1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
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)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports) and (2) has been subject
to such filing for the past 90 days. Yes No X
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Class Shares outstanding as of August 31, 1998
----- ----------------------------------------
Common Stock, $.01 par value 19,391,675
Non-voting Common Stock, $.01 par value 896,431
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ECLIPSYS CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
INDEX
PART I. Financial Information
Item 1. Condensed Consolidated Balance Sheets - June 30, 1998
(unaudited) and December 31, 1997
Condensed Consolidated Statements of Operations - For the
Three and Six Months ended June 30, 1998 and 1997 (unaudited)
Condensed Consolidated Statements of Cash Flows - For the Six
Months ended June 30, 1998 and 1997 (unaudited)
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II. Other Information
Item 2. Changes in Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
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PART 1.
ITEM 1.
ECLISPSYS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1998 AND DECEMBER 31, 1997
(IN THOUSANDS)
(UNAUDITED)
ASSETS JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
Current Assets
Cash $ 2,778 $ 4,786
Accounts receivable 39,582 30,969
Inventory 610 866
Other current assets 8,578 1,114
--------- ---------
TOTAL CURRENT ASSETS 51,548 37,735
Fixed Assets, net 12,078 9,517
Capitalized software development costs 3,402 1,591
Acquired technology, net 22,341 25,802
Intangible assets, net 16,824 28,288
Other assets 9,524 3,832
--------- ---------
TOTAL ASSETS $ 115,717 $ 106,765
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities
Deferred revenue $ 37,503 $ 25,295
Current portion of long-term debt 3,794 12,794
Other current liabilities 32,810 31,150
--------- ---------
TOTAL CURRENT LIABILITIES 74,107 69,239
Deferred revenue 7,586 6,966
Long-term debt 17,000 3,794
Other long-term liabilities 3,765 9,480
Mandatorily redeemable preferred stock 30,356 35,607
Shareholders' deficit
Preferred stock 104 95
Common stock 53 42
Unearned stock compensation (214) (250)
Additional-paid-in-capital 131,757 115,777
Cumulative foreign currency translation adjustment 38 28
Retained deficit (148,835) (134,013)
--------- ---------
TOTAL SHAREHOLDERS' DEFICIT (17,097) (18,321)
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 115,717 $ 106,765
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
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ECLIPSYS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- -----------------------------
REVENUES 1998 1997 1998 1997
---- ---- ---- ----
Systems and services $ 29,125 $ 23,523 $ 56,089 $ 40,546
Hardware 3,164 744 5,494 1,366
----------------------- ----------------------------
TOTAL REVENUES 32,289 24,267 61,583 41,912
----------------------- ----------------------------
COSTS AND EXPENSES
Cost of systems and services revenues 17,761 19,970 34,404 36,834
Cost of hardware revenue 2,718 491 4,695 993
Marketing and sales 4,693 3,204 8,904 6,332
Research and development 6,311 3,329 12,423 8,027
General and administration 1,276 1,413 2,891 2,197
Depreciation and amortization 2,523 2,420 5,391 4,708
Nonrecurring charges - 6,988 7,193 99,189
----------------------- ----------------------------
TOTAL COSTS AND EXPENSES 35,282 37,815 75,901 158,280
----------------------- ----------------------------
----------------------- ----------------------------
LOSS FROM OPERATIONS (2,993) (13,548) (14,318) (116,368)
----------------------- ----------------------------
Interest expense, net 219 222 504 333
----------------------- ----------------------------
NET LOSS (3,212) (13,770) (14,822) (116,701)
----------------------- ----------------------------
DIVIDENDS AND ACCRETION OF MANDATORILY
REDEEMABLE PREFERRED STOCK (1,178) (1,568) (2,513) (2,586)
PREFERRED STOCK CONVERSION - - - (3,105)
----------------------- ----------------------------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS $ (4,390) $ (15,338) $ (17,335) $ (122,392)
----------------------- ----------------------------
BASIC AND DILUTED NET LOSS PER SHARE $ (0.89) $ (4.70) $ (3.66) $ (37.56)
----------------------- ----------------------------
WEIGHTED AVERAGE COMMON STOCK OUTSTANDING 4,937,086 3,261,053 4,732,602 3,258,553
----------------------- ----------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
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ECLIPSYS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
---------------------------
1998 1997
---------- ----------
OPERATING ACTIVITIES
Net Loss $ (14,822) $ (116,701)
Total adjustments to reconcile net loss
to net cash provided by operating activities 25,992 116,761
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 11,170 60
---------- ----------
INVESTING ACTIVITIES
Purchase of property, equipment and software, net (3,471) (1,303)
Capitalized software development costs (1,811) (189)
Acquisitions, net of cash - (108,983)
Changes in other assets (21,565) -
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (26,847) (110,475)
---------- ----------
FINANCING ACTIVITIES
Borrowings 17,000 10,000
Payments on borrowings (12,794) -
Exercise of options 453 -
Sale of preferred stock 9,000 73,764
Sale of mandatorily redeemable preferred stock - 30,000
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 13,659 113,764
---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS 10 13
---------- ----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,008) 3,362
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,786 4,589
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,778 $ 7,951
---------- ----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART TO THESE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
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ECLIPSYS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1998
1. BASIS OF PRESENTATION
The consolidated financial statements include all adjustments that, in the
opinion of management, are necessary for a fair presentation of the
results for the periods indicated. All such adjustments are considered of
normal recurring nature. Quarterly results of operations are not
necessarily indicative of annual results.
