-----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, D42LgtVrn4/FVgf5B2JsYBQkKqm/L2e3R8d0hs8cWJPczTF1AibuL4EFatiByYn7 DnjtP8gjEBpd1ZmAwY75eA== 0000950133-99-003845.txt : 19991208 0000950133-99-003845.hdr.sgml : 19991208 ACCESSION NUMBER: 0000950133-99-003845 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990217 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19991207 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: 99770167 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): FEBRUARY 17, 1999 COMMISSION FILE NUMBER: 000-24539 ECLIPSYS CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 65-0632092 (State of Incorporation) (IRS Employer Identification Number) 777 East Atlantic Avenue Suite 200 Delray Beach, Florida 33483 (Address of principal executive offices) (561)-243-1440 (Telephone number of registrant) 2 ITEM 5. OTHER EVENTS On February 17, 1999, Eclipsys Corporation ("the Company") completed a merger with PowerCenter Systems, Inc. ("PCS"), an enterprise resource planning software company. The merger, which is being accounted for as a pooling of interests, was valued at the time of the merger at approximately $35.0 million paid through the issuance of the Company's common stock. Copies of the press release dated as of February 8, 1999 are included herein as Exhibit 99.2 and are incorporated by reference into this Item 5. On June 17, 1999, Eclipsys Corporation ("the Company") completed a merger with MSI Solutions, Inc. and MSI Integrated Services, Inc. (collectively "MSI"), a web-enabling solutions company. The merger, which is being accounted for as a pooling of interests, was valued at the time of the merger at approximately $53.6 million paid through the issuance of the Company's common stock. Copies of the press release dated as of June 18, 1999 are included herein as Exhibit 99.3 and are incorporated by reference into this Item 5. Eclipsys will file a registration statement on Form S-3 with the Securities and Exchange Commission during December 1999 to permit the resale of the outstanding shares issued and options assumed in the acquisitions of PCS and MSI. Attached as Exhibit 99.4 are the consolidated financial statements for each of the three years in the period ended December 31, 1998 and the accompanying notes which have been restated to reflect the Company's financial position and results of operations as if PCS and MSI were wholly-owned subsidiaries since the earliest period presented in accordance with accounting required for pooling of interests transactions. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (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. 3 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ECLIPSYS CORPORATON Date: December 7, 1999 /s/ Robert J. Vanaria ---------------------- Robert J. Vanaria Chief Financial Officer 4 ECLIPSYS CORPORATION EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION --- ----------- 2.1 Agreement and Plan of Merger dated as of February 5, 1999, by and among Eclipsys, PCS and Sub (incorporated by reference to Exhibit 2.1 to Form 8-K filed on March 3, 1999) 2.2 Agreement and Plan of Merger dated as of June 17, 1999, by and among Eclipsys Corporation, Eclipsys Merger Corp., MSI Solutions, Inc., MSI Integrated Services, Inc., Anna L. Bean, Michael R. Cote, Robert J. Feldman and the 1997 Feldman Family Trust (incorporated by reference to Exhibit 2 to Form 10-Q filed on August 12, 1999) 27 Financial Data Schedule 99.1 Escrow Agreement dated as of February 17, 1999, by and among Eclipsys, Sub, PCS and the PCS stockholders and noteholders (incorporated by reference to Exhibit 99.1 to Form 8-K filed on March 3, 1999) 99.2 Press Release dated February 8, 1999 99.3 Press Release date June 18, 1999 99.4 Consolidated Financial Statements of Eclipsys Corporation 99.5 Consolidated Financial Statements of ALLTEL Healthcare Information Services, Inc.
EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 37,983 17,003 66,048 3,724 517 127,840 27,810 (15,190) 221,014 102,116 0 0 0 321 98,111 221,014 182,458 182,458 106,909 106,909 109,274 0 (2,701) (31,024) 4,252 (35,276) 0 0 0 (46,204) (1.95) (1.95)
EX-99.2 3 EXHIBIT 99.2 1 EXHIBIT 99.2 [ECLIPSYS LETTERHEAD] Contact: Stephanie P. Massengill, Market Development (media) (561)243-1457 - stephanie.massengill@eclipsys.com Bob Vanaria, CFO (investors) (561)266-2324 - investor.relations@eclipsys.com ECLIPSYS CORPORATION SIGNS AGREEMENT TO ACQUIRE POWERCENTER SYSTEMS DELRAY BEACH, FL--FEB. 8, 1999--Eclipsys Corporation (Nasdaq:ECLP), a leading provider of integrated healthcare enterprise information technology solutions, has signed a definitive agreement to acquire PowerCenter Systems, Inc., a leading provider of Enterprise Resource Planning (ERP) solutions. "PowerCenter is the only Enterprise Resource Planning vendor focused exclusively on the healthcare industry," said Harvey J. Wilson, Eclipsys chairman and CEO. "The company's modern architecture and comprehensive, enterprise-wide functionality make PowerCenter applications an excellent complement to our Sunrise(TM) line of software that supports improvement in clinical, financial and satisfaction outcomes." PowerCenter's series of fully integrated ERP application suites include support for Materials Management, Surgery Scheduling, Accounts Payable, General Ledger, Budgeting, Fixed Assets, Package Tracking, and Human Resources. The acquisition, which is subject to certain closing conditions, is expected to close in February. Terms call for PowerCenter to be acquired with 1.1 million shares of Eclipsys common stock and the assumption of approximately $2.2 million of convertible debt that will be converted to Eclipsys common stock upon closing. The acquisition is expected to be accounted for as a pooling of interests. Matthew Ehrlich, president of PowerCenter Systems, stated that "Over the past several months, we have enjoyed a close working relationship with Eclipsys and share its vision of improving outcomes across the healthcare enterprise through the power of integrated information technology. We welcome this opportunity to become a part of the growing Eclipsys family. This move will enable us to further expand our products' scope and their benefit to our customers." -MORE- 2 ECLIPSYS CORPORATION AGREEMENT TO ACQUIRE POWERCENTER SYSTEMS FEB. 8, 1999 PAGE 2 OF 2 PowerCenter, based in Uniondale, NY, was founded in 1993. It is an ERP solution provider, furnishing and implementing all aspects of application software; system and database software; hardware and networking systems; implementation and training and post-implementation service and support. The company has regional offices in Houston, Minneapolis, Birmingham, Philadelphia and San Franisco. 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 with the Securities and Exchange Commission. Product and company names in this news release are trademarks or registered trademarks of their respective companies. EX-99.3 4 EXHIBIT 99.3 1 EXHIBIT 99.3 [ECLIPSYS LETTERHEAD] Contacts: Eclipsys Corporation: Stephanie P. Massengill, Market Development (media) (561)243-1457 - stephanie.massengill@eclipsys.com Bob Vanaria, CFO (investors) (561)266-2324 - investor.relations@eclipsys.com MSI Solutions, Inc: Anna Bean, President and CEO (770)767-2401 - anna.bean@msi-solutions.com ECLIPSYS CORPORATION COMPLETES ACQUISITION OF MSI SOLUTIONS, INC. DELRAY BEACH, FL--JUNE 18, 1999--Eclipsys Corporation (Nasdaq:ECLP), a leading provider of outcomes-focused healthcare information technology solutions, today announced that it has completed its acquisition of MSI Solutions, Inc. (MSI), a leading web application integration company. The acquisition is effective June 17. According to terms of the agreement, first announced June 11, 1999, 100% of MSI stock has been acquired by Eclipsys in exchange for 2.375 million shares of Eclipsys common stock. The acquisition is expected to be accounted for as a pooling of interests. MSI, a privately held company based in Atlanta, GA, was founded in 1991. Its eWebIT product suite is a unified solution designed to facilitate the rapid, cost-efficient development and integration of mission-critical web, e-commerce and legacy information-technology applications. Eclipsys will utilize MSI's products and expertise in Enterprise Application Integration (EAI) to provide web-enabling and integration of new and heritage Eclipsys solutions as well as that of Eclipsys customers' other existing information systems. In addition to their system-integration capabilities, MSI's eWebIT applications will be incorporated into Eclipsys' current development projects to enhance clinician access to clinical data via the Internet. MSI consultant staff will also enhance Eclipsys' implementation team, expanding the company's capabilities to speed return on investment from Eclipsys solutions. MSI will be operated as the Systems Integration Division of Eclipsys, headed by Anna Bean, president and CEO of MSI. Eclipsys Corporation is a Delray Beach, FL-based company providing integrated healthcare information-technology software and service solutions. The company's Sunrise product line is a web-enabled suite of rules-oriented applications that provide actionable information at the point of decision, -MORE- 2 ECLIPSYS CORPORATION ECLIPSYS FINALIZES ACQUISITION OF MSI SOLUTIONS JUNE 18, 1999 PAGE 2 OF 2 supporting decision making that enables customers to balance and improve mission- critical clinical, financial and satisfaction outcomes. 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 information- management and business process-reengineering services. For more information on Eclipsys, see its web site a www.eclipsys.com. For information on MSI products and services, see its web site at www.msi-solutions.com. For more information, contact Eclipsys at investor.relations@eclipsys.com, or call (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 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 5 EXHIBIT 99.4 1 EXHIBIT 99.4 ECLIPSYS CORPORATION CONSOLIDATED FINANCIAL STATEMENTS TABLE OF CONTENTS Management's Discussion and Analysis of Financial Condition and Results of Operations Reports of Independent Accountants Consolidated Balance Sheets at December 31, 1997 and 1998 Consolidated Statement of Operations for the three years ended December 31, 1996, 1997 and 1998 Consolidated Statement of Stockholders' Equity for the three years ended December 31, 1996, 1997 and 1998 Consolidated Statement of Cash Flows for the three years ended December 31, 1996, 1997 and 1998 Notes to Consolidated Financial Statements 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Eclipsys Corporation is a healthcare information technology company delivering solutions that enable healthcare providers to achieve improved clinical, financial and satisfaction outcomes. The Company offers an integrated suite of healthcare products and associated services in seven functional areas--clinical management, access management, patient financial management, health information management, strategic decision support, resource planning management and enterprise application integration. These products and services can be licensed either in combination to provide an enterprise-wide solution or individually to address specific needs. These solutions take many forms and can include a combination of software, hardware, maintenance, consulting services, remote processing services, network services and information technology outsourcing. Eclipsys' products have been designed specifically to deliver a measurable impact on outcomes, enabling Eclipsys' customers to quantify clinical benefits and return on investment in a precise and timely manner. Eclipsys' products can be integrated with a customer's existing information systems, which Eclipsys believes reduce overall cost of ownership and increase the attractiveness of its products. Eclipsys also provides outsourcing, remote processing and networking services to assist customers in meeting their healthcare information technology requirements. Eclipsys markets its products primarily to large hospitals, academic medical centers and integrated healthcare delivery networks. To provide direct and sustained customer contact, Eclipsys maintains decentralized sales, implementation and customer support teams in each of its eight North American regions. 3 The Company was formed in December 1995 and has grown primarily through a series of strategic acquisitions as follows:
METHOD OF TRANSACTION DATE ACCOUNTING ----------- ---- ---------- ALLTEL Healthcare Information Services, Inc. 1/24/97 Purchase ("Alltel") SDK Medical Computer Services Corporation 6/26/97 Purchase ("SDK") Emtek Healthcare Systems 1/30/98 Purchase ("Emtek") a division of Motorola, Inc. HealthVISION, Inc. (acquired by Transition) 12/3/98 Purchase ("HealthVISION") Transition Systems, Inc. 12/31/98 Pooling ("Transition") PowerCenter Systems, Inc. 2/17/99 Pooling ("PCS") Intelus Corporation and Med Data Systems, Inc. 3/31/99 Purchase ("Intelus" and "Med Data") wholly owned subsidiaries of Sungard Data Systems, Inc. MSI Solutions, Inc. and MSI Integrated 6/17/99 Pooling Services, Inc. (collectively "MSI")
The consolidated financial statements of the Company reflect the financial results of the purchased entities from the respective dates of the purchase. For all transactions accounted for using the pooling of interests method, the Company's consolidated financial statements have been retroactively restated as if the transactions had occurred as of the beginning of the earliest period presented. In May 1996, the Company entered into a license for the development, commercialization, distribution and support of certain intellectual property relating to the BICS clinical information systems software developed by Partners HealthCare System, Inc. In connection with this license, the Company issued to Partners 988,290 shares of Common Stock. In January 1997, the Company purchased Alltel from Alltel Information Services, Inc. ("AIS") for a total purchase price of $201.5 million, after giving effect to certain purchase price adjustments. The Alltel acquisition was paid for with cash, the issuance of Series C Redeemable Preferred Stock and Series D Convertible Preferred Stock and the assumption of certain liabilities. The acquisition was accounted for as a purchase, and the Company recorded total intangible assets of $163.8 million, consisting of $92.2 million of acquired in-process research and development, $42.3 million of acquired technology, $10.8 million to reflect the value of ongoing customer relationships, $9.5 million related to a management services agreement ("MSA")with AIS and $9.0 million of goodwill. The Company wrote off the acquired in-process 4 research and development as of the date of the acquisition, and is amortizing the acquired technology over three years on an accelerated basis. The value of the ongoing customer relationships and the goodwill are being amortized over five years and twelve years, respectively. In the first quarter of 1998 the Company entered into an agreement with AIS terminating the MSA resulting in the Company recording a charge of 7.2 million. As a result of the agreement, the Company recorded a network services intangible asset related to the Company's ability to provide services in this area. The network services asset is being amortized over thirty six months. In June 1997, the Company acquired SDK for a total purchase price of $16.5 million. The SDK Acquisition was paid for with cash as well as the issuance of promissory notes and Common Stock. The acquisition was accounted for as a purchase, and the Company recorded total intangible assets of $14.8 million, consisting of $7.0 million of acquired in-process research and development, $3.2 million of acquired technology and $4.6 million of goodwill. The Company wrote off the acquired in-process research and development as of the date of the acquisition, and is amortizing both the acquired technology and the goodwill over five years. In January 1998, the Company acquired Emtek from Motorola for a total purchase price of $11.7 million, net of a $9.6 million receivable from Motorola. The Emtek acquisition was paid for with the issuance of Common Stock and the assumption of certain liabilities. The acquisition was accounted for as a purchase, and the Company recorded total intangible assets of $4.1 million, consisting of acquired technology which is being amortized over five years. On December 31, 1998, the Company acquired Transition. The acquisition was paid for entirely with the issuance of Common Stock. The acquisition was accounted for as a pooling of interests. Accordingly, the financial statements have been retroactively restated to give effect to the acquisition as if it had occurred as of the earliest period presented. On December 3, 1998 Transition acquired HealthVISION for a total purchase price of $31.6 million in cash plus an earn out of up to $10.8 million if specified financial milestones are met. The acquisition was accounted for as a purchase, and Transition recorded intangible assets of $40.6, consisting of $2.4 million of acquired in-process research and development, $27.3 million of acquired technology and $10.9 million of goodwill. Transition wrote off the acquired in-process research and development as of the date of the acquisition, and is amortizing both the acquired technology and the goodwill over 3 years. On July 22, 1996, Transition acquired substantially all of the outstanding stock and a note held by a selling principal of Enterprising HealthCare, Inc. ("EHI"), based in Tucson, Arizona, for a total purchase price of approximately $1.8 million in cash. EHI provides system integration products and services for the health care market. The acquisition was accounted for under the purchase method and accordingly the results of operations of EHI are included from the date of the acquisition. Acquired technology costs of $1.6 million are being amortized on a straight-line basis over 7 years. On September 19, 1997, Transition 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 132,302 shares of the Company's common stock with a value of $3.6 million. The acquisition was accounted for under the purchase method of accounting and accordingly the results of operations of Vital are included from the date of the acquisition. In February 1999, the Company acquired PCS for a total purchase price of approximately $35.0 million paid for entirely with the issuance of Common Stock. The acquisition was accounted for as a pooling of interests, and accordingly the financial statements have been retroactively restated to give effect to the acquisition as if it had occurred as of the earliest period presented. In March 1999, the Company acquired Intelus and Med Data for a total purchase price of approximately $25.0 million in cash. The acquisition was accounted for as a purchase, and the Company recorded total intangible assets of $18.7 million, consisting of acquired technology which is being amortized over 3 years. 5 In July 1999, the Company sold Med Data for a total sales price of $5.0 million in cash. The Company reduced acquired technology originally recorded in the purchase by $4.4 million, which represented the difference between the sales price and the net tangible assets sold. In June 1999, the Company acquired MSI for a total purchase price of approximately $53.6 million paid for entirely with the issuance of the Company's Common Stock. The acquisition was accounted for as a pooling of interests, and accordingly the financial statements have been retroactively restated to give effect to the acquisition as if it had occurred as of the earliest period presented. REVENUES Revenues are derived from sales of systems and services, which include the licensing of software, software and hardware maintenance, remote processing, outsourcing, implementation, training and consulting, and from the sale of computer hardware. The Company's products and services are generally sold to customers pursuant to contracts that range in duration from three to seven years. The Company generally licenses its software products pursuant to multiple element arrangements that include maintenance for periods that range from three to seven years. For software license fees sold to customers that are bundled with services and maintenance and require significant implementation efforts, the Company recognizes revenue using the percentage of completion method, as the services are considered essential to the functionality of the software. Revenue from other software license fees which are bundled with long-term maintenance agreement is recognized on a straight-line basis over the contracted maintenance period. Remote processing and outsourcing services are marketed under long-term agreements and revenues are recognized monthly as the work is performed. Revenues related to other support services, such as training, consulting, and implementation, are recognized when the services are performed. Revenues from the sale of hardware are recognized upon shipment of the equipment to the customer. COSTS OF REVENUES The principal costs of systems and services revenues are salaries, benefits and related overhead costs for implementation, remote processing, outsourcing and field operations personnel. As the Company implements its growth strategy, it is expected that additional operating personnel will be required, which would lead to an increase in cost of revenues on an absolute basis. Other significant costs of systems and services revenues are the amortization of acquired technology and capitalized software development costs. Acquired technology is amortized over three to five years based upon the estimated economic life of the underlying asset, and capitalized software development costs are amortized over three years on a straight-line basis commencing upon general release of the related product. Cost of revenues related to hardware sales include only the Company's cost to acquire the hardware from the manufacturer. MARKETING AND SALES Marketing and sales expenses consist primarily of salaries, benefits, commissions and related overhead costs. Other costs include expenditures for marketing programs, public relations, trade shows, advertising and related communications. As the Company continues to implement its growth strategy, marketing and sales expenses are expected to continue to increase on an absolute basis. 