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Eclipsys Corp – ‘S-4’ on 12/4/98

As of:  Friday, 12/4/98   ·   Accession #:  950133-98-4050   ·   File #:  333-68353

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

12/04/98  Eclipsys Corp                     S-4                   15:991K                                   Bowne - DC/FA

Registration of Securities Issued in a Business-Combination Transaction   —   Form S-4
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: S-4         Form S-4 Registration Statement Eclipsys Corp.       278   1.49M 
 2: EX-5.1      Opinion of Hale and Dorr LLP                           2     13K 
 3: EX-8.1      Opinion of Hale and Dorr LLP as to Tax Matters         4     15K 
 4: EX-8.2      Form of Opinion of Foley, Hoag & Eliot LLP             3     14K 
 5: EX-23.1     Consent of Pricewaterhousecoopers LLP                  1      7K 
 6: EX-23.2     Consent of Pricewaterhousecoopers LLP                  1      7K 
 7: EX-23.3     Consent of Kpmg Peat Marwick LLP                       1      8K 
 8: EX-23.4     Consent of Pricewaterhousecoopers LLP                  1      8K 
 9: EX-23.5     Consent of Ernst & Young LLP                           1      7K 
10: EX-99.3     Form of Proxy Card for Eclipsys Corp.                  2±    12K 
11: EX-99.4     Form of Proxy Card for Transition Systems, Inc.        2     12K 
12: EX-99.5     Consent of Bt Alex. Brown Incorporated                 1      8K 
13: EX-99.6     Consent of Morgan Stanley & Co.                        1      8K 
14: EX-99.7     Consent of Robert F. Raco                              1      7K 
15: EX-99.8     Consent of Patrick T. Hackett                          1      7K 


S-4   —   Form S-4 Registration Statement Eclipsys Corp.
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
"Eclipsys Corporation
"Harvey J. Wilson
5Table of Contents
6Questions and Answers about the Proposed Eclipsys/TSI Merger
9Summary
"The Companies
"Transition Systems, Inc
11Who is Entitled to Vote; What Vote is Required
12Eclipsys
"Tsi
13Anticipated Closing of the Merger
15Explanation of Certain Terms
16Risk Factors
18Potential Fluctuations in Quarterly Performance
19Competition
24Market Price Information
25Selected Consolidated Financial Data for Eclipsys
27Selected Consolidated Financial Data for TSI
28Selected Unaudited Pro Forma Combined Financial Data Reflecting the Merger
29Comparative Per Share Data
30Management's Discussion and Analysis of Financial Condition and Results of Operations of Eclipsys
"Overview
32Taxes
35Acquired In-Process Research and Development
36Alltel
37Sdk
39Backlog
40Management's Discussion and Analysis of Financial Condition and Results of Operations of TSI
45Subsequent Events
47Eclipsys Special Stockholders' Meeting
49TSI Special Stockholders' Meeting
51The Merger
53Recommendations of the Boards of Directors
"Reasons for the Merger
"Joint Reasons for the Merger
56Opinions of Financial Advisors
64Interests of Certain Persons in the Merger
65Accounting Treatment
66Regulatory Approvals
67Appraisal Rights
68Unaudited Pro Forma Condensed Combined Consolidated Financial Statements
79The Merger Agreement
81No Solicitation
88Business of Eclipsys
99Eclipsys Management
101Observer Rights
102Employment Arrangements
103Stock Plans
104Principal Stockholders of Eclipsys
107Certain Transactions Relating to Eclipsys
109Business of TSI
115Recent Developments
116Principal Stockholders of TSI
118Description of Eclipsys Capital Stock
"Warrants
119Registration Rights
120Comparison of Stockholders' Rights
126Legal Matters
"Experts
"Future Stockholder Proposals
127Where You Can Find More Information
"Forward-Looking Statements
128Where to Find Certain Defined Terms
130Index to Financial Statements
131Report of Independent Accountants
137Unbilled Accounts Receivable
148Stock Option Plan
152Simione Investment
155ALLTEL Healthcare Information Services, Inc
166Independent Auditors' Report
167SDK Healthcare Information Systems
181Notes to Consolidated Financial Statements
191HealthVISION Acquisition
192Report of Independent Auditors
193HealthVISION, Inc
206Condensed Consolidated Balance Sheet as of September 30, 1998 (unaudited)
208Condensed Consolidated Statement of Changes in Stockholders' Equity (Deficit) for the nine months ended September 30, 1998 (unaudited)
218Article I the Merger
"Section 1.01 Effective Time of the Merger
"Section 1.02 Closing
"Section 1.03 Effects of the Merger
"Section 1.04 Directors of Eclipsys
219Article Ii Conversion of Securities
"Section 2.01 Conversion of Capital Stock
220Section 2.02 Exchange of Certificates
222Article Iii Representations and Warranties of Tsi
"Section 3.01 Organization of TSI
"Section 3.02 TSI Capital Structure
223Section 3.03 Authority; No Conflict; Required Filings and Consents
224Section 3.04 SEC Filings; Financial Statements
"Section 3.05 No Undisclosed Liabilities
"Section 3.06 Absence of Certain Changes or Events
225Section 3.07 Taxes
226Section 3.08 Properties
"Section 3.09 Intellectual Property
227Section 3.10 Agreements, Contracts and Commitments
228Section 3.11 Litigation
"Section 3.12 Environmental Matters
"Section 3.13 Employee Benefit Plans
229Section 3.14 Compliance With Laws
"Section 3.15 Accounting and Tax Matters
"Section 3.16 Registration Statement; Proxy Statement/Prospectus
230Section 3.17 Labor Matters
"Section 3.18 Insurance; Risk Management
"Section 3.19 No Existing Discussions
"Section 3.20 Opinion of Financial Advisor
"Section 3.21 Anti-Takeover Laws
"Section 3.22 Insider Trading Policies and Practices
231Article Iv Representations and Warranties of Eclipsys and Sub
"Section 4.01 Organization of Eclipsys and Sub
"Section 4.02 Eclipsys Capital Structure
232Section 4.03 Authority; No Conflict; Required Filings and Consents
233Section 4.04 SEC Filings; Financial Statements
"Section 4.05 No Undisclosed Liabilities
"Section 4.06 Absence of Certain Changes or Events
"Section 4.07 Taxes
234Section 4.08 Properties
"Section 4.09 Intellectual Property
235Section 4.10 Agreements, Contracts and Commitments
"Section 4.11 Litigation
"Section 4.12 Environmental Matters
236Section 4.13 Employee Benefit Plans
"Section 4.14 Compliance With Laws
"Section 4.15 Accounting and Tax Matters
"Section 4.16 Registration Statement; Proxy Statement/Prospectus
237Section 4.17 Labor Matters
"Section 4.18 Insurance; Risk Management
"Section 4.19 No Existing Discussions
"Section 4.20 Opinion of Financial Advisor
"Section 4.21 Anti-Takeover Laws
"Section 4.22 Insider Trading Policies and Practices
"Section 4.23 Interim Operations of Sub
238Article V Conduct of Business
"Section 5.01 Covenants of TSI
239Section 5.02 Covenants of Eclipsys
240Section 5.03 Cooperation
"Section 5.04 HealthVISION Acquisition
"Section 5.05 Voting Agreements
"Section 5.06 Eclipsys Permitted Acquisitions
241Article Vi Additional Agreements
"Section 6.01 No Solicitation
"Section 6.02 Proxy Statement/Prospectus; Registration Statement
242Section 6.03 Nasdaq Quotation
"Section 6.04 Access to Information
"Section 6.05 Stockholders' Meetings
"Section 6.06 Legal Conditions to Merger
243Section 6.07 Public Disclosure
"Section 6.08 Tax-Free Reorganization
"Section 6.09 Pooling Accounting
244Section 6.10 Affiliate Agreements
"Section 6.11 Nasdaq Quotation
"Section 6.12 Stock Plans and Warrants
245Section 6.13 Brokers or Finders
"Section 6.14 Indemnification
246Section 6.15 Letter of Eclipsys' Accountants
"Section 6.16 Letter of TSI's Accountants
"Section 6.17 Warburg Registration Rights Agreement
"Article Vii Conditions to Merger
"Section 7.01 Conditions to Each Party's Obligation To Effect the Merger
247Section 7.02 Additional Conditions to Obligations of Eclipsys and Sub
248Section 7.03 Additional Conditions to Obligations of TSI
"Article Viii Termination and Amendment
"Section 8.01 Termination
249Section 8.02 Effect of Termination
"Section 8.03 Fees and Expenses
251Section 8.04 Amendment
"Section 8.05 Extension; Waiver
252Article Ix Miscellaneous
"Section 9.01 Nonsurvival of Representations, Warranties and Agreements
"Section 9.02 Notices
"Section 9.03 Interpretation
253Section 9.04 Counterparts
"Section 9.05 Entire Agreement; No Third Party Beneficiaries
"Section 9.06 Governing Law
"Section 9.07 Assignment
255Voting Agreement
258Stockholder
"Shares
259Proxy
265Affiliate Agreement
270Annex B
272Annex C
274Item 20. Indemnification of Directors and Officers
"Item 21. Exhibits and Financial Statement Schedules
276Item 22. Undertakings
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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 4, 1998 REGISTRATION NO. 333- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------ FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------ ECLIPSYS CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) 7373 (PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER) 65-0632092 (I.R.S. EMPLOYER IDENTIFICATION NUMBER) 777 EAST ATLANTIC AVENUE SUITE 200 DELRAY BEACH, FLORIDA 33483 (561) 243-1440 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) HARVEY J. WILSON CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER ECLIPSYS CORPORATION 777 EAST ATLANTIC AVENUE SUITE 200 DELRAY BEACH, FLORIDA 33483 (561) 243-1440 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------ Copies to: JOHN A. BURGESS, ESQ. BRENT B. SILER, ESQ. HALE AND DORR LLP 1455 PENNSYLVANIA AVENUE, N.W. WASHINGTON, D.C. 20004 TELEPHONE: (202) 942-8400 TELECOPY: (202) 942-8484 ROBERT W. SWEET, JR., ESQ. DAVID H. FEINBERG, ESQ. FOLEY, HOAG & ELIOT LLP ONE POST OFFICE SQUARE BOSTON, MASSACHUSETTS 02109 TELEPHONE: (617) 832-1000 TELECOPY: (617) 832-7000 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective and certain other conditions under the Merger Agreement are met or waived. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [ ] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] __________ If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] __________ ------------------ CALCULATION OF REGISTRATION FEE [Enlarge/Download Table] ======================================================================================================================== PROPOSED PROPOSED MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM OFFERING PRICE AGGREGATE OFFERING REGISTRATION SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE(3) ------------------------------------------------------------------------------------------------------------------------ Common Stock, $0.01 par value per share.................... 11,060,808 shares $18.69 $206,726,502 $57,470 ======================================================================================================================== (1) Based upon an estimate of the maximum number of shares of the Common Stock of the Registrant issuable in the merger described herein to stockholders of Transition Systems, Inc. ("TSI"). (2) Estimated solely for the purpose of calculating the registration fee pursuant to Rules 457(c) and 457(f)(1) under the Securities Act of 1933, as amended (the "Securities Act"), and based upon the average of the high and low sales prices of the Common Stock of TSI on the Nasdaq National Market on November 27, 1998. (3) A fee of $49,707 was previously paid by the Registrant pursuant to Rule 14a-6 promulgated under the Securities Exchange Act of 1934, as amended, in connection with the filing of the preliminary Joint Proxy Statement/Prospectus on November 20, 1998. Pursuant to Rule 457(b) under the Securities Act, such fee is being credited against the registration fee and, accordingly, $7,763 in additional fees is being paid in connection with this Registration Statement. ------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY DETERMINE. -------------------------------------------------------------------------------- --------------------------------------------------------------------------------
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JOINT PROXY STATEMENT/PROSPECTUS [ECLIPSYS LOGO] [TSI LOGO] MERGER PROPOSED -- YOUR VOTE IS VERY IMPORTANT The Boards of Directors of Eclipsys Corporation and Transition Systems, Inc. have agreed to a merger in which Eclipsys will acquire TSI. We are seeking your vote on this important transaction. If the merger is completed, TSI stockholders will receive 0.525 shares of Eclipsys Voting Common Stock for each share of TSI Voting or Non-Voting Common Stock that they own. Eclipsys stockholders will continue to own their existing shares after the merger. If the merger is completed, the stockholders of TSI prior to the merger will own approximately 33.7% of the total outstanding shares of Eclipsys Common Stock on a fully diluted basis (assuming the exercise of all warrants and stock options of both TSI and Eclipsys, except for options that will not be exercisable until after December 31, 1998). The merger cannot be completed unless TSI stockholders approve and adopt the merger agreement and the merger and Eclipsys stockholders approve the issuance of shares of Eclipsys Voting Common Stock in the merger. We have scheduled special meetings for our stockholders to vote on these proposals. Your vote is very important. Whether or not you plan to attend a meeting, please take the time to vote by completing and mailing the enclosed proxy card to us. If you sign, date and mail your proxy card without indicating how you want to vote, your proxy will be counted as a vote in favor of the proposals submitted at your meeting. If you are a TSI stockholder and fail to return the card, the effect will be a vote against the merger, unless you attend your meeting and vote in favor of the proposal. The dates, times and places of the meetings are as follows: For Eclipsys stockholders: December 30, 1998 10:00 a.m., local time Delray Beach Marriott 10 North Ocean Boulevard Delray Beach, Florida 33444 For TSI stockholders: December 30, 1998 10:00 a.m., local time Foley, Hoag & Eliot LLP One Post Office Square 16th Floor Boston, Massachusetts 02109 This Joint Proxy Statement/Prospectus provides you with detailed information about the proposed merger. In addition, you may obtain information about our companies from documents that we have filed with the Securities and Exchange Commission. We encourage you to read this entire document carefully. [Download Table] /s/ HARVEY J. WILSON /s/ ROBERT F. RACO Harvey J. Wilson, Robert F. Raco, President, Chief Executive Officer and President and Chief Executive Officer Chairman of the Board Transition Systems, Inc. Eclipsys Corporation Neither the Securities and Exchange Commission nor any state securities regulator has approved the Eclipsys Voting Common Stock to be issued in the merger or determined if this Joint Proxy Statement/Prospectus is accurate or adequate. Any representation to the contrary is a criminal offense. Joint Proxy Statement/Prospectus dated December 4, 1998, and first mailed to stockholders on or about December 7, 1998.