Certain financial information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's Registration Statement on Form S-1 as amended dated August 6,
1998.
2. SUBSEQUENT EVENTS
Effective August 6, 1998, Eclipsys Corporation ("the Company") completed
an initial public offering. Net proceeds from the offering were $67.4
million, including the exercise of the underwriters' over-allotment
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.
3. ACQUISITION
Effective January 30, 1998, the Company acquired the net asset of the
North American operations of Emtek Healthcare Systems ("Emtek"), a
division of Motorola, Inc. ("Motorola") for an aggregate purchase price of
$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.
Unaudited pro forma results of operations for the six months ended June
30, 1998, as if the aforementioned acquisition had occurred on January 1,
1998 is as follows (in thousands except per share data):
Revenues $ 62,563
Net loss (16,512)
Basic and diluted loss per share $ (3.88)
4. SIMIONE INVESTMENT
In April 1998, the Company made a strategic investment in Simione
Central Holdings, Inc. ("Simione") a publicly traded company,
purchasing 420,000 shares of restricted common stock from certain
stockholders of Simione. 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. Since
the date of the investment, the market price of Simione's common stock
has declined. Currently, Management is evaluating whether there has
been a permanent impairment of this investment in light of market
conditions and other factors.
Concurrently 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
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PART I.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report contains forward-looking statements. For this purpose, any
statements contained herein that are not statements of historical fact may
be deemed to be forward-looking statements. Without limiting the forgoing,
the words "believes," "anticipates," "plans," "expects," and similar
expressions are intended to identify forward-looking statements. The
important factors discussed below under the caption "Certain Factors that
May Affect Future Operating Results/Risk Factors," among others, could
cause actual results to differ materially from those indicated by
forward-looking statements made herein and presented elsewhere by
management from time to time. The Company undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
OVERVIEW
Eclipsys Corporation is a healthcare information technology company
delivering solutions that enable healthcare providers to achieve
improved clinical, financial and administrative outcomes. The Company
offers an integrated suite of core products in four critical areas -
clinical management, access management, patient financial management and
enterprise data warehouse and analysis. These products can be purchased
in combination to provide an enterprise-wide solution or individually to
address specific needs. These solutions take many forms and can include
a combination of software, hardware, maintenance, consulting services,
remote processing services, network services and information technology
outsourcing.
The Company was formed in December 1995, but had no significant operations
until January 1997, when it acquired ALLTEL Healthcare Information
Services, Inc. ("Alltel"). The Company has grown primarily through three
strategic acquisitions. The Company acquired Alltel effective January 24,
1997, SDK Healthcare Information Systems ("SDK") effective June 26, 1997
and Emtek effective January 30, 1998, (collectively the "Acquisitions").
The Acquisitions were accounted for as purchases; accordingly, the
Company's consolidated financial statements reflect the results of
operations of these businesses from the respective dates acquired.
RESULTS OF OPERATIONS
SUMMARY
Total revenues for the quarter ended June 30, 1998 increased 33% to $32.3
million compared with $24.3 million for the second quarter 1997. For the
six months ended June 30, 1998, total revenues increased 47% to $61.6
million versus $41.9 million in the same period last year.
Total costs and expenses for the quarter ended June 30, 1998 decreased 7%
compared to the same period in 1997. For the six months ended June 30,
1998, total costs and expenses decreased 52% compared to the same period
in 1997.
These changes in revenue and expense combined to decrease operating loss
for the quarter and the six months ended June 30, 1998 by 78% to ($3.0)
million and 88% to ($14.3) million, respectively, compared to the same
periods in 1997.
Included in the reported quarterly operating losses were acquisition
related in-process research and development write-offs and amortization of
intangible assets recorded in connection with the
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Acquisitions of $4.9 million in the second quarter 1998 and $13.6 million
in the second quarter 1997. Included in the reported year-to-date
operating losses were acquisition related in-process research and
development write-offs and amortization of intangible assets recorded in
connection with the Acquisitions of $17.4 million in the six months ended
June 30, 1998 and $110.2 million in the same period in 1997.
REVENUES
System and services revenues increased 24% to $29.1 million for the second
quarter of 1998 and 38% to $56.1 million for the six months ended June 30,
1998, compared to the same periods in 1997. Contributing to this increase
was the inclusion of the results of operations of the Acquisitions
throughout the 1998 periods, as well as, new contracted business during
1998. The increase in new contracted business was a result of an increase
in marketing efforts related to the regional realignment completed in 1997
and the successful integration of the Acquisitions completed in 1997 and
1998.