6 RESEARCH AND DEVELOPMENT Research and development expenses consist primarily of salaries, benefits and related overhead associated with the design, development and testing of new products by the Company. The Company capitalizes internal software development costs subsequent to attaining technological feasibility. Such costs are amortized as an element of cost of revenues annually over three years either on a straight line basis or, if greater, based on the ratio that current revenues bear to total anticipated revenues for the applicable product. The Company expects to continue to increase research and development spending on an absolute basis. GENERAL AND ADMINISTRATIVE General and administrative expenses consist primarily of salaries, benefits and related overhead costs for administration, executive, finance, legal, human resources, purchasing and internal systems personnel, as well as accounting and legal fees and expenses. As the Company implements its business plan, general and administrative expenses are expected to continue to increase on an absolute basis. DEPRECIATION AND AMORTIZATION The Company depreciates the costs of its tangible capital assets on a straight-line basis over the estimated economic life of the asset, which is generally not longer than five years. Acquisition-related intangible assets, which include acquired technology, a network services asset, the value of ongoing customer relationships and goodwill, are amortized based upon the estimated economic life of the asset at the time of the acquisition, and will therefore vary among acquisitions. The Company recorded amortization expenses for acquisition-related intangible assets of $25.6 million and $20.9 million in 1997 and 1998, respectively. TAXES As of December 31, 1998, the Company had operating loss carryforwards for federal income tax purposes of $55.0 million. The carryforwards expire in varying amounts through 2018 and are subject to certain restrictions. Based on evidence then available, the Company did not record any benefit for income taxes at December 31, 1997 and 1998, because management believes it is more likely then not that the Company would not realize its net deferred tax assets. Accordingly, the Company has recorded a valuation allowance against its total net deferred tax assets. RESULTS OF OPERATIONS 1998 COMPARED TO 1997 In the period-to-period comparison below, both the 1998 and 1997 results reflect the operations of Eclipsys retroactively restated for the pooling of interests with Transition, PCS and MSI. Total revenues increased by $35.2 million, or 23.8%, from $147.3 million in 1997 to $182.5 million in 1998. This increase was caused primarily by the inclusion in 1998 of twelve full months of the operations of Alltel and SDK, as well as the inclusion of eleven months of operations of Emtek. Also contributing to the increase was new business contracted in 1998, which was the result of an increase in marketing efforts related to the regional realignment of Eclipsys' operations completed in 1997 and the integration of acquisitions completed in 1997 and 1998. Total cost of revenues increased by $11.3 million, or 11.8%, from $95.6 million, or 64.9% of total revenues, in 1997 to $106.9 million, or 58.5% of total revenues, in 1998. The increase in cost was due primarily to the increase in business activity, offset in part by a reduction in certain expenses related to integrating the acquisitions. 7 Marketing and sales expenses increased by $6.8 million, or 29.6%, from $22.9 million, or 15.5% of total revenues, in 1997 to $29.7 million, or 16.2% of total revenues, in 1998. The increase was due primarily to the addition of marketing and direct sales personnel following the acquisitions and the regional realignment of Eclipsys' sales operations. Total expenditures for research and development, including both capitalized and non-capitalized portions, increased by $17.8 million, or 75.1%, from $23.7 million, or 16.0% of total revenues, in 1997 to $41.5 million, or 22.7% of total revenues, in 1998. These amounts exclude amortization of previously capitalized expenditures, which are recorded as cost of revenues. The increase was due primarily to the inclusion in 1998 of twelve full months of the operations of Alltel and SDK as well as eleven months of Emtek operations, as well as the continued development of an enterprise-wide, client server platform solution. The portion of research and development expenditures that were capitalized increased by $2.0 million, from $2.3 million in 1997 to $4.3 million in 1998. The increase in capitalized software development costs was due primarily to the acquisitions. As a result of this activity, research and development expense increased $15.7 million, or 73.3%, from $21.4 million in 1997 to $37.1 million in 1998. General and administrative expenses increased by $900,000, or 8.8%, from $10.2 million, or 6.9% of total revenues, in 1997 to $11.1 million, or 6.0% of total revenues, in 1998. The increase was due primarily to the timing of the acquisitions, partially offset by the savings generated by the rationalization of Eclipsys' administrative, financial and legal organizations. Depreciation and amortization expense increased by $500,000, or 4.3%, from $11.5 million, or 7.8% of total revenues, in 1997 to $12.0 million, or 6.5% of total revenues, in 1998. The increase was due primarily to the amortization of the value of ongoing customer relationships and goodwill related to the acquisitions. Partially offsetting this increase was a reduction in goodwill amortization as a result of the renegotiation of certain matters relating to the Alltel acquisition. Write-offs of acquired in-process research and development of $105.5 million were recorded in 1997, of which $92.2 million was attributable to the Alltel acquisition, $7.0 million was attributable to the SDK acquisition and $6.3 million was attributable to Transition's acquisition of Vital. A write-off of $2.4 million was recorded in 1998 related to Transition's acquisition of HealthVISION. Eclipsys recorded a $7.2 million charge during 1998 related to the buyout of the MSA. Additionally, the Company recorded a charge of $4.8 million related to the write down of an investment in Simione and recognized $5.0 million of costs related to the merger with Transition. As a result of the foregoing factors, net loss decreased from $126.3 million in 1997 to $35.3 million in 1998. 1997 COMPARED TO 1996 In the period-to-period comparison below, both the 1997 and 1996 results reflect the operations of Eclipsys retroactively restated for the pooling of interests with Transition, PCS and MSI. Total revenues increased by $105.5 million, or 252.3%, from $41.8 million in 1996 to $147.3 million in 1997. This increase was caused primarily by the inclusion in 1997 of the operations of Alltel. 8 Total cost of revenues increased by $83.4 million, or 681.2%, from $12.2 million, or 29.1% of total revenues, in 1996 to $95.6 million, or 64.9% of total revenues, in 1997. The increase was due primarily to the inclusion in 1997 of the operations of Alltel. Marketing and sales expenses increased by $15.8 million, or 224.0%, from $7.0 million, or 16.7% of total revenues, in 1996 to $22.9 million, or 15.5% of total revenues, in 1997. The increase was due primarily to the inclusion in 1997 of the operations of Alltel. Total expenditures for research and development, including both capitalized and non-capitalized portions, increased by $16.9 million, or 248.5%, from $6.8 million, or 16.2% of total revenues in 1996 to $23.7 million, or 16.0% of total revenues, in 1997. These amounts exclude amortization of previously capitalized expenditures, which are recorded as cost of revenues. The increase was due primarily to the inclusion in 1997 of the operations of Alltel. The portion of research and development expenditures that were capitalized increased by $1.6 million, from $700,000 in 1996 to $2.3 million in 1997. The increase in capitalized software development costs was due primarily to the inclusion in 1997 of the operations of Alltel. Additionally, research and development expense increased $15.3 million, or 250.8%, from $6.1 million in 1996 to $21.4 million in 1997. General and administrative expenses increased by $6.0 million, or 145.6%, from $4.1 million, or 9.8% of total revenues, in 1996 to $10.2 million, or 6.9% of total revenues, in 1997. The increase was due primarily to the inclusion in 1997 of the operations of Alltel. Depreciation and amortization expense increased by $9.9 million, or 618.7%, from $1.6 million, or 3.8% of total revenues, in 1996 to $11.5 million, or 7.8% of total revenues, in 1997. The increase was due primarily to the inclusion in 1997 of the operations of Alltel. Write-offs of acquired in-process research and development of $105.5 million were recorded in 1997, of which $92.2 million was attributable to the Alltel Acquisition, $7.0 million was attributable to the SDK Acquisition and $6.3 million was attributable to Transition's acquisition of Vital. There were no write-offs recorded in 1996. Compensation charge of $3.0 million was incurred in 1996 related to Transition's recapitalization, specifically the purchase of common stock issued to certain executive officers pursuant to the exercise of options. Extraordinary item charged in 1996 of $2.1 million was related to the early extinguishment of debt. There were no extraordinary items recorded in 1997. As a result of the foregoing factors, net income decreased from $1.4 million in 1996 to a loss of $126.3 million in 1997. ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT In connection with the Alltel, SDK and HealthVISION acquisitions, the Company wrote off in-process research and development totaling $92.2 million and $7.0 million in 1997 and $2.4 million in 1998, respectively. These amounts were expensed as non-recurring charges on the respective acquisition dates. These write-offs were necessary because the acquired technology had not yet reached technological feasibility and had no future alternative uses. The Company is using the acquired in-process research and development to create new clinical management, access management, patient financial management and data warehousing products which will become part of the Sunrise product suite over the next several years. Certain products using the acquired in-process technology were generally released during 1998, with additional product releases expected in subsequent periods through 2001. The Company expects that the acquired 9 in-process research and development will be successfully developed, but there can be no assurance that commercial viability of these products will be achieved. The nature of the efforts required to develop the purchased in-process technology into commercially viable products principally relate to the completion of all planning, designing, prototyping, verification and testing activities that are necessary to establish that the product can be produced to meet its design specifications, including functions, features and technical performance requirements. The value of the purchased in-process technology was determined by estimating the projected net cash flows related to such products, including costs to complete the development of the technology and the future revenues to be earned upon commercialization of the products. These cash flows were discounted back to their net present value. The resulting projected net cash flows from such projects were based on management's estimates of revenues and operating profits related to such projects. These estimates were based on several assumptions, including those summarized below for each of the respective acquisitions. If these projects to develop commercial products based on the acquired in-process technology are not successfully completed, the sales and profitability of the Company may be adversely affected in future periods. Additionally, the value of other intangible assets may become impaired. ALLTEL The primary purchased in-process technology acquired in the Alltel acquisition was the client-server based core application modules of the TDS 7000 product. This project represented an integrated clinical software product whose functionality included order management, health information management, physician applications, nursing applications, pharmacy, laboratory and radiology applications and ancillary support. Additionally, the product included functionality facilitating the gathering and analysis of data throughout a healthcare organization, a data integration engine and various other functionality. Revenue attributable to the in-process technology was assumed to increase over the twelve-year projection period at annual rates ranging from 234% to 5%, resulting in annual revenues of approximately $27 million to $640 million. Such projections were based on assumed penetration of the existing customer base, new customer transactions, historical retention rates and experiences of prior product releases. The projections reflect accelerated revenue growth in the first five years (1997 to 2001) as the products derived from the in-process technology are generally released. In addition, the projections were based on annual revenue to be derived from long-term contractual arrangements ranging from seven to ten years. New customer contracts for products developed from the in-process technology were assumed to peak in 2001, with rapidly declining sales volume in the years 2002 to 2003 as other new products were expected to enter the market. The projections assumed no new customer contracts after 2003. Projected revenue in years after 2003 was determined using a 5% annual growth rate, which reflected contractual increases. Operating profit was projected to grow over the projection period at rates ranging from 1238% to 5%, resulting in incremental annual operating profit (loss) of approximately $(5) million to $111 million. The operating profit projections during the years 1997 to 2001 assumed a growth rate slightly higher than the revenue projections. The higher growth rate is attributable to the increase in revenues discussed above, together with research and development costs expected to remain constant at approximately $15 million annually. The operating profit projections include a 5% annual growth rate for the years after 2003 consistent with the revenue projections. Through September 30, 1999, revenues and operating profit attributable to the acquired in-process technology have not materially differed from the projections used in determining its 10 value. Throughout 1999, the Company has continued the development of the in-process technology that was acquired in the Alltel transaction. To date, the Company is installing modules derived from the acquired in-process technology in various field trial sites that are expected to be activated by the end of 1999. Additionally, the Company has begun to successfully market certain aspects of the technology to new and existing customers. The Company expects to continue releasing products derived from the technology through 2001. Management continues to believe the projections used reasonably estimate the future benefits attributable to the in-process technology. However, no assurance can be given that deviations from these projections will not occur. The projected net cash flows were discounted to their present value using the weighted average cost of capital (the "WACC"). The WACC calculation produces the average required rate of return of an investment in an operating enterprise, based on required rates of return from investments in various areas of the enterprise. The WACC used in the projections was 21%. This rate was determined by applying the capital asset pricing model. This method yielded an estimated average WACC of approximately 16.5%. A risk premium was added to reflect the business risks associated with the stage of development of the Company, as well as the technology risk associated with the in-process software, resulting in a WACC of 21%. In addition, the value of customer relationships was calculated using a discount rate of 21% and a return to net tangible assets was estimated using a rate of return of 11.25%. The value of the goodwill was calculated as the remaining intangible value not otherwise allocated to identifiable intangible assets (resulting in an implied discount rate on the goodwill of approximately 28%). The Company used a 21% discount rate for valuing existing technology because it faces substantially the same risks as the business as a whole. Accordingly, a rate equal to the WACC of 21% was used. The Company used a 28% discount rate for valuing in-process technology. The spread over the existing technology discount rate reflects the inherently greater risk of the research and development efforts. The spread reflected the nature of the development efforts relative to the existing base of technology and the potential market for the in-process technology once the products were released. The Company estimates that the costs to develop the purchased in-process technology acquired in the Alltel acquisition into commercially viable products will be approximately $75 million in the aggregate through 2001 ($15 million per year from 1997 to 2001). SDK The purchased in-process technology acquired in the SDK acquisition comprised three major enterprise-wide modules in the areas of physician billing, home health care billing and long-term care billing; a graphical user interface; a corporate master patient index; and a standard query language module. Revenue attributable to the in-process technology was assumed to increase in the first three years of the ten-year projection period at annual rates ranging from 497% to 83% decreasing over the remaining years at annual rates ranging from 73% to 14% as other products are released in the market place. Projected annual revenue ranged from approximately $5 million to $56 million over the term of the projections. These projections were based on assumed penetration of the existing customer base, synergies as a result of the SDK acquisition, new customer transactions and historical retention rates. Projected revenues from the in-process technology were assumed to peak in 2000 and decline from 2000 to 2007 as other new products were expected to enter the market. Operating profit was projected to grow over the projection period at annual rates ranging from 1497% to 94% during the first three years, decreasing during the remaining years of the projection period similar to the revenue growth projections described above. Projected annual 11 operating profit ranged from approximately $250,000 to $8 million over the term of the projections. Through September 30, 1999, revenues and operating profit attributable to in-process technology have been consistent with the projections. However, no assurance can be given that deviations from these projections will not occur in the future. The WACC used in the analysis was 20%. This rate was determined by applying the capital asset pricing model and a review of venture capital rates of return for companies in a similar life cycle stage. The Company used a 20% discount rate for valuing existing and in-process technology because both technologies face substantially the same risks as the business as a whole. Accordingly, a rate equal to the WACC of 20% was used. The Company estimates that the costs to develop the in-process technology acquired in the SDK acquisition will be approximately $1.7 million in the aggregate through the year 2000 ($500,000 in 1998, $600,000 in 1999 and $600,000 in 2000). YEAR 2000 ISSUES Eclipsys has a Year 2000 Committee whose task is to evaluate the Company's Year 2000 readiness for both internal and external management information systems, recommend a plan of action to minimize disruption and execute the Company's Year 2000 plan. The Committee has developed a comprehensive Year 2000 Plan. The Year 2000 Plan covers all significant internal and external management information systems. Eclipsys believes that all of its significant internal management information systems are currently Year 2000 compliant and, accordingly, does not anticipate any significant expenditures to remediate or replace existing internal-use systems. All of the products currently offered by Eclipsys are Year 2000 compliant. Some of the products previously sold by Alltel, Emtek and Transition and installed in Eclipsys' customer base are not Year 2000 compliant. Eclipsys has developed and tested solutions for these non-compliant, installed products. In addition, because Eclipsys' products are often interfaced with a customer's existing third-party applications and certain Eclipsys' products include software licensed from third-party vendors, Eclipsys' products may experience difficulties interfacing with third-party, non-compliant applications. Based on currently available information, Eclipsys does not expect the cost of compliance related to interactions with non-compliant, third party systems to be material. Unexpected difficulties in implementing Year 2000 solutions for the installed Alltel, Emtek or Transition products or difficulties in interfacing with third-party products could adversely effect the Company. Apprehension in the marketplace over Year 2000 compliance issues may lead businesses, including customers of the Company, to defer significant capital investments in information technology programs and software. They could elect to defer those investments either because they decide to focus their capital budgets on the expenditures necessary to bring their own existing systems into compliance or because they wish to purchase only software with a proven ability to process data after 1999. If these deferrals are significant, the Company may not achieve expected revenue or earnings levels. 