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[ECLIPSYS LETTERHEAD] NOTICE OF SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON DECEMBER 30, 1998 To the Stockholders of Eclipsys Corporation: NOTICE IS HEREBY GIVEN that a special meeting of stockholders (the "Eclipsys Special Stockholders' Meeting") of Eclipsys Corporation, a Delaware corporation ("Eclipsys"), will be held on December 30, 1998 at the Delray Beach Marriott, 10 North Ocean Boulevard, Delray Beach, Florida 33444, commencing at 10:00 a.m., local time for the following purposes: 1. To consider and vote upon a proposal to approve the issuance of shares of Common Stock, $.01 par value per share, of Eclipsys ("Eclipsys Voting Common Stock"), as contemplated by the Agreement and Plan of Merger dated as of October 29, 1998 (the "Merger Agreement") among Eclipsys Corporation, Exercise Acquisition Corp., a Massachusetts corporation that is a wholly owned subsidiary of Eclipsys ("Sub"), and Transition Systems, Inc., a Massachusetts corporation ("TSI"). The Merger Agreement provides that, among other things, (a) Sub will be merged with and into TSI, with TSI being the surviving corporation and becoming a wholly owned subsidiary of Eclipsys, and (b) each outstanding share of Voting and Non-Voting Common Stock, $.01 par value per share, of TSI will be converted into the right to receive 0.525 shares of Eclipsys Voting Common Stock. 2. To transact such other business as may properly be brought before the Eclipsys Special Stockholders' Meeting, or any adjournments or postponements thereof. A copy of the Merger Agreement is attached as Annex A to the accompanying Joint Proxy Statement/Prospectus. Holders of record of Eclipsys Voting Common Stock at the close of business on November 30, 1998 (the "Record Date") are entitled to notice of and to vote at the Eclipsys Special Stockholders' Meeting and any adjournment or postponement of the Eclipsys Special Stockholders' Meeting. All stockholders of Eclipsys are invited to attend the meeting in person. However, to ensure your representation at the meeting, you are urged to complete, sign and return the enclosed proxy card as promptly as possible in the enclosed postage-prepaid envelope. By Order of the Board of Directors /s/ T. JACK RISENHOOVER, II T. Jack Risenhoover, II Secretary December 4, 1998 Delray Beach, Florida
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[TSI LETTERHEAD] NOTICE OF SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON DECEMBER 30, 1998 To the Stockholders of Transition Systems, Inc.: NOTICE IS HEREBY GIVEN that a special meeting of stockholders (the "TSI Special Stockholders' Meeting") of Transition Systems, Inc., a Massachusetts corporation ("TSI"), will be held on December 30, 1998 at the offices of Foley, Hoag & Eliot LLP, One Post Office Square, 16th Floor, Boston, Massachusetts 02109, commencing at 10:00 a.m., local time, for the following purposes: 1. To consider and vote upon the Agreement and Plan of Merger dated as of October 29, 1998 (the "Merger Agreement") among Eclipsys Corporation, a Delaware corporation ("Eclipsys"), Exercise Acquisition Corp., a Massachusetts corporation ("Sub") and TSI, and the merger (the "Merger") contemplated thereby. The Merger Agreement provides that, among other things, (a) Sub, a wholly owned subsidiary of Eclipsys, will be merged with and into TSI with TSI as the surviving corporation and with TSI becoming a wholly owned subsidiary of Eclipsys, and (b) each outstanding share of Voting and Non-Voting Common Stock of TSI will be converted into the right to receive 0.525 shares of Eclipsys Voting Common Stock. 2. To transact such other business as may properly be brought before the TSI Special Stockholders' Meeting or any adjournments or postponements thereof. A copy of the Merger Agreement is attached as Annex A to the accompanying Joint Proxy Statement/Prospectus. If the Merger Agreement and the Merger are approved by the TSI stockholders at the TSI Special Stockholders' Meeting and the Merger is effected, any stockholder (1) who files with TSI, before the taking of the vote at the TSI Special Stockholders' Meeting, written objection to the Merger stating that he or she intends to demand payment for his or her shares if the Merger is effected and (2) whose shares are not voted in favor of the Merger has or may have the right to demand in writing from TSI, within twenty days after the date of mailing to him or her of notice in writing that the Merger has become effective, payment for his or her shares and an appraisal of the value thereof. TSI and any such stockholder shall in such cases have the rights and duties and shall follow the procedure set forth in sections 88 to 98, inclusive, of chapter 156B of the General Laws of Massachusetts. Holders of record of TSI Voting and Non-Voting Common Stock at the close of business on November 30, 1998 (the "Record Date") are entitled to notice of the TSI Special Stockholders' Meeting. The holders of record of TSI Voting Common Stock on the Record Date are entitled to vote at the TSI Special Stockholders' Meeting and any adjournment or postponement thereof. All shareholders of TSI are invited to attend the meeting in person. However, to ensure your representation at the meeting, you are urged to complete, sign and return the enclosed proxy card as promptly as possible in the enclosed postage-prepaid envelope. By Order of the Board of Directors /s/ DONALD R. WARE Donald R. Ware Clerk December 4, 1998 Boston, Massachusetts
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TABLE OF CONTENTS [Download Table] PAGE ---- Questions and Answers about the Proposed Eclipsys/TSI Merger........ ii Summary............................... 1 The Companies....................... 1 Reasons for the Merger.............. 1 Effects of the Merger; Issuance of New Shares; Treatment of TSI Options and Warrants............. 2 The Stockholders' Meetings.......... 3 Who is Entitled to Vote; What Vote is Required...................... 3 Voting Agreements................... 3 Share Ownership of Management....... 4 New TSI Designated Directors........ 4 Recommendations of the Boards of Directors........................ 4 Opinions of Financial Advisors...... 4 Interests of Certain Persons in the Merger........................... 5 Anticipated Closing of the Merger... 5 Conditions to the Merger............ 5 Termination of the Merger Agreement........................ 5 Appraisal Rights.................... 6 Regulatory Approvals................ 6 Accounting Treatment................ 6 Federal Income Tax Considerations... 6 Surrender of Stock Certificates..... 6 Certain Effects of the Merger on the Rights of TSI Stockholders....... 6 Forward-Looking Statements May Prove Inaccurate....................... 7 Explanation of Certain Terms........ 7 Risk Factors.......................... 8 Market Price Information.............. 16 Selected Consolidated Financial Data for Eclipsys........................ 17 Selected Consolidated Financial Data for TSI............................. 19 Selected Unaudited Pro Forma Combined Financial Data Reflecting the Merger.............................. 20 Comparative Per Share Data............ 21 [Download Table] PAGE ---- Management's Discussion and Analysis of Financial Condition and Results of Operations of Eclipsys........... 22 Management's Discussion and Analysis of Financial Condition and Results of Operations of TSI................ 32 Eclipsys Special Stockholders' Meeting............................. 39 TSI Special Stockholders' Meeting..... 41 The Merger............................ 43 Unaudited Pro Forma Condensed Combined Consolidated Financial Statements... 60 The Merger Agreement.................. 71 Business of Eclipsys.................. 80 Eclipsys Management................... 91 Principal Stockholders of Eclipsys.... 96 Certain Transactions Relating to Eclipsys............................ 99 Business of TSI....................... 101 Principal Stockholders of TSI......... 108 Description of Eclipsys Capital Stock............................... 110 Comparison of Stockholders' Rights.... 112 Legal Matters......................... 118 Experts............................... 118 Future Stockholder Proposals.......... 118 Where You Can Find More Information... 119 Forward-Looking Statements............ 119 Where to Find Certain Defined Terms... 120 Index to Financial Statements......... F-1 ANNEXES Annex A -- Agreement and Plan of Merger among Eclipsys Corporation, Exercise Acquisition Corp. and Transition Systems, Inc. dated October 29, 1998.... A-1 Annex B -- Opinion of Morgan Stanley & Co. Incorporated........ B-1 Annex C -- Opinion of BT Alex. Brown Incorporated.............. C-1
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QUESTIONS AND ANSWERS ABOUT THE PROPOSED ECLIPSYS/TSI MERGER Q: WHY ARE THE TWO COMPANIES PROPOSING TO MERGE? A: We believe that the Merger, by combining the complementary product offerings, customer bases and other resources of our companies, will position the combined company to enjoy greater growth and earnings than either company would have experienced individually. To review the reasons for the merger in greater detail, see pages 45 through 47. Q: WHAT DO I NEED TO DO NOW? A: After you have carefully read this Joint Proxy Statement/Prospectus, just indicate on your proxy card how you want to vote, and sign and mail it in the enclosed postage-prepaid return envelope marked "Proxy" as soon as possible, so that your shares may be represented and voted at the appropriate special meeting, as indicated below: Eclipsys Special Stockholders' Meeting December 30, 1998 10:00 a.m., local time Delray Beach Marriott 10 North Ocean Boulevard Delray Beach, Florida 33444 TSI Special Stockholders' Meeting December 30, 1998 10:00 a.m., local time Foley, Hoag & Eliot LLP One Post Office Square 16th Floor Boston, Massachusetts 02109 Holders of a majority of the shares of Eclipsys Voting Common Stock present or represented and voting at the Eclipsys special stockholders' meeting must approve the issuance of shares of Eclipsys Voting Common Stock in connection with the merger, and therefore it is important that Eclipsys stockholders return their signed proxy cards. The Eclipsys board of directors recommends voting "FOR" the issuance of the Eclipsys Voting Common Stock in the merger. Holders of two-thirds of the outstanding TSI Voting Common Stock must approve the merger and the merger agreement, and therefore it is important that TSI stockholders return their signed proxy cards. The TSI board of directors recommends voting "FOR" the merger and the merger agreement. Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY SHARES FOR ME? A: Your broker will vote your shares only if you provide instructions on how to vote. You should follow the directions provided by your broker regarding how to instruct your broker to vote your shares. If you do not return your proxy, your shares will not be voted on the proposed merger, which, in the case of TSI stockholders, will have the same effect as voting against the proposed merger. Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD? A: Yes. There are three ways in which you may revoke your proxy and change your vote. First, you may send a written notice to the party to whom you submitted your proxy stating that you would like to revoke your proxy. Second, you may complete and submit a new proxy card. Third, you may attend the Eclipsys Special Stockholders' Meeting or the TSI Special Stockholders' Meeting, as applicable, and vote in person. Simply attending the special meeting, however, will not revoke your proxy. If you have instructed a broker to vote your shares, you must follow directions received from your broker to change your vote. Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW? A: No. After the merger is completed, Eclipsys will send TSI stockholders written instructions for exchanging their stock certificates. Eclipsys stockholders will keep their existing stock certificates. ii
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Q: WHAT WILL HOLDERS OF TSI VOTING AND NON-VOTING COMMON STOCK RECEIVE IN THE MERGER? A: At the completion of the merger, each share of TSI Voting and Non-Voting Common Stock will be converted into 0.525 shares of Eclipsys Voting Common Stock. Eclipsys will not issue fractional shares of Eclipsys Voting Common Stock. Instead Eclipsys will pay cash with respect to any fractional shares. For example, a holder of 100 shares of TSI Voting or Non-Voting Common Stock would receive 52 shares of Eclipsys Voting Common Stock, plus a cash payment equal to the value of 0.5 of a share of Eclipsys Voting Common Stock. Q: WHAT IS THE "EXCHANGE RATIO"? A: The exchange ratio is the fraction of a share of Eclipsys Voting Common Stock into which each share of TSI Voting and Non-Voting Common Stock will be converted upon completion of the merger. The exchange ratio is fixed at 0.525. Please note that because the exchange ratio is fixed and the market price of the shares of Eclipsys Voting Common Stock will receive may fluctuate, TSI stockholders cannot be sure of the market value of the shares of Eclipsys Voting Common Stock they will receive. Q: WHAT WILL HAPPEN TO THE TSI OPTIONS AND WARRANTS IN THE MERGER? A: TSI options and warrants outstanding and unexercised at the time of the merger will be converted into rights to acquire Eclipsys Voting Common Stock under the same terms, provided that the number of shares will decrease and the exercise price per share will increase to reflect the exchange ratio. For example, an option to purchase 100 shares of TSI Voting Common Stock at an exercise price of $5.00 per share will become an option to purchase 52 shares of Eclipsys Voting Common Stock at an exercise price of $9.52 per share. Q: WHAT WILL THE STOCKHOLDERS OF ECLIPSYS VOTING AND NON-VOTING COMMON STOCK RECEIVE IN THE MERGER? A: Holders of Eclipsys Voting and Non-Voting Common Stock will retain the shares that they currently own and such shares will remain unchanged. However, as a result of the merger, they will own shares of a larger, more diversified company, as more fully described in this Joint Proxy Statement/ Prospectus. Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED? A: We are working toward completing the merger as quickly as possible. In addition to the approvals of the holders of Eclipsys Voting Common Stock and TSI Voting Common Stock, we must also obtain certain regulatory approvals. We currently expect to close the merger by December 31, 1998. Q: WHAT ARE THE TAX CONSEQUENCES OF THE MERGER? A: We expect that for United States federal income tax purposes, your exchange of shares of TSI Voting or Non-Voting Common Stock for shares of Eclipsys Voting Common Stock generally will not cause you to recognize any gain or loss. You will, however, recognize income or gain in connection with any cash received instead of fractional shares of Eclipsys Voting Common Stock. Your holding period for the Eclipsys Voting Common Stock received in the merger, which determines how any gain or loss should be treated for federal income tax purposes upon future sales of Eclipsys Voting Common Stock, generally will include the holding period for the TSI Voting or Non-Voting Common Stock exchanged in the merger. For a more complete discussion of federal income tax considerations, see pages 57 to 58. Q: WILL THE COMPOSITION OF THE ECLIPSYS BOARD OF DIRECTORS CHANGE AS A RESULT OF THE MERGER? A: Yes. At the time the merger is completed, the Eclipsys board of directors will appoint Robert F. Raco and Patrick T. Hackett to the Eclipsys board of directors. Mr. Raco and Mr. Hackett are currently directors of TSI. Eclipsys will have a total of nine directors after the merger is completed. iii
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Q: WHAT OTHER MATTERS WILL BE VOTED ON AT THE SPECIAL STOCKHOLDERS' MEETINGS? A: We do not expect to ask the Eclipsys Voting Common Stockholders to vote on any matter other than the issuance of the Eclipsys Voting Common Stock in connection with the merger; and we do not expect to ask the TSI Voting Common Stockholders to vote on any matter other than approval of the merger and the merger agreement. Q: WILL THE RIGHTS OF TSI STOCKHOLDERS CHANGE AS A RESULT OF THE MERGER? A: Yes. Currently the rights of TSI stockholders are governed by Massachusetts law and TSI's charter and bylaws, whereas the rights of Eclipsys stockholders are governed by Delaware law and Eclipsys' charter and bylaws. After the merger, TSI stockholders will become stockholders of Eclipsys, and therefore their rights will be governed by Delaware law and Eclipsys' charter and bylaws. For a summary of certain differences between the rights of TSI stockholders and the rights of Eclipsys stockholders, see pages 112 through 117. Q: WHOM SHOULD STOCKHOLDERS CALL WITH QUESTIONS AND TO OBTAIN ADDITIONAL COPIES OF THE JOINT PROXY STATEMENT/PROSPECTUS? A: Eclipsys stockholders should call Karen Young at (561) 266-2324. TSI stockholders should call TSI Investor Relations at (617) 305-5283. iv
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SUMMARY This summary highlights selected information from this document and does not contain all of the information that may be important to you. To understand the merger fully and for a more complete description of the legal terms of the merger, you should read carefully this entire document and the documents to which we have referred you. See "Where You Can Find More Information" on page 119. We have included page references parenthetically to direct you to a more complete discussion of the topics presented in this summary. THE COMPANIES Eclipsys Corporation (page 80) 777 East Atlantic Avenue Suite 200 Delray Beach, Florida 33483 (561) 243-1440 Eclipsys Corporation ("Eclipsys") is a healthcare information technology company delivering solutions that enable healthcare providers to achieve improved clinical, financial and administrative outcomes. Eclipsys markets its products primarily to large hospitals, academic medical centers and integrated healthcare delivery networks. Eclipsys offers an integrated suite of healthcare products in four critical areas -- clinical management, access management, patient financial management and enterprise data warehouse and analysis. These products can be purchased in combination to provide an enterprise-wide solution or individually to address specific needs. Eclipsys also provides outsourcing, remote processing and networking services to assist customers in meeting their healthcare information technology requirements. Eclipsys was formed in December 1995 and has grown to date primarily through three acquisitions, all completed since January 1997. Transition Systems, Inc. (page 101) One Boston Place Boston, Massachusetts 02108 (617) 723-4222 Transition Systems, Inc. ("TSI") provides management information technology to hospitals, integrated delivery networks, physician groups and other healthcare organizations. TSI's software products span a healthcare organization's information technology needs, providing data integration services, master person identifier solutions, disease management products and a clinical data repository as well as enterprise-wide financial, operational and clinical decision support in a real-time environment. TSI's products help its customers increase efficiency, improve the quality of care and lower the cost of care delivery. On December 3, 1998, TSI completed the acquisition of the capital stock of HealthVISION, Inc. ("HealthVISION") not already owned by TSI. HealthVISION, located in Santa Rosa, California, is a provider of electronic medical record software. HealthVISION products include CareVISION, a patient-centered clinical data repository and lifetime patient record system that is an integral component of TSI's new generation of decision support solutions. (page 107) REASONS FOR THE MERGER (page 45) We believe that the merger, by combining the complementary product offerings, customer bases and other resources of our companies, will position the combined company to enjoy greater growth and earnings than either Eclipsys or TSI would have experienced individually. We believe the merger will: - enable the combined company to offer a broader range of products, product features and technical solutions for customers; 1