Hardware revenues increased 325% to $3.2 million for the second quarter of
1998 and 302% to $5.5 million for the six months ended June 30, 1998,
compared to the same periods in 1997. The increase is primarily due to
increased volume as a result of the Acquisitions.
EXPENSES
Total cost of revenues remained consistent for the second quarter of 1998
and increased slightly for the six months ended June 30, 1998, compared to
the same periods in 1997. Increased costs of hardware associated with the
growth in hardware sales were offset by a reduction of certain expenses
and realization of cost savings during 1998 as a result of the integration
of the Acquisitions.
Sales and marketing expenses increased 46% for the second quarter of 1998
and 41% for the six months ended June 30, 1998, compared to the same
periods in 1997. The increase was primarily due to the addition of
marketing and direct sales personnel following the Acquisitions and the
regional realignment of the Company's sales force.
Total expenditures for research and development, including both
capitalized and non-capitalized expense increased 105% to $7.2 million for
the second quarter 1998 and increased 73% to $14.2 million for the six
months ended June 30, 1998, compared to the same periods in 1997. The
increase was due primarily to the inclusion in 1998 of the Acquisitions
and the continued development of an enterprise-wide, client server
platform solution. Research and development expenses capitalized for the
second quarter of 1998 and the six months ended June 30, 1998 increased to
$900,000 and $1.8 million, respectively, compared to the same periods
in 1997. Increased capitalization is primarily the result of projects
related to the development of an enterprise-wide, client server platform
solution.
General and administrative expenses decreased 10% for the second quarter
of 1998 and increased 32% for the six months ended June 30, 1998, compared
to the same periods in 1997. The quarter decrease is primarily the result
of certain integration expenses related to the Alltel acquisition incurred
during 1997 that did not recur during 1998. The six months increase is
primarily due to the addition of administrative and finance personnel
following the Acquisitions.
Depreciation and amortization increased 4% for the second quarter of 1998
and 15% for the six months ended June 30, 1998, compared to the same
periods in 1997. The increase for the quarter is primarily the result of
the inclusion of SDK goodwill amortization partially offset by a reduction
in Alltel related goodwill amortization as a result of a write-down of
goodwill due to a renegotiation with the former owner of Alltel of certain
obligations under a management and services agreement (the "Alltel
Renegotiation") during 1998. The increase in the six months
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depreciation and amortization is primarily the result of the timing of the
Acquisitions and increased depreciation on capital expenditures. This
increase is partially offset by a reduction in Alltel related goodwill
amortization as a result of the Alltel Renegotiation.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with the Alltel and SDK acquisitions, the Company wrote off
in-process research and development totaling $92.2 million and $7.0
million, respectively. These amounts were expensed as non-recurring
charges on the respective acquisition dates. The Company continues to
believe that the acquired in-process research and development will be
successfully developed, but there can be no assurance that commercial
viability of these products will be achieved.
The value of the acquired in-process research and development 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.
Through June 30, 1998, revenues and operating profit attributable to
acquired in-process research and development have not materially differed
from the projections used in determining its value, except for the timing
of one outsourcing contract. Management continues to believe the
projections used reasonably estimate the future benefits attributable to
the acquired in-process research and development. However, no assurance
can be given that deviations from these projections will not occur.
BALANCE SHEET
OTHER CURRENT ASSETS
Other current assets increased during the six months ended June 30, 1998
primarily related to the acquisition of Emtek, including a receivable from
Motorola of $9.6 million (as of acquisition date) that is due within one
year for working capital purposes.
INTANGIBLE ASSETS
Intangible assets decreased during the six months ended June 30, 1998
primarily due to the Alltel Renegotiation and amortization during the
period. In connection with the Alltel Renegotiation, the Company recorded
a reduction of $9.2 million to goodwill. As a result of this reduction,
the Company recorded a nonrecurring charge of $7.2 million.
OTHER ASSETS
Other assets increased during the six months ended June 30, 1998 primarily
due to a strategic minority investment in Simione, purchasing
approximately 4.9% of Simione's outstanding common stock from certain
stockholders of Simione for $5.6 million.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 1998, the Company generated $11.2
million in cash flow from operations. The Company used $26.8 million in
investing activities, which was primarily the result of the payment
related to the Alltel Renegotiation. Financing activities provided an
additional $13.7 million, primarily due to net borrowings on the Company's
revolving credit facility and the sale of preferred stock.
Effective August 6, 1998, the Company completed its initial public
offering. Net proceeds from the offering including the exercise of the
underwriters' over-allotment option, were $67.4
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million. The Company used $61.2 million of the net proceeds from the
offering to redeem the outstanding shares of the Company's mandatorily
redeemable preferred stock, repay acquisition related debt and to repay
amounts outstanding under the Company's revolving credit facility.
