== ======= ==== ==== =========== ========= ADDITIONAL TOTAL PAID-IN RETAINED STOCKHOLDERS' CAPITAL EARNINGS EQUITY ---------- -------- ------------- 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 ======= ======= =======
The accompanying notes are an integral part of the consolidated financial statements. F-51 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 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: Equipment........................... 3 to 5 years Furniture and fixtures.............. 3 to 5 years Leasehold improvements.............. the lesser of the useful life or remaining lease term
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 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.
FISCAL YEAR ENDED SEPTEMBER 30, -------------------------------------------------------------------------- 1996 1997 ------------------------------------ ----------------------------------- PER SHARE PER SHARE INCOME SHARES AMOUNT INCOME SHARES AMOUNT ---------- ----------- --------- ---------- ---------- --------- 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 ---------- ----------- ----- ---------- ---------- ----- FISCAL YEAR ENDED SEPTEMBER 30, ----------------------------------- 1998 ----------------------------------- PER SHARE INCOME SHARES AMOUNT ---------- ---------- --------- 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 ---------- ---------- -----
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 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):
1997 1998 ------- ------- Billed...................................................... $11,973 $10,862 Unbilled.................................................... 7,541 8,332 ------- ------- 19,514 19,194 Allowance for doubtful accounts............................. (175) (200) ------- ------- $19,339 $18,994 ======= =======
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):
1997 1998 ------- ------- 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 ======= =======
F-55 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 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:
WEIGHTED AVERAGE NUMBER OF EXERCISE OPTIONS PRICE ---------- -------- 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 ========== ======
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 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:
1996 1997 1998 ---- ---- ---- 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
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:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------------- ----------------------------- REMAINING WEIGHTED- WEIGHTED- RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE --------------- ----------- ----------- -------------- ----------- -------------- $ 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
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 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 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):
1996 1997 1998 ------- ------ ------ 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 ======= ====== ======
A reconciliation between the Company's effective rate and the U.S. statutory rate is as follows:
SEPTEMBER 30, -------------------- 1996 1997 1998 ---- ---- ---- 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% ==== ==== ====
Components of the Company's deferred tax liabilities and assets are as follows (in thousands):
SEPTEMBER 30, --------------- 1997 1998 ----- ------ 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 ===== ======
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 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):
OPERATING FISCAL YEAR LEASES - ----------- --------- 1999....................................................... $ 627 2000....................................................... 495 2001....................................................... 58 2002....................................................... 2 ------ Total minimum lease payments............................. $1,182 ======
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 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 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 18 HEALTHVISION, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31, 1996 1997 ------------ ------------ 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 =========== ============
See accompanying notes. F-64 19 HEALTHVISION, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, 1996 1997 ------------ ------------ 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) ============ ============
See accompanying notes. F-65 20 HEALTHVISION, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
SERIES A-1 SERIES A-2 7% CONVERTIBLE CONVERTIBLE ADDITIONAL PREFERRED PREFERRED PREFERRED COMMON PAID-IN STOCK STOCK STOCK STOCK CAPITAL --------- ----------- ----------- ------- ------------ 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 ====== ======== ======== ======= ============ CUMULATIVE TOTAL ACCUMULATED TRANSLATION STOCKHOLDER'S DEFICIT ADJUSTMENT EQUITY ------------ ----------- ------------- 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) ============ ========= ============
See accompanying notes. F-66 21 HEALTHVISION, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, 1996 1997 ------------ ------------ 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 ============ ============
See accompanying notes. F-67 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 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 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 25 HEALTHVISION, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. EQUIPMENT AND FURNITURE Equipment and furniture consist of the following at December 31:
1996 1997 ---------- ----------- 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 ========== ===========
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:
1996 1997 ---------- --------- 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 ========== =========
Scheduled maturities of long-term debt as of December 31, 1997 are as follows:
CAPITAL LEASE OBLIGATIONS ------------- 1998........................................................ $454,275 1999........................................................ 45,962 -------- Total minimum payments...................................... 500,237 Less amount representing interest........................... (33,881) -------- Present value of minimum payments........................... $466,356 ========
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 26 HEALTHVISION, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. INCOME TAXES Significant components of the Company's deferred tax assets are as follows:
DECEMBER 31, --------------------------- 1996 1997 ----------- ------------ 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.................................. $ -- $ -- =========== ============