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- combine the highly complementary customer bases of the two companies; - enable the combined company to achieve efficiencies and economies of scale that could not be achieved by either company independently; and - provide the combined company with substantially greater financial and other resources. We believe these factors will benefit the stockholders of both companies. EFFECTS OF THE MERGER; ISSUANCE OF NEW SHARES; TREATMENT OF TSI OPTIONS AND WARRANTS (pages 71 and 74-75) If the proposed merger is completed, TSI will become a wholly owned subsidiary of Eclipsys. The stockholders of TSI will receive 0.525 shares of Eclipsys Voting Common Stock for each share of TSI Voting or Non-Voting Common Stock they own. Eclipsys will not issue any fractional shares. Instead, it will pay to TSI stockholders an amount equal to the cash value of any fractional share of Eclipsys Voting Common Stock in place of receiving such fractional shares. The merger agreement describes the method that will be used to determine the value of fractional shares. Each outstanding share of Eclipsys stock will remain unchanged and outstanding after the merger. After the merger, each outstanding option to acquire shares of TSI Voting Common Stock, whether such option is vested or unvested, will become an option to acquire shares of Eclipsys Voting Common Stock, and each outstanding warrant to acquire shares of TSI Non-Voting Common Stock will become a warrant to acquire shares of Eclipsys Voting Common Stock. In each case, the number of shares purchasable will be decreased, and the per-share exercise price will be increased, to reflect the exchange ratio of 0.525 shares of Eclipsys Voting Common Stock for every share of TSI Voting and Non-Voting Common Stock. All other terms of the original options and warrants will remain the same as prior to the completion of the merger. If the merger is completed, the stockholders of TSI prior to the merger will own approximately 33.7% of the total outstanding shares of Eclipsys Voting Common Stock on a fully diluted basis (assuming exercise of all warrants and exercisable stock options of both TSI and Eclipsys). The following table illustrates the maximum number of shares of Eclipsys Voting Common Stock that could be issued in connection with the merger to TSI stockholders, option holders and warrant holders. It also illustrates the relative ownership of Eclipsys Voting Common Stock by TSI and Eclipsys stockholders, option holders and warrant holders after the merger. These calculations are based on the shares, options and warrants outstanding on the record date and assume that all options and warrants outstanding on that date issued by TSI and Eclipsys are exercised prior to the merger, except for options that will not be exercisable until after December 31, 1998. These calculations also treat all shares of Eclipsys Non-Voting Common Stock as if they had been converted into Eclipsys Voting Common Stock. [Enlarge/Download Table] NUMBER OF PERCENTAGE ECLIPSYS SHARES OF TOTAL --------------- ---------- NEW TSI SHARES TSI stockholders.......................................... 9,662,112 29.4% TSI option holders........................................ 1,242,284 3.8 TSI warrant holders....................................... 156,412 0.5 EXISTING ECLIPSYS SHARES Eclipsys stockholders..................................... 20,358,073 62.1 Eclipsys option holders................................... 413,400 1.3 Eclipsys warrant holders.................................. 962,833 2.9 ---------- ------ Total............................................. 32,795,114 100.0% The Eclipsys options used in these calculations have a weighted average exercise price of $4.91 per share and the Eclipsys warrants have an exercise price of $0.01 per share. The TSI options have a 2
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weighted average exercise price of $3.93 per share and the TSI warrants have an exercise price of $0.02 per share. These calculations do not reflect outstanding options of Eclipsys and TSI that become exercisable after December 31, 1998 (in the case of Eclipsys, options to purchase an aggregate of 2,025,058 shares of Eclipsys Voting Common Stock and, in the case of TSI, options to purchase an aggregate of 1,054,283 shares of TSI Voting Common Stock, or the equivalent of 553,498 shares of Eclipsys Voting Common Stock). In addition, Eclipsys has agreed, if the merger is completed on or before March 31, 1999, to permit current TSI employees to apply an aggregate of approximately $90,000 of salary deferred under TSI's existing employee stock purchase plan to the purchase of Eclipsys Voting Common Stock on March 31, 1999. This purchase will be at a price per share equal to the lower of $12.75 per share or 85% of the market price of Eclipsys Voting Common Stock at that time. THE STOCKHOLDERS' MEETINGS (pages 39 and 41) The Eclipsys special stockholders' meeting will be held on December 30, 1998 at the Delray Beach Marriott, 10 North Ocean Boulevard, Delray Beach, Florida 33444, commencing at 10:00 a.m., local time for the following purpose: - to approve the issuance of shares of Eclipsys Voting Common Stock in connection with the merger. The TSI special stockholders' meeting will be held on December 30, 1998 at the offices of Foley, Hoag & Eliot LLP, One Post Office Square, 16th Floor, Boston Massachusetts 02109, commencing at 10:00 a.m., local time for the following purpose: - to approve the merger and the merger agreement. WHO IS ENTITLED TO VOTE; WHAT VOTE IS REQUIRED Eclipsys (page 39) You are entitled to vote any shares of Eclipsys Voting Common Stock held by you at the close of business on November 30, 1998, the record date, at the Eclipsys special stockholders' meeting. On the record date, there were 19,461,642 outstanding shares of Eclipsys Voting Common Stock, each of which will be entitled to one vote. Stockholders holding at least a majority of the shares present or represented by proxy and voting at the Eclipsys special stockholders' meeting must vote in favor of the proposal submitted for approval in order for Eclipsys to proceed with the merger. TSI (page 41) You are entitled to vote any shares of TSI Voting Common Stock held by you at the close of business on November 30, 1998, the record date, at the TSI special stockholders' meeting. On the record date, there were 18,047,762 outstanding shares of TSI Voting Common Stock, each of which will be entitled to one vote. Stockholders holding at least two-thirds of the outstanding shares of TSI must vote to approve the merger and the merger agreement in order for TSI to proceed with the merger. Holders of TSI Non-Voting Common Stock are entitled to notice of the TSI special stockholders' meeting but are not entitled to vote at the meeting. VOTING AGREEMENTS (pages 39 and 41) Certain stockholders of Eclipsys have agreed to vote the Eclipsys shares over which they exercise voting control in favor of the issuance of shares of Eclipsys Voting Common Stock in connection with the merger in accordance with the terms of the merger agreement. Together, these stockholders control approximately 53.8% of the shares of Eclipsys Voting Common Stock outstanding on the record date. 3
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Certain stockholders of TSI have agreed to vote the TSI shares over which they exercise voting control in favor of the approval of the merger and the merger agreement. Together, these stockholders control approximately 34.4% of the shares of TSI Voting Common Stock outstanding on the record date. SHARE OWNERSHIP OF MANAGEMENT (page 56) On the record date, directors and executive officers of Eclipsys and their affiliates had voting control over 11,553,707 outstanding shares of Eclipsys Voting Common Stock (including the shares covered by the voting agreements described above), or approximately 59.4% of the Eclipsys Voting Common Stock outstanding on the record date. On the record date, directors and executive officers of TSI and their affiliates had voting control over 6,296,672 outstanding shares of TSI Voting Common Stock (including the shares covered by the voting agreements described above), or approximately 34.9% of the TSI Voting Common Stock outstanding on the record date. The directors and executive officers of each company have indicated that they intend to vote the Eclipsys Voting Common Stock or TSI Voting Common Stock owned by them in favor of the proposals submitted for approval at the special stockholders' meetings. NEW TSI DESIGNATED DIRECTORS (page 92) If the merger is completed, Robert F. Raco and Patrick T. Hackett, each a current director of TSI, will become directors of Eclipsys. Mr. Raco will have a term ending with the annual stockholders' meeting of Eclipsys to be held in 1999 and Mr. Hackett will have a term ending with the annual stockholders' meeting of Eclipsys to be held in 2000. There will be a total of nine directors of Eclipsys after the merger. RECOMMENDATIONS OF THE BOARDS OF DIRECTORS (page 45) Eclipsys The Board of Directors of Eclipsys believes that the merger is fair and is in the best interests of the stockholders of Eclipsys. Therefore, the Board of Directors of Eclipsys recommends that the Eclipsys stockholders vote in favor of the issuance of shares of Eclipsys Voting Common Stock in connection with the merger. TSI The Board of Directors of TSI believes that the merger is fair and is in the best interests of the stockholders of TSI. Therefore, TSI's Board of Directors recommends that the TSI stockholders vote to approve the merger and the merger agreement. OPINIONS OF FINANCIAL ADVISORS (page 48) In deciding to approve the merger, the Eclipsys Board of Directors considered the opinion of Morgan Stanley & Co. Incorporated that the exchange ratio was, as of the date of the opinion, fair to Eclipsys from a financial point of view. The TSI Board of Directors received and considered the opinion of its financial advisor, BT Alex. Brown Incorporated, that the exchange ratio was, as of the date of the opinion, fair, from a financial point of view, to the holders of TSI Voting and Non-Voting Common Stock. Morgan Stanley & Co. Incorporated and BT Alex. Brown Incorporated gave these opinions subject to certain important qualifications and assumptions. These opinions are attached as Annex B and Annex C to this document. Holders of Eclipsys Voting Common Stock and TSI Voting and Non-Voting Common Stock should read these opinions carefully. 4
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INTERESTS OF CERTAIN PERSONS IN THE MERGER (page 56) Several directors, executive officers and a significant stockholder of TSI have interests in the merger that may differ from the interests of other TSI stockholders: - two directors of TSI, Robert F. Raco and Patrick T. Hackett, will become members of the Eclipsys Board of Directors after the merger; - Eclipsys has agreed to continue certain indemnification and insurance arrangements for existing and former directors and officers of TSI after the merger; and - Eclipsys will grant certain registration rights to a significant stockholder of TSI. ANTICIPATED CLOSING OF THE MERGER We currently anticipate that the merger will be closed by December 31, 1998. CONDITIONS TO THE MERGER (page 75) Eclipsys and TSI will complete the merger only if certain conditions are either satisfied or (in some cases) waived. These conditions include, among other things: - the merger and the merger agreement have been approved by the TSI stockholders; - the issuance of shares of Eclipsys Voting Common Stock in connection with the merger has been approved by the Eclipsys stockholders; - the total number of shares of TSI Voting and Non-Voting Common Stock as to which appraisal rights have been perfected (see "Appraisal Rights" below) is not more than 5% of all outstanding shares of TSI Voting and Non-Voting Common Stock; - no governmental agency or court has prohibited consummation of the merger; - counsel to Eclipsys has delivered an opinion to Eclipsys in respect of certain federal income tax consequences of the merger and counsel to TSI has delivered a similar opinion to TSI; - the independent accountants for both Eclipsys and TSI have delivered a letter to each company stating that they are not aware of any condition that would preclude the merger from qualifying for pooling-of-interests accounting treatment; and - there is no material adverse change in the financial condition, results of operations, cash flows, business or properties with respect to the other company (the companies have agreed that the failure of either company to achieve any level of revenue and earnings at any time shall not of itself be such a material adverse change). TERMINATION OF THE MERGER AGREEMENT (page 77) Eclipsys and TSI can jointly agree to terminate the merger agreement at any time without completing the merger. In addition, either company can terminate the merger agreement if: - the merger is not completed by April 30, 1999; - a governmental authority or legal action permanently prohibits the merger; - the stockholders of the other company do not vote the required number of shares in favor of the proposals submitted for their approval; - the other company breaches any of its representations or warranties or its obligations under the merger agreement, resulting in the inability to satisfy a condition to the completion of the merger, if such breach is not cured within 20 business days; or - the other company's board of directors withdraws or adversely modifies its recommendation to its stockholders or recommends or announces its intention to engage in a designated alternative transaction or fails to hold its special stockholders' meeting. In addition, TSI may terminate the merger agreement if its Board of Directors recommends, accepts or approves a proposal for an alternative transaction that is more favorable to the TSI stockholders. 5
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Under certain circumstances, in the event that the merger agreement is terminated, TSI or Eclipsys may be required to reimburse the other company for actual expenses up to $2.0 million or to pay to the other company a termination fee of $9.1 million. APPRAISAL RIGHTS (page 59) TSI stockholders who vote against the merger and the merger agreement and who make a specified written filing with TSI prior to the TSI special stockholders' meeting are entitled under Massachusetts law to seek an appraisal of the fair value of their shares. No shares held by these stockholders will be converted into shares of Eclipsys Voting Common Stock as part of the merger. If a TSI stockholder has not properly notified TSI prior to the stockholder vote at the TSI special stockholders' meeting or has withdrawn the demand for appraisal, that stockholder's shares will be converted into shares of Eclipsys Voting Common Stock in accordance with the terms of the merger agreement. Under Delaware law, Eclipsys stockholders are not entitled to an appraisal of the value of their shares in connection with the merger. REGULATORY APPROVALS (page 58) Eclipsys and TSI have each filed the notification and report forms required by the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, with the Antitrust Division of the Department of Justice and the Federal Trade Commission. We were granted early termination of the waiting period under that Act on November 24, 1998. ACCOUNTING TREATMENT (page 57) We expect that the merger will be accounted for as a pooling of interests, which provides that the companies be treated as if they had always been combined for accounting and financial reporting purposes. Both Eclipsys and TSI will obtain from their independent accountants a letter stating that, as of the date of the letter, they are not aware of any condition that would preclude the merger from qualifying for pooling-of-interests accounting treatment. FEDERAL INCOME TAX CONSIDERATIONS (page 57) Eclipsys and TSI will each receive from its outside counsel an opinion that the merger will constitute a "reorganization" within the meaning of the Internal Revenue Code. This means that, as a general matter, TSI stockholders will not be taxed as a result of the exchange of TSI Voting and Non-Voting Common Stock solely for Eclipsys Voting Common Stock in the merger. TSI stockholders will be taxed to the extent they receive cash for fractional shares. Eclipsys stockholders will not be taxed as a result of the merger. SURRENDER OF STOCK CERTIFICATES (page 71) When the merger is completed, Eclipsys will mail a notice and a transmittal form to all holders of record of TSI Voting and Non-Voting Common Stock immediately prior to the merger. The notice will contain instructions for surrendering the certificates representing TSI Voting or Non-Voting Common Stock in exchange for certificates representing shares of Eclipsys Voting Common Stock and a cash payment in lieu of fractional shares, if any. YOU SHOULD NOT SURRENDER STOCK CERTIFICATES UNTIL YOU RECEIVE THE LETTER OF TRANSMITTAL. CERTAIN EFFECTS OF THE MERGER ON THE RIGHTS OF TSI STOCKHOLDERS (page 112) When the merger is completed, TSI stockholders will become stockholders of Eclipsys. Eclipsys is a company governed by Delaware law and Eclipsys' existing charter and bylaws. As a result, the rights of TSI stockholders will change with respect to certain matters. 6
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FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE (page 119) We have each made forward-looking statements in this document that are subject to risks and uncertainties. Forward-looking statements include information concerning possible or assumed future results of operations of Eclipsys and TSI. Also, when we use words such as "believes," "expects," "anticipates," or similar expressions, we are making forward-looking statements. You should note that many factors, some of which are discussed elsewhere in this document, including under the caption "Risk Factors" and, in the case of TSI, in the documents incorporated by reference, could affect the future financial results of Eclipsys and TSI and could cause those results to differ materially from those expressed in any forward-looking statements contained in or incorporated by reference in this document. EXPLANATION OF CERTAIN TERMS We have used the following defined terms throughout this document: - We refer to Eclipsys Corporation as "Eclipsys." - We refer to Transition Systems, Inc. as "TSI." - We refer to Exercise Acquisition Corp., the wholly owned subsidiary of Eclipsys that will merge with TSI, as "Sub." - We refer to the proposed merger of Sub with and into TSI as the "Merger." - TSI will be the surviving corporation in the Merger with Sub and will be a wholly owned subsidiary of Eclipsys after the Merger. We sometimes refer to TSI, in that capacity after the Merger, as the "Surviving Corporation." - We refer to the agreement dated October 29, 1998 among Eclipsys, Sub and TSI relating to the Merger as the "Merger Agreement." - Eclipsys has two classes of common stock: Common Stock, $.01 par value per share, and Non-Voting Common Stock, $.01 par value per share. We refer to these respectively as "Eclipsys Voting Common Stock" and "Eclipsys Non-Voting Common Stock." Sometimes we refer to them together as "Eclipsys Voting and Non-Voting Common Stock." - TSI also has two classes of common stock: Common Stock, $.01 par value per share, and Non-Voting Common Stock, $.01 par value per share. We refer to these respectively as "TSI Voting Common Stock" and "TSI Non-Voting Common Stock." Sometimes we refer to them together as "TSI Voting and Non-Voting Common Stock." - We refer to the per-share exchange ratio by which each share of TSI Voting and Non-Voting Common Stock will be converted into 0.525 shares of Eclipsys Voting Common Stock in the Merger as the "Exchange Ratio." For an index of other defined terms used in this document, please see page 120. 7
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RISK FACTORS As a stockholder of Eclipsys or TSI, you should carefully consider the following risk factors in determining whether to vote in favor of the proposals submitted for approval at the respective special stockholders' meetings. You should consider these matters together with the other information included and incorporated by reference in this document. DIFFICULTY OF INTEGRATING ECLIPSYS AND TSI OPERATIONS Integrating the operations of Eclipsys with those of TSI and HealthVISION after the Merger will be difficult and time consuming. Management of the combined company will need to successfully integrate, among other things, the product offerings, the product development, sales and marketing and customer service functions, and the management information systems of both companies. In addition, the combined company will need to retain the management, key employees, customers, distributors, vendors and other business partners of both companies. The integration of these organizations may temporarily distract management from the day-to-day business of the combined company following the Merger. The combined company may fail to manage this integration so as to achieve any of the anticipated synergies and other benefits that both companies hope to achieve from the Merger. POTENTIALLY SIGNIFICANT INTEGRATION COSTS AND CHARGES Eclipsys expects to incur restructuring and integration costs in connection with the integration of the operations of Eclipsys and TSI. These costs may include costs for employee severance and other compensation charges, facilities closures, relocation, discontinuance of overlapping products and other merger-related costs. Eclipsys has not yet determined the amount of these costs. Eclipsys expects to charge such costs to operations in the quarter in which the Merger is completed. POSSIBLE DILUTION IN PER-SHARE EARNINGS The combination of the two companies' businesses will not necessarily result in increased per-share earnings of Eclipsys after the Merger (taking into consideration the greater number of Eclipsys shares to be outstanding as a result of the Merger) or a financial condition superior to that which would have been achieved by Eclipsys or TSI on a stand-alone basis. Eclipsys does not anticipate that the Merger will dilute the earnings per share of its stockholders, although TSI does anticipate that the Merger will have such an effect for its stockholders. The Merger could fail to produce the benefits both companies anticipate, or could have other adverse effects that neither company currently foresees. In this event, the Merger could result in a reduction of per-share earnings of Eclipsys following the Merger as compared to the per-share earnings that would have been achieved if the Merger had not occurred. FIXED EXCHANGE RATIO DESPITE POTENTIAL SHARE PRICE FLUCTUATIONS The Exchange Ratio was fixed at 0.525 at the time Eclipsys and TSI executed the Merger Agreement. The Exchange Ratio is not subject to adjustment. Any increase or decrease of the market price of the shares of Eclipsys Voting Common Stock will correspondingly increase or decrease the value of the merger consideration to be received by the holders of TSI Voting and Non-Voting Common Stock in the Merger. In addition, neither company will have the right to terminate the Merger Agreement or elect not to consummate the Merger as a result of changes in the market prices of either company's common stock. The relative market prices of shares of Eclipsys Voting Common Stock and shares of TSI Voting Common Stock at the time the Merger is completed may vary significantly from their prices on the date the Merger Agreement was executed, the date hereof or the date on which the special stockholders' meetings occur. These potential fluctuations could result from changes in the business, operations, and prospects of Eclipsys or TSI, from market assessments of the Merger, of the synergies expected to be achieved in the Merger and of the likelihood that the Merger will be completed, and from general market and economic conditions and other factors. 8