The Company has a revolving credit facility with available borrowings up
to $50.0 million. As of June 30, 1998, amounts outstanding against the
revolving credit facility totaled $17.0 million. As a result of the
Company's use of a portion of the net proceeds from its initial public
offering to repay amounts outstanding under the credit facility, the
Company had available borrowings of $50.0 million under the credit
facility at August 31, 1998.
As of June 30, 1998, the Company had $2.8 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.
CERTAIN FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS/RISK FACTORS
Limited Combined Operating History; History of Operating Losses. The
Company began operations in 1996 and has grown primarily through a series
of acquisitions completed since January 1997. Accordingly, the Company and
its acquired operations have a limited combined operating history upon
which an evaluation of the Company and its prospects can be based. The
success of the Company will depend, in part, on its ability to integrate
the operations of these acquired businesses and to consolidate its product
offerings. There can be no assurance that the operating results of the
Company will meet or exceed the combined individual operating results
achieved by the respective businesses prior to their acquisition. In
addition, the Company's senior management group has been assembled
relatively recently. There can be no assurance that the management group
will be able to oversee the combined entity and implement the Company's
operating or growth strategies effectively. The Company has incurred net
losses in each year since its inception, including net losses of $131.1
million in 1997 and $14.8 million for the first six months of 1998. At
June 30, 1998, the Company had a shareholders' deficit of $17.1 million.
The Company's losses resulted primarily from certain write-offs related to
the Alltel and SDK acquisitions which were consummated during 1997 and
charges in the first quarter of 1998 related to the Alltel Renegotiation.
The Company expects to continue to incur net losses for the foreseeable
future. There can be no assurance that the Company will achieve
profitability.
Management of Growth. The growth in the size and complexity of the
Company's business as a result of the Acquisitions has placed, and is
expected to continue to place, a significant strain on the Company's
management and other resources. The Company's ability to compete
effectively and to manage future growth, if any, will depend on its
ability to continue to implement and improve operational and financial
systems on a timely basis and to expand, train, motivate and manage its
work force. There can be no assurance that the Company's personnel,
systems, procedures and controls will be adequate to support the Company's
operations. If the Company's management is unable to manage growth
effectively, the Company's business, financial condition and results of
operations could be materially adversely affected.
Risks Associated With Future Acquisitions. An important element of the
Company's business strategy has been, and is expected to continue to be,
expansion through acquisitions. The Company's ability to continue to
expand through acquisitions depends on many factors, including the
availability of capital to purchase other businesses and to support such
growth, the successful identification and acquisition of businesses and
management's ability to effectively integrate and operate the new
businesses. The Company currently has no commitments, understandings or
arrangements with respect to any future acquisitions. There is significant
competition for
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acquisition opportunities in the information technology industry.
Competition may intensify due to consolidation in the industry, which
could increase the costs of future acquisitions. The Company competes for
acquisition opportunities with other companies, some of which may have
significantly greater financial and management resources than the Company.
Further, the anticipated benefits from any acquisition may not be achieved
unless the operations of the acquired business are successfully combined
with those of the Company. The integration of acquired businesses requires
substantial attention from management. The diversion of the attention of
management and any difficulties encountered in the transition process
could have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that the
Company will be able to identify suitable acquisition candidates, acquire
any such candidates on reasonable terms or integrate acquired businesses
successfully. Future acquisitions could result in the issuance of
additional shares of capital stock or the incurrence of additional
indebtedness, could entail the payment of consideration in excess of book
value and could have a dilutive effect on the Company's net income per
share. Many business acquisitions must be accounted for under the purchase
method of accounting. Consequently, such acquisitions may generate
significant goodwill or other intangible assets. Consequently, acquisition
of these businesses would typically result in substantial amortization
charges to the Company. Acquisitions could also involve significant
charges reflecting write-offs of acquired in-process research and
development.
Ability to Attract and Retain Key Personnel. The Company's success
depends, in significant part, upon the continued services of its key
technical, marketing, sales and management personnel and on its ability to
continue to attract, motivate and retain highly qualified employees.
Competition for technical, marketing, sales and management employees is
intense and the process of recruiting personnel with the combination of
skills and attributes required to execute the Company's strategy can be
difficult, time-consuming and expensive. There can be no assurance that
the Company will be successful in attracting or retaining highly skilled
technical, management, sales and marketing personnel. The failure to
attract, hire, assimilate or retain such personnel could have a material
adverse effect on the Company's business, financial condition and results
of operations.
The Company believes that its ability to implement its strategic goals
depends to a considerable degree on its senior management team. The loss
of any member of that team or, in particular, the loss of Harvey J.
Wilson, the Company's founder, Chairman of the Board, President and Chief
Executive Officer, could have a material adverse effect on the Company's
business, financial condition and results of operations.