12 BACKLOG Backlog consists of revenues the Company expects to recognize over the following twelve months under existing contracts. The revenues to be recognized may relate to a combination of one-time fees for software licensing and implementation, hardware sales and installations and professional service, or annual or monthly fees for licenses, maintenance, and outsourcing or remote processing services. As of December 31, 1998, the Company had a backlog of approximately $170.0 million. BALANCE SHEET 1998 COMPARED TO 1997 ACCOUNTS RECEIVABLE Accounts receivable increased during the twelve months ended December 31, 1998 primarily due to the acquisition of Emtek and HealthVISION. OTHER CURRENT ASSETS Other current assets increased during the twelve months ended December 31, 1998 primarily due to the acquisition of Emtek and an increase in prepaid royalties and software maintenance. ACQUIRED TECHNOLOGY Acquired technology increased during the twelve months ended December 31, 1998 due to the acquisitions of Emtek and HealthVISION. DEFERRED REVENUE Deferred revenue increased during the twelve months ended December 31, 1998 primarily due to increased billings related to new contracted business including customers obtained through the acquisition of Emtek. OTHER CURRENT LIABILITIES Other current liabilities increased during the twelve months ended December 31, 1998 primarily due to the acquisitions of Emtek and HealthVISION and employee related liabilities. LONG-TERM DEBT AND MANDATORILY REDEEMABLE PREFERRED STOCK Long-term debt decreased during the twelve months ended December 31, 1998 due to repayment by the Company with proceeds from the Company's initial public offering. LIQUIDITY AND CAPITAL RESOURCES During the twelve months ended December 31, 1998, the Company generated $31.7 million in cash flow from operations. The Company used $77.6 million in investing activities, which was primarily the result of the acquisition of HealthVISION, payment related to the settlement of the Alltel purchase, purchase of investments and the investment in Simione. Financing activities provided $20.4 million, primarily due to the initial public offering partially offset by the redemption of the Mandatorily Redeemable Preferred Stock and the repayment of long-term debt. During the twelve months ended December 31, 1997, the Company generated $14.1 million in cash flow from operations. The Company used $124.9 million in investing activities, which was primarily the result of the acquisitions of Alltel, SDK and Vital. Financing activities provided 13 $114.2 million, primarily due to the sale of Preferred Stock and Mandatorily Redeemable Preferred Stock. The Company has a revolving credit facility with available borrowings up to $50.0 million. As of December 31, 1998, there were no amounts outstanding under the revolving credit facility. As of December 31, 1998, the Company had $55.0 million in cash and short-term investments. Management believes that its available cash and short-term investments, anticipated cash generated from its future operations and amounts available under the existing revolving credit facility will be sufficient to meet the Company's operating requirements for at least the next twelve months. 14 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Eclipsys Corporation In our opinion, based upon our audits and the report of other auditors, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Eclipsys Corporation and its subsidiaries at December 31, 1997 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 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 did not audit the financial statements of PowerCenter Systems, Inc. a wholly owned subsidiary, which statements reflect net loss of $1,617,345 for the year ended December 31, 1996. Those statements were audited by other auditors whose report thereon has been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for PowerCenter Systems, Inc., is based solely on the report of the other auditors. 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 and the report of other auditors provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP Atlanta, Georgia February 19, 1999, except as to the acquisition of Intelus Corporation and Med Data Systems, Inc. which is as of March 31, 1999, the pooling of interests with MSI Solutions, Inc. and MSI Integrated Services, Inc. which is as of June 17, 1999, the sale of Med Data which is as of July 1, 1999 and the investment in HEALTHvision, Inc. which is as of July 16, 1999 as described in Note 15. 1 15 Report of Independent Auditors Board of Directors PowerCenter Systems, Inc. We have audited the balance sheet of PowerCenter Systems, Inc. (the "Company") as of December 31, 1996, and the related statements of operations, stockholders' equity (deficiency), and cash flows for the year then ended (not presented herein). 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 audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of PowerCenter Systems, Inc. at December 31, 1996 and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Melville, New York March 20, 1998, except as to Note 9(a), as to which the date is July 30, 1998, and Note 9(b), as to which the date is February 5, 1999 2 16 ECLIPSYS CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, ------------------------- ASSETS 1997 1998 --------- --------- Current Assets: Cash and cash equivalents $ 63,414 $ 37,983 Investments 500 17,003 Accounts receivable, net of allowance for doubtful accounts of $2,303 and $3,724 53,668 62,324 Inventory 866 517 Other current assets 2,925 10,013 --------- --------- TOTAL CURRENT ASSETS 121,373 127,840 Property and equipment, net 11,398 12,620 Capitalized software development costs, net 3,002 5,248 Acquired technology, net 27,138 43,318 Intangible assets, net 28,579 25,928 Other assets 9,837 6,060 --------- --------- TOTAL ASSETS $ 201,327 $ 221,014 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Deferred revenue $ 32,967 $ 51,366 Current portion of long-term debt 14,244 1,890 Other current liabilities 39,292 48,860 --------- --------- TOTAL CURRENT LIABILITIES 86,503 102,116 Deferred revenue 6,966 16,700 Long-term debt 3,794 - Other long-term liabilities 9,575 3,756 Mandatorily redeemable preferred stock 35,607 - Commitments and contingencies Stockholders' equity Preferred stock: Series A, convertible preferred stock of PowerCenter 1 1 Series D, $.01 par value, 7,200,000 shares authorized; issued and outstanding 7,058,786, $12.55 per share liquidation preference 71 - Series E, $.01 par value, 920,000 shares authorized; issued and outstanding 896,431, $12.55 per share liquidation preference 9 - Series F, $.01 par value, 1,530,000 shares authorized; issued and outstanding 1,478,097, $6 per share liquidation preference 15 - Common stock: Voting, $.01 par value, 30,000,000 and 200,000,000 authorized; issued and outstanding 16,664,524 and 32,177,452 167 321 Non-voting, $.01 par value, 5,000,000 shares authorized; issued and outstanding 0 and 896,431 - 9 Non-voting common stock warrant 395 395 Unearned stock compensation (250) (1,623) Additional paid-in capital 165,265 241,975 Accumulated deficit (106,819) (142,680) Accumulated other comprehensive income 28 44 --------- --------- TOTAL STOCKHOLDERS' EQUITY 58,882 98,442 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 201,327 $ 221,014 ========= =========
The accompanying notes are an integral part of these consolidated financial statements 3 17 ECLIPSYS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE DATA)
YEAR ENDED DECEMBER 31, -------------------------------------------------- 1996 1997 1998 REVENUES: Systems and services $ 41,633 $ 142,908 $ 168,025 Hardware 145 4,420 14,433 -------------------------------------------------- TOTAL REVENUES 41,778 147,328 182,458 -------------------------------------------------- COSTS AND EXPENSES: Cost of systems and services 12,141 92,635 94,775 Cost of hardware sales 99 2,991 12,134 Sales and marketing 7,067 22,902 29,651 Research and development 6,067 21,369 37,139 General and administration 4,143 10,179 11,107 Depreciation and amortization 1,646 11,514 11,981 Write-down of investment - - 4,778 Write-off of in-process research and development - 105,481 2,392 Write-off of MSA - - 7,193 Pooling costs - - 5,033 Compensation charge in connection with the recapitalization 3,024 - - -------------------------------------------------- TOTAL COSTS AND EXPENSES 34,187 267,071 216,183 -------------------------------------------------- -------------------------------------------------- INCOME (LOSS) FROM OPERATIONS 7,591 (119,743) (33,725) -------------------------------------------------- Interest income, net 682 1,511 2,701 -------------------------------------------------- Income (loss) before taxes and extraordinary item 8,273 (118,232) (31,024) Provision for income taxes 4,690 8,096 4,252 -------------------------------------------------- Income (loss) before extraordinary item 3,583 (126,328) (35,276) Loss on early extinguishment of debt (net of taxes of $1,492) 2,149 - - -------------------------------------------------- Net income (loss) 1,434 (126,328) (35,276) -------------------------------------------------- Dividends and accretion on mandatorily redeemable preferred stock (593) (5,850) (10,928) Preferred stock conversion - (3,105) - -------------------------------------------------- Net income (loss) available to common stockholders $ 841 $ (135,283) $ (46,204) ================================================== INCOME (LOSS) PER SHARE: ================================================== Basic net income (loss) per common share $ 0.06 $ (8.60) $ (1.95) ================================================== Basic weighted average common shares outstanding 13,780,156 15,734,208 23,668,072 ================================================== Diluted net income (loss) per common share $ 0.05 $ (8.60) $ (1.95) ================================================== Diluted weighted average common shares outstanding 15,404,421 15,734,208 23,668,072 ==================================================
The accompanying notes are an integral part of these consolidated financial statements 4 18 ECLIPSYS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ----------------------------------------- 1996 1997 1998 --------- --------- --------- Operating activities: Net income (loss) $ 1,434 $(126,328) $ (35,276) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Extraordinary item, gross 3,641 - - Depreciation and amortization 1,646 33,426 29,932 Tax benefit of stock option exercises 1,201 1,626 1,171 Provision for bad debts 97 750 1,100 Loss on disposal of property and equipment - 557 8 Write-off of in-process research and development - 105,481 2,392 Write-off of MSA intangible asset - - 7,193 Write-off of contributed technology 1,482 - - Write-down of investment - - 4,778 Write-off of capitalized software development costs - - 1,306 Compensation charge in connection with the recapitalization 3,024 - - Stock compensation expense 152 38 150 Changes in operating assets and liabilities, net of acquisitions Accounts receivable (2,634) (8,263) (1,712) Inventory - 655 349 Other current assets (970) (84) 3,301 Other assets (34) (71) (1,562) Deferred taxes (1,747) 3,301 - Deferred revenue 884 (860) 17,300 Other current liabilities 1,982 4,005 2,253 Other long-term liabilities 57 (148) (971) --------- --------- --------- Total adjustments 8,781 140,413 66,988 --------- --------- --------- Net cash provided by operating activities 10,215 14,085 31,712 Investing activities: Purchase of investments - (750) (33,591) Maturities of investments - 250 16,838 Sale of investments - - 250 Purchase of property and equipment, net of acquisitions (1,134) (4,314) (5,951) Capitalized software development costs (704) (2,303) (4,329) Acquisitions, net of cash acquired (1,728) (111,650) (29,259) Payments under MSA - - (16,000) Changes in other assets (792) (6,094) (5,565) --------- --------- --------- Net cash used by investing activities (4,358) (124,861) (77,607) Financing activities Borrowings 50,342 10,713 18,940 Payments on borrowings (2) (1,018) (35,088) Early extinguishment of debt (50,000) - - Distributions - MSI (716) (495) (585) Sale of common stock 114,621 52 65,399 Sale of preferred stock 8,001 73,764 9,000 Sale of mandatorily redeemable preferred stock - 30,000 - Redemption of mandatorily redeemable preferred stock - - (38,771) Purchase of common stock related to recapitalization (80,618) - - Exercies of stock options 367 1,132 1,266 Employee stock purchase plan - 74 287 --------- --------- --------- Net cash provided by financing activities 41,995 114,222 20,448 Effect of exchange rates on cash and cash equivalents 28 16 Net increase (decrease) in cash, cash equivalents, and investments 47,852 3,474 (25,431) Cash and cash equivalents - beginning of year 12,088 59,940 63,414 --------- --------- --------- Cash and cash equivalents -end of year $ 59,940 $ 63,414 $ 37,983 ========= ========= ========= Cash paid for interest $ 1,119 $ 990 $ 612 ========= ========= ========= Cash paid for income taxes $ 2,835 $ 2,944 $ 4,364 ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 5 19 ECLIPSYS CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS, EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
VOTING AND NON-VOTING NON-VOTING COMMON STOCK COMMON STOCK TREASURY STOCK -------------------------------------------------------------------------- SHARES AMOUNT WARRANT SHARES AMOUNT ------ ------ ------------- ------ ------ BALANCE AT DECEMBER 31, 1995 19,206,101 $192 (876,750) $ (1,471) Capital contribution 2,008,373 20 Net effect of Transition recapitalization and preferred stock issuance, retirement and conversion 5,402,340 54 $395 (15,011,012) (108,386) Sale of common stock - Transition initial public offering 3,622,500 36 Retirement of treasury stock (15,887,762) (159) 15,887,762 109,857 Stock grants 109,999 1 Issuance of Series A Preferred stock Issuance of common stock 988,290 10 Stock option exercises 160,435 2 Income tax benefit from stock options exercised Distributions - MSI Issuance of stock options Compensation expense recognized Net income -------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1996 15,610,276 156 395 - - Issuance of Series D Preferred stock Acquisition of Alltel Issuance of Series E Preferred stock Stock warrant exercise - PCS 46,926 1 Issuance of common stock warrants Exchange of Series A for Series F Acquisition of SDK 499,997 5 Acquistion of Vital 132,302 1 Employee stock purchase - Transition 3,921 Stock option exercises 356,102 4 Income tax benefit from stock options exercised Stock grants 15,000 Dividends and accretion on mandatorily redeemable preferred stock Distributions - MSI Issuance of stock options Compensation expense recognized Comprehensive income: Net loss Foreign currency translation adjustment Other comprehensive income Comprehensive income -------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1997 16,664,524 167 395 - - EMTEK Acquisition 1,000,000 10 Sale of common stock - Eclipsys intial public offering 4,830,000 48 Conversion of preferred stock 10,033,313 100 Issuance of Series G Preferred Stock Stock warrant exercise - PCS 60,238 Stock option exercises 465,008 5 Employee stock purchase 20,800 Income tax benefit from stock options exercised Dividends and accretion on mandatorily redeemable preferred stock Distributions - MSI Issuance of stock options Compensation expense recognized Comprehensive income: Net loss Foreign currency translation adjustment Other comprehensive income Comprehensive income -------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1998 33,073,883 $ 330 $395 - - ==========================================================================
PREFERRED STOCK ------------------------------------------------------------------------ SERIES A SERIES D SERIES E ------------------------------------------------------------------------------ SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ------- ------ ------ ------ ------ ------ BALANCE AT DECEMBER 31, 1995 Capital contribution Net effect of Transition recapitalization and preferred stock issuance, retirement and conversion Sale of common stock - Transition initial public offering Retirement of treasury stock Stock grants Issuance of Series A Preferred stock 1,020,000 $ 11 Issuance of common stock Stock option exercises Income tax benefit from stock options exercised Distributions - MSI Issuance of stock options Compensation expense recognized Net income ------------------------------------------------------------------------------ BALANCE AT DECEMBER 31, 1996 1,020,000 11 Issuance of Series D Preferred stock 4,981,289 $ 50 Acquisition of Alltel 2,077,497 21 Issuance of Series E Preferred stock 896,431 $ 9 Stock warrant exercise - PCS Issuance of common stock warrants Exchange of Series A for Series F (1,000,000) (10) Acquisition of SDK Acquistion of Vital Employee stock purchase - Transition Stock option exercises Income tax benefit from stock options exercised Stock grants Dividends and accretion on mandatorily redeemable preferred stock Distributions - MSI Issuance of stock options Compensation expense recognized Comprehensive income: Net loss Foreign currency translation adjustment Other comprehensive income Comprehensive income ------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1997 20,000 1 7,058,786 71 896,431 9 EMTEK Acquisition Sale of common stock - Eclipsys intial public offering Conversion of preferred stock (7,058,786) (71) (896,431) (9) Issuance of Series G Preferred Stock Stock warrant exercise - PCS Stock option exercises Employee stock purchase Income tax benefit from stock options exercised Dividends and accretion on mandatorily redeemable preferred stock Distributions - MSI Issuance of stock options Compensation expense recognized Comprehensive income: Net loss Foreign currency translation adjustment Other comprehensive income Comprehensive income ------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1998 20,000 1 - - - - ===============================================================================