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LIMITED OPERATING HISTORY OF ECLIPSYS; HISTORY OF OPERATING LOSSES Eclipsys began operations in 1996 and has grown primarily through a series of acquisitions completed since January 1997. Accordingly, you have only a limited combined operating history of Eclipsys and its acquired operations upon which to base an evaluation of Eclipsys and its prospects. In addition to managing the integration with TSI, Eclipsys will need to continue to integrate the operations of these other acquired businesses and to consolidate their product offerings. Eclipsys has incurred net losses in each year since its inception, including net losses of $131.1 million in 1997 and $16.8 million in the first nine months of 1998. These losses resulted primarily from certain write-offs related to acquisitions completed by Eclipsys during 1997 and charges in the first quarter of 1998 related to the buyout by Eclipsys of certain obligations under an agreement entered into in connection with one of the acquisitions. Eclipsys expects to continue to incur net losses for the foreseeable future. Eclipsys cannot predict when or if it will achieve profitability. MANAGEMENT OF GROWTH The rapid growth in the size and complexity of Eclipsys' business as a result of its previous acquisitions has placed a significant strain on Eclipsys' management and other resources. The difficulties faced by the combined company in managing its growth will become more acute following the Merger. To compete effectively and to manage future growth, if any, the combined company will need to continue to implement and improve operational and financial systems on a timely basis and to expand, train, motivate and manage its work force. The combined company's personnel, systems, procedures and controls may not be adequate to support its operations. RISKS ASSOCIATED WITH FUTURE ACQUISITIONS An important element of Eclipsys' business strategy has been expansion through acquisitions. Eclipsys expects the combined company will continue this strategy after the Merger. This acquisition strategy involves a number of risks, which include: - There is significant competition for acquisition opportunities in the healthcare information technology industry. Competition may intensify due to consolidation in the industry, which could increase the costs of future acquisitions. The combined company will compete for acquisition opportunities with other companies, some of which may have significantly greater financial and management resources than the combined company. - The anticipated benefits from any acquisition may not be achieved unless the operations of the acquired business are successfully combined with those of the combined company. The integration of acquired businesses requires substantial attention from management. The diversion of the attention of management and any difficulties encountered in the transition process could hurt the combined company. - Future acquisitions could result in the issuance of additional shares of capital stock or the incurrence of additional indebtedness, could entail the payment of consideration in excess of book value and could have a dilutive effect on the combined company's net income per share. - Many business acquisitions must be accounted for under the purchase method of accounting. Consequently, such acquisitions may generate significant goodwill or other intangible assets and result in substantial amortization charges to the combined company. Acquisitions could also involve significant charges reflecting write-offs of acquired in-process research and development. As a result of previous acquisitions, Eclipsys recorded amortization expenses for acquisition-related intangible assets of $25.3 million in 1997 and wrote off $99.2 million of in-process research and development. As a result of the acquisition of HealthVISION, TSI expects to write off approximately $2.5 million of in-process research and development. 9
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POTENTIAL FLUCTUATIONS IN QUARTERLY PERFORMANCE Both Eclipsys and TSI have experienced significant variations in revenues and operating results from quarter to quarter. The quarterly operating results of the combined company following the Merger may continue to fluctuate due to a number of factors, including: - potential deferrals of sales resulting from customer concerns over the Year 2000 issue; - the timing and size of future acquisitions; - the timing, size and nature of the combined company's product sales and implementations; - the length of the sales cycle; - the success of implementation efforts; - market acceptance of new services, products or product enhancements by the combined company or its competitors; - product and price competition; - the relative proportions of revenues derived from systems and services and from hardware; - changes in operating expenses; - personnel changes; - the performance of the combined company's products; and - fluctuations in economic and financial market conditions. It is difficult to predict the timing of revenues from product sales because the sales cycle can vary depending upon several factors. These factors include the size of the transaction, the changing business plans of the customer, the effectiveness of the customer's management and general economic conditions. In addition, because revenue is recognized at various points during the term of a contract, the timing of revenue recognition varies considerably. Factors affecting the timing of revenue recognition include the type of contract, the availability of personnel, the implementation schedule and the complexity of the implementation process. Because a significant percentage of the combined company's expenses will be relatively fixed, a variation in the timing of sales and implementations could cause significant variations in operating results from quarter to quarter. Neither Eclipsys nor TSI believes that period-to-period comparisons of its historical results of operations are necessarily meaningful. You should not rely on these comparisons as indicators of future performance. LONG SALES AND IMPLEMENTATION CYCLES Both Eclipsys and TSI have experienced long sales and implementation cycles. These cycles will likely be just as long for the combined company. How and when to implement, replace, expand or substantially modify an information system, or modify or add business processes or lines of business, are major decisions for customers. Furthermore, the purchase of solutions like those provided by Eclipsys and TSI typically require significant capital expenditures by the customer. The sales cycle for Eclipsys' systems has ranged from six to 18 months or more from initial contact to contract execution. The sales cycle for new TSI accounts typically ranges from six to 12 months or more. Historically, Eclipsys' implementation cycle has ranged from 12 to 36 months from contract execution to completion of implementation and TSI's implementation cycle has ranged from three to 12 months. Although Eclipsys believes that the migration of its products to its new SOLA architecture will significantly shorten the implementation cycle, Eclipsys cannot provide any assurance in this regard. During the sales cycle and the implementation cycle, 10
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the combined company will expend substantial time, effort and funds preparing contract proposals, negotiating the contract and implementing the solution. RISKS ASSOCIATED WITH DEVELOPMENT BY ECLIPSYS OF INTEGRATED CLINICAL MANAGEMENT SUITE Eclipsys is currently in the process of integrating selected features and functionalities from a number of heritage clinical management products acquired in its previous acquisitions and licensed from Partners HealthCare Systems, Inc. ("Partners") to create the Sunrise Clinical Management suite. See "Business of Eclipsys." This product suite is currently undergoing field trials. Although most of the key functionalities of the Sunrise Clinical Management suite are currently available in heritage products, Eclipsys does not expect the integrated Sunrise Clinical Management suite to be generally available until 1999. Eclipsys may not be successful in completing the integration of these functionalities on a timely basis. In addition, the field trials may not be successful and the Sunrise Clinical Management suite, if and when generally available, may not meet the needs of the marketplace or achieve market acceptance. COMPETITION The combined company will operate in a market that is intensely competitive. The principal competitors of the combined company will include Cerner Corp., HBO & Company, IDX Systems Corp. and Shared Medical Systems Corporation ("SMS"). The combined company will also face competition from providers of practice management systems, general decision support and database systems and other segment-specific applications, as well as from healthcare technology consultants. A number of existing and potential competitors are more established and have greater name recognition and financial, technical and marketing resources than will the combined company. Eclipsys and TSI also expect that competition will continue to increase as a result of consolidation in both the information technology and healthcare industries. DEPENDENCE ON RELATIONSHIP WITH PARTNERS AND OTHER THIRD PARTIES Eclipsys has an exclusive license granted by Partners to develop, commercialize, distribute and support certain intellectual property relating to a clinical information systems software developed at Brigham & Women's Hospital ("Brigham"). If the combined company breaches certain terms of the license, Partners has the option to convert the license to a non-exclusive license. Such conversion by Partners could cause the intellectual property and the ability to develop and commercialize such intellectual property to become more widely available to competitors of the combined company. Eclipsys also works closely with physicians and research and development personnel at Brigham and its affiliate, Massachusetts General Hospital ("MGH"), to develop and commercialize new information technology solutions for the healthcare industry and to test and demonstrate new and existing products. If the combined company breaches the Partners license, the cooperative working relationship with Brigham and MGH, including future access to products developed by personnel at Brigham granted under the Partners license, could become strained or cease altogether. The loss of good relations with Brigham or MGH could hurt the ability of the combined company to develop new solutions and could cause delays in bringing new products to the market. In addition, the reputation and status of the combined company in the industry could be hurt. TSI depends upon licenses for certain technology used in its products from a number of third-party vendors, including Computer Corporation of America, Oracle Corporation and Sterling Software (United States of America), Inc. TSI also has licenses from HCIA Inc. and Premier, Inc. for certain database management systems and other software components and clinical benchmarking data. Most of these licenses expire within one to four years, can be renewed only by mutual consent and may be terminated if TSI or the combined company breaches the terms of the license and fails to cure the breach within a specified period of time. TSI or the combined company may not be able to continue using the technology licensed under these licenses on commercially reasonable terms or at all. As a result, TSI or the combined company may have to discontinue, delay or reduce product shipments until equivalent technology is obtained, which could hurt TSI or the combined company. Most of TSI's third-party licenses, including its 11
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license from New England Medical Center, Inc. for the original version of the Transition I software, are non-exclusive. The competitors of TSI or the combined company may obtain the right to use any of the technology covered by the licenses and use the technology to directly compete with TSI. In addition, if TSI's vendors choose to discontinue to support the licensed technology, TSI may not be able to modify or adapt its own products going forward. UNCERTAINTY IN THE HEALTHCARE INDUSTRY The combined company will operate in an industry subject to changing political, economic and regulatory influences. The potential impact of these industry changes include: - During the past several years, the U.S. healthcare industry has been subject to an increase in governmental regulation and reform proposals. These reforms may increase governmental involvement in healthcare, continue to reduce reimbursement rates and otherwise change the operating environment for customers of the combined company. Customers may react to these proposals and the uncertainty surrounding the proposals by curtailing or deferring investments, including those for the products and services of the combined company. - Many healthcare providers are consolidating to create larger healthcare delivery enterprises with greater market power. This consolidation could erode the customer base of the combined company and could reduce the size of its target market. In addition, the resulting enterprises could have greater bargaining power, which may lead to price erosion. POTENTIAL FDA REGULATION The U.S. Food and Drug Administration (the "FDA") is likely to become increasingly active in regulating computer software intended for use in the healthcare setting. The FDA has recently issued a draft guidance document addressing the regulation of certain computer products and computer-assisted products as medical devices under the Federal Food, Drug, and Cosmetic Act (the "FDC Act") and has recently indicated it may modify such draft policy or create a new policy. If the FDA chooses to regulate any of the products of the combined company as medical devices, it can impose extensive requirements upon the combined company, including: - the combined company would be required to seek either FDA clearance of a premarket notification submission demonstrating that the product is substantially equivalent to a device already legally marketed or obtain FDA approval of a premarket approval application establishing the safety and effectiveness of the product; - the combined company would be required to comply with rigorous regulations governing the preclinical and clinical testing, manufacture, distribution, labeling and promotion of medical devices; and - the combined company would be required to comply with the FDC Act's general controls, including establishment registration, device listing, compliance with good manufacturing practices, reporting of certain device malfunctions and adverse device events. If the combined company failed to comply with applicable requirements, the FDA could respond by imposing fines, injunctions or civil penalties, requiring recalls or product corrections, suspending production, refusing to grant premarket clearance or approval of products, withdrawing clearances and approvals, and initiating criminal prosecution. Any final FDA policy governing computer products, once issued, may increase the cost and time to market of new or existing products. NEW REGULATIONS RELATING TO PATIENT CONFIDENTIALITY State and federal laws regulate the confidentiality of patient records and the circumstances under which such records may be released. These regulations govern both the disclosure and use of confidential 12
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patient medical record information. Regulations governing electronic health data transmissions are evolving rapidly and are often unclear and difficult to apply. On August 22, 1996, President Clinton signed the Health Insurance Portability and Accountability Act of 1996 ("HIPAA"). This legislation requires the Secretary of Health and Human Services (the "Secretary") to adopt national standards for certain types of electronic health information transactions and the data elements used in such transactions and to adopt standards to ensure the integrity and confidentiality of health information. The Secretary has recently issued proposed standards regarding four of the five sets of standards that are ultimately expected. Eclipsys believes that the proposed standards issued to date would not materially affect the business of the combined company if adopted as proposed. Eclipsys cannot predict the potential impact of the standards that have not yet been proposed or any other standards that might be finally adopted instead of the proposed standards. The HIPAA legislation also required the Secretary to submit recommendations to Congress for legislation to protect privacy and confidentiality of personal health information. If Congress fails to enact such legislation by August 21, 1999, HIPAA requires the Secretary to promulgate such protections by regulation. Legislation governing the dissemination of medical record information is also frequently proposed and debated at the state level. Such legislation, if enacted, could require patient consent before even non-individually-identifiable (e.g., coded or anonymous) patient information may be shared with third parties and could also require that holders or users of such information implement specified security measures. These laws or regulations, when adopted, could restrict the ability of customers to obtain, use or disseminate patient information. This could adversely affect demand for the products of the combined company. YEAR 2000 ISSUES Eclipsys believes that all of its 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. Although all of the products currently offered by Eclipsys are Year 2000 compliant, some of the products previously sold by Alltel and Emtek and installed in Eclipsys' customer base are not Year 2000 compliant. Eclipsys has developed and tested solutions for these non-compliant installed products. Eclipsys currently estimates that the total cost of bringing these installed products into Year 2000 compliance, in those cases in which Eclipsys is required to do so at its own expense, will be approximately $900,000. Eclipsys expects that all of this expense will be incurred by mid-1999. In addition, because Eclipsys' products are often interfaced with a customer's existing third-party applications, 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. However, any unexpected difficulties in implementing Year 2000 solutions for the installed Alltel or Emtek products or difficulties in interfacing with third-party products could hurt the combined company. TSI's software license agreements generally contain warranties concerning the Year 2000 compliance of the licensed product. TSI has tested the products it has developed internally and believes that, with the exception of its Transition for Quality product (for which TSI expects to release a fully Year 2000 compliant version in early 1999), the current release of each of its internally developed products is Year 2000 compliant. TSI includes in its products certain software licensed from third-party vendors. TSI has not yet completed its evaluation of the Year 2000 compliance of all such third-party software. For example, TSI has not yet verified that Uniface, licensed from Compuware Corporation, is Year 2000 compliant. In order to use TSI's products, customers must themselves license software, including certain operating system and database management system software, from third-party vendors such as Microsoft Corporation and Oracle Corporation. Not all such third-party software may be fully Year 2000 compliant. For example, Microsoft Corporation has not certified that its Windows NT operating system is Year 2000 compliant. TSI has also evaluated the Year 2000 compliance of its critical internal software systems, including its financial, payroll and human resources systems and its telephone switch, and believes, based in part on certification from the vendors of such systems, that such systems are Year 2000 compliant. TSI 13