Potential Fluctuations in Quarterly Performance. The Company's revenues
and operating results have varied from quarter to quarter, primarily due
to acquisitions. The Company's quarterly operating results may continue to
fluctuate due to a number of factors, including the timing and size of
future acquisitions; the timing, size and nature of the Company's product
sales and implementations; the length of the sales cycle; implementation
efforts; market acceptance of new services, products or product
enhancements by the Company or its competitors; product and price
competition; the relative proportions of revenues derived from systems and
services and from hardware; changes in the Company's operating expenses;
personnel changes; the performance of the Company's products; and
fluctuations in economic and financial market conditions. The timing of
revenues from product sales is difficult to forecast because the Company's
sales cycle can vary depending upon factors such as the size of the
transaction, the changing business plans of the customer, the
effectiveness of the customer's management and general economic
conditions. In addition, because revenue is recognized at various points
during the term of a contract, the timing of revenue recognition varies
considerably based on a number of factors, including the type of contract,
the availability of personnel, the implementation schedule and the
complexity of the implementation process. How and when to implement,
replace, expand or substantially modify an information system, or modify
or add business processes or lines of
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business, are major decisions for healthcare organizations. The sales
cycle for the Company's systems may range from six to eighteen months or
more from initial contact to contract execution. Historically, the
Company's implementation cycle has ranged from twelve to thirty-six months
from contract execution to completion of implementation. Although the
Company believes that the migration of its products to its new Structured
Object Layered Architecture (SOLA) will significantly shorten the
implementation cycle, there can be no assurance in this regard. During
the sales cycle and the implementation cycle, the Company expends
substantial time, effort and funds preparing contract proposals,
negotiating the contract and implementing the solution. Because a
significant percentage of the Company's expenses are relatively fixed, a
variation in the timing of sales and implementations can cause
significant variations in operating results from quarter to quarter. Due
to the foregoing factors, the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful
and that such comparisons cannot be relied upon as indicators of future
performance.
Rapid Technological Change and Evolving Market. The market for the
Company's products and services is characterized by rapidly changing
technologies, evolving industry standards and new product introductions
and enhancements that may render existing products obsolete or less
competitive. As a result, the Company's position in the healthcare
information technology market could erode rapidly due to unforeseen
changes in the features and functions of competing products, as well as
the pricing models for such products. The Company's future success will
depend in part upon the Company's ability to enhance its existing products
and services and to develop and introduce new products and services to
meet changing customer requirements. The process of developing products
and services such as those offered by the Company is extremely complex and
is expected to become increasingly complex and expensive in the future as
new technologies are introduced. The Company has recently announced the
development of, and has commenced migrating its products to, its new SOLA
architecture. There can be no assurance that the development of SOLA or
the migration of products to the SOLA architecture will be successful,
that such products will meet their scheduled release dates, that the
Company will successfully complete the development and release of other
new products or the migration of new or existing products to specific
platforms or configurations in a timely fashion or that the Company's
current or future products will satisfy the needs of potential customers
or gain general market acceptance.
Risks Associated with Development of Integrated Clinical Management Suite.
The Company is currently in the process of integrating selected features
and functionalities from a number of heritage clinical management products
acquired in the Alltel and Emtek acquisitions and licensed from Partners
Healthcare Systems, Inc. ("Partners") to create the Sunrise Clinical
Management suite. Although most of the key functionalities of the Sunrise
Clinical Management suite are currently available in heritage products,
the initial components of the integrated Sunrise Clinical Management
suite is not expected to be generally available until 1999. There can be
no assurance that the Company will be successful in completing the
integration of these functionalities on a timely basis, that field
trials will be successful or that the Sunrise Clinical Management suite,
if and when generally available, will meet the needs of the marketplace
or achieve market acceptance. Any difficulties or delays in integrating
these functionalities into the Sunrise Clinical Management suite, or the
failure of the Sunrise Clinical Management suite to gain market
acceptance, could have a material adverse effect on the Company's
business, financial condition and results of operations.
Competition. The market for the Company's products and services is
intensely competitive and is characterized by rapidly changing
technologies and user needs and the frequent introduction of new products.
The Company's principal competitors include Cerner Corp., HBO & Company,
IDX Systems Corp. and Shared Medical Systems Corporation. The Company also
faces competition from providers of practice management systems, general
decision support and database systems and other segment-specific
applications, as well as from healthcare technology
13
consultants. A number of the Company's competitors are more established,
benefit from greater name recognition and have substantially greater
financial, technical and marketing resources than the Company. The Company
also expects that competition will continue to increase as a result of
consolidation in both the information technology and healthcare
industries. There can be no assurance that the Company will be able to
compete successfully against current and future competitors or that
competitive pressures faced by the Company will not materially adversely
affect its business, financial condition and results of operations.