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 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 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:
SHARES UNDER EXERCISE WEIGHTED-AVERAGE OPTIONS PRICE EXERCISE PRICE ------------ ----------- ---------------- 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 ========= =========== =====
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 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: 1998........................................................ $ 836,778 1999........................................................ 771,660 2000........................................................ 152,930 2001........................................................ 31,952 2002........................................................ -- ---------- $1,793,320 ==========
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 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:
1996 1997 ------------ ------------ 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 ============ ============
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 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)
SEPTEMBER 30, 1998 ------------- 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 ============
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements F-77 32 HEALTHVISION, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, -------------------------------- 1997 1998 ------------- ------------- 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) =========== ===========
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements F-78 33 HEALTHVISION, INC. CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
ADDITIONAL CUMULATIVE TOTAL 7% PREFERRED COMMON PAID-IN ACCUMULATED TRANSLATION STOCKHOLDER'S STOCK STOCK CAPITAL DEFICIT ADJUSTMENT DEFICIT ------------ ------- ---------- ------------ ----------- ------------- 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) ==== ======= ========== ============ ======= ============
F-79 34 HEALTHVISION, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------- 1997 1998 ----------- ----------- 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 =========== ===========
The accompanying notes are an integral part to these unaudited condensed consolidated financial statements. F-80 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 EX-99.2 5 FINANCIAL STATEMENTS OF ECLIPSYS AND TSI 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 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 3 UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995
PRO FORMA PRO FORMA ECLIPSYS(1) TSI(2)(3) ADJUSTMENTS COMBINED ----------- ----------- ----------- --------- (IN THOUSANDS EXCEPT PER SHARE DATA) 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)
- --------------- (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 4 UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996
PRO FORMA PRO FORMA ECLIPSYS TSI(1) ADJUSTMENTS COMBINED -------- ----------- ----------- --------- (IN THOUSANDS EXCEPT PER SHARE DATA) 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)
- --------------- (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 5 UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997
ECLIPSYS --------------------------------------------------------------------- ACQUISITION AND OTHER ECLIPSYS ECLIPSYS ALLTEL(1) SDK(2) EMTEK(3) ADJUSTMENTS PRO FORMA TSI(4) ---------- --------- ------ -------- ----------- --------- -------- (IN THOUSANDS EXCEPT PER SHARE DATA) 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 HEALTH- PRO FORMA PRO FORMA VISION(5) ADJUSTMENTS COMBINED --------- ----------- --------- (IN THOUSANDS EXCEPT PER SHARE DATA) 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)
64 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):
ALLTEL SDK EMTEK TOTAL ------ ----- ------- ------- 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 ====== ===== ======= =======
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):
VALUE FIRST YEAR AMORTIZATION ------------------------- ------------------------- ALLTEL SDK EMTEK ALLTEL SDK EMTEK ------- ------ ------ -------- ----- ------ 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 $ -- ======= ====== ====== ======= ==== ====
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 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): 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) =======
(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 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 9 UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
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) 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)
- --------------- (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 10 (6) Represents adjustments for amortization expense related to the Emtek Acquisition as if it had occurred January 1, 1997 as follows (in thousands): Amortization of capitalized software development costs reflected in the historical accounts prior to the Emtek Acquisition..................................... $(145) Acquired technology......................................... 68 ----- Total.............................................. $ (77) =====
(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): 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) =====
(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 11 UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
ADJUSTMENTS FOR SEPTEMBER 30, JUNE 30, THE 1998 1998 HEALTHVISION ADJUSTMENTS PRO FORMA ECLIPSYS TSI ACQUISITION(1) FOR THE MERGER COMBINED ------------- -------- ---------------- -------------- --------- (IN THOUSANDS) 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 ========= ======= =========
- --------------- (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 EX-99.3 6 PRESS RELEASE DATED DECEMBER 31, 1998 1 EXHIBIT 99.3 [ECLIPSYS CORPORATION LETTERHEAD] Contact: Stephanie P. Massengill, Corporate Development & Communications (media) (561)243-1457 - stephanie.massengill@eclipsys.com Bob Vanaria, CFO (investors) (561)266-2324 - investor.relations@eclipsys.com 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) 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 investor.relations@eclipsys.com, (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. EX-99.4 7 AMENDMENT TO REGISTRATION RIGHTS AGREEMENT 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: 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 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 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 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 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 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 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 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 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 -----END PRIVACY-ENHANCED MESSAGE-----