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does not expect to incur material costs in completing its Year 2000 assessment and remediation program. However, the discovery of previously undetected Year 2000 defects in TSI's products (including those licensed from third-party vendors), in third-party software required for customers to use TSI's products or in its internal software systems could damage TSI's business and hurt the combined company. Apprehension in the marketplace over Year 2000 compliance issues may lead businesses, including customers of the combined 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 combined company may not achieve expected revenue or earnings levels. POTENTIAL FOR PRODUCT LIABILITY; SECURITY ISSUES Both TSI and Eclipsys provide products with applications that relate to patient medical histories and treatment plans. If these products fail to provide accurate and timely information, customers could assert liability claims against the combined company. Both companies attempt to contractually limit their liability for damages arising from negligence, errors or mistakes. Despite this precaution, the limitations of liability set forth in these contracts may not be enforceable or may not otherwise protect the combined company from liability for damages. The combined company will maintain general liability insurance coverage, including coverage for errors or omissions. However, such coverage may not continue to be available on acceptable terms or may not be available in sufficient amounts to cover one or more large claims. In addition, the insurer might disclaim coverage as to any future claim. One or more large claims could exceed available insurance coverage. Litigation with respect to liability claims, regardless of its outcome, could result in substantial cost to the combined company, could divert management's attention from operations and could decrease market acceptance of the combined company's products. Both companies have included security features in their products that are intended to protect the privacy and integrity of customer data. Despite the existence of these security features, these products may be vulnerable to break-ins and similar disruptive problems. Break-ins and other disruptions could jeopardize the security of information stored in and transmitted through the computer systems of customers. The combined company may need to expend significant capital and other resources to address evolving security issues. CONTROL BY DIRECTORS AND OFFICERS Executive officers and directors of the combined company, and their affiliates, will beneficially own approximately 51.5% of the outstanding Eclipsys Voting Common Stock following completion of the Merger. These stockholders, if acting together, would have the ability to elect Eclipsys' directors and to determine the outcome of corporate actions requiring stockholder approval, regardless of how other stockholders of Eclipsys may vote. They might also be able to delay or prevent a change in control of the combined company. ANTI-TAKEOVER PROVISIONS Eclipsys' charter and by-laws contain certain provisions, including a staggered Board of Directors, that could make it more difficult for a third party to acquire, and could therefore discourage a third party from attempting to acquire, control of Eclipsys. These provisions could limit the price that certain investors might be willing to pay in the future for shares of Eclipsys Voting Common Stock. In addition, certain provisions of Delaware corporate law applicable to Eclipsys could have the effect of delaying, deferring or preventing a change in control of Eclipsys. 14
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OTHER RISKS The combined company will face a variety of other risks typically encountered by technology and software companies. Among other things: - The combined company will need to continue to attract, motivate and retain highly qualified employees. - The combined company will operate in a market characterized by rapidly changing technology, industry standards and customer requirements. Existing products may quickly become obsolete or uncompetitive. - The means utilized by the combined company to protect its proprietary technology may not be adequate to prevent misappropriation by others. - Third parties could assert that the products of the combined company infringe their proprietary rights. This could result in significant defense costs and, ultimately, in injunctions preventing the combined company from distributing certain products. - The software products of the combined company could contain undetected errors. This could result in product delays, remediation costs and decreased market acceptance and customer satisfaction. - The trading price of the Eclipsys Voting Common Stock could be highly volatile after the merger, including volatility unrelated to the particular performance of the combined company. 15
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MARKET PRICE INFORMATION The principal trading market for the Eclipsys Voting Common Stock and for the TSI Voting Common Stock is the Nasdaq National Market. Eclipsys Voting Common Stock has been quoted on the Nasdaq National Market under the symbol "ECLP" since August 7, 1998. TSI Voting Common Stock has been quoted on the Nasdaq National Market under the symbol "TSIX" since April 18, 1996. The following tables set forth the reported high and low sale prices of Eclipsys Voting Common Stock and TSI Voting Common Stock on the Nasdaq National Market for the periods indicated. [Download Table] HIGH LOW ------ ------ ECLIPSYS Year Ending December 31, 1998: Third Quarter (from August 7, 1998)....................... $23.38 $11.88 Fourth Quarter (through December 2, 1998)................. 26.25 18.38 TSI Fiscal Year Ended September 30, 1997: First Quarter............................................. $22.00 $ 8.25 Second Quarter............................................ 16.63 11.75 Third Quarter............................................. 18.25 9.00 Fourth Quarter............................................ 21.75 16.88 Fiscal Year Ended September 30, 1998: First Quarter............................................. $23.88 $17.75 Second Quarter............................................ 24.88 17.38 Third Quarter............................................. 24.25 9.94 Fourth Quarter............................................ 13.25 6.38 Fiscal Year Ending September 30, 1999: First Quarter (through December 2, 1998).................. $12.00 $ 5.50 On October 28, 1998, the last full trading day prior to the execution and delivery of the Merger Agreement and the public announcement thereof, the reported high and low sale prices on the Nasdaq National Market of Eclipsys Voting Common Stock were $26.25 and $24.88, respectively, and of TSI Voting Common Stock were $9.31 and $8.63, respectively. On such date, the last reported sale price on the Nasdaq National Market of Eclipsys Voting Common Stock was $25.88 per share and of TSI Voting Common Stock was $8.63 per share. Based on the Exchange Ratio of 0.525 shares of Eclipsys Voting Common Stock for each share of TSI Voting Common Stock, the equivalent per-share value of TSI Voting Common Stock on October 28, 1998 was $13.58 per share. On December 2, 1998, the most recent practicable date prior to the printing of this Joint Proxy Statement/Prospectus, the last reported sale price on the Nasdaq National Market of Eclipsys Voting Common Stock was $22.50 per share and of TSI Voting Common Stock was $11.38 per share, and the equivalent per-share value of TSI Voting Common Stock was $11.81 per share. Because the market price of Eclipsys Voting Common Stock is subject to fluctuation and the Exchange Ratio is fixed, the market value of the shares of Eclipsys Voting Common Stock that TSI stockholders will receive in the Merger may increase or decrease prior to the Merger. Eclipsys and TSI stockholders are urged to obtain a current market quotation for the Eclipsys Voting Common Stock and the TSI Voting Common Stock. 16
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SELECTED CONSOLIDATED FINANCIAL DATA FOR ECLIPSYS The selected consolidated financial data of Eclipsys set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations of Eclipsys" and the financial statements and notes thereto included elsewhere in this document. The statement of operations data for the years ended December 31, 1996 and 1997 and the balance sheet data at December 31, 1996 and 1997, under the heading "Eclipsys" set forth below, are derived from, and are qualified by reference to, Eclipsys' audited consolidated financial statements, which appear elsewhere in this document. Statement of operations data for the years ended December 31, 1995 and 1996, under the heading "Predecessor," are derived from, and are qualified by reference to, the ALLTEL Healthcare Information Services, Inc. ("Alltel") audited financial statements, which appear elsewhere in this document. The financial data for the year ended and at December 31, 1994 are derived from audited financial statements of Alltel not included in this document. The financial data for the year ended and at December 31, 1993 are derived from unaudited financial statements of Alltel not included in this document. The statement of operations data for the nine months ended September 30, 1997 and 1998 and the balance sheet data at September 30, 1998 are derived from, and are qualified by reference to, Eclipsys' unaudited consolidated financial statements, which appear elsewhere in this document and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial data for such periods. The results of operations for the nine months ended September 30, 1998 are not necessarily indicative of the results to be expected for the full year or for any future period. [Enlarge/Download Table] NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, --------------------------------------------------------------- --------------------- PREDECESSOR ECLIPSYS --------------------------------------- ------------------------------------------------ 1993 1994 1995 1996 1996 1997(1) 1997(1) 1998(1) ------- ------- -------- -------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT SHARE DATA) STATEMENT OF OPERATIONS DATA: Total revenues.............. $74,136 $80,204 $100,114 $108,800 $ -- $ 94,077 $ 67,479 $ 97,743 ------- ------- -------- -------- --------- --------- --------- --------- Costs and expenses: Cost of revenues.......... 44,209 48,692 61,335 71,483 -- 80,036 58,223 61,021 Marketing and sales....... 13,082 12,541 11,128 11,091 770 13,662 9,881 13,945 Research and development... 10,596 10,186 8,522 10,271 1,704(2) 15,714 11,991 19,267 General and administrative. 7,215 7,898 8,168 7,101 603 5,672 4,143 4,580 Depreciation and amortization............ 3,032 3,788 6,735 8,135 32 9,710 7,292 7,937 Write-off of in-process research and development(3).......... -- -- -- -- -- 99,189 99,189 -- Write-off of MSA(4)....... -- -- -- -- -- -- -- 7,193 ------- ------- -------- -------- --------- --------- --------- --------- Total costs and expenses.............. 78,134 83,105 95,888 108,081 3,109 223,983 190,719 113,943 ------- ------- -------- -------- --------- --------- --------- --------- Income (loss) from operations... (3,998) (2,901) 4,226 719 (3,109) (129,906) (123,240) (16,200) Interest expense (income), net....................... 983 1,324 2,733 3,758 (156) 1,154 727 628 ------- ------- -------- -------- --------- --------- --------- --------- Income (loss) before income taxes..................... (4,981) (4,225) 1,493 (3,039) (2,953) (131,060) (123,967) (16,828) Income tax benefit (provision)(5)............ -- 1,373 (887) 843 -- -- -- -- ------- ------- -------- -------- --------- --------- --------- --------- Net income (loss)........... (4,981) (2,852) 606 (2,196) (2,953) (131,060) (123,967) (16,828) Dividends and accretion on mandatorily Redeemable Preferred Stock........... -- -- -- -- -- (5,850) (4,199) (10,928) Preferred stock conversion(6)... -- -- -- -- -- (3,105) (3,105) -- ------- ------- -------- -------- --------- --------- --------- --------- Net income (loss) available to common shareholders.... $(4,981) $(2,852) $ 606 $ (2,196) $ (2,953) $(140,015) $(131,271) $ (27,756) ======= ======= ======== ======== ========= ========= ========= ========= Basic and diluted net loss per common share(7)....... $ (.98) $ (39.73) $ (38.28) $ (3.41) Weighted average common shares outstanding(7)..... 3,022,660 3,524,313 3,429,385 8,133,275 OTHER DATA: EBITDA(8)................... $ 905 $ 895 $ 11,148 Net cash provided by operating activities...... 1,068 3,292 15,176 Net cash used by investing activities................ (113,670) (111,778) (27,824) Net cash provided by financing activities...... 112,771 113,764 20,138 17
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[Enlarge/Download Table] AS OF AS OF DECEMBER 31, SEPTEMBER 30, ------------------------------------------------------------- ------------- PREDECESSOR ECLIPSYS ----------------------------------------- --------------------------------- 1993 1994 1995 1996 1996 1997 1998 -------- -------- -------- -------- ------ -------- ------------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents................ $ 2,808 $ 1,672 $ 2,599 $ 2,022 $4,589 $ 4,786 $ 12,309 Working capital (deficit)................ (4,756) (8,561) (3,923) (9,558) 3,956 (31,504) (8,574) Total assets............................. 56,411 70,338 88,381 100,443 5,740 106,765 121,691 Debt, including current portion.......... 1,983 810 260 86 -- 16,588 -- Mandatorily Redeemable Preferred Stock... -- -- -- -- -- 35,607 -- Shareholders' equity (deficit)........... (29,310) (23,633) (23,011) (25,387) 4,801 (18,321) 38,567 --------------- (1) The acquisitions of Alltel (the "Alltel Acquisition"), SDK Medical Computer Services Corporation ("SDK") (the "SDK Acquisition") and the North American operations of the Emtek Healthcare Systems division of Motorola, Inc. ("Emtek") in January 1998 (the "Emtek Acquisition") were accounted for using the purchase method of accounting and accordingly the statement of operations data of Eclipsys for 1997 and 1998 reflect the results of operations from these businesses from the respective acquisition dates. (2) Includes a write-off of $1.5 million related to licensed technology acquired from Partners that was not technologically feasible at the time of the transaction. See Note 4 of Notes to the Eclipsys Consolidated Financial Statements. (3) In connection with the Alltel and SDK Acquisitions, Eclipsys wrote off in-process research and development of $92.2 million and $7.0 million, respectively, reflecting the appraised values of certain in-process research and development acquired in these acquisitions in 1997. See Note 6 of Notes to the Eclipsys Consolidated Financial Statements. (4) In connection with the buyout in the first quarter of 1998 of Eclipsys' obligations under a Management and Services Agreement (the "MSA") entered into in connection with the Alltel Acquisition (the "MSA Buyout"), Eclipsys recorded a charge of $7.2 million in 1998. See "Certain Transactions Relating to Eclipsys" and Note 13 of Notes to the Eclipsys Consolidated Financial Statements. (5) Eclipsys has not recorded any benefit for income taxes because management believes, based on the evidence available at December 31, 1997 and September 30, 1998, it is more likely than not that Eclipsys' net deferred tax assets will not be realized. Accordingly, Eclipsys has recorded a valuation allowance against its total net deferred tax assets. (6) Represents the charge related to the January 1997 issuance of Series F Convertible Preferred Stock of Eclipsys in exchange for the cancellation of Series A Convertible Preferred Stock. (7) See Note 2 of Notes to Eclipsys Consolidated Financial Statements. (8) Represents earnings before interest expense, income tax expense, depreciation and amortization and nonrecurring charges ("EBITDA"). EBITDA is not a measurement in accordance with generally accepted accounting principles in the United States ("GAAP" or "U.S. GAAP") and should not be considered an alternative to, or more meaningful than, income from operations, net income or cash flows as defined by GAAP or as a measure of Eclipsys' profitability or liquidity. All registrants do not calculate EBITDA in the same manner and accordingly, EBITDA may not be comparable with other registrants. Eclipsys has included information concerning EBITDA herein because management believes EBITDA provides useful information. 18
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SELECTED CONSOLIDATED FINANCIAL DATA FOR TSI The selected consolidated statement of operations data of TSI for the years ended September 30, 1996, 1997 and 1998 and the selected consolidated balance sheet data of TSI at September 30, 1997 and 1998 are derived from, and are qualified by reference to, TSI's audited consolidated financial statements, which appear elsewhere in this document. The selected consolidated statement of operations data of TSI for the years ended September 30, 1994 and 1995 and the selected consolidated balance sheet data of TSI at September 30, 1994, 1995 and 1996 are derived from audited financial statements of TSI not included in this document. The selected consolidated statement of operations data for the nine-month periods ended June 30, 1997 and 1998 and the selected consolidated balance sheet data of TSI at such dates are derived from unaudited financial statements of TSI, which appear elsewhere in this document, and in the opinion of management of TSI, include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial data for such periods. The results of operations of TSI for the nine months ended June 30, 1998 are not necessarily indicative of the results to be expected for the full year or for any future period. TSI has never declared or paid cash dividends on the TSI Voting or Non-Voting Common Stock. [Enlarge/Download Table] NINE MONTHS ENDED FISCAL YEAR ENDED SEPTEMBER 30, JUNE 30, ----------------------------------------------- ----------------- 1994 1995 1996 1997 1998 1997 1998 ------- ------- ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues.................................. $24,497 $27,386 $34,269 $44,565 $43,951 $30,875 $33,946 Income before income taxes and extraordinary items..................... 8,521 9,975 10,611 12,948 14,762 12,546 11,897 Provision for income taxes................ 3,407 4,349 4,324 7,629 5,905 5,018 4,759 Income before extraordinary item.......... 5,114 5,626 6,287 5,319 8,857 7,528 7,138 Extraordinary item: Loss on early extinguishment of debt.... -- -- 2,149 -- -- -- -- Net income................................ 5,114 5,626 4,138 5,319 8,857 7,528 7,138 Series A non-voting preferred stock dividends............................... -- -- 593 -- -- -- -- Net income allocable to common stockholders............................ 5,114 5,626 3,545 5,319 8,857 7,528 7,138 Net income allocable to common stockholders per share: Basic................................... $ 0.19 $ 0.27 $ 0.31 $ 0.49 $ 0.43 $ 0.39 Diluted................................. $ 0.19 $ 0.22 $ 0.27 $ 0.43 $ 0.38 $ 0.35 Weighted average shares: Basic................................... 30,060 13,214 17,435 18,210 17,333 18,153 Diluted................................. 30,060 16,137 19,977 20,394 19,900 20,459 BALANCE SHEET DATA (END OF PERIOD): Total assets.............................. $20,274 $27,737 $74,284 $89,819 $99,864 $86,562 $97,814 Working capital........................... 8,207 14,207 55,672 63,569 73,548 59,766 71,275 Long-term debt............................ -- -- 21 -- -- -- -- Stockholders' equity...................... 10,566 16,192 60,633 73,519 84,272 70,987 81,720 19
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SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA REFLECTING THE MERGER The following selected unaudited pro forma combined financial information has been derived from and should be read in conjunction with the Unaudited Pro Forma Condensed Combined Financial Statements and notes thereto included elsewhere in this Joint Proxy Statement/Prospectus. The following selected unaudited pro forma combined financial information reflects adjustments to the historical consolidated balance sheets and related historical statements of income of Eclipsys and TSI to give effect to the Merger, using the pooling-of-interests method of accounting for business combinations, and to certain other acquisitions by TSI and Eclipsys. Eclipsys' consolidated financial statements for its fiscal years ended December 31 have been combined with TSI's consolidated financial statements for its fiscal years ended September 30. Eclipsys' unaudited consolidated financial statements for the nine months ended September 30 have been combined with TSI's unaudited consolidated financial statements for the nine months ended June 30. The pro forma combined financial data is not necessarily indicative of the operating results or financial position that would have been achieved if the Merger had been consummated as of the beginning of the periods presented, nor is it necessarily indicative of the future operating results or financial position of the combined company. The pro forma information does not reflect any costs associated with the integration and consolidation of the companies anticipated by the management of Eclipsys as a result of the Merger. [Enlarge/Download Table] YEARS ENDED DECEMBER 31, NINE MONTHS ------------------------------ ENDED 1995 1996 1997 SEPTEMBER 30, 1998 ------- ------- -------- ------------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) COMBINED STATEMENT OF OPERATIONS DATA: Total revenues............................... $27,386 $34,269 $179,743 $141,410 Income (loss) before extraordinary item available to common stockholders(1)........ 5,626 2,741 (68,696) (13,875) Income (loss) per share before extraordinary item available to common stockholders(1): Basic...................................... $ 0.36 $ 0.28 $ (2.39) $ (0.47) Diluted.................................... $ 0.36 $ 0.24 $ (2.39) $ (0.47) Weighted average shares: Basic...................................... 15,781 9,959 28,791 29,335 Diluted.................................... 15,781 11,494 28,791 29,335 [Download Table] SEPTEMBER 30, 1998 ------------------ (IN THOUSANDS) COMBINED BALANCE SHEET DATA: Cash and cash equivalents................................... $ 52,450 Working capital............................................. 32,908 Total assets................................................ 226,305 Shareholders' equity........................................ 117,834 --------------- (1) Represents, for each period other than the year ended December 31, 1996, income (loss) available to common stockholders. For the year ended December 31, 1996, represents income before extraordinary item, after reflecting accretion of $593,000 of dividends on Series A non-voting preferred stock. In the year ended December 31, 1996, TSI recorded as an extraordinary item a loss on early extinguishment of debt of $2.1 million, attributable to the prepayment of certain debt in connection with TSI's initial public offering. The pro forma combined income available to common stockholders and income per share for such period, giving effect to the extraordinary item, are $592,000, $0.06 per share (basic) and $0.05 per share (diluted), respectively. 20