Dependence on Relationship with Partners. The Company has an exclusive
license granted by Partners (the "Partners License") to develop,
commercialize, distribute and support certain intellectual property
relating to the BICS clinical information systems software developed at
Brigham and Women's Hospital ("Brigham"). If the Company breaches certain
terms of the license, Partners has the option to convert the license to a
non-exclusive license. Such conversion by Partners could cause the
intellectual property and the ability to develop and commercialize such
intellectual property to become more widely available to competitors of
the Company, which could have a material adverse effect on the Company's
business, financial condition and results of operations. No sales have
been made and, consequently, no royalties have been paid by the Company
pursuant to the Partners License because products based on the licensed
technology are still in field trials. The Company also works closely with
physicians and research and development personnel at Brigham and
Massachusetts General Hospital ("MGH") to develop and commercialize new
information technology solutions for the healthcare industry and to test
and demonstrate new and existing products. A breach of the terms of the
Partners License could cause the cooperative working relationship with
Brigham and MGH, including future access to products developed by
personnel at Brigham granted under the Partners License, to become
strained or to cease altogether. The loss of good relations with Brigham
or MGH could have a material adverse impact on the Company's ability to
develop new solutions and cause delays in bringing new products to the
market. Additionally, a loss of the relationship with Brigham or MGH could
result in the Company's reputation and status in the industry being
diminished. Any of these events could have a material adverse effect on
the Company's business, financial condition and results of operations.
Uncertainty in the Healthcare Industry. The healthcare industry is subject
to changing political, economic and regulatory influences that may affect
the procurement practices and operations of healthcare industry
participants. During the past several years, the U.S. healthcare industry
has been subject to an increase in governmental regulation and reform
proposals. These reforms may increase governmental involvement in
healthcare, continue to reduce reimbursement rates and otherwise change
the operating environment for the Company's customers. Healthcare industry
participants may react to these proposals and the uncertainty surrounding
such proposals by curtailing or deferring investments, including those for
the Company's products and services. In addition, many healthcare
providers are consolidating to create larger healthcare delivery
enterprises with greater market power. Such consolidation could erode the
Company's existing customer base and reduce the size of the Company's
target market. In addition, the resulting enterprises could have greater
bargaining power, which may lead to price erosion. The failure of the
Company to maintain adequate price levels or sales, or the reduction in
the size of the Company's target market, as a result of legislative or
market-driven reforms or industry consolidation could have a material
adverse effect on the Company's business, financial condition and results
of operations.
Possible Adverse Effects of Government Regulation. The United States Food
and Drug Administration (the "FDA") has issued a draft guidance document
addressing the regulation of certain computer products and
computer-assisted products as medical devices under the Federal Food,
Drug, and Cosmetic Act (the "FDC Act") and has recently indicated it may
modify such draft policy or create a new policy. The Company expects that
the FDA is likely to become increasingly active in regulating computer
software intended for use in the healthcare setting. If
14
the FDA chooses to regulate any of the Company's healthcare software
systems as medical devices, it can impose extensive requirements upon the
Company, including the requirement that the Company seek either FDA
clearance of a premarket notification submission demonstrating that the
product is substantially equivalent to a device already legally marketed
or file for and obtain FDA approval of a premarket approval application
establishing the safety and effectiveness of the product. FDA regulations
also govern, among other things, the preclinical and clinical testing,
manufacture, distribution, labeling and promotion of medical devices. In
addition, the Company would be required to comply with the FDC Act's
general controls, including establishment registration, device listing,
compliance with good manufacturing practices, reporting of certain device
malfunctions and adverse device events. Noncompliance with applicable
requirements can result in, among other things, fines, injunctions, civil
penalties, recalls or product corrections, total or partial suspension of
production, failure of the government to grant premarket clearance or
approval of products, withdrawal of clearances and approvals, and criminal
prosecution. There can be no assurance that any final FDA policy governing
computer products, once issued, or future laws and regulations concerning
the manufacture or marketing of medical devices or healthcare information
systems will not increase the cost and time to market of new or existing
products.
The confidentiality of patient records and the circumstances under which
such records may be released are subject to substantial regulation by
state and federal laws and regulations, which govern both the disclosure
and use of confidential patient medical record information. Regulations
governing electronic health data transmissions are evolving rapidly and
are often unclear and difficult to apply in the rapidly restructuring
healthcare market. On August 22, 1996, President Clinton signed the Health
Insurance Portability and Accountability Act of 1996 ("HIPAA"). This
legislation requires the Secretary of Health and Human Services (the
"Secretary") to adopt national standards for certain types of electronic
health information transactions and the data elements used in such
transactions and to adopt standards to ensure the integrity and
confidentiality of health information. There can be no assurance that
these standards, particularly those related to data security, will not
have a material adverse effect on the Company's business, financial
condition and results of operations.
The HIPAA legislation also required the Secretary to submit
recommendations to Congress for legislation to protect privacy and
confidentiality of personal health information. There can be no assurance
that such laws or regulations will not materially restrict the ability of
the Company's customers to obtain or disseminate patient information,
which could adversely affect demand for the Company's products.
Legislation governing the dissemination of medical record information is
frequently proposed and debated at both the federal and state levels. Such
legislation, if enacted, could require patient consent before even
non-individually-identifiable (e.g., coded or anonymous) patient
information maybe shared with third parties and could also require that
holders or users of such information implement specified security
measures. Any material restriction on the ability of healthcare providers
to obtain or disseminate patient information could adversely affect the
Company's business, financial condition and results of operations.