PREFERRED STOCK -------------------------------------------------------- SERIES F SERIES G ADDITIONAL -------------------------------------------------------- PAID-IN SHARES AMOUNT SHARES AMOUNT CAPITAL ------ ------ ------ ------ ---------- BALANCE AT DECEMBER 31, 1995 $1,079 Capital contribution 178 Net effect of Transition recapitalization and preferred stock issuance, retirement and conversion 33,703 Sale of common stock - Transition initial public offering 114,387 Retirement of treasury stock (109,698) Stock grants Issuance of Series A Preferred stock 7,990 Issuance of common stock 1,472 Stock option exercises 365 Income tax benefit from stock options exercised 1,201 Distributions - MSI Issuance of stock options 288 Compensation expense recognized Net income ------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1996 50,965 Issuance of Series D Preferred stock 62,464 Acquisition of Alltel 26,051 Issuance of Series E Preferred stock 11,241 Stock warrant exercise - PCS 51 Issuance of common stock warrants 10,501 Exchange of Series A for Series F 1,478,097 $15 (5) Acquisition of SDK 3,243 Acquistion of Vital 3,624 Employee stock purchase - Transition 74 Stock option exercises 1,128 Income tax benefit from stock options exercised 1,626 Stock grants 97 Dividends and accretion on mandatorily redeemable preferred stock (5,850) Distributions - MSI Issuance of stock options 55 Compensation expense recognized Comprehensive income: Net loss Foreign currency translation adjustment Other comprehensive income Comprehensive income ------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1997 1,478,097 15 - - 165,265 EMTEK Acquisition 9,050 Sale of common stock - Eclipsys intial public offering 65,351 Conversion of preferred stock (1,478,097) (15) (900,000) $(9) 4 Issuance of Series G Preferred Stock 900,000 9 8,991 Stock warrant exercise - PCS 61 Stock option exercises 1,200 Employee stock purchase 287 Income tax benefit from stock options exercised 1,171 Dividends and accretion on mandatorily (10,928) redeemable preferred stock Distributions - MSI Issuance of stock options 1,523 Compensation expense recognized Comprehensive income: Net loss Foreign currency translation adjustment Other comprehensive income Comprehensive income ------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1998 - - - - $241,975 ================================================================================
RETAINED ACCUMULATED EARNINGS OTHER UNEARNED (ACCUMULATED COMPREHENSIVE COMPREHENSIVE COMPENSATION DEFICIT) INCOME (LOSS) INCOME (LOSS) TOTAL ----------- ------- ------------ ------------ ---------- BALANCE AT DECEMBER 31, 1995 $19,286 $19,086 Capital contribution 198 Net effect of Transition recapitalization and preferred stock issuance, retirement and conversion (74,234) Sale of common stock - Transition initial public offering 114,423 Retirement of treasury stock - Stock grants 1 Issuance of Series A Preferred stock 8,001 Issuance of common stock 1,482 Stock option exercises 367 Income tax benefit from stock options exercised 1,201 Distributions - MSI (716) (716) Issuance of stock options $(288) - Compensation expense recognized 152 152 Net income 1,434 1,434 ------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1996 (136) 20,004 71,395 Issuance of Series D Preferred stock 62,514 Acquisition of Alltel 26,072 Issuance of Series E Preferred stock 11,250 Stock warrant exercise - PCS 52 Issuance of common stock warrants 10,501 Exchange of Series A for Series F - Acquisition of SDK 3,248 Acquistion of Vital 3,625 Employee stock purchase - Transition 74 Stock option exercises 1,132 Income tax benefit from stock options exercised 1,626 Stock grants 97 Dividends and accretion on mandatorily - redeemable preferred stock (5,850) Distributions - MSI (495) (495) Issuance of stock options (55) - Compensation expense recognized (59) (59) Comprehensive income: - Net loss (126,328) $(126,328) (126,328) Foreign currency translation adjustment 28 $28 28 -------------- Other comprehensive income 28 - ------------- Comprehensive income (126,300) - ------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1997 (250) (106,819) 28 58,882 EMTEK Acquisition 9,060 Sale of common stock - Eclipsys intial public offering 65,399 Conversion of preferred stock - Issuance of Series G Preferred Stock 9,000 Stock warrant exercise - PCS 61 Stock option exercises 1,205 Employee stock purchase 287 Income tax benefit from stock options exercised 1,171 Dividends and accretion on mandatorily (10,928) redeemable preferred stock - Distributions - MSI (585) (585) Issuance of stock options (1,523) - Compensation expense recognized 150 150 Comprehensive income: - Net loss (35,276) (35,276) (35,276) Foreign currency translation adjustment 16 16 16 ------------- Other comprehensive income 16 ------------- Comprehensive income (35,260) ------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1998 $(1,623) $(142,680) $44 $98,442 ===============================================================================
6 20 ECLIPSYS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 1998 1. ORGANIZATION AND DESCRIPTION OF BUSINESS Eclipsys Corporation ("Eclipsys") and its subsidiaries (collectively, the "Company") is a healthcare information technology solutions provider which was formed in December 1995 and commenced operations in January 1996. The Company provides, on an integrated basis, enterprise-wide, clinical management, health information management, strategic decision support, resource planning management and enterprise application integration solutions to healthcare organizations. Additionally, Eclipsys provides other information technology solutions including outsourcing, remote processing, networking technologies and other related services. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The financial statements include the accounts of Eclipsys and its wholly-owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation. FINANCIAL STATEMENT PRESENTATION The Company has completed mergers with Transition Systems, Inc. ("Transition") effective December 31, 1998, PowerCenter Systems, Inc. ("PCS") effective February 17, 1999 and MSI Solutions, Inc. and MSI Integrated Services, Inc. (collectively "MSI") effective June 17, 1999. Each of these mergers were accounted for as a pooling of interests and, accordingly, the consolidated financial statements have been retroactively restated as if the mergers had occurred as of the beginning of the earliest period presented. Transition had a September 30 fiscal year end. In connection with the retroactive restatement, the financial statements of Transition were recast to a calendar year end to conform to Eclipsys' presentation. A reconciliation between revenue and net loss as previously reported by the Company in the 1998 Annual report on Form 10-K and as restated for the PCS and MSI poolings of interests is as follows:
Revenue: 1996 1997 1998 ----------------------------------------- As previously reported $ 36,197 $ 141,071 $ 170,689 PCS 388 659 1,437 MSI 5,193 5,598 10,332 --------- --------- --------- As restated $ 41,778 $ 147,328 $ 182,458 ========= ========= ========= Net income(loss): As previously reported $ 1,785 $(125,040) $ (34,678) PCS (1,617) (2,083) (2,472) MSI 1,266 795 1,874 --------- --------- --------- As restated $ 1,434 $(126,328) $ (35,276) ========= ========= =========
USE OF ESTIMATES The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosures of contingent assets and liabilities. The estimates and assumptions used in the accompanying consolidated financial statements are based upon management's evaluation of the relevant facts and circumstances as of the date of the financial statements. Actual results could differ from those estimates. 7 21 CASH AND CASH EQUIVALENTS For purposes of the consolidated statement of cash flows, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash equivalents are stated at cost plus accrued interest, which approximates market value. INVESTMENTS As of December 31, 1998, the Company has classified all investments as held to maturity. The securities totaled $17.0 million as of December 31, 1998 and consisted of federal agency obligations. The estimated fair value of each investment approximates the amortized cost plus accrued interest. Unrealized gains at December 31, 1998 were $18,000. As of December 31, 1997, the Company's investments were municipal bonds held by MSI and were classified as available for sale. The fair value of these investments approximated the cost. REVENUE RECOGNITION The Company's products are sold to customers based primarily on contractual arrangements that include implementation services that often extend for periods in excess of one year. Revenues are derived from licensing of computer software, software and hardware maintenance, remote processing and outsourcing, training, implementation assistance, consulting, and the sale of computer hardware. For arrangements in which the Company does not use percentage of completion accounting the Company recognizes revenue in accordance with the American Institute of Certified Public Accountants Statement of Position 97-2 "Software Revenue Recognition" ("SOP 97-2") which requires, among other matters, that there be a signed contract evidencing an arrangement exists, delivery of the software has occurred, the fee is fixed and determinable and collectibility of the fee is probable. SYSTEMS AND SERVICES MULTIPLE ELEMENT ARRANGEMENTS The Company generally licenses its software products pursuant to multiple element arrangements that include maintenance for periods that range from 3 to 7 years. For software license fees sold to customers that are bundled with services and maintenance and require significant implementation efforts, the Company recognizes revenue using the percentage of completion method, as the services are considered essential to the functionality of the software. For the Eclipsys product line ("EPL") transactions entered into with customers that require significant implementation efforts, the Company recognizes the bundled license and services fee from the arrangement using the percentage of completion method over the implementation period based on input measures (based substantially on implementation hours incurred). For the Transition Systems, Inc. product line ("TPL"), the Company recognizes revenue for transactions entered into prior to January 1, 1998 under the percentage of completion method based principally upon progress and performance as measured by achievement of contract milestones. Effective January 1, 1998, the Company adopted SOP 97-2 with respect to TPL transactions. In connection with the adoption, the Company accounted for TPL transactions entered into on or after January 1, 1998 under the same percentage of completion method used for the EPL as the Company's management intended to manage implementation efforts of the TPL on the basis of inputs rather than the output method used by pre-merger TSI management. The Company recognizes the TPL bundled license and service fee revenue ratably over the implementation period which corresponds with the timing of the related implementation efforts. Revenue from other software license fees which are bundled with long-term maintenance agreements (3 to 7 years) is recognized on a straight-line basis over the contracted maintenance period. Other software license fee arrangements relate to certain "add-on" module EPL products sold to customers in the EPL installed base. Because the Company does not sell the "add-on" modules or the associated extended term maintenance elements separately, the entire arrangement fee is recognized as revenue over the contracted maintenance period in accordance with paragraph 12 of SOP 97-2. SERVICES Remote processing and outsourcing services are marketed under long-term arrangements generally over periods from 5 to 7 years. Revenues from these arrangements are recognized as the services are performed. Software maintenance fees are marketed under annual and multi year agreements and are recognized as revenue ratably over the contracted maintenance term. The Company's software maintenance arrangements include when and if available upgrades and do not contain specific upgrade rights. Implementation revenues and other services, including training and consulting are recognized as services are performed for time and material arrangements and using the percentage of completion method based on labor input measures for fixed fee arrangements. The Company sells these services separately and accordingly has sufficient vendor specific objective evidence of the element to recognize revenue. HARDWARE SALES AND MAINTENANCE Hardware sales are generally recognized upon shipment of the equipment to the customer. Hardware maintenance revenues are billed and recognized monthly over the contracted maintenance term. UNBILLED ACCOUNTS RECEIVABLE The timing of revenue recognition and contractual billing terms under certain multiple element arrangements may not precisely coincide resulting in the recording of unbilled accounts receivable or deferred revenue. Customer payments are due under these arrangements in varying amounts upon the achievement of certain contractual milestones throughout the implementation period. Implementation periods generally range from 12 to 24 months. The current portion of unbilled accounts 8 22 receivable of $13.5 million and $10.3 million as of December 31, 1997 and 1998, respectively, is included in accounts receivable in the accompanying financial statements. In addition, the Company maintains certain long-term contracts used to finance a portion of certain customer hardware and software fees owed. All such contracts were entered into by Alltel Healthcare Information Services, Inc. ("Alltel") prior to the Company's January 1997 acquisition of that business (see Note 7). These arrangements generally provide for payment terms that range from three to five years and carry interest rates that range from 7% to 10%. Such amounts are recorded as non current unbilled accounts receivable until the customers are billed which is generally on a monthly basis. The non-current portion of amounts due related to these arrangements was $1.8 million and $1.5 million as of December 31, 1997 and 1998, respectively, and is included in other assets in the accompanying financial statements. The current portion of amounts due related to these arrangements was $3.6 million and $2.6 million as of December 31, 1997 and 1998, respectively, and is included in accounts receivable in the accompanying financial statements. The Company does not have any obligation to refund any portion of the software or hardware fees and its contracts are generally non cancelable. INVENTORY Inventory consists of computer parts and peripherals and is stated at the lower of cost or market. Cost is determined using the first-in, first-out method. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives, which range from two to ten years. Computer equipment is depreciated over two to five years. Office equipment is depreciated over two to ten years. Purchased software for internal use is amortized over three to five years. Leasehold improvements are amortized over the shorter of the useful lives of the assets or the remaining term of the lease. When assets are retired or otherwise disposed of, the related costs and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in income. Expenditures for repairs and maintenance not considered to substantially lengthen the property and equipment lives are charged to expense as incurred. CAPITALIZED SOFTWARE DEVELOPMENT COSTS The Company capitalizes a portion of its internal computer software development costs incurred subsequent to establishing technological feasibility, including salaries, benefits, and other directly related costs incurred in connection with programming and testing software products. Capitalization ceases when the products are generally released for sale to customers. Management monitors the net realizable value of all capitalized software development costs to ensure that the investment will be recovered through margins from future sales. Capitalized software development costs were approximately $704,000, $2.3 million and $4.3 million for the years ended December 31, 1996, 1997 and 1998, respectively. These costs are amortized over the greater of the ratio that current revenues bear to total and anticipated future revenues for the applicable product or the straight-line method over three to five years. Amortization of capitalized software development costs, which is included in cost of systems and services revenues, were approximately $750,000, $700,000 and $777,000 for the years ended December 31, 1996, 1997 and 1998, respectively. Accumulated amortization of capitalized software development costs were $4.9 million and $5.8 million as of December 31, 1997 and 1998, respectively. In December 1998, based on a review of products acquired in conjunction with the Transition merger and other related activities, the Company recorded a write-off of approximately $1.3 million of capitalized software development costs related to duplicate products that did not have any alternative future use. 9 23 ACQUIRED TECHNOLOGY AND INTANGIBLE ASSETS The intangible assets from the Company's acquisitions (Notes 6 and 7) consist of the following as of December 31, 1997 and 1998 (in thousands):
December 31, Useful Life ------------------------------------------------- ------------- 1997 1998 ---------------------- --------------------- Gross Net Gross Net -------- -------- -------- ------- Acquired technology $ 47,168 $ 27,138 $ 79,118 $ 43,318 3 - 5 Years Ongoing customer relationships 10,846 8,858 10,846 6,690 5 Years Management and services agreement 9,543 7,346 9,543 - 4 Years Network services - - 5,764 4,324 3 Years Goodwill 13,550 12,084 17,537 14,779 5 - 12 Years Other 378 291 863 135 3 - 5 Years -------------------------------------------------- $ 81,485 $ 55,717 $123,671 $ 69,246 ==================================================
The carrying values of intangible assets are reviewed if the facts and circumstances suggest that it may be impaired. This review indicates if the assets will not be recoverable based on future expected cash flows. Based on its review, the Company does not believe that an impairment of its excess of cost over fair value of net assets acquired has occurred. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of the Company's financial instruments, including cash and cash equivalents, accounts receivable, and other current liabilities, approximate fair value. The recorded amount of long-term debt approximates fair value as the debt bears interest at a floating market rate. INCOME TAXES The Company accounts for income taxes utilizing the liability method, and deferred income taxes are determined based on the estimated future tax effects of differences between the financial reporting and income tax basis of assets and liabilities and tax carryforwards given the provisions of the enacted tax laws. Prior to the pooling of interests merger with the Company, MSI had elected "S" corporation status for income tax purposes. As a result of the merger, MSI terminated its "S" corporation election. The pro forma provision for income taxes, taken together with reported income tax expense presents the combined pro forma tax expense of MSI as if it had been a "C" corporation during the periods presented. The pro forma net income (loss) of the Company considering this impact is as follows:
1996 1997 1998 Net income (loss) $ 1,434 $(126,328) $ (35,276) Pro forma tax adjustments (431) (270) (637) --------- --------- --------- Pro forma net income(loss) $ 1,003 $(126,598) $ (35,913) ========= ========= =========