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COMPARATIVE PER SHARE DATA The following tables set forth certain historical per share data of Eclipsys and TSI and combined per share data on an unaudited pro forma basis after giving effect to the Merger, on a pooling-of-interests basis (and assuming the issuance of 0.525 shares of Eclipsys Voting Common Stock in the Merger in exchange for each share of TSI Voting and Non-Voting Common Stock). This data should be read in conjunction with the selected historical consolidated financial data, the Unaudited Pro Forma Condensed Combined Financial Statements, including the notes thereto, and the separate historical consolidated financial statements appearing elsewhere in this document. The pro forma combined financial data is not necessarily indicative of the operating results or financial position that would have been achieved if the Merger had been consummated as of the beginning of the periods presented, nor is it necessarily indicative of the future operating results or financial position of Eclipsys. Neither Eclipsys nor TSI has paid cash dividends on its Voting or Non-Voting Common Stock. The pro forma data does not reflect any costs associated with the integration and consolidation of the companies anticipated by the management of Eclipsys as a result of the Merger. [Enlarge/Download Table] YEAR ENDED DECEMBER 31, NINE MONTHS ------------------------ ENDED 1995 1996 1997 SEPTEMBER 30, 1998 ----- ------ ------- ------------------- ECLIPSYS: Income (loss) before extraordinary item: Historical (basic and diluted)................. $ -- $(0.98) $(39.73) $(3.41) Pro forma(1): Basic....................................... 0.36 0.28 (2.39) (0.47) Diluted..................................... 0.36 0.24 (2.39) (0.47) Book value (deficit): Historical..................................... (5.20) 4.74 Pro forma(1)................................... 4.02 [Enlarge/Download Table] YEAR ENDED SEPTEMBER 30, NINE MONTHS ------------------------ ENDED 1995 1996 1997 JUNE 30, 1998 ----- ------ ------- ------------------- TSI: Income (loss) before extraordinary item available to common stockholders(2): Historical: Basic....................................... $0.19 $ 0.43 $ 0.31 $ 0.39 Diluted..................................... 0.19 0.35 0.27 0.35 Equivalent pro forma(3): Basic....................................... 0.19 0.15 (1.25) (0.25) Diluted..................................... 0.19 0.13 (1.25) (0.25) Book value: Historical..................................... 4.22 4.50 Equivalent pro forma(3)........................ 2.11 --------------- (1) Represents the unaudited pro forma combined income (loss) before extraordinary item and unaudited pro forma combined book value of Eclipsys and TSI. See Note 1 of "Selected Unaudited Pro Forma Combined Financial Data Reflecting the Merger" and "Unaudited Pro Forma Condensed Consolidated Financial Statements." (2) Represents, for each period other than the year ended December 31, 1996, income (loss) available to common stockholders. For the year ended December 31, 1996, represents income before extraordinary item, after reflecting accretion of $593,000 of dividends on Series A non-voting preferred stock. (3) Represents the unaudited pro forma amounts for Eclipsys set forth above, multiplied by the 0.525 Exchange Ratio. 21
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF ECLIPSYS Eclipsys was formed in December 1995, but had no significant operations until 1997. As a result, the following discussion as it relates to 1995 and 1996 reflects the operations of Alltel, which was Eclipsys' predecessor, acquired by Eclipsys in January 1997. The discussion as it relates to 1997 reflects the operations of Eclipsys for 1997, which included only 11 months of Alltel operations. In addition to the Alltel Acquisition, Eclipsys completed the SDK Acquisition in June 1997 and the Emtek Acquisition in January 1998. As a result, the following discussion regarding period-to-period comparisons may not be indicative of future results. The Alltel Acquisition, the SDK Acquisition and the Emtek Acquisition are referred to collectively as the "Eclipsys Acquisitions." OVERVIEW Eclipsys is a healthcare information technology company delivering solutions that enable healthcare providers to achieve improved clinical, financial and administrative outcomes. Eclipsys offers an integrated suite of core products in four critical areas -- clinical management, access management, patient financial management and enterprise data warehouse and analysis. These products can be purchased in combination to provide an enterprise-wide solution or individually to address specific needs. These solutions take many forms and can include a combination of software, hardware, maintenance, consulting services, remote processing services, network services and information technology outsourcing. Founded in 1995, Eclipsys has grown to its current position primarily through a series of strategic acquisitions completed since January 1997. In May 1996, Eclipsys entered into an exclusive license agreement with Partners to develop, commercialize, distribute and support certain intellectual property relating to a clinical information systems software developed at Brigham & Women's Hospital (the "Partners License"). In connection with this license, Eclipsys issued to Partners 988,290 shares of Eclipsys Voting Common Stock. In January 1997, Eclipsys 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 (which was redeemed at the time of the initial public offering) and Series D Convertible Preferred Stock (which was converted into shares of Eclipsys Voting Common Stock at the time of the initial public offering) and the assumption of certain liabilities. The acquisition was accounted for as a purchase, and Eclipsys recorded total intangible assets of $154.3 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 and $9.0 million of goodwill. Eclipsys wrote off the acquired in-process 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 June 1997, Eclipsys 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 $7.6 million of subordinated promissory notes (the "SDK Notes") and Eclipsys Voting Common Stock. The acquisition was accounted for as a purchase, and Eclipsys 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. Eclipsys 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, Eclipsys acquired Emtek from Motorola, Inc. ("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 Eclipsys recorded total intangible assets of $4.1 million, consisting of acquired technology which is being amortized over five years. 22
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In April 1998, Eclipsys made a strategic minority investment in Simione Central Holdings, Inc. ("Simione"), purchasing approximately 4.9% of Simione's outstanding common stock from certain stockholders of Simione for approximately $5.6 million (the "Simione Investment"). In connection with this investment, Eclipsys received the right to designate one member for election to Simione's board of directors and an option, which expired unexercised in October 1998, to purchase up to an additional 4.9% of Simione's common stock under certain circumstances. Concurrently with the Simione Investment, Eclipsys and Simione entered into a Remarketing Agreement pursuant to which Eclipsys has certain rights to distribute Simione software products. Simione is a provider of home healthcare consulting solutions and information systems. The write-off of acquired in-process research and development of $92.2 million and $7.0 million associated with the Alltel Acquisition and the SDK Acquisition, respectively, together with the amortization of acquisition-related intangible assets of $25.3 million, accounted for $124.5 million of Eclipsys' $131.1 million net loss in 1997. See "-- Acquired In-Process Research and Development." 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. Eclipsys' products and services are generally sold to customers pursuant to contracts which range in duration from five to seven years. For contracts in which Eclipsys is required to make significant production, modification or customization changes, revenues from systems and services are recognized using the percentage-of-completion method over the implementation period of the contracts. Other systems and services revenues are generally recognized on a straight-line basis over the term of licensing and maintenance agreements. 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 product to the customer. Eclipsys' revenues can vary from quarter to quarter due to a number of factors. See "Risk Factors -- Potential Fluctuations in Quarterly Performance." COST 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 Eclipsys 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. Eclipsys recorded amortization expenses related to acquired technology from the Alltel and SDK Acquisitions of $19.7 million in 1997, and expects to record additional acquired technology amortization from the Acquisitions of approximately $14.8 million, $10.2 million and $2.1 million in 1998, 1999 and 2000, respectively. No capitalized software development costs were amortized in 1997. 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 23
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and related communications. As Eclipsys continues to implement its growth strategy, marketing and sales expenses are expected to continue to increase on an absolute basis. 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 Eclipsys. Eclipsys capitalizes internal software development costs subsequent to attaining technological feasibility. Such costs are amortized as an element of cost of revenues annually over three to five years either on a straight line basis or, if greater, based on the ratio that current revenues bear to total anticipated revenues for the applicable product. Eclipsys expects to continue to increase research and development spending on an absolute basis as it migrates its products to the SOLA architecture. 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 Eclipsys implements its business plan, general and administrative expenses are expected to continue to increase on an absolute basis. DEPRECIATION AND AMORTIZATION Eclipsys 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 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. Eclipsys recorded amortization expenses for acquisition-related intangible assets of $5.7 million in 1997. TAXES As of December 31, 1997, Eclipsys had operating loss carryforwards for federal income tax purposes of $20.1 million. The carryforwards expire in varying amounts through 2012 and are subject to certain restrictions. Based on evidence then available, Eclipsys did not record any benefit for income taxes at December 31, 1997, because management believed it was more likely than not that Eclipsys would not realize its net deferred tax assets. Accordingly, Eclipsys has recorded a valuation allowance against its total net deferred tax assets. RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1997 Total revenues increased 44.8% from $67.5 million for the first nine months of 1997 to $97.7 million for the first nine months of 1998. Systems and services revenues increased by $24.1 million, or 37.3%, and hardware revenues increased by $6.2 million, or 206%. These increases were caused primarily by the inclusion in 1998 of nine full months of the operations of Alltel, as compared to only eight months in 1997, as well as the inclusion in 1998 of nine months of operations of SDK and eight months of operations of Emtek, which were not included in the results of operations in the first nine months of 1997. 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 successful integration of the acquisitions completed in 1997 and 1998. Total cost of revenues increased 4.8% from $58.2 million, or 86.2% of total revenues, in the first nine months of 1997 to $61.0 million, or 62.4% of total revenues, in the first nine months of 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 Eclipsys Acquisitions. The reduction in total cost of revenues as a 24
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percentage of total revenues was due to the relatively small increase in costs compared to the increase in revenues. Marketing and sales expenses increased 41.1% from $9.9 million, or 14.6% of total revenues, in the first nine months of 1997 to $13.9 million, or 14.3% of total revenues, in the first nine months of 1998. The increase was due primarily to the addition of marketing and direct sales personnel following the Eclipsys Acquisitions and the regional realignment of Eclipsys' sales operations. Total expenditures for research and development, including both capitalized and non-capitalized portions, increased by 73.0% from $12.7 million, or 18.8% of total revenues, in the first nine months of 1997 to $22.0 million, or 22.5% of total revenues, in the first nine months of 1998. The increase was due primarily to the inclusion in 1998 of nine full months of the operations of Alltel and SDK as well as eight months of Emtek operations, as well as the continued development of an enterprise-wide, client server platform solution. Research and development expenditures of $698,000 were capitalized in the first nine months of 1997 and $2.7 million were capitalized in the first nine months of 1998. The capitalization of software development costs in 1998 was due primarily to product development activities related to technology acquired in the Eclipsys Acquisitions. As a result of this activity, research and development expense increased 60.7% from $12.0 million in the first nine months of 1997 to $19.3 million in the first nine months of 1998. General and administrative expenses increased by $437,000, or 10.5%, from $4.1 million, or 6.1% of total revenues, in the first nine months of 1997 to $4.6 million, or 4.7% of total revenues, in the first nine months of 1998. The increase was due primarily to the addition of administrative and finance personnel following the Eclipsys Acquisitions. Depreciation and amortization expense increased by 8.8% from $7.3 million, or 10.8% of total revenues, in the first nine months of 1997 to $7.9 million, or 8.1% of total revenues, in the first nine months of 1998. The increase was due primarily to the amortization of ongoing customer relationships and goodwill related to the Eclipsys 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. Eclipsys recorded a $7.2 million charge in the first nine months of 1998 related to the MSA Buyout. In the first nine months of 1997, Eclipsys recorded a charge of $99.2 million related to the write-off of in-process research and development attributable to the Alltel and SDK Acquisitions. As a result of the foregoing, net loss decreased from $123.9 million in the first nine months of 1997 to $16.8 million in the first nine months of 1998. 1997 COMPARED TO 1996 In the period-to-period comparison below, the 1997 results reflect the operations of Eclipsys and the 1996 results reflect the operations of its predecessor, Alltel. Following the Alltel and SDK Acquisitions in 1997, Eclipsys' efforts and resources were focused on integrating the acquisitions into its operations. Particular emphasis was placed on retaining customers and integrating the acquired products into Eclipsys' systems and services offerings in order to position Eclipsys for future business opportunities. These efforts included refocusing Eclipsys' research and development operations, realigning the sales departments and reducing general and administrative overhead. As a result, Eclipsys did not actively seek to exploit new business opportunities during 1997. Eclipsys believes that the investment of time and resources in improving the internal structure of Eclipsys and the integration of its acquisitions have positioned Eclipsys to capitalize on business opportunities in the future. Total revenues decreased by $14.7 million, or 13.5%, from $108.8 million in 1996 to $94.1 million in 1997. This decrease was caused primarily by the inclusion in 1997 of only eleven full months of the operations of Alltel, as well as a reduction in revenues from hardware sales of $5.2 million, offset in part by the inclusion of $3.5 million in revenues attributable to SDK. In addition, in accounting for the Alltel Acquisition, Eclipsys reduced deferred revenue by $7.3 million to reflect the estimated fair value of certain 25
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contractual obligations. This accounting adjustment had the effect of reducing revenues by $4.5 million in 1997 compared to 1996 revenues. Eclipsys does not expect the deferred revenue adjustment to materially impact future periods. Adding Alltel results for the 23 days from January 1, 1997 to the closing of the Alltel Acquisition, 1997 total revenues would have been $100.3 million. Total cost of revenues increased by $6.8 million, or 9.5%, from $71.5 million, or 65.7% of total revenues, in 1996 to $80.0 million, or 85.1% of total revenues, in 1997. The increase was due primarily to a $19.7 million increase in amortization of acquired technology and $2.2 million of amortization of the value of the MSA. This increase was offset, in part, by a $7.2 million decrease in amortization of capitalized software costs, as no software costs were amortized in 1997. Further offsetting the increase were the timing of the Alltel Acquisition and the reduction in hardware sales. Adding Alltel results for the period prior to the Alltel Acquisition, total cost of revenues in 1997 would have been $84.4 million. Marketing and sales expenses increased by $2.6 million, or 23.2%, from $11.1 million, or 10.2% of total revenues, in 1996 to $13.7 million, or 14.5% of total revenues, in 1997. The increase was due primarily to the addition of marketing and direct sales personnel as part of Eclipsys' investment in its marketing and sales operations following the Alltel and SDK Acquisitions. This increase was offset in part by the timing of the Alltel Acquisition. Adding Alltel results for the period prior to the Alltel Acquisition, 1997 marketing and sales expenses would have been $14.3 million. Total expenditures for research and development, including both capitalized and non-capitalized portions, decreased by $5.1 million, or 22.9%, from $22.4 million, or 20.6% of total revenues in 1996 to $17.3 million, or 18.4% of total revenues, in 1997. These amounts exclude amortization of previously capitalized expenditures, which are recorded as cost of revenues. The decrease was due primarily to the refocusing of Eclipsys' research and development organization, and, to a lesser extent, the timing of the Alltel Acquisition. The portion of research and development expenditures that were capitalized decreased by $10.6 million, from $12.2 million in 1996 to $1.6 million in 1997. The reduction in capitalized software development costs was due primarily to Eclipsys' emphasis on enhancing existing technology acquired in the Alltel and SDK Acquisitions, the costs of which were expensed as incurred. As a result of this emphasis, research and development expense increased $5.4 million, or 53.0%, from $10.3 million in 1996 to $15.7 million in 1997. Adding Alltel results for the period prior to the Alltel Acquisition, 1997 research and development expenses would have been $16.5 million. General and administrative expenses decreased by $1.4 million, or 20.1%, from $7.1 million, or 6.5% of total revenues, in 1996 to $5.7 million, or 6.0% of total revenues, in 1997. The decrease was due primarily to the timing of the Alltel Acquisition, as well as savings generated by the rationalization of Eclipsys' administrative, financial and legal organizations. Adding Alltel results for the period prior to the Alltel Acquisition, 1997 general and administrative expense would have been $6.3 million. Depreciation and amortization expense increased by $1.6 million, or 19.4%, from $8.1 million, or 7.5% of total revenues, in 1996 to $9.7 million, or 10.5% of total revenues, in 1997. The increase was due primarily to the amortization of the value of ongoing customer relationships and goodwill related to the Alltel and SDK Acquisitions. Adding Alltel results for the period prior to the Alltel Acquisition, 1997 depreciation and amortization expense would have been $10.3 million. Write-offs of acquired in-process research and development of $99.2 million were recorded in 1997, of which $92.2 million was attributable to the Alltel Acquisition and $7.0 million was attributable to the SDK Acquisition. There were no write-offs recorded in 1996. As a result of the foregoing factors, net loss increased from $2.2 million in 1996 to $131.1 million in 1997. 26