Year 2000 Issues. Although all of the products currently offered by the
Company are Year 2000 compliant, some of the products previously sold by
Alltel and Emtek and installed in the Company's customer base are not Year
2000 compliant. The Company has developed and tested solutions for these
non-compliant installed products. In addition, because the Company's
products are often interfaced with a customer's existing third-party
applications, the Company's products may experience difficulties
interfacing with third-party non-compliant applications. Any unexpected
difficulties in implementing Year 2000 solutions for the installed Alltel
or Emtek products or difficulties in interfacing with third-party products
could have a material adverse effect on the Company's business, financial
condition and results of operations. As a result of apprehension in the
marketplace over Year 2000 compliance issues, businesses, including the
Company's customers, may elect to defer significant capital investments in
information
15
technology programs and software, 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. As a result,
the Company may not achieve expected sales revenues and its business,
financial condition and results of operations could be materially
adversely affected.
Limited Protection of Proprietary Rights. The Company is dependent upon
its proprietary information and technology. There can be no assurance that
the Company's means of protecting its proprietary rights will be adequate
to prevent misappropriation. The laws of some foreign countries may not
protect the Company's proprietary rights as fully or in the same manner as
do the laws of the United States. Also, despite the steps taken by the
Company to protect its proprietary rights, it may be possible for
unauthorized third parties to copy aspects of the Company's products,
reverse engineer such products or otherwise obtain and use information
that the Company regards as proprietary. In certain limited instances,
customers can access source code versions of the Company's software,
subject to contractual limitations on the permitted use of such source
code. Although the Company's license agreements with such customers
attempt to prevent misuse of the source code, the possession of the
Company's source code by third parties increases the ease and likelihood
of potential misappropriation of such software. Furthermore, there can be
no assurance that others will not independently develop technologies
similar or superior to the Company's technology or design around the
proprietary rights owned by the Company. In addition, although the Company
does not believe that its products infringe the proprietary rights of
third parties, there can be no assurance that infringement or invalidity
claims (or claims for indemnification resulting from infringement claims)
will not be asserted or prosecuted against the Company or that any such
assertions or prosecutions will not materially adversely affect the
Company's business, financial condition and results of operations.
Regardless of the validity of such claims, defending against such claims
could result in significant costs and diversion of Company resources,
which could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, the assertion
of such infringement claims could result in injunctions preventing the
Company from distributing certain products, which could have a material
adverse effect on the Company's business, financial condition and results
of operations. If any claims or actions are asserted against the Company,
the Company may seek to obtain a license to such intellectual property
rights. There can be no assurance, however, that such a license would be
available on reasonable terms or at all.
Product Errors; Potential for Product Liability; Security Issues. Highly
complex software products, such as those offered by the Company, often
contain undetected errors or failures when first introduced or as new
versions are released. Testing of the Company's products is particularly
challenging because it is difficult to simulate the wide variety of
computing environments in which the Company's customers may deploy these
products. Despite extensive testing, the Company from time to time has
discovered defects or errors in its products. Accordingly, there can be no
assurance that such defects, errors or difficulties will not cause delays
in product introductions and shipments, result in increased costs and
diversion of development resources, require design modifications or
decrease market acceptance or customer satisfaction with the Company's
products. In addition, there can be no assurance that, despite testing by
the Company and by current and potential customers, errors will not be
found after commencement of commercial shipments, resulting in loss of or
delay in market acceptance, which could have a material adverse effect
upon the Company's business, financial condition and results of
operations. Certain of the Company's products provide applications that
relate to patient medical histories and treatment plans. Any failure of
the Company's products to provide accurate and timely information could
result in liability claims against the Company. Although the Company has
not experienced any claims to date, there can be no assurance that the
Company will not be subject to such claims in the future. The Company
attempts to limit contractually its liability for damages arising from
negligent acts, errors, mistakes or omissions in designing its products
and
16
rendering its services. Despite this precaution, there can be no assurance
that the limitations of liability set forth in its contracts would be
enforceable or would otherwise protect the Company from liability for
damages. The Company maintains general liability insurance coverage,
including coverage for errors or omissions. However, there can be no
assurance that such coverage will continue to be available on acceptable
terms, or will be available in sufficient amounts to cover one or more
large claims, or that the insurer will not disclaim coverage as to any
future claim. The successful assertion of one or more large claims against
the Company that exceed available insurance coverage or changes in the
Company's insurance policies, including premium increases or the
imposition of large deductible or co- insurance requirements, could have a
material adverse effect on the Company's business, financial condition and
results of operations. Furthermore, litigation with respect to liability
claims, regardless of its outcome, could result in substantial cost to the
Company, divert management's attention from the Company's operations and
decrease market acceptance of the Company's products. Any product
liability claim or litigation against the Company could, therefore, have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company has included security features in its
products that are intended to protect the privacy and integrity of
customer data. Despite the existence of these security features, the
Company's software products may be vulnerable to break-ins and similar
disruptive problems. Such computer break-ins and other disruptions may
jeopardize the security of information stored in and transmitted through
the computer systems of the Company's customers. Addressing these evolving
security issues may require significant expenditures of capital and
resources by the Company, which may have a material adverse effect on the
Company's business, financial condition and results of operations
17
PART II.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company is furnishing the following information with respect to the
use of proceeds from its initial public offering of common stock, $.01 par
value per share, which closed in August 1998.