STOCK-BASED COMPENSATION The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees", and related Interpretations and to elect the disclosure option of Statement of Financial Accounting Standards ("FAS") No. 123, "Accounting for Stock-Based Compensation". Accordingly, compensation cost for stock options is measured as the excess, if any, of the estimated market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. 10 24 BASIC AND DILUTED NET INCOME (LOSS) PER SHARE For all periods presented, basic net income (loss) per common share is presented in accordance with FAS 128, "Earnings per Share", which provides for the accounting principles used in the calculation of earnings per share and was effective for financial statements for both interim and annual periods ending after December 15, 1997. Basic net income (loss) per common share is based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share reflect the potential dilution from assumed conversion of all dilutive securities such as stock options. Stock options to acquire 2,679,224, 3,835,565 and 4,344,958 shares of common stock in 1996, 1997 and 1998, respectively, and warrants to acquire up to 156,412, 1,179,483 and 1,119,245 shares of common stock in 1996, 1997 and 1998, were the only securities issued which would be included in the diluted earnings per share calculation if dilutive. In 1996, dilutive stock options of 1,496,850 and warrants of 127,415, after the application of the treasury stock method, were included in the calculation of diluted weighted average common stock outstanding. In 1997 and 1998, the inclusion of stock options and warrants would have been antidilutive due to the net loss reported by the Company. The Company has excluded 370,609 contingently returnable shares of common stock from basic and diluted earnings per share computations (Note 4 ). For the year ended December 31, 1996, basic and diluted earnings per share for income before extraordinary item were $0.22 and $0.19, respectively, and the impact to basic and diluted earnings per share of the extraordinary item was a reduction of $0.16 and $0.14, respectively. CONCENTRATION OF CREDIT RISK The Company's customers operate primarily in the healthcare industry. The Company sells its products and services under contracts with varying terms. The accounts receivable amounts are unsecured. Management believes the allowance for doubtful accounts is sufficient to cover credit losses. The Company doesn't believe that the loss of any one customer would have a material effect on the financial position of the Company. FOREIGN CURRENCY TRANSLATION The financial position and results of operations of foreign subsidiaries are measured using the currency of the respective countries as the functional currency. Assets and liabilities are translated at the foreign exchange rate in effect at the balance sheet date, while revenue and expenses for the year are translated at the average exchange rate in effect during the year. Translation gains and losses are not included in determining net income or loss but are accumulated and reported as a separate component of stockholders' equity. The Company has not entered into any hedging contracts during the three year period ended December 31, 1998. COMPREHENSIVE INCOME Effective January 1, 1998, the Company implemented Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income". This standard requires that the total changes in equity resulting from revenue, expenses, and gains and losses, including those that do not affect the accumulated deficit, be reported. Accordingly, those amounts that are comprised solely of foreign currency translation adjustments are included in other comprehensive income in the consolidated statement of stockholders' equity. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued FAS 131, "Disclosure about Segments of an Enterprise and Related Information". In October 1997, the American Institute of Certified Public Accountants issued Statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition". Effective January 1, 1998, the Company adopted FAS 131 and SOP 97-2. The adoption of FAS 131 has not had a material impact on the Company's financial statement disclosures. In connection with the adoption of SOP 97-2, the Company deferred approximately $9.1 million of revenue under certain Transition contracts that were entered into after December 31, 1997. 3. PROPERTY AND EQUIPMENT 11 25 Property and equipment as of December 31, 1997 and 1998 is summarized as follows (in thousands):
December 31, ----------------------- 1997 1998 -------- -------- Computer equipment $ 12,813 $ 15,039 Office equipment and other 3,049 4,310 Purchased software 3,446 5,112 Leasehold improvements 2,478 3,349 ----------------------- 21,786 27,810 Less: Accumulated depreciation and amortization (10,388) (15,190) ----------------------- $ 11,398 $ 12,620 =======================
Depreciation and amortization expense of property and equipment totaled approximately $667,000, $7.1 million and $7.6 million in 1996, 1997 and 1998, respectively. 4. LICENSING ARRANGEMENT In May 1996, the Company entered into an exclusive licensing arrangement with Partners HealthCare System, Inc. ("Partners") to further develop, commercialize, distribute and support certain intellectual property which was being developed at Partners. As consideration for the license, the Company issued 988,290 shares of Common Stock of the Company and agreed to pay royalties to Partners on sales of the developed product until the Company completed an initial public offering of common stock with a per share offering price of $10.00 or higher. There was no revenue recognized by the Company or royalties paid to Partners under the arrangement in 1996, 1997 or 1998. In August of 1998, the Company completed an initial public offering (Note 5) whereby the royalty provision of the agreement terminated. Under the terms of the license, the Company may further develop, market, distribute and support the original technology and license it, as well as market related services, to other healthcare providers and hospitals throughout the world (other than in the Boston, Massachusetts metropolitan area). The Company is obligated to offer to Partners and certain of their affiliates an internal use license, granted on most favored customer terms, to any new software applications developed by the Company, whether or not derived from the licensed technology, and major architectural changes to the licensed software. After May 3, 1998, Partners and certain of their affiliates are entitled to receive internal use licenses for any changes to any modules or applications included in the licensed technology, as defined. The Company has an exclusive right of first offer to commercialize new information technologies developed in connection with Partners. If the Company fails to pay the required royalties, breaches any material term under the licensing arrangement or if the current Chairman of the Board and Chief Executive Officer of the Company voluntarily terminates his employment with the Company prior to May 1999, the license may become non-exclusive, at the option of Partners. If Partners elects to convert the license to non-exclusive, it must return 370,609 shares of Common Stock to the Company. At the time the license arrangement was consummated, the licensed technology had not reached technological feasibility and had no alternative future use. The licensed technology being developed consisted of enterprise-wide, clinical information software. The Company released certain commercial products derived from the licensed technology in late 1998. The Company accounted for the license arrangement with Partners by recording a credit to additional paid-in capital of $1.5 million (representing the estimated fair value of the licensed technology) and a corresponding charge to its statement of operations for the year ended December 31, 1996. The charge was taken because the technology had not reached technological feasibility and had no alternative future use. As part of the agreement, the Company has provided development services to Partners related to commercializing the intellectual property; fees for these development services totaled $2.0 million, $2.5 million, and $1.2 million for the years ended December 31, 12 26 1996, 1997 and 1998 respectively, and are included as a reduction in research and development expenses in the accompanying consolidated statements of operations. 5. STOCKHOLDERS' EQUITY AND MANDATORILY REDEEMABLE PREFERRED STOCK STOCK SPLIT In May 1997, the Company declared a three-for-two split for all Voting Common Stock and Non-Voting Common Stock issued and outstanding. In addition, the shareholders approved an increase in the number of authorized shares of Voting Common Stock from 30,000,000 to 50,000,000. In June 1998, the Company effected a two-for-three reverse stock split of all Voting Common Stock and Non-Voting Common Stock outstanding. The accompanying consolidated financial statements give retroactive effect to the May 1997 and June 1998 stock splits as if they had occurred at the beginning of the earliest period presented. MANDATORILY REDEEMABLE PREFERRED STOCK In connection with its acquisition of Alltel (Note 7), the Company sold 30,000 shares of Series B 8.5% Cumulative Redeemable Preferred Stock ("Series B") and warrants to purchase up to 1,799,715 shares of Non-Voting Common Stock at $.01 per share for total consideration of $30.0 million. The number of warrants to be issued was subject to adjustment in the event the Company redeemed all or a portion of the Series B prior to its mandatory redemption date. The Series B was non-voting and was entitled to a liquidation preference of $1,000 per share plus any unpaid dividends. Dividends are cumulative and accrue at an annual rate of 8.5%. The Series B was redeemable by the Company at its redemption price at any time on or before the mandatory redemption date of December 31, 2001. The redemption price, as defined, equaled the liquidation preference amount plus all accrued and unpaid dividends. With respect to liquidation preferences, the Series B ranked equal to the Series C 8.5% Cumulative Redeemable Preferred Stock ("Series C") and senior to all other equity instruments. In January 1997, 20,000 shares of the Series C were issued to Alltel Information Services, Inc. ("AIS") as part of the consideration paid for Alltel (Note 7). The Series C contained substantially the same terms, including voting rights, ability to redeem and liquidation preferences as the Series B. The Series B has preferential rights in the event of a change of ownership percentages of certain of the Company's stockholders; the Series C did not have these preferential rights. The Series C redemption price was determined the same as Series B and had to be redeemed on or before December 31, 2001. The Company has accounted for the Series B and C as mandatorily redeemable preferred stock. Accordingly, the Company accrued dividends and amortized any discount over the redemption period with a charge to additional paid-in capital ("APIC"). The Company recorded a discount on the Series B at the time of its issuance for the estimated fair value of the warrants ($10.5 million). The Company valued the maximum amount of warrants that would be issued up to the mandatory redemption date of the Series B as of the acquisition date, January 23, 1997 and the mandatory redemption date, December 31, 2001. The Company recorded the Series C on the date of acquisition of Alltel at $10.3 million ((after adjustment for the 4,500 shares returned by AIS (Note 7)), which included a discount from its face amount of $5.2 million. Dividends and accretion on the Series B was $4.1 million and $10.7 million for the years ended December 31, 1997 and 1998, respectively. During the years ended December 31, 1997 and 1998, dividends and accretion on the Series C was $1.8 million and $200,000, respectively. The Series B and C were redeemed in August 1998 for $38.8 million with proceeds from the Company's initial public offering. In connection with this early redemption, the Company recorded a one-time charge to APIC of $10.9 million, which represented the difference between the carrying value of the Series B and C and the redemption value. This amount is included in dividends and accretion in the accompanying financial statements. SERIES A CONVERTIBLE PREFERRED STOCK In May 1996, concurrent with entering into the Partners' licensing arrangement, the Company sold 1,000,000 shares of Series A Convertible Preferred Stock ("Series A") for $6.0 million to outside investors. The Series A was convertible on a one-to-one basis to shares of Common Stock of the Company at the discretion of the outside investors. The Series A had voting rights equivalent to Common Stock on an as converted basis and a liquidation preference of $6 per share. The Company did not declare or pay any 13 27 dividends on Series A. In January 1997, the Company issued 1,478,097 shares of Series F Convertible Preferred Stock ("Series F") in exchange for the cancellation of Series A. The Company accounted for the transaction analogously to an extinguishment of debt with a related party and, accordingly, recorded a charge of $3.1 million to additional paid-in capital at the date of this transaction. In addition, the charge is recorded as an increase to net loss available to common shareholders in the accompanying statement of operations. In March 1996, PCS sold 20,000 shares of its Series A Convertible Preferred Stock ("PCS Series A") for $2.0 million to outside investors. At the time of the merger the PCS Series A were converted into 241,183 shares of Common Stock of the Company. SERIES D CONVERTIBLE PREFERRED STOCK In January 1997, the Company sold 4,981,289 shares of the Series D Convertible Preferred Stock ("Series D") for $62.5 million to private investors and issued 2,077,497 shares to AIS in connection with the acquisition of Alltel. Each share of Series D was convertible into one share of Common Stock. The Series D contained voting rights as if it were converted into Common Stock and had a liquidation preference of $12.55 per share plus any declared but unpaid dividends. The Series D was equivalent to Series E Convertible Preferred Stock ("Series E") with respect to liquidation preference and rank. Both the Series D and E ranked junior to the Series B and C and senior to Series F. The Company did not declare or pay any dividends on the Series D. Concurrent with the Company's initial public offering, the Series D were converted into 7,058,786 shares of Common Stock. SERIES E CONVERTIBLE PREFERRED STOCK In January 1997, the Company sold 896,431 shares of Series E for $11.3 million. The Series E was non-voting and was identical to the Series D with respect to liquidation preference and rank. Each share of Series E was convertible into one share of Non-Voting Common Stock. The Company did not declare or pay any dividends on the Series E. Concurrent with the Company's initial public offering, the Series E were converted into 896,431 shares of Non-Voting Common Stock. SERIES F CONVERTIBLE PREFERRED STOCK As described above, in January 1997, 1,478,097 shares of Series F were issued in exchange for the cancellation of the outstanding shares of Series A. The Series F contained a liquidation preference of $6 per share. The Series F ranked junior to the Company's other classes of preferred stock with respect to liquidation preferences. Each share of Series F was convertible into one share of Common Stock. The Company did not declare or pay any dividends on the Series F. Concurrent with the Company's initial public offering, the Series F were converted into 1,478,097 shares of Common Stock. SERIES G CONVERTIBLE PREFERRED STOCK In February 1998, the Company sold 900,000 shares of Series G Convertible Preferred Stock ("Series G") to outside investors for total consideration of $9.0 million. The proceeds were utilized to repay the outstanding Term Loan balance. Each share of the Series G was convertible on a two-for-three basis to shares of Common Stock. The conversion rate was subject to adjustment in certain circumstances. The Series G had a liquidation preference of $10 per share. In the event of an involuntary liquidation of the Company, the Series G would have participated on a pro rata basis with the Series D and E. Concurrent with the Company's initial public offering, the Series G was converted into 600,000 shares of Common Stock. VOTING AND NON-VOTING COMMON STOCK Holders of Common Stock are entitled to one vote per share. Holders of Non-Voting Common Stock do not have voting rights other than as provided by statute. 14 28 UNDESIGNATED PREFERRED STOCK The Company has available for issuance, 5.0 million, shares of undesignated preferred stock (the "Undesignated Preferred"). The liquidation, voting, conversion and other related provisions of the Undesignated Preferred will be determined by the Board of Directors at the time of issuance. Currently, there are no outstanding shares. INITIAL PUBLIC OFFERING Effective August 6, 1998, the Company completed an initial public offering ("IPO"). Net proceeds from the offering were $65.4 million, including proceeds from the exercise of the underwriters' overallotment option. The Company used the net proceeds from the offering to redeem the outstanding shares of the Company's Mandatorily Redeemable Preferred Stock, repay the principal balance and accrued interest on acquisition related debt and to repay amounts outstanding under the Company's revolving credit facility. In connection with the redemption of the Mandatorily Redeemable Preferred Stock, the Company recorded an increase to net loss available to common shareholders of $10.9 million reflecting the difference between the carrying value and redemption value of the stock. Concurrent with the initial public offering, all Series of Convertible Preferred Stock were automatically converted into Common Stock or Non-Voting Common Stock and all Mandatorily Redeemable Preferred Stock was redeemed. 6. TRANSITION MERGER As discussed in Note 2, on December 31, 1998, the Company completed a merger with Transition, a publicly traded provider of integrated clinical and financial decision support systems for hospitals, integrated health networks, physician groups and other healthcare organizations. Transition stockholders received .525 shares of common stock of Eclipsys for each share of Transition common stock, or an aggregate of 11.1 million shares. The transaction was accounted for as a pooling of interests, and accordingly, all prior periods have been restated to give effect to this transaction. The Company incurred transaction costs of approximately $5.0 million directly related to the merger. Significant transactions of Transition during the restatement period, after giving effect to the .525 conversion ratio were as follows: 1996 RECAPITALIZATION In January 1996, prior to its contemplation of an initial public offering, Transition effected a leveraged recapitalization transaction (the " Recapitalization"), in which Transition repurchased 15,011,012 shares of Common Stock then issued and outstanding from New England Medical Center, Inc. ("NEMC") and other stockholders of Transition for an aggregate of approximately $111.4 million. Additionally, Transition incurred approximately $4.8 million in costs related to the Recapitalization (approximately $3.4 million is included in the statement of operations). Up until the Recapitalization, Transition was a majority-owned subsidiary of NEMC. In addition, Warburg, Pincus Ventures, L.P. ("WP Ventures") purchased from certain executive officers of Transition shares of Common Stock, including shares of Common Stock acquired by such executive officers pursuant to their exercise of stock options, for an aggregate of $9.0 million. WP Ventures then contributed such shares of Common Stock to Transition. The principal purpose of the Recapitaliztion was to provide liquidity to Transition's existing stockholders while permitting them to retain an ownership interest in Transition. Transition accounted for this transaction as a leveraged recapitalization. To finance the repurchase of these shares, Transition issued to certain institutional investors shares of Series A non-voting preferred stock for an aggregate of $20.0 million, shares of Series B convertible preferred stock (convertible into 4,529,338 shares of Common Stock) for an aggregate of $33.6 million and shares of Series C non-voting convertible preferred stock (convertible into 187,038 shares of Common Stock) for an aggregate of $1.4 million. In addition, Transition 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 156,412 shares of non-voting common stock at an initial exercise price of $7.43 per share, subject to 15 29 adjustment in certain circumstances. Transition recorded a discount on the Senior Subordinated Notes for the estimated fair value of the warrants ($395,000). In addition, in the first quarter of 1996, Transition incurred a non-cash compensation charge of approximately $3.0 million. This compensation charge arose from the purchase by Transition (both directly and indirectly, through WP Ventures) from certain of its executive officers 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 was equal to the difference between the approximately $766,000 exercise price paid by such officers upon such exercise and the proceeds received by the officers from the purchase by Transition of such shares. TRANSITION INITIAL PUBLIC OFFERING On April 18, 1996, Transition completed an initial public offering of 3,622,500 shares of its common stock that 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 (included as part of the recapitalization on the statement of changes in stockholders' equity), to repay the $34.7 million outstanding principal amount and accrued interest under a secured term loan facility, to repay the $10.3 million outstanding principal amount and accrued interest related to the senior subordinated notes and to repay the $5.1 million outstanding principal amount and accrued interest under a revolving credit facility. ACQUISITIONS On July 22, 1996, Transition acquired substantially all of the outstanding stock and a note held by a selling principal of Enterprising HealthCare, Inc. ("EHI"), based in Tucson, Arizona, for a total purchase price of approximately $1.8 million in cash. EHI provides system integration products and services for the health care market. The acquisition was accounted for under the purchase method and accordingly the results of operations of EHI are included from the date of the acquisition. Acquired technology costs of $1.6 million are being amortized on a straight-line basis over 7 years. On September 19, 1997, Transition 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 132,302 shares of the Company's common stock with a value of $3.6 million. The acquisition was accounted for under the purchase method of accounting and accordingly the results of operations of Vital are included from the date of the acquisition. The amount allocated to acquired in-process research and development ($2.4 million) 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 which had no alternative future use. Accordingly, the amount was charged to operations at the date of the acquisition. On December 3, 1998, Transition acquired substantially all of the outstanding stock of HealthVISION ("HV"), a provider of electronic medical record software. The purchase price was approximately $41.1 million, which was comprised of approximately $31.6 million in cash (of which $6.0 million was invested in 1997) and the assumption of approximately $9.5 million in liabilities, plus an earn-out of up to $10.8 million if specified financial milestones are met. The acquisition was accounted for under the purchase method and accordingly the results of operations of HV are included from the date of the acquisition. The amount allocated to acquired in-process research and development ($2.4 million) 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 which had no alternative future use. Accordingly, the amount was charged to operations at the date of the acquisition. Unaudited pro forma results of operations have not been presented for EHI and Vital, as the effects of these acquisitions on the financial statements are not material. For unaudited pro forma results of operations for the years ended December 31, 1997 and 1998, as if the HV acquisition had occurred on January 1, 1997 see Note 7. EXTRAORDINARY ITEM During 1996, Transition incurred an extraordinary loss of approximately $2.1 million (after taxes) for the write-off of approximately $3.6 million of unamortized capitalized financing costs. These costs were attributable to indebtedness 16 30 incurred in the Recapitalization that was repaid out of the proceeds of Transition's initial public offering as more fully discussed above. 