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1996 COMPARED TO 1995 The period-to-period comparison below reflects the operations of Eclipsys' predecessor, Alltel, for 1996 and 1995. Total revenues increased by $8.7 million, or 8.7%, from $100.1 million in 1995 to $108.8 million in 1996. This increase was caused primarily by increases in revenues related to outsourcing contracts. Total cost of revenues increased by $10.2 million, or 16.5%, from $61.3 million, or 61.3% of total revenues, in 1995 to $71.5 million, or 65.7% of total revenues, in 1996. The increase was due primarily to increases in staff related to outsourcing contracts. Marketing and sales expenses remained constant at $11.1 million in both periods, representing 11.1% of total revenues in 1995 and 10.2% of total revenues in 1996. Total expenditures for research and development, including both capitalized and non-capitalized portions, increased by $1.0 million, or 4.7%, from $21.4 million, or 21.4% of total revenues, in 1995 to $22.4 million, or 20.6% of total revenues, in 1996. These amounts exclude amortization of previously capitalized expenditures, which are recorded as cost of revenues. The increase was due primarily to wage increases for research and development personnel. The portion of research and development expenditures that were capitalized decreased by $735,000, from $12.9 million in 1995 to $12.2 million in 1996. General and administrative expenses decreased by $1.1 million, or 13.1%, from $8.2 million, or 8.2% of total revenues, in 1995 to $7.1 million, or 6.5% of total revenues, in 1996. The decrease was due primarily to a $1.0 million decrease in legal fees. Depreciation and amortization expenses increased by $1.4 million, or 20.8%, from $6.7 million, or 6.7% of total revenues, in 1995 to $8.1 million, or 7.5% of total revenues, in 1996. The increase was due primarily to depreciation of computer equipment acquired for research and development purposes. As a result of the foregoing factors, net income was $606,000 in 1995 and net loss was $2.2 million in 1996. ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT OVERVIEW In connection with the Alltel and SDK Acquisitions, Eclipsys wrote off in-process research and development totaling $92.2 million and $7.0 million, respectively. These amounts were expensed as non-recurring charges on the respective acquisition dates. These write-offs were necessary because the acquired technology had not yet reached technological feasibility and had no future alternative uses. Eclipsys 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. Eclipsys anticipates that certain products using the acquired in-process technology will be generally released before the end of 1998, with additional product releases in subsequent periods through 2001. Eclipsys expects that the acquired in-process research and development will be successfully developed, but there can be no assurance that commercial viability of these products will be achieved. The 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 27
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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 Eclipsys 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 are 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 reflects 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. To date, revenues and operating profit attributable to in-process technology have been adversely impacted by the deferral of one outsourcing contract that had been approved but not finalized at the time the projections were completed. Although it was successful in contracting outsourcing business in 1997, Eclipsys decided in late March 1997 to focus its efforts on integrating the products acquired in the Acquisitions and lower its sales efforts in the outsourcing arena. In late 1997, Eclipsys reorganized the outsourcing operations and began to refocus on selling such services in the first quarter of 1998. Revenue attributable to the deferred contract is expected to be realized in 1999. 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 Eclipsys, 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 28
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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%). Eclipsys 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. Eclipsys 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. Eclipsys 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 marketplace. 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 are 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 operating profit ranged from approximately $250,000 to $8 million over the term of the projections. To date, 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. Eclipsys 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. Eclipsys 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). LIQUIDITY AND CAPITAL RESOURCES For purposes of the following discussion, cash flow data for 1997 and the first nine months of 1998 relate to Eclipsys and cash flow data for 1995 and 1996 relate to Alltel. Eclipsys was formed in December 1995 and has grown primarily through a series of acquisitions completed since January 1997. Eclipsys' principal sources of liquidity have been equity capital contributions, borrowings from commercial lenders and cash provided by operating activities. The funds 29
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generated by these sources have been applied primarily to acquisitions and research and development activities. Cash provided by operating activities totaled $3.3 million and $15.2 million in the nine months ended September 30, 1997 and 1998, respectively. The increase in cash provided by operating activities was the result of increased business activity and the reduction in certain expenses related to integrating the Eclipsys Acquisitions. Cash provided by financing activities totaled $113.8 million and $20.1 million in the nine months ended September 30, 1997 and 1998, respectively. The 1997 period included the issuance of $103.8 million of Preferred Stock in connection with the Alltel Acquisition, which was subsequently converted into Eclipsys Voting Common Stock at the time of Eclipsys' initial public offering in August 1998 (the "Eclipsys IPO"). Cash used by investing activities totaled $111.8 million and $27.8 million in the nine months ended September 30, 1997 and 1998, respectively. The 1997 period included $109.0 million applied to the Alltel and SDK Acquisitions. As of September 30, 1998, Eclipsys had $12.3 million of cash and cash equivalents. Cash provided by operating activities totaled $15.9 million, $15.9 million and $1.1 million in 1995, 1996 and 1997, respectively. The decrease in cash provided by operating activities from 1996 to 1997 was primarily the result of a greater portion of research and development being expensed as incurred, rather than being capitalized. Cash provided by financing activities totaled $5.5 million, $11.9 million and $112.8 million in 1995, 1996 and 1997, respectively. The increase from 1996 to 1997 was primarily the result of $103.8 million of proceeds from the issuance of Preferred Stock concurrently with the Alltel Acquisition. Cash used by investing activities totaled $20.5 million, $28.2 million and $113.7 million in 1995, 1996 and 1997, respectively. The increase in cash used by investing activities from 1996 to 1997 was the result of $109.0 million applied to the Alltel and SDK Acquisitions, offset in part by a $10.6 million reduction in capitalization of software development costs. Eclipsys invested $7.7 million, $9.2 million and $3.1 million in computer equipment, leasehold improvements and other capital assets in 1995, 1996 and 1997, respectively. Eclipsys also incurred $21.4 million, $22.4 million and $17.3 million in research and development costs in 1995, 1996 and 1997. Eclipsys expects that the combined company will invest approximately $6 million and $45 million in capital expenses and research and development, respectively, through the end of 1999. In January 1997, Eclipsys entered into a $30 million credit facility, consisting of a $10 million term loan (the "Term Loan") and a $20 million revolving loan (the "Revolver"). The Term Loan and the Revolver are secured by substantially all of Eclipsys' assets, and bear interest at a variable rate. See Note 7 of Notes to Eclipsys' Consolidated Financial Statements. In January 1998, the Term Loan was repaid with the proceeds of the issuance of Preferred Stock, which was subsequently converted into Eclipsys Voting Common Stock at the time of the Eclipsys IPO. In March 1998, pursuant to the MSA Buyout, Eclipsys paid AIS $14.0 million. Of this payment, $9.0 million was funded through borrowings under the Revolver. In April 1998, Eclipsys borrowed an additional $5.6 million under the Revolver to fund its investment in Simione. In May 1998, the Revolver was amended to increase the borrowing limit to $50.0 million, under substantially similar terms and conditions as contained in the original credit facility. As of September 30, 1998, the effective interest rate for the Revolver was 6.7% and the amount available for borrowing thereunder was $50.0 million. In March 1998, pursuant to the renegotiation in the first quarter of 1998 of certain matters relating to the Alltel Acquisition (the "Alltel Renegotiation"), AIS returned to Eclipsys 11,000 shares of Redeemable Preferred Stock for cancellation. As part of this transaction, AIS agreed that no dividends would accrue on the remaining 4,500 shares of Redeemable Preferred Stock held by it until July 1, 1998. Eclipsys redeemed the full $34.5 million face value of the outstanding Redeemable Preferred Stock and all accrued dividends with a portion of the proceeds from the Eclipsys IPO. A charge to additional paid-in capital was recorded in the quarter ended September 30, 1998 (the period in which the redemption occurred) equal to the difference between the redemption price of the Redeemable Preferred Stock and its carrying amount ($10.9 million). In addition, this charge resulted in an increase in net loss available to common stockholders in the statement of operations for the quarter. 30
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In August 1998, Eclipsys completed the Eclipsys IPO, selling an aggregate of 4,830,000 shares of Eclipsys Voting Common Stock and realizing approximately $66.0 million in net proceeds, after deducting underwriting discounts and commissions and expenses of the offering payable by Eclipsys. Of these net proceeds, Eclipsys used (i) approximately $38.8 million to redeem all outstanding Redeemable Preferred Stock, including $4.3 million of accrued dividends, (ii) approximately $3.9 million to repay the remaining balance of subordinated promissory notes issued in connection with the SDK Acquisition and (iii) approximately $18.5 million to repay the outstanding balance under the Revolver. Eclipsys believes that its existing cash balances, funds generated by operations and borrowings available under the Revolver will be sufficient to finance its operations for at least the next twelve months. However, to the extent acquisitions are completed or anticipated capital and operating requirements change, Eclipsys may be required to raise additional financing. There can be no assurance that, if needed, such financing would be available, or would be available on terms satisfactory to Eclipsys. YEAR 2000 ISSUES Eclipsys believes that all of its 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. Although all of the products currently offered by Eclipsys are Year 2000 compliant, some of the products previously sold by Alltel and Emtek and installed in Eclipsys' customer base are not Year 2000 compliant. Eclipsys has developed and tested solutions for its non-compliant installed products. Eclipsys currently estimates that the total cost of bringing these installed products into Year 2000 compliance, in those cases in which Eclipsys is required to do so at its own expense, will be approximately $900,000, all of which is expected to be incurred by mid-1999. In addition, because Eclipsys' products are often interfaced with a customer's existing third-party applications, 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. However, any unexpected difficulties in implementing Year 2000 solutions for the installed Alltel or Emtek products or difficulties in interfacing with third-party products could have a material adverse effect on Eclipsys' business, financial condition and results of operations. BACKLOG Backlog consists of revenues Eclipsys 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 services, or annual or monthly fees for licenses, maintenance, and outsourcing or remote processing services. As of December 31, 1997, Eclipsys had a backlog of approximately $108 million. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued FAS 130, "Reporting for Comprehensive Income" and 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, "Software Revenue Recognition." All three statements are effective for fiscal years beginning after December 15, 1997, and are not expected to have a material impact on Eclipsys' results of operations or financial condition. Effective January 1, 1998, Eclipsys adopted Statement of Position 97-2 and implemented FAS 130. 31
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF TSI This discussion and analysis contains certain forward-looking statements. These forward-looking statements represent TSI's beliefs, expectations and intentions concerning future events, including, without limitation, financial matters, plans and objectives of management for future operations, products and services, the future economic performance of TSI, and the assumptions underlying such beliefs, expectations and intentions. Such statements are not guaranties of future performance, and involve certain risks and uncertainties that could cause TSI's future results to differ materially from those expressed in any forward-looking statements made by or on behalf of TSI. Many of such factors are beyond TSI's ability to control or predict. Readers are accordingly cautioned not to place undue reliance on forward-looking statements. TSI disclaims any intent or obligation to update publicly any forward-looking statements, whether in response to new information, future events or otherwise. These forward-looking statements are further qualified by important factors that could cause actual results to differ materially from those in the forward-looking statements, including, without limitation, those discussed above under the heading "Risk Factors" at page 8, and in Item 1A, "Risk Factors," in TSI's Annual Report on Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended September 30, 1997. OVERVIEW TSI provides management information technology to hospitals, integrated delivery networks, physician groups and other health care organizations. Using TSI products, these organizations are able to increase efficiency, improve quality of care and lower the cost of care delivery. TSI product lines span the health care organization's information technology needs, providing data integration services, master person identifier solutions, disease management products and a clinical data repository as well as enterprise-wide financial, operational and clinical decision support. TSI was founded in 1985 and has been profitable in each fiscal year since 1987. TSI's revenues are derived from sales of software licenses and related implementation services and of software maintenance. The software and implementation revenues associated with the licensing and installation of TSI's products at an individual customer site typically range from $0.1 million to $1.2 million. Software maintenance contracts are sold separately at the time of the initial software license sale and are generally renewable annually. Annual software maintenance fees range from 15% to 18% of the initial software license fee for the product and provide a source of recurring revenue for TSI. Software and implementation revenues are accounted for using the percentage of completion method, and revenue is recognized as contract milestones are reached. The implementation process generally takes from three to twelve months. The length of time required to complete an implementation depends on many factors outside the control of TSI, including the state of the customer's existing information systems and the customer's ability to commit the personnel and other resources necessary to complete elements of the implementation process for which the customer is responsible. Revenue attributable to a contract milestone is recognized upon certification by the customer that the milestone has been met. As a result, TSI may be unable to predict accurately the amount of revenue it will recognize in any period in connection with the sale of its products. The payment terms of a contract may provide that the amount of the contract price that TSI is entitled to bill upon achievement of a milestone is less than the revenue recognized by TSI in connection with the achievement of that milestone. In such cases, the excess of the revenue recognized over the amount billed is included in accounts receivable as an "unbilled account receivable." Software maintenance fees, which are generally received annually in advance, are recorded as deferred revenue on TSI's balance sheet and are recognized as revenue ratably over the life of the contract. See Notes 2 and 3 of Notes to Consolidated Financial Statements of TSI. Cost of software and implementation revenue consists primarily of the cost of third-party software that is resold by TSI or included in TSI's products, personnel costs, the cost of related benefits, travel and living expenses, costs of materials and other costs related to the installation and implementation of TSI's 32
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products, and amortization of capitalized software development costs. Cost of maintenance revenue consists primarily of maintenance fees payable by TSI associated with the third-party software included in TSI's products and personnel costs incurred in providing maintenance and technical support services to TSI's customers. TSI's research and development expenses consist primarily of personnel-related costs, including employee salaries and benefits and payments to consultants. TSI capitalizes certain software development costs in accordance with Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed." Capitalized software costs are amortized over the life of the product (generally three years) and amounts amortized are included in cost of software and implementation revenue. Capitalized software as a percentage of total research and development expense has declined from 17.2% in fiscal 1996 to 15.3% in fiscal 1997 and 10.6% in fiscal 1998. In each of fiscal 1996, 1997 and 1998, TSI capitalized $0.7 million of software development costs, while amortization of capitalized software development costs in such years amounted to $0.8 million, $0.7 million and $0.7 million, respectively. In January 1996, TSI repurchased from New England Medical Center and the other stockholders of TSI 87.4% of the shares of common stock then issued and outstanding on a fully diluted basis for an aggregate purchase price of approximately $111.4 million (the "Recapitalization"). The principal purpose of this transaction was to provide liquidity for the existing stockholders of TSI while permitting them to retain an ownership interest in TSI. The transaction has been accounted for by TSI as a leveraged recapitalization. To finance the repurchase of these shares, TSI issued to Warburg, Pincus Ventures, L.P. and NationsBank Investment Corporation ("NIC") shares of preferred stock for an aggregate of $55.0 million. TSI also issued to NIC Senior Subordinated Notes in the aggregate principal amount of $10.0 million and a related warrant and made borrowings of $40.0 million under a term loan and a revolving credit facility. In April 1996, TSI completed an initial public offering of 6,900,000 shares of its common stock, which generated net proceeds of $114.4 million. The outstanding balance of these borrowings was repaid in full and all outstanding Series A non-voting preferred stock was redeemed upon the closing of the initial public offering. In July 1996, TSI acquired substantially all of the outstanding stock and a note held by a selling principal of Enterprising HealthCare, Inc. ("Enterprising HealthCare"), based in Tucson, Arizona, for a total purchase price of approximately $1.8 million in cash. Enterprising HealthCare provides system integration products and services for the health care market. The acquisition was accounted for under the purchase method with the results of Enterprising HealthCare included from the date of acquisition. Purchased technology costs of $1.6 million are being amortized on a straight-line basis over seven years. Pro forma results of operations have not been presented, as the effect of this acquisition on the financial statements was not material. In January 1997, TSI acquired a 19.5% ownership interest in HealthVISION for $6.0 million in cash. HealthVISION is a Santa Rosa, California provider of electronic medical record software. Its products include CareVISION, a patient-centered clinical data repository and lifetime patient record system, which is expected to constitute an integral component of TSI's Transition IV product. On December 3, 1998, TSI completed its acquisition of the remaining capital stock of HealthVISION not already owned by TSI. See "-- Subsequent Events" below. In September 1997, TSI acquired all the outstanding shares of Vital Software Inc. ("Vital"), a privately held developer of products that automate the clinical processes unique to medical oncology. The purchase price was approximately $6.3 million, which was comprised of $2.7 million in cash and 252,003 shares of TSI's common stock with a value of $3.6 million. The purchase price was allocated entirely to purchased research and development. See Note 16 of Notes to Consolidated Financial Statements of TSI. 33