1. The effective date of the Registration Statement on Form S-1 for the
offering was August 6, 1998, and the commission file number of the
Registration Statement is 333-50781.
2. The offering commenced on August 6, 1998.
3. Not applicable
4. (i.) The offering terminated on August 17, 1998, the date of the
exercise of the underwriters' over-allotment option. All of the shares
of common stock registered for the account of the Company were sold
prior to the termination of the offering.
(ii.) The managing underwriters for the offering were Morgan Stanley
Dean Witter, Bancamerica Robertson Stephens, Lehman Brothers and
Salomon Smith Barney.
(iii.) The Company registered shares of its common stock, $.01 par
value per share, in the offering.
(iv.) The Company registered 4,830,000 shares. The aggregate offering
price of the shares registered and sold by the Company was $72,450,000
(v.) The actual expenses incurred for the account of the Company in
connection with the offering were as follows (amounts represent
estimates except for Underwriters discount):
Underwriting discount $ 5,071,500
SEC registration fee 40,000
NASD filing fee 10,000
NASDAQ National Market listing fee 105,000
Transfer Agent and Registrar fees 10,000
Accounting fees and expenses 400,000
Legal fees and expenses 450,000
Printing and mailing expenses 415,000
Other 270,000
-------------
$ 6,771,500
Payment of expenses were to persons other than directors,
officers, general partners of the Company or their associates,
persons owning 10% or more of the equity securities of the
Company or affiliates of the Company.
(vi.) The net offering proceeds to the Company after expenses were
approximately $67.4 million.
(vii.) The Company used the proceeds as follows:
Redemption of mandatorily redeemable preferred stock $38,771,443
Repayment of acquisition related debt 3,926,405
Repayment of amounts outstanding under revolving
credit facility 18,500,000
Purchase of short-term investments 5,000,000
Working capital requirements 1,180,652
-----------
$67,378,500
(viii.) Not applicable
18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended June 30, 1998, in lieu of the 1998 annual meeting
of stockholders, the Company submitted certain matters to a vote of its
stockholders through the solicitation of written consents under Section
228 of the General Corporation Law of the State of Delaware. Written
consents were received from stockholders with dates ranging from May 1,
1998 to June 1, 1998. These consents approved:
(1) the filing of an amendment to the Company's Second Amended and
Restated Certificate of Incorporation;
(2) a two-for-three reverse stock split and the filing of a second
amendment to the Second Amended and Restated Certificate of Incorporation
to effectuate the stock split;
(3) the filing of the Company's Third Amended and Restated
Certificate of Incorporation effective upon the closing of a qualifying
initial public offering of the Company's Common Stock (an "IPO");
(4) the adoption of the Company's Amended and Restated Bylaws
effective upon the closing of an IPO;
(5) the adoption of the Company's 1998 Stock Incentive Plan;
(6) the adoption of the Company's 1998 Employee Stock Purchase Plan;
(7) the reservation of an aggregate of 6,500,000 shares of Common
Stock (4,333,333 after giving effect to the reverse stock split) for
issuance in the aggregate under and pursuant to the 1998 Stock Incentive
Plan, the 1998 Employee Stock Purchase Plan and the 1996 Stock Plan; and
(8) the election of the following as directors of the Company, each
to serve until the next annual meeting of the stockholders and until their
successors are duly elected and qualified: Steven A. Denning, C. Fred
DiBona, Eugene V. Fife, William E. Ford, Jeffrey Fox*, Jay B. Pieper,
Richard D. Severns and Harvey J. Wilson.
A total of 12,710,310 votes (out of a possible 14,516,543
votes) were cast for each of these matters (such numbers do not reflect
the two-for-three reverse stock split approved in the vote).
* Subsequent to the end of the quarter, Mr. Fox was removed from the
board of directors by the stockholders.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: See Index to exhibits.
(b) Reports on Form 8-K: None
19
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 CORPORATION
Date: September 21, 1998 -----------------------------
Robert J. Vanaria
Chief Financial Officer
20
ECLIPSYS CORPORATION
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- -------- -----------
3.1 Third Amended and Restated Certificate of Incorporation.
3.2 Amended and Restated By-Laws (incorporated by reference to Exhibit
3.4 to the Registrant's Registration Statement on Form S-1, as
amended (File No. 333-50781))
10.1 Amended and Restated 1998 Employee Stock Purchase Plan.
10.2 Letter agreement amending First Amended and Restated Credit
Agreement dated May 29, 1998, by and among Eclipsys Corporation,
First Union National Bank, f/k/a First Union National Bank of North
Carolina as Agent and BankBoston, N.A., as Co-Agent.
27 Financial Data Schedule (for SEC use only).