7. ACQUISITIONS Effective January 24, 1997, Eclipsys completed the acquisition of Alltel. As consideration for this transaction, Eclipsys paid AIS $104.8 million cash, issued 15,500 (after consideration of the return of 4,500 shares by AIS in October 1997) shares of Series C valued at approximately $10.3 million and 2,077,497 shares of Series D valued at approximately $26.1 million. Concurrent with the acquisition, the Company and Alltel entered into the Management and Services Agreement ("MSA") whereby Alltel agreed to provide certain services to the Company and its customers together with certain non-compete provisions. In exchange, the Company agreed to pay Alltel $11.0 million in varying installments through December 2000. The obligation and equivalent corresponding asset were recorded at its net present value of $9.5 million at the date of signing. To finance the transaction, the Company sold, for $30.0 million, 30,000 shares of Series B and warrants to purchase up to 1,799,715 shares of Non-Voting Common Stock to private investors. Additionally, the Company sold 4,981,289 shares of Series D and 896,431 shares of Series E for total proceeds of $73.8 million. The transaction was accounted for as a purchase and accordingly, the purchase price was allocated based on the fair value of the net assets acquired. The purchase price is composed of and allocated as follows (in thousands): Cash, net of cash acquired................ $ 104,814 Issuance of Series D...................... 26,072 Issuance of Series C...................... 10,258 Transaction costs......................... 2,008 Liabilities assumed....................... 58,397 ----------- 201,549 ----------- Current assets............................ 31,803 Property and equipment.................... 12,242 Other assets.............................. 3,148 Identifiable intangible assets: In-process research and development.. 92,201 Acquired technology.................. 42,312 Ongoing customer relationships....... 10,846 ----------- 192,552 ----------- Goodwill.................................. $ 8,997 ===========
The acquisition agreement contains certain provisions whereby the purchase price could be adjusted within twelve months from the acquisition date based on certain criteria defined in the agreement. Based on these provisions, in October 1997, AIS returned 4,500 shares of Series C to Eclipsys. In December 1997, the Company presented its final analysis to AIS of items for which, under the agreement, the Company believed it was entitled to consideration. In the first quarter of 1998, the Company and AIS renegotiated, in two separate transactions, certain matters relating to the acquisition of Alltel. In one transaction, AIS returned to the Company, for cancellation, 11,000 shares of Series C in exchange for resolving certain open issues in connection with the Alltel acquisition, and the Company agreed, at AIS' option, to redeem the remaining 4,500 shares of Series C held by AIS for an aggregate price of $4.5 million at the time of the IPO and for a period of 30 days thereafter. These shares were redeemed with the proceeds from the Company's IPO (Note 5). In the second transaction, the Company paid AIS an aggregate of $14.0 million in exchange for terminating all of the rights and obligations of both parties under the MSA. The Company recorded a charge of approximately $7.2 million related to the write-off of the MSA intangible asset. In addition, the Company recorded a reduction to goodwill of approximately $7.8 million related to the final settlement of certain issues related to the Alltel acquisition resulting in the return of the 11,000 shares of Series C. Additionally, the Company recorded a Network Service intangible asset related to the Company's ability to provide services in this area as a result of the settlement. This asset is being amortized over thirty-six months. After accounting for these adjustments, the Company's total consideration paid for this acquisition was $201.5 million, including liabilities assumed, net of cash acquired. In connection with the recording of the acquisition of Alltel, the Company reduced the predecessor's reported deferred revenue by $7.3 million to the amount that reflects the estimated fair value of the contractual obligations assumed. This adjustment results from the Company's requirement, in accordance with generally accepted accounting principles; to record the fair value of the obligation assumed with respect to arrangements for which the related revenue was previously collected by the predecessor company. The Company's liability at acquisition includes its estimated costs in fulfilling those contract obligations. 17 31 Effective June 26, 1997, the Company acquired all of the common stock of SDK Healthcare Information Systems, Inc. ("SDK") in exchange for 499,997 shares of Common Stock valued at approximately $3.2 million, $2.2 million in cash and acquisition debt due to SDK shareholders totaling $7.6 million. The transaction was accounted for as a purchase and, accordingly, the purchase price was allocated based on the estimated fair value of the net assets acquired. The purchase price is composed of and allocated as follows (in thousands): Cash, net of cash acquired................ $ 2,161 Issuance of Common Stock.................. 3,248 SDK acquisition debt...................... 7,588 Liabilities assumed....................... 3,514 --------- 16,511 --------- Current assets............................ 1,061 Property and equipment.................... 671 Other assets.............................. 33 Identifiable intangible assets: In-process research and development.. 6,988 Acquired technology.................. 3,205 --------- 11,958 --------- Goodwill.................................. $ 4,553 =========
The Company is using the acquired in-process research and development to create new clinical, patient financial, access management and data warehousing products, which will become part of its product suite over the next several years. The Company anticipates that certain products will be generally released through 2001. It is management's expectation that the acquired in-process research and development will be successfully developed however there can be no assurance that commercial viability of these products will be achieved. In the event that these products are not generally released in a timely manner, the Company may experience fluctuations in future earnings as a result of such delays. In connection with the Alltel and SDK acquisitions, the Company wrote off in-process research and development 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. Effective January 30, 1998, the Company acquired the net assets of the Emtek Healthcare Division of Motorola, Inc., ("Emtek") for an aggregate purchase price of approximately $11.7 million, including 1,000,000 shares of Common Stock valued at $9.1 million and liabilities assumed of approximately $12.3 million. In addition, Motorola agreed to pay the Company $9.6 million in cash due within one year for working capital purposes. The purchase price is composed of and allocated as follows (in thousands): Issuance of Common Stock........................... $ 9,060 Receivable from Motorola........................... (9,600) Liabilities assumed................................ 12,275 --------- 11,735 --------- Current assets..................................... 5,033 Property and equipment............................. 2,629 --------- 7,662 --------- Identifiable intangible assets (acquired technology)........................................ $ 4,073 =========
Unaudited pro forma results of operations for the years ended December 31, 1997 and 1998, as if the aforementioned acquisitions (including HV) had occurred on January 1, 1997 is as follows (in thousands, except per share data):
Year ended December 31, ------------ 1997 1998 --------- --------- Revenues $ 188,929 $ 195,029 Net loss (152,242) (57,274) Basic and diluted loss per share $ (9.41) $ (2.87)
18 32 8. LONG-TERM DEBT Long-term debt consists of the following as of December 31, (in thousands):
1997 1998 -------- -------- Term Loan ......................................................................... $ 9,000 $ - Convertible notes payable of PCS, interest payable at 11.0% per annum 1,450 1,890 SDK acquisition debt, interest payable quarterly at 9.5%, principal due in two annual installments of $3,794, commencing April 1998 ........................ 7,588 - -------- -------- 18,038 1,890 Less current portion .............................................................. (14,244) (1,890) -------- -------- Long-term debt .................................................................... $ 3,794 $ - ======== ========
In connection with the Alltel acquisition, the Company entered into a $30.0 million credit facility (the "Facility"). The Facility included a $10.0 million term loan (the "Term Loan") and a $20.0 million revolving credit facility (the "Revolver"). Borrowings under the Facility are secured by substantially all of the assets of the Company. The Term Loan was payable in varying quarterly installments through January 2000. As more fully discussed in Note 5, the Term Loan was repaid in full with the proceeds of the sale of Series G Convertible Preferred Stock in February 1998. As such, the entire balance of the Term Loan as of December 31, 1997 was classified as current in the accompanying financial statements. On May 29, 1998, the Company entered into an agreement to increase the available borrowings under the Facility from $20.0 million to $50.0 million. In August 1998, the long-term debt balance and accrued interest were repaid in full with proceeds from the Company's IPO. PCS issued convertible notes and warrants to purchase common stock to certain investors. At the time of the merger, the convertible debt was converted into shares of Common Stock of the Company. Borrowings under the Facility bear interest, at the Company's option, at (i) LIBOR plus 1% to 3% or (ii) the higher of a) the banks prime lending rate or b) the Federal Funds Rate plus 0.5%; plus 0% to 1.75%. The interest rates vary based on the Company's ratio of earnings to consolidated debt, as defined. At December 31, 1998, the Company's borrowing rate under the Facility was 6.85%. Under the terms of the Facility, the Company is required to maintain certain financial covenants related to consolidated debt to earnings, consolidated earnings to interest expense and consolidated debt to capital. In addition, the Company has limitations on the amounts of certain types of expenditures and is required to obtain certain approvals related to mergers and acquisitions, as defined. The Company was in compliance with all provisions of the Facility as of December 31, 1998. As of December 31, 1998, the Company has $50.0 million available for future borrowings under the Revolver. The Revolver expires on the third anniversary of the Facility. Under the terms of the Revolver, the Company pays an annual commitment fee of .375% for any unused balance, as defined. Additionally, the Company pays a fee of .125% for any Letters of Credit issued under the agreement. As of December 31, 1998, unused Letters of Credit totaling approximately $4.5 million were outstanding against the Revolver. 9. OTHER CURRENT LIABILITIES Other current liabilities consist of the following (in thousands):
December 31, -------------------- 1997 1998 ------- ------- Accounts payable $ 5,416 $ 7,782 Accrued compensation and incentives 10,533 15,206
19 33 Customer deposits 7,959 9,576 Payment due to AIS under MSA 2,000 - Accrued royalties 1,024 6,586 Accrued interest 672 295 Other 11,694 9,415 ------- ------- $39,298 $48,860 ======= =======
10. INCOME TAXES A reconciliation of the effect of applying the federal statutory rate and the effective income tax rate on the Company's income tax provision is as follows (in thousands):
Years ended December 31, -------------------------------------- 1996 1997 1998 -------- -------- -------- Statutory federal income tax rate (34%) $ 2,813 $(40,199) $(10,548) In-process research and development - 4,418 813 Other 124 232 237 State income taxes 580 (4,516) (872) Non-deductible transaction costs - - 1,546 Non-deductible amortization - 747 927 Valuation allowance (319) 47,414 12,149 -------- -------- -------- 3,198 8,096 4,252 Income tax benefit on extraordinary item 1,492 - - -------- -------- -------- Provision for income taxes $ 4,690 $ 8,096 $ 4,252 ======== ======== ========
The significant components of the Company's net deferred tax asset were as follows (in thousands):
December 31, ----------------------- 1997 1998 -------- -------- Deferred tax assets: Alltel in-process research and development $ 34,969 $ 32,471 Intangible assets 5,353 12,940 Deferred revenue 4,642 5,307 Allowance for doubtful accounts 760 1,097 Accrued expenses 4,123 2,448 Depreciation and amortization 1,381 1,111 Other 259 2,481 Net operating loss carryforwards 5,220 23,084 -------- -------- $ 56,707 $ 80,939 ======== ========
20 34 Deferred tax liabilities: Capitalization of software development costs 1,140 11,857 -------- -------- Net deferred tax asset 55,567 69,082 -------- -------- Valuation allowance (55,567) (69,082) -------- -------- $ - $ - ======== ========
At December 31, 1998, the Company had net operating loss carryforwards for federal income tax purposes of approximately $55.0 million. The carryforwards expire in varying amounts through 2018. Additionally, the Company has Canadian net operating loss carryovers of approximately $5.5 million that expire in varying amounts through 2004. Under the Tax Reform Act of 1986, the amounts of, and the benefits from, net operating loss carryforwards may be impaired or limited in certain circumstances. The Company experienced an ownership change as defined under Section 382 of the Internal Revenue Code in January, 1997 and December 1998. As a result of the ownership changes, net operating loss carryforwards of approximately $1.5 million at January 1997 and $55.0 million at December 1998, which were incurred prior to the date of change, are subject to annual limitation on their future use. As of December 31, 1998, a valuation allowance has been established against the deferred tax assets that the Company does not believe are more likely than not to be realized. The future reduction of the valuation allowance, up to $7.2 million, will be reflected as a reduction of goodwill. 11. EMPLOYEE BENEFIT PLANS 1996 STOCK OPTION PLAN In April 1996, the Board of Directors of the Company (the "Board") adopted the 1996 Stock Plan (the "1996 Stock Plan"). The 1996 Stock Plan, as amended, provides for grants of stock options, awards of Company stock free of any restrictions and opportunities to make direct purchases of restricted stock of the Company. The 1996 Stock Plan allows for the issuance of options or other awards to purchase up to 2,500,000 shares of Common Stock. Pursuant to the terms of the 1996 Stock Plan, a committee of the Board is authorized to grant awards to employees and non-employees and establish vesting terms. The options expire ten years from the date of grant. 1998 STOCK INCENTIVE PLAN In January 1998, the Board adopted the 1998 Stock Incentive Plan (the "Incentive Plan"). The Incentive Plan provides for the granting of stock options, stock appreciation rights, restricted stock awards or unrestricted stock awards. Under the provisions of the Incentive Plan, no options or other awards may be granted after April 2008. There are currently 4,333,333 shares of common stock reserved under the Incentive Plan, together with the 1996 Stock Plan and the 1998 Employee Stock Purchase Plan. Options granted under the Incentive Plan will be granted at the fair market value of the stock as of the date of grant. The following table summarizes activity under the Plan:
1996 1997 1998 ------------------------------------------------------------------------------------ WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE --------- ---------- --------- ---------- --------- ----------- Outstanding at beginning of year 1,588,134 $ 2.29 2,679,224 $ 3.75 3,835,565 $ 7.78 Granted 1,375,760 4.95 1,823,559 14.27 1,217,463 18.85 Exercised (270,409) 1.36 (356,102) 3.05 (465,008) 2.61
21 35 Forfeited (14,261) 2.29 (311,116) 17.04 (243,062) 21.06 Outstanding at end of year 2,679,224 3.75 3,835,565 7.78 4,344,958 10.69 Exercisable at end of the year 1,038,768 1,280,480 1,654,029
1996 1997 1998 ------------------------------------------------------------------------ WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED AVERAGE FAIR AVERAGE FAIR AVERAGE FAIR EXERCISE MARKET EXERCISE MARKET EXERCISE MARKET OPTION GRANTED DURING THE YEAR PRICE VALUE PRICE VALUE PRICE VALUE - ------------------------------------- -------- -------- -------- -------- -------- -------- Option price > fair market value $11.44 $34.56 $24.49 Option price = fair market value 0.20 6.54 21.31 Option price < fair market value 0.08 - - Weighted Fair Market Value of Options $4.34 $12.49 $18.43
During 1996 and 1997, pursuant to the 1996 Stock Plan, the Board issued 109,999 and 15,000 shares of Common Stock, respectively, to employees and non-employees for services. Compensation expense of approximately $1,000 and $97,000 was recorded in 1996 and 1997, respectively, related to these transactions. The Company has adopted the disclosure only provision of FAS 123. Had compensation cost for the Company's stock option grants described above been determined based on the fair value at the grant date for awards in 1996, 1997 and 1998 consistent with the provisions of FAS 123, the Company's net loss and loss per share would have been increased to the pro forma amounts indicated below (in thousands, except share data):
