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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
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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.
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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
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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.
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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.
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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.
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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.
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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
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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
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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
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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
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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.
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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.
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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
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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,
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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.
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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.
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