YEAR ENDED DECEMBER 31, Net income (loss): 1996 1997 1998 ----------- ----------- ----------- As reported $ 1,434 $ (126,328) $ (35,276) Pro forma (785) (131,806) (47,780) Basic net income (loss) per share: As reported $ 0.06 $ (8.60) $ (1.95) Pro forma $ (0.10) $ (8.95) $ (2.48) Diluted net income (loss) per share: As reported $ 0.05 $ (8.60) $ (1.95) Pro forma $ (0.10) $ (8.95) $ (2.48)
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1996, 1997 and 1998: dividend yield of 0% for all years, risk-free interest rate of 5.55% for all years, expected life of 7.85, 9.98 and 8.35 based on the plan and volatility of 103%. The following table summarizes information about stock options outstanding at December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE -----------------------------------------------------------------
22 36
WEIGHTED AVERAGE WEIGHTED WEIGHTED NUMBER REMAINING AVERAGE NUMBER AVERAGE RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE EXERCISE PRICE AT 12/31/98 LIFE PRICE AT 12/31/98 PRICE - --------------- ----------- ----------- -------- ----------- -------- $0.01 - $6.00 1,586,293 6.7 $ 1.68 1,170,045 $ 2.10 $6.01 - $ 12.00 1,795,661 8.3 7.58 434,423 7.08 $12.01 - $18.00 291,472 9.8 14.17 - - $18.01 - $24.00 53,444 9.1 20.07 4,620 20.95 $24.01 - $30.00 141,948 8.5 27.72 43,679 25.71 $30.01 - $36.00 146,996 8.6 35.45 - - $36.01 - $42.00 26,248 9.2 37.38 1,262 37.38 $42.01 - $48.00 202,896 9.1 44.29 - - $48.01 - $54.00 - - - - - $54.01 - $60.00 100,000 9.3 60.00 - -
In connection with the Transition merger, options held by employees of Transition were converted into options to purchase 1,792,854 shares of Voting Common Stock based on the .525 conversion ratio. All option disclosures reflect the impact of Transition options after retroactive restatement for the impact of the Transition merger. As of December 31, 1996, 1997 and 1998, respectively, there were 2,000,175, 1,999,867 and 1,792,854 options outstanding related to Transition's stock options plans. In connection with the PCS and MSI mergers, options held by employees were converted into outstanding options of the Company. As of December 31, 1996, 1997 and 1998, respectively, there were 9,048, 9,048 and 56,551 options outstanding related to PCS's stock option plan. As of December 31, 1996, 1997 and 1998, respectively, there were 0,0 and 117,090 options outstanding related to MSI's stock option plan. Additionally, in connection with the MSI merger, the Company recorded unearned stock compensation of $1,523,000 related to options granted to MSI employees during 1998 EMPLOYEE SAVINGS PLAN During 1997, the Company established a Savings Plan (the "Plan") pursuant to Section 401(k) of the Internal Revenue Code (the "Code"), whereby employees may contribute a percentage of their compensation, not to exceed the maximum amount allowable under the Code. At the discretion of the Board, the Company may elect to make matching contributions, as defined in the Plan. For the year end December 31, 1997 and 1998, the Board authorized matching contributions totaling $780,000 and $ 1,400,000, respectively. Transition maintained a savings plan pursuant to Section 401 (k) of the Code. In connection with this plan, employer contributions totaling $263,000, $306,000 and $376,000 were made in 1996, 1997 and 1998, respectively. In connection with the Transition merger, employees of Transition became eligible to enroll in the Plan. 1998 EMPLOYEE STOCK PURCHASE PLAN Under the Company's 1998 Employee Stock Purchase Plan (the "Purchase Plan") (implemented in April 1998), employees of the Company, including directors of the Company who are employees are eligible to participate in quarterly plan offerings in which payroll deductions may be used to purchase shares of Common Stock. The purchase price of such shares is the lower of 85% of the fair market value of the Common Stock on the day the offering commences and 85% of the fair market value of the Common Stock on the day the offering terminates. 12. COMMITMENTS AND CONTINGENCIES NONCANCELABLE OPERATING LEASES The Company leases its office space and certain equipment under noncancelable operating leases. Rental expense under operating leases was approximately $654,000, $7.0 million and $8.7 million for the years ended December 31, 1996, 1997 and 1998, 23 37 respectively. Future minimum rental payments for noncancelable operating leases as of December 31, 1998 are as follows (in thousands):
YEAR ENDING DECEMBER 31, - ------------ 1999 $ 7,460 2000 3,852 2001 2,682 2002 2,525 2003 2,520 Thereafter 5,618 ------- $24,657 =======
LITIGATION The Company is involved in litigation incidental to its business. In the opinion of management, after consultation with legal counsel, the ultimate outcome of such litigation will not have a material adverse effect on the Company's financial position or results of operations or cash flows. 13. RELATED PARTY TRANSACTIONS During 1997, the Company paid AIS $1.7 million for certain transition services provided by AIS related to accounting services, computer processing and other various activities. During 1997, Eclipsys paid a total of $348,000 to certain subsidiaries of AIS and Alltel Corporation related to the purchase of various goods and services. The Company leases office space from the former owner of SDK. During the year ended December 31, 1997 and 1998 the Company paid $178,000 and $330,000, respectively, under this lease. The lease is noncancelable and expires in 2009. In 1997 and 1998, the Company paid $336,000 and $446,000, respectively, to a charter company for the use of an aircraft for corporate purposes. The aircraft provided for the Company's use was leased by the charter company from a company owned by the Chairman of the Board and Chief Executive Officer of the Company (the "Chairman"). The Chairman's company received $219,000 and $310,000, during 1997 and 1998, respectively, for these transactions. The Chairman has no interest in the charter company. The Company has an employment agreement with the Chairman through May 1, 1999. Under the provisions of the agreement, the Chairman earns an annual salary of $150,000, subject to adjustment from time to time. The payment of amounts earned under the agreement were to be deferred until certain earnings were attained by the Company. During 1997 and 1998, $66,000 and $185,000, respectively, was paid under the agreement. Effective January 1, 1998, the Chairman's annual salary was increased to $200,000. 14. INVESTMENT WRITE-DOWN In April 1998, the Company made a strategic investment in Simione Central Holdings, Inc. ("Simione") a publicly traded company, purchasing 420,000 shares of restricted common stock from certain stockholders of Simione for $5.6 million. At the time of the transaction, the common stock represented 4.9% of Simione's outstanding common stock. The Company accounts for its investment in these shares using the cost method. 24 38 Concurrent with the investment, the Company and Simione entered into a remarketing agreement pursuant to which the Company has certain rights to distribute Simione software products. At December 31, 1998, the Company determined that an other than temporary impairment of its investment occurred. Accordingly, the investment was written down to its estimated fair value of $ 787,000 and the Company recorded a charge of $4.8 million in the accompanying statement of operations. 15. SUBSEQUENT EVENTS As discussed in Note 2, on February 17, 1999, the Company completed a merger with PCS for total consideration of approximately $35.0 million. The Company issued 1,140,000 of its common stock for all of the common stock outstanding of PCS. No adjustments were made to the net assets of PCS as a result of the acquisition. The merger was accounted for as a pooling of interests and accordingly, the accompanying consolidated financial statements have been retroactively restated as if the merger occurred as of the earliest period presented. PCS provides enterprise resource planning software throughout the healthcare industry. Effective March 31, 1999, the Company acquired the common stock of Intelus Corporation ("Intelus") and Med Data Systems, Inc. ("Med Data"), both wholly owned subsidiaries of Sungard Data Systems, Inc. for total consideration of $25.0 million in cash. The acquired entities both provide document imaging technology and workflow solutions to entities throughout the healthcare industry. The acquisition was accounted for as a purchase and, accordingly, the purchase price was allocated based on the fair value of the net assets acquired. As of March 31, 1999 the Company intended to dispose of Med Data. The purchase price is composed of and allocated as follows (in thousands):
Cash $ 25,000 Liabilities assumed 4,306 -------- 29,306 Current assets 9,830 Fixed assets 778 -------- 10,608 Identifiable intangible assets (acquired technology) $ 18,698 ========
Unaudited pro forma results of operations as if the Intelus and Med Data acquisitions (including acquisitions discussed in Note 7 and HV) had occurred on January 1, 1997 is as follows (in thousands except per share data):
Year ended December 31, 1997 1998 --------- --------- Revenues $ 199,029 $ 213,444 Net loss (154,414) (57,623) Basic and diluted net loss per share $ (9.54) $ (2.88)
As discussed in Note 2, on June 17, 1999, the Company completed a merger with MSI for total consideration of approximately $53.6 million. The Company issued 2,375,000 of its common stock for all of the common stock oustanding of MSI. No adjustments were made to the net assets of MSI as a result of the acquisition. The merger was accounted for as a pooling of interests and accordingly, the accompanying consolidated financial statements have been retroactively restated as if the merger occurred as of the earliest period presented. MSI provides web-enabling and integration software. In connection with the pooling of MSI, the Company wrote off $2.8 million of capitalized software development costs related to duplicate products and incurred a stock compensation charge of $1.0 million related to certain MSI options that were required to be fully vested at the merger date. Effective July 1, 1999, the Company sold Med Data for total consideration of $5.0 million in cash. The Company will reduce acquired technology originally recorded in the purchase during the quarter ending September 30, 1999 by $4.4 million, which represents the difference between the sales price and the net tangible assets sold. During July 1999, the Company invested in HEALTHvision, Inc., a Dallas based, privately held internet healthcare company, in conjunction with VHA, Inc. and General Atlantic Partners, LLC. The Company purchased 3,400,000 shares of common stock for $34,000, which represents 34% of the outstanding common stock on an as if converted basis of HEALTHvision, Inc. The Company will account for the investment using the equity method of accounting. This entity is a start-up enterprise that bears no relationship to the acquisition by Transition in December 1998. 25 EX-99.5 6 EXHIBIT 99.5 1 EXHIBIT 99.5 ALLTEL HEALTHCARE INFORMATION SERVICES, INC. CONSOLIDATED FINANCIAL STATEMENTS TABLE OF CONTENTS Report of Independent Accountants Consolidated Balance Sheets as of December 31, 1995 and 1996 Consolidated Statements of Operations for the years ended December 31, 1995 and 1996 and the period from January 1 through January 23, 1997 Consolidated Statements of Shareholder's Deficit for the years ended December 31, 1995 and 1996 and the period from January 1 through January 23, 1997 Consolidated Statements of Cash Flows for the years ended December 31, 1995 and 1996 and the period from January 1 through January 23, 1997 Notes to Consolidated Financial Statements 2 EXHIBIT 99.5 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Eclipsys Corporation In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of changes in shareholder's deficit and of cash flows present fairly, in all material respects, the financial position of ALLTEL Healthcare Information Services, Inc. (the Company) (a Delaware corporation, wholly-owned by ALLTEL Information Services, Inc., an Arkansas corporation) and its subsidiaries at December 31, 1995 and 1996, and the results of their operations and their cash flows for the years then ended and for the period from January 1, 1997 through January 23, 1997 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 10, effective January 24, 1997, the Company was acquired by Eclipsys Corporation. /s/ PricewaterhouseCoopers LLP Atlanta, Georgia June 27, 1997 F-25 3 ALLTEL HEALTHCARE INFORMATION SERVICES, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, ------------------- 1995 1996 -------- -------- ASSETS Current assets: Cash and cash equivalents................................. $ 2,599 $ 2,022 Accounts receivable, net of allowance for doubtful accounts of $749 and $1,274 at December 31, 1995 and 1996, respectively..................................... 29,435 29,713 Inventory................................................. 2,081 1,576 Deferred tax asset........................................ 3,676 3,682 Other current assets...................................... 678 634 -------- -------- Total current assets................................... 38,469 37,627 Property and equipment, net................................. 10,168 10,739 Purchased software, net of accumulated amortization of $2,985 and $4,453 at December 31, 1995 and 1996, respectively.............................................. 4,098 2,882 Capitalized software development costs, net of accumulated amortization of $4,671 and $11,880 at December 31, 1995 and 1996, respectively.................................... 27,632 35,306 Intangible assets, net of accumulated amortization of $1,129 and $2,101 at December 31, 1995 and 1996, respectively.... 5,670 4,698 Other assets................................................ 2,344 9,191 -------- -------- Total assets........................................... $ 88,381 $100,443 ======== ======== LIABILITIES AND SHAREHOLDER'S DEFICIT Current liabilities: Deferred revenue.......................................... $ 24,724 $ 26,807 Other current liabilities................................. 17,668 20,378 -------- -------- Total current liabilities.............................. 42,392 47,185 Deferred revenue............................................ 15,913 10,148 Other long-term liabilities................................. 1,250 Deferred income taxes....................................... 7,002 9,294 Intercompany payable to parent.............................. 46,085 57,953 -------- -------- Total liabilities...................................... 111,392 125,830 Shareholder's deficit: Common stock, $.01 par value, 1,000 shares authorized, issued and outstanding................................. 1 1 Additional paid-in capital................................ 15,678 15,678 Accumulated deficit....................................... (38,236) (40,432) Cumulative foreign currency translation adjustment........ (454) (634) -------- -------- Total shareholder's deficit............................ (23,011) (25,387) -------- -------- Total liabilities and shareholder's deficit....... $ 88,381 $100,443 ======== ========
The accompanying notes are an integral part of these financial statements. F-26 4 ALLTEL HEALTHCARE INFORMATION SERVICES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS)
YEAR ENDED PERIOD FROM DECEMBER 31, JANUARY 1, 1997 ------------------- THROUGH 1995 1996 JANUARY 23, 1997 -------- -------- ---------------- Revenues: Service and systems..................................... $ 90,737 $ 99,213 $ 6,064 Hardware................................................ 9,377 9,587 122 -------- -------- ------- Total revenues....................................... 100,114 108,800 6,186 -------- -------- ------- Costs and expenses: Cost of service and systems revenues.................... 53,385 63,572 4,277 Cost of hardware revenues............................... 7,950 7,911 104 Marketing and sales..................................... 11,128 11,091 660 Research and development................................ 8,522 10,271 794 General and administrative.............................. 8,168 7,101 621 Depreciation and amortization........................... 6,735 8,135 568 -------- -------- ------- Total costs and expenses............................. 95,888 108,081 7,024 -------- -------- ------- Income (loss) from operations............................. 4,226 719 (838) Interest expense, net..................................... (2,733) (3,758) (379) -------- -------- ------- Income (loss) before income taxes......................... 1,493 (3,039) (1,217) Income tax benefit (provision)............................ (887) 843 437 -------- -------- ------- Net income (loss)......................................... $ 606 $ (2,196) $ (780) ======== ======== =======
The accompanying notes are an integral part of these financial statements. F-27 5 ALLTEL HEALTHCARE INFORMATION SERVICES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDER'S DEFICIT (IN THOUSANDS EXCEPT SHARE DATA)
EQUITY ADJUSTMENT FROM COMMON STOCK ADDITIONAL FOREIGN --------------- PAID-IN ACCUMULATED CURRENCY SHARES AMOUNT CAPITAL DEFICIT TRANSLATION TOTAL ------ ------ ---------- ----------- ----------- -------- Balance at December 31, 1994........ 1,000 $1 $15,678 $(38,842) $(470) $(23,633) Net income.......................... 606 606 Foreign translation adjustment...... 16 16 ----- -- ------- -------- ----- -------- Balance at December 31, 1995........ 1,000 1 15,678 (38,236) (454) (23,011) Net loss............................ (2,196) (2,196) Foreign translation adjustment...... (180) (180) ----- -- ------- -------- ----- -------- Balance at December 31, 1996........ 1,000 1 15,678 (40,432) (634) (25,387) Net loss............................ (780) (780) Foreign translation adjustment...... 3 3 ----- -- ------- -------- ----- -------- Balance at January 23, 1997......... 1,000 $1 $15,678 $(41,212) $(631) $(26,164) ===== == ======= ======== ===== ========
The accompanying notes are an integral part of these financial statements. F-28 6 ALLTEL HEALTHCARE INFORMATION SERVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED PERIOD FROM DECEMBER 31, JANUARY 1, 1997 ------------------- THROUGH 1995 1996 JANUARY 23, 1997 -------- -------- ---------------- Operating activities: Net income (loss)....................................... $ 606 $ (2,196) $ (780) -------- -------- ------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization........................ 13,205 15,344 945 Deferred income taxes................................ 6,040 2,286 (52) Changes in assets and liabilities Accounts receivable................................ (6,574) (278) 325 Inventory.......................................... 566 505 55 Other current assets............................... (74) 44 10 Deferred revenue................................... 1,090 (3,682) 1,951 Other current liabilities.......................... 906 2,710 2,351 Other long term liabilities........................ -- 1,250 (1,250) Other assets....................................... 162 (43) (81) -------- -------- ------- Total adjustments............................... 15,321 18,136 4,254 -------- -------- ------- Net cash provided by operating activities..... 15,927 15,940 3,474 -------- -------- ------- Investing activities: Purchase of property, equipment and software............ (7,716) (9,231) (323) Capitalized software development costs.................. (12,905) (12,170) (661) Changes in other assets................................. 96 (6,804) 27 -------- -------- ------- Net cash used in investing activities................ (20,525) (28,205) (957) -------- -------- ------- Financing activities: Net change in intercompany payable to parent............ 5,509 11,868 (1,855) -------- -------- ------- Effect of exchange rate changes on cash and cash equivalents............................................. 16 (180) 3 -------- -------- ------- Net (decrease) increase in cash and cash equivalents...... 927 (577) 665 Cash and cash equivalents, beginning of year.............. 1,672 2,599 2,022 -------- -------- ------- Cash and cash equivalents, end of year.................... $ 2,599 $ 2,022 $ 2,687 ======== ======== =======
The accompanying notes are an integral part of these financial statements. F-29 7 ALLTEL HEALTHCARE INFORMATION SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 1. ORGANIZATION AND DESCRIPTION OF BUSINESS Alltel Healthcare Information Services, Inc. ("AHIS") and its subsidiaries (collectively, the "Company") are engaged in one business segment primarily providing enterprise-wide clinical, patient care and financial software solutions, as well as outsourcing, remote processing, networking technologies and other services to healthcare organizations throughout the United States and Western Europe. The Company is a wholly owned subsidiary of Alltel Information Services, Inc. ("AIS") which is a wholly owned subsidiary of Alltel Corporation ("Alltel"). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The financial statements include the accounts of AHIS and its wholly owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation. FINANCIAL STATEMENT PRESENTATION The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. The estimates and assumptions used in the accompanying consolidated financial statements are based upon management's evaluation of the relevant facts and circumstances as of the date of the financial statements. Actual results could differ from those estimates. The consolidated statements of operations include all revenues and costs directly attributable to the operations of AHIS, including the costs of facilities, administration, and other various costs. As more fully described in Notes 8 and 11, certain costs related to interest, benefits, and other costs were allocated to AHIS based on usage and other defined criteria. All of the allocations utilized in the consolidated financial statements are based on assumptions that AHIS management believes are reasonable under the circumstances. However, these allocations are not necessarily indicative of the costs which would have resulted had AHIS been a separate entity. CASH AND CASH EQUIVALENTS For purposes of the consolidated statement of cash flows, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. REVENUE RECOGNITION The Company's products are sold to customers based on contractual agreements. Revenues are derived from the licensing of computer software, the sale of computer hardware, hardware and software maintenance, remote processing and outsourcing, training, implementation assistance, custom development, and consulting. SERVICE AND SYSTEMS Revenues from software license fees are recognized using the percentage-of-completion method for contracts in which the Company is required to make significant production, modification, or customization changes over the implementation period of the contracts based on implementation hours incurred. Other software license fees are generally recognized on a monthly basis over the term of the licensing and maintenance agreements which are generally five years. Remote processing and outsourcing services are F-30 8 ALLTEL HEALTHCARE INFORMATION SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 -- (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) marketed under long-term agreements generally over periods from five to seven years and revenues are recognized monthly as the work is performed. Software maintenance fees are marketed under annual and multiyear agreements and are recognized ratably over the term of the agreements. Implementation revenues are recognized as the services are performed or on a percentage-of-completion basis for fixed fee arrangements. Hardware maintenance revenues are billed and recognized monthly over the term of the agreements. Revenues related to other support services, such as training, consulting, and custom development, are recognized when the services are performed. The Company warrants its products will perform in accordance with specifications as outlined in the respective customer contracts. The Company records a reserve for warranty costs at the time it recognizes revenue. Historically, warranty costs have been minimal. The Company accrues for product returns at the time it recognizes revenue, based on actual experience. Historically, product return costs have been minimal. HARDWARE SALES Hardware sales are recognized upon shipment of the product to the customer. UNBILLED ACCOUNTS RECEIVABLE Unbilled accounts receivable represent amounts owed to the Company under noncancelable agreements for software license fees with extended payment terms and computer hardware purchases which have been financed over extended payment terms. The current portion of unbilled accounts receivable of $4,883,000 and $3,245,000 as of December 31, 1995 and 1996, respectively, is included in accounts receivable in the accompanying financial statements. The non-current portion of unbilled accounts receivable of $2,109,000 and $2,151,000 as of December 31, 1995 and 1996, respectively, is included in other assets in the accompanying financial statements. The non-current portion of unbilled accounts receivable provides for payment terms that generally range from three to five years and carry annual interest rates ranging from 7% to 10%. The Company recognizes revenue in advance of billings under certain of its non-cancelable long-term contracts that contain extended payment terms. The Company does not have any obligation to refund any portion of its fees and has a history of enforcement and collection of amounts due under such arrangements. Payments owed under contracts with extended payment terms are due in accordance with the terms of the respective contract. Historically, the Company has had minimal write-offs of amounts due under such arrangements. Additionally, included in unbilled accounts receivable are costs and earnings in excess of billings related to certain software license fee arrangements which are being recognized on a percentage-of-completion basis. These amounts totaled approximately $1,572,000 and $1,240,000 as of December 31, 1995 and 1996, respectively. INVENTORY Inventory consists of computer parts and peripherals and is stated at the lower of cost or market. Cost is determined using the first-in, first-out method. FOREIGN CURRENCY TRANSLATION The financial position and results of operations of foreign subsidiaries are measured using the currency of the respective countries as the functional currency. Assets and liabilities are translated at the foreign exchange rate in effect at the balance sheet date, while revenues and expenses for the year are translated at the average exchange rate in effect during the year. Translation gains and losses are not included in F-31 9 ALLTEL HEALTHCARE INFORMATION SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 -- (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) determining net income or loss but are accumulated and reported as a separate component of shareholder's deficit. The Company has not entered into any hedging contracts during the two year period ended December 31, 1996. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. For financial reporting purposes, depreciation and amortization are provided using the straight-line method over the estimated useful lives, which range from two to ten years. Computer equipment is depreciated over useful lives which range from two to five years. Office furniture and equipment is depreciated over two to ten years. Leasehold improvements are amortized over the shorter of the useful lives of the assets or the remaining term of the lease. When assets are retired or otherwise disposed of, the related costs and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in income. Expenditures for repairs and maintenance not considered to substantially lengthen the property lives are charged to expense as incurred. CAPITALIZED SOFTWARE DEVELOPMENT COSTS The Company capitalizes a portion of the internal computer software development costs incurred. Salaries, overhead, and other related costs incurred in connection with programming and testing software products are capitalized subsequent to establishing technological feasibility. Management monitors the net realizable value of all capitalized software development costs to ensure that the investment will be recovered through margins from future sales. These costs are amortized utilizing the straight-line method over periods of 36-60 months. Capitalized costs related to software development were approximately $12,905,000 and $12,170,000, for the years ended December 31, 1995 and 1996, respectively and $750,000 for the period from January 1, 1997 through January 23, 1997. Amortization of capitalized software development costs amounted to approximately $6,470,000 and $7,209,000 for the years ended December 31, 1995 and 1996, respectively, and $377,000 for the period from January 1, 1997 through January 23, 1997 and is included in operating expenses in the accompanying statements of operations. INTANGIBLE ASSETS The intangible assets arose from the acquisition of Medical Data Technology, Inc. are stated at cost less accumulated amortization, and consist of contracts and the excess of cost over fair value of net assets acquired. The intangible assets are being amortized using the straight-line method over seven years. The carrying value of the excess of cost over fair value of net assets acquired is reviewed if the facts and circumstances suggest that it may be impaired. This review indicates if the asset will not be recoverable as determined based on future expected cash flows. Based on its review, the Company does not believe that an impairment of its excess of cost over fair value of net assets acquired has occurred. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of the Company's financial instruments, including cash and cash equivalents, accounts receivable, and other current liabilities approximate fair value. The carrying amount of the intercompany payable to parent balance approximates fair value based on current rates of interest available to Alltel, and accordingly, the Company, for loans of similar maturities. F-32 10 ALLTEL HEALTHCARE INFORMATION SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 -- (CONTINUED) 3. PROPERTY AND EQUIPMENT Property and equipment consists of the following at December 31, 1995 and 1996 (in thousands):
1995 1996 -------- -------- Computer equipment.......................................... $ 21,106 $ 25,093 Office furniture and equipment.............................. 2,815 4,198 Leasehold improvements and other............................ 2,407 3,461 -------- -------- 26,328 32,752 Less: Accumulated depreciation and amortization............. (16,160) (22,013) -------- -------- $ 10,168 $ 10,739 ======== ========
4. OTHER ASSETS During 1996, the Company entered into a marketing agreement with Integrated Medical Networks, Inc. ("IMN") for the marketing rights of certain software which will provide financial and managed care applications for entities within the healthcare industry. Under the terms of the agreement, IMN will perform significant enhancements to existing technology over a three year period. AHIS will retain worldwide, perpetual marketing rights, as defined, for the resulting technology. For the year ended December 31, 1996, AHIS made payments totaling approximately $5,811,000 under this agreement and is included in other assets in the accompanying financial statements. As discussed in Note 12, this agreement and related asset was transferred to Alltel in conjunction with the sale of the Company. 5. OTHER CURRENT LIABILITIES Included in other current liabilities were the following as of December 31, 1995 and 1996 (in thousands):
1995 1996 ------- ------- Accrued compensation and incentives......................... $ 6,434 $ 6,603 Accrued hardware costs...................................... 3,700 3,326 Accrued royalty costs....................................... 1,045 648 Current portion of long-term debt........................... 260 86 Other....................................................... 6,229 9,715 ------- ------- $17,668 $20,378 ======= =======
6. INCOME TAXES The Company files its income tax return with AIS which files as part of the consolidated Alltel group. Income tax expense and related balances shown in the accompanying financial statements have been determined as if the Company filed its tax return on a separate company basis. F-33 11 ALLTEL HEALTHCARE INFORMATION SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 -- (CONTINUED) 6. INCOME TAXES (CONTINUED) The income tax benefit (provision) consists of the following (in thousands):
PERIOD ENDED 1995 1996 JANUARY 23, 1997 ------- ------- ---------------- Current Federal........................................ $ 4,123 $ 2,503 $ -- State and other................................ 1,030 626 -- ------- ------- ---- Deferred......................................... 5,153 3,129 -- ------- ------- ---- Federal........................................ (4,833) (1,829) 377 State and other................................ (1,207) (457) 60 ------- ------- ---- (6,040) (2,286) 437 ------- ------- ---- $ (887) $ 843 $437 ======= ======= ====
A reconciliation of the federal statutory rate and the effective income tax rate follows (in thousands):
PERIOD ENDED 1995 1996 JANUARY 23, 1997 ----- ------ ---------------- Statutory federal income tax rate (34%)......... $(508) $1,033 $413 Meals and entertainment....................... (128) (164) (14) State income taxes............................ (141) 76 46 Non-deductible amortization................... (91) (101) (8) Other......................................... (19) (1) -- ----- ------ ---- Income tax benefit (provision)................ $(887) $ 843 $437 ===== ====== ====
The significant components of the Company's net deferred tax liability were as follows (in thousands):
1995 1996 -------- -------- Deferred tax assets Deferred revenue.......................................... $ 4,009 $ 3,596 Inventory and accounts receivable allowances.............. 710 846 Compensation related accrued expenses..................... 584 806 Accrued expenses.......................................... 1,627 1,624 Deferred rent............................................. 660 484 Other..................................................... 1,949 844 -------- -------- 9,539 8,200 -------- -------- Deferred tax liabilities Capitalization of software development costs.............. (10,298) (11,475) Depreciation.............................................. (1,039) (856) Other..................................................... (1,528) (1,481) -------- -------- (12,865) (13,812) -------- -------- Net deferred tax liability.................................. $ (3,326) $ (5,612) ======== ========
F-34 12 ALLTEL HEALTHCARE INFORMATION SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 -- (CONTINUED) 7. EMPLOYEE BENEFIT PLANS Effective January 1, 1995, through Alltel, employees of the Company may participate in a noncontributory, trusteed profit-sharing plan which covers substantially all employees who meet certain length-of-service requirements. Company contributions are determined annually by the Board of Directors of Alltel. Contributions to the plan approximated $1,516,000 and $1,781,000 for the years ended December 31, 1995 and 1996, respectively. During 1994, the Company maintained a defined contribution profit-sharing plan. This plan was merged into the Alltel trusteed thrift plan, discussed below during 1995. Also, effective January 1, 1995, through Alltel, substantially all employees of the Company may participate in the Alltel trusteed thrift plan. Employees may contribute up to 10% of the employee's salary and the employer's matching contribution is the lesser of 25% of the employee's contribution or 1.5% of the employee's salary. The trusteed thrift plan is intended to meet all requirements of qualifications under Section 401(k) of the Internal Revenue Code. Company contributions to the trusteed thrift plan were approximately $412,000 and $452,000 for the years ended December 31, 1995 and 1996, respectively. During 1995, employees of the Company became eligible to participate in the AIS Employee Stock Purchase Plan (the "ESPP") which has reserved for issuance 1,000,000 shares of Alltel common stock. The ESPP provides for the purchase of shares of common stock by employees through payroll deductions which may not exceed five percent of employee compensation, as defined. The employee contributes 85% of the prevailing market price of the shares, which are purchased on the open market. The remaining 15% is expensed by the Company in the period the contribution is made. Company contributions to the ESPP were approximately $104,000 and $48,000 for the years ended December 31, 1995 and 1996, respectively. On June 30, 1996, the ESPP was terminated. During 1995, the employees of the Company became eligible to participate in various benefit plans which were administered by Alltel. In addition to the trusteed profit-sharing plan and trusteed thrift plan, employees were also eligible to participate in certain benefit plans including group medical, dental and other various plans. Total expenses related to these plans were approximately $2,196,000 and $2,328,000 for the years ended December 31, 1995 and 1996, respectively and $194,000 for the period from January 1, 1997 through January 23, 1997. 8. COMMITMENTS AND CONTINGENCIES NONCANCELABLE OPERATING LEASES The Company leases offices and certain equipment under noncancelable operating leases. Rental expense under operating leases was approximately $7,014,000 and $5,531,000 for the years ended December 31, 1995 and 1996, respectively, and $461,000 for the period from January 1, 1997 through January 23, 1997. Future minimum rental payments for noncancelable operating leases as of December 31, 1996 are as follows (in thousands):
YEAR ENDING DECEMBER 31, ---------------- 1997................................................... $ 4,877 1998................................................... 4,818 1999................................................... 3,625 2000................................................... 1,535 2001................................................... 1,414 Thereafter............................................. 1,798 ------- $18,067 =======
F-35 13 ALLTEL HEALTHCARE INFORMATION SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 -- (CONTINUED) 8. COMMITMENTS AND CONTINGENCIES (CONTINUED) LITIGATION The Company is involved in litigation incidental to its business. In the opinion of management, after consultation with legal counsel, the ultimate outcome of such litigation will not have a material adverse effect on the Company's financial position or results of operations or cash flows. 9. RELATED PARTY TRANSACTIONS The intercompany payable to parent balance represents amounts owed to Alltel related to cash disbursements and receipts activity and certain other transactions. All vendor related invoices are charged to this account at the time an invoice is processed and, consequently, the accompanying financial statements do not reflect an accounts payable balance. The intercompany balance is reduced upon the posting of cash receipts. Intercompany interest of approximately $2,833,000 and $3,858,000 for the years ended December 31, 1995 and 1996, respectively, and $379,000 for the period from January 1, 1997 through January 23, 1997 was charged to this account at interest rates which ranged from 3.5% to 8.0% which represented the incremental borrowing rates of Alltel. As more fully discussed in Note 12, the intercompany payable balance was converted to equity on January 24, 1997 in connection with the sale of the Company. For the years ended December 31, 1995 and 1996, Alltel charged the Company approximately $2,277,000 and $2,100,000, respectively, and $175,000 for the period January 1, 1997 through January 24, 1997 for costs related to providing certain data center charges in conjunction with an outsourcing contract between the Company and one of its customers. During 1995 and 1996, legal services and external fees were provided and paid by Alltel. These costs were approximately $1,869,000 and $964,000 for the years ended December 31, 1995 and 1996, respectively, and are reflected in general and administrative expenses in the accompanying financial statements. During 1996 certain administrative services were performed by AIS, the cost of which was estimated to be approximately $585,000 and is reflected in general and administrative expenses in the accompanying financial statements. Prior to 1996, these functions were performed directly by employees of the Company and, accordingly, the related costs are reflected in the accompanying financial statements. 10. SUBSEQUENT EVENT On January 24, 1997, the Company was purchased by Eclipsys Corporation (formerly Integrated Healthcare Solutions, Inc.) for cash and other consideration totaling approximately $201,500,000, including liabilities assumed. Pursuant to the acquisition agreement, Alltel will retain the rights to certain assets of the Company. These assets include the IMN marketing rights (Note 4) with a balance of approximately $5,811,000 as of December 31, 1996 and one of the Company's software products with related net capitalized software costs as of December 31, 1996 of approximately $6,543,000. F-36 -----END PRIVACY-ENHANCED MESSAGE-----