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RESULTS OF OPERATIONS The following table sets forth certain revenue and expense data as a percentage of TSI's total revenues for each period presented: [Download Table] FISCAL YEAR ENDED SEPTEMBER 30, --------------------- 1996 1997 1998 ----- ----- ----- Revenues: Software and implementation............................... 72.5% 74.1% 68.8% Maintenance............................................... 27.5 25.9 31.2 ----- ----- ----- Total revenues.................................... 100.0 100.0 100.0 ----- ----- ----- Cost of revenues: Software and implementation............................... 21.4 23.2 28.1 Maintenance............................................... 9.2 6.4 6.7 Research and development.................................... 9.7 8.7 13.5 Sales and marketing......................................... 13.2 15.5 18.0 General and administrative.................................. 6.9 8.7 7.4 Compensation charge......................................... 8.8 -- -- Acquired in-process research and development................ -- 14.1 -- ----- ----- ----- Total operating expenses.................................... 69.2 76.6 73.7 Income from operations...................................... 30.8 23.4 26.3 Net interest income......................................... 0.2 5.6 7.3 Income before income taxes and extraordinary item........... 31.0 29.0 33.6 Provision for income taxes.................................. 12.6 17.1 13.4 ----- ----- ----- Net income before extraordinary item........................ 18.4 11.9 20.2 Extraordinary item: Loss on early extinguishment of debt, net of taxes........ 6.3 -- -- ----- ----- ----- Net income.................................................. 12.1 11.9 20.2 Series A non-voting preferred stock dividends............... 1.7 -- -- ----- ----- ----- Net income allocable to common stockholders................. 10.4% 11.9% 20.2% ===== ===== ===== FISCAL YEARS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997 REVENUES. TSI's total revenues decreased 1.4%, to $44.0 million in 1998 from $44.6 million in 1997. Software and implementation revenues decreased 8.5% to $30.2 million in 1998, compared to $33.0 million in 1997. The decrease in software and implementation revenue is primarily due to TSI's failure to achieve planned levels of new system bookings. New system bookings were adversely impacted by an overall lengthening of the sales cycle. TSI believes the sales cycle was adversely affected by Year 2000 problems in healthcare legacy systems, which caused delays in the acquisition of new systems due to resource constraints. In addition, consolidation among healthcare providers has caused a lengthening of the purchasing cycle of most healthcare organizations due to management shifts and more complex approval processes. Maintenance revenue grew 18.9% to $13.7 million in 1998, compared to $11.6 million in 1997, due to continued growth in TSI's installed base of customers. COST OF REVENUES. Cost of software and implementation revenue increased 20.0% to $12.4 million (or 40.9% of software and implementation revenue) in 1998, from $10.3 million (or 31.2% of software and implementation revenue) in 1997. The increase is primarily due to costs associated with additional implementation staff and professional consultants as well as increased royalty costs for third-party software. Cost of maintenance revenue increased 3.4% to $2.9 million (or 21.4% of maintenance revenue) in 1998 from $2.8 million (or 24.6% of maintenance revenue) in 1997. The increase in cost of maintenance 34
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revenue is primarily due to the increase in the number of technical support staff necessary to support the growth in TSI's installed base. RESEARCH AND DEVELOPMENT. Research and development expenses increased 53.0% to $5.9 million in 1998 from $3.9 million in 1997. Research and development expenses as a percent of total revenue also increased to 13.5% in 1998, compared to 8.7% in 1997. The increase is primarily due to an increase in staff and increased professional consulting expense to support new product development, including Transition IV and Vital Oncology, without a corresponding increase in revenue. SALES AND MARKETING. Sales and marketing expenses increased 14.2% to $7.9 million in 1998, from $6.9 million in 1997. Sales and marketing expenses as a percent of total revenue also increased to 18.0% in 1998 from 15.5% in 1997. The increase in spending is primarily associated with the growth of the sales organization and marketing programs to support the expanding product lines. GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased 16.5% to $3.2 million in 1998, from $3.9 million in 1997. General and administrative expenses as a percent of total revenue also decreased to 7.4% in 1998 from 8.7% in 1997. The decrease in spending is primarily due to a reduction in performance related compensation expenses during the year as a result of the decrease in revenue. ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. Acquired in-process research and development expense for 1997 includes a charge for purchased research and development of $6.3 million relating to the acquisition of Vital. NET INTEREST INCOME. Net interest income increased to $3.2 million in 1998 from $2.5 million in 1997. The increase in net interest income is attributable to the interest generated on higher cash balances during fiscal 1998. PROVISION FOR INCOME TAXES. TSI's effective income tax rate decreased to 40.0% in 1998 from 58.9% in 1997. The decrease was primarily due to the effect of the charge for in-process research and development associated with the acquisition of Vital, which was not deductible for tax purposes in fiscal year 1997. No such charge occurred in 1998. FISCAL YEARS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996 REVENUES. TSI's total revenues increased 30.0% to $44.6 million in 1997, from $34.3 million in 1996. Software and implementation revenues grew 32.8% to $33.0 million in 1997, compared to $24.9 million in 1996. The growth in software and implementation revenue is primarily due to sales to new TSI customers, increased consolidation among existing customers which resulted in the sale of additional site licenses, and the expansion of TSI's product line which resulted in increased product sales to existing customers. Maintenance revenue grew 22.7% to $11.5 million in 1997, compared to $9.4 million in 1996, due to continued growth in TSI's installed base of customers. COST OF REVENUES. Cost of software and implementation revenue increased 40.5% to $10.3 million (or 31.2% of software and implementation revenue) in 1997, from $7.3 million (or 29.5% of software and implementation revenue) in 1996. The dollar increase is primarily due to costs associated with additional implementation staff and professional consultants as well as increased royalty costs for third-party software. Cost of maintenance revenue decreased 10.4% to $2.8 million (or 24.6% of maintenance revenue) in 1997 from $3.2 million (or 33.6% of maintenance revenue) in 1996. The decrease in cost of maintenance revenue is primarily due to the reduced technical support necessary on mature products. RESEARCH AND DEVELOPMENT. Research and development expenses increased 17.0% to $3.9 million in 1997 from $3.3 million in 1996. The increase in spending is primarily a result of organizational changes which resulted in a net increase in the number of staff assigned to research and development roles. Research and development expenses as a percent of total revenue decreased slightly to 8.7% in 1997, compared to 9.7% in 1996. The decrease is primarily due to increased productivity from investments in technologies made in prior years and maturing of the core product lines. TSI expects that research and 35
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development expenses will increase as a percentage of revenue in future periods as new development projects are undertaken. SALES AND MARKETING. Sales and marketing expenses increased 53.6% to $6.9 million in 1997, from $4.5 million in 1996. Sales and marketing expenses as a percent of total revenue also increased to 15.5% in 1997 from 13.2% in 1996. The increase in spending is primarily due to additional staff and marketing programs as well as increased commission expense directly related to the growth in revenue. GENERAL AND ADMINISTRATIVE. General and administrative expenses increased 64.2% to $3.9 million in 1997, from $2.4 million in 1996. General and administrative expenses as a percent of total revenue also increased to 8.7% in 1997 from 6.9% in 1996. The increase in spending is primarily due to professional services and other costs associated with becoming a publicly traded company as well as additional administrative expenses related to Enterprising HealthCare, which was acquired in July 1996. COMPENSATION CHARGE. In fiscal 1996 TSI incurred a compensation charge of $3.0 million arising from its acquisition, in connection with the January 1996 Recapitalization, of shares of common stock issued to certain executive officers pursuant to the exercise of options. ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. Acquired in-process research and development expense includes a charge for purchased research and development of $6.3 million relating to the acquisition of Vital in September 1997. NET INTEREST INCOME. Net interest income increased to $2.5 million in 1997 from $0.1 million in 1996. The increase in net interest income is primarily due to the repayment out of the proceeds of TSI's initial public offering in April 1996 of debt incurred in the January 1996 Recapitalization and interest earned on cash balances generated from operations and the balance of the proceeds of TSI's initial public offering. PROVISION FOR INCOME TAXES. TSI's effective income tax rate increased to 58.9% in 1997 from 40.6% in 1996, primarily due to the effect of the charge for in-process research and development associated with the acquisition of Vital, which is not deductible for tax purposes. The tax rate for 1997 without the effect of the charge for in-process research and development was 39.7%. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1998, TSI had cash and cash equivalents of $38.7 million and short term investments of $27.3 million, an increase of $7.5 million from the amount at September 30, 1997. The increase in cash and cash equivalents and short term investments was comprised primarily of net cash provided by operating activities of $10.0 million. Net cash provided by operating activities in fiscal 1998 was generated primarily from net income. TSI has an unsecured revolving line of credit in the amount of $15 million. The credit facility contains covenants setting minimum net worth, maximum leverage ratio and minimum net income requirements for TSI. There have been no amounts drawn on this line. Advances under the revolving line of credit bear interest, at TSI's election, either at a "base rate" or at a "eurodollar rate." The base rate is a floating rate equal to the greater of (a) the prime rate or (b) the federal funds effective rate plus one-half of one percent (.50%). The eurodollar rate is equal to the sum of (x) a rate determined by reference to the then-current interbank offered rate for dollar-denominated eurodollar deposits, with certain adjustments, plus (y) one percent (1.0%). TSI believes available funds, cash generated from operations and its unused line of credit of $15 million will be sufficient to finance TSI's operations and planned capital expenditures for at least the next twelve months. There can be no assurance, however, that TSI will not require additional financing during that time or thereafter. 36
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YEAR 2000 ISSUES TSI's software license agreements generally contain warranties concerning the Year 2000 compliance of the licensed product. TSI has tested the products it has developed internally and believes that, with the exception of its Transition for Quality product (for which TSI expects to release a fully Year 2000 compliant version in early 1999), the current release of each of its internally developed products is Year 2000 compliant. TSI includes in its products certain software licensed from third-party vendors. TSI has not yet completed its evaluation of Year 2000 compliance of all such third-party software. For example, TSI has not yet verified that Uniface, licensed from Compuware Corporation, is Year 2000 compliant. In order to use TSI's products customers must themselves license software, including certain operating system and database management system software, from third-party vendors such as Microsoft Corporation and Oracle Corporation. Not all such third-party software may be fully Year 2000 compliant. For example, Microsoft Corporation has not certified that its Windows NT operating system is Year 2000 compliant. TSI has also evaluated the Year 2000 compliance of its critical internal software systems, including its financial, payroll and human resources systems and its telephone switch, and believes, based in part on certification from the vendors of such systems, that such systems are Year 2000 compliant. TSI does not expect to incur material costs in completing its Year 2000 assessment and remediation program. However, the discovery of previously undetected Year 2000 defects in TSI's products (including those licensed from third-party vendors), in third-party software required for customers to use TSI's products or in its internal software systems could damage TSI's business. Also, apprehension in the marketplace over Year 2000 compliance issues has led and may in the future lead businesses, including customers of TSI, 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. SUBSEQUENT EVENTS On October 29, 1998, TSI entered into the Merger Agreement pursuant to which a wholly-owned subsidiary of Eclipsys will be merged into TSI, with TSI becoming a wholly-owned subsidiary of Eclipsys. On December 3, 1998, TSI completed its acquisition of HealthVISION by acquiring the approximately 80.5% of the outstanding capital stock of HealthVISION not already owned by TSI for cash in the amount of $25.6 million plus assumed liabilities of $9.3 million, net of cash acquired, plus an earn-out of up to $10.8 million if specified financial milestones are met. The acquisition will be accounted for as a purchase. HealthVISION's total revenues for the year ended December 31, 1997 and for the nine-month period ended September 30, 1998, were approximately $9.2 million and $9.4 million, respectively. HealthVISION incurred net losses of $11.1 million and $6.0 million for such periods, respectively. At September 30, 1998, HealthVISION employed approximately 150 persons in seven offices in the United States, Canada and Australia. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which establishes standards for reporting and display of comprehensive income and its components (revenue, expenses, gains and losses) in a full set of general purpose financial statements. TSI will be required to adopt the standard in the first quarter of its 1999 fiscal year, and does not believe this statement will have a material effect on TSI's financial position or results of operations. In June 1997, the FASB issued Statement of Financial Accounting Standard No. 131 ("SFAS 131"), "Disclosure about Segments of an Enterprise and Related Information." Based on the management approach to segment reporting, SFAS No. 131 establishes requirements to report selected segment information quarterly and to report entity-wide disclosures about products and services, major customers 37
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and the countries in which the entity holds material assets and reports material revenue. TSI will be required to adopt the standard in the first quarter of its 1999 fiscal year, and does not believe this statement will have a material effect on TSI's financial disclosures. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133 ("SFAS 133") "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for such instruments. SFAS 133 is effective for fiscal years beginning after June 15, 1999. Currently, TSI has no such derivative holdings. On October 27, 1997, the AICPA Accounting Standards Executive Committee issued Statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition." SOP 97-2 supersedes Statement of Position 91-1, "Software Revenue Recognition," and provides guidance on when and in what amounts revenue should be recognized for the licensing, selling, leasing, or marketing of computer software. SOP 97-2 is effective for transactions beginning in the first quarter of TSI's 1999 fiscal year. TSI is analyzing the impact of the SOP which may cause a deferral of revenue. 38
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ECLIPSYS SPECIAL STOCKHOLDERS' MEETING GENERAL This Joint Proxy Statement/Prospectus is being furnished to holders of Eclipsys Voting Common Stock in connection with the solicitation of proxies by the Board of Directors of Eclipsys (the "Eclipsys Board") for use at the Eclipsys Special Stockholders' Meeting to be held on December 30, 1998, at the Delray Beach Marriott, 10 North Ocean Boulevard, Delray Beach, Florida 33444, commencing at 10:00 a.m., local time, and at any adjournment or postponement thereof. This Joint Proxy Statement/Prospectus and the accompanying forms of proxy are first being mailed to stockholders of Eclipsys on or about December 7, 1998. Eclipsys' management does not expect a representative from Eclipsys' accountants to attend the Eclipsys Special Stockholders' Meeting. MATTERS TO BE CONSIDERED At the Eclipsys Special Stockholders' Meeting, holders of Eclipsys Voting Common Stock will be asked to consider and vote upon the issuance of shares of Eclipsys Voting Common Stock in connection with the Merger. This matter is referred to as the "Eclipsys Voting Proposal." BOARD OF DIRECTORS' RECOMMENDATIONS The Eclipsys Board has, by unanimous vote of all directors present, approved the Merger and the Merger Agreement and recommends a vote FOR approval of the Eclipsys Voting Proposal. RECORD DATE AND VOTING Holders of record of shares of Eclipsys Voting Common Stock at the close of business on November 30, 1998 (the "Record Date") are entitled to notice of and to vote at the Eclipsys Special Stockholders' Meeting. At such date, there were 19,461,642 outstanding shares of Eclipsys Voting Common Stock, each of which is entitled to one vote at the Eclipsys Special Stockholders' Meeting, which shares were held by approximately 162 holders of record. The representation, in person or by properly executed proxy, of the holders of a majority of all of the shares of stock entitled to vote at the Eclipsys Special Stockholders' Meeting is necessary to constitute a quorum at the Eclipsys Special Stockholders' Meeting. The approval of the Eclipsys Voting Proposal will require the affirmative vote of the holders of a majority of the shares of Eclipsys Voting Common Stock present in person or represented by proxy and voting at the Eclipsys Special Stockholders' Meeting. Shares of Eclipsys Voting Common Stock, represented in person or by proxy, will be counted for the purpose of determining whether a quorum is present at the Eclipsys Special Stockholders' Meeting. Shares that abstain from voting as to a particular matter will be treated as shares that are present and entitled to vote at the Eclipsys Special Stockholders' Meeting for purposes of determining whether a quorum exists, but will not be counted as votes cast on such matter. If a broker or nominee holding stock in "street name" indicates on a proxy that it does not have discretionary authority to vote as to a particular matter ("broker non-votes"), those shares will be treated as present and entitled to vote at the Eclipsys Special Stockholders' Meeting for purposes of determining whether a quorum exists, but will not be counted as votes cast on such matter. Accordingly, in determining whether the Eclipsys Voting Proposal has received the requisite number of affirmative votes, abstentions and broker non-votes will have no effect on the voting on such proposal. Stockholders of Eclipsys who have voting control over outstanding shares of Eclipsys Voting Common Stock representing 53.8% of the votes that may be cast at the Eclipsys Special Stockholders' Meeting have irrevocably appointed TSI as proxy to vote all shares of Eclipsys Voting Common Stock held by such 39
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stockholders, in favor of the Eclipsys Voting Proposal at the Eclipsys Special Stockholders' Meeting. In addition, directors and executive officers of Eclipsys who, together with their affiliates, may be deemed to have voting control over approximately 5.6% of the outstanding shares of Eclipsys Voting Common Stock not covered by the Voting Agreements described in the previous sentence, have advised Eclipsys that they intend to vote or direct the vote of all shares of Eclipsys Voting Common Stock over which they have voting control for approval of the Eclipsys Voting Proposal. PROXIES This Joint Proxy Statement/Prospectus is being furnished to Eclipsys stockholders in connection with the solicitation of proxies by and on behalf of the Eclipsys Board for use at the Eclipsys Special Stockholders' Meeting, and is accompanied by a form of proxy. All shares of Eclipsys Voting Common Stock which are entitled to vote and are represented at the Eclipsys Special Stockholders' Meeting by properly executed proxies received prior to or at such meeting, and not revoked, will be voted at such meeting in accordance with the instructions indicated on such proxies. If no instructions are indicated (other than in the case of broker non-votes), such proxies will be voted for approval of the Eclipsys Voting Proposal. If any other matters are properly presented at the Eclipsys Special Stockholders' Meeting for consideration, including, among other things, consideration of a motion to adjourn such meeting to another time and/or place (including, without limitation, for the purpose of soliciting additional proxies), the persons named in the enclosed forms of proxy and acting thereunder will have discretion to vote on such matters in accordance with their best judgment. Any proxy given pursuant to this solicitation may be revoked by the person giving it at any time before it is voted. Proxies may be revoked by (i) filing with the Secretary of Eclipsys, at or before the taking of the vote at the Eclipsys Special Stockholders' Meeting, a written notice of revocation bearing a later date than the proxy, (ii) duly executing a later dated proxy relating to the same shares and delivering it to the Secretary of Eclipsys before the taking of the vote at the Eclipsys Special Stockholders' Meeting, or (iii) attending the Eclipsys Special Stockholders' Meeting and voting in person (although attendance at the Eclipsys Special Stockholders' Meeting will not in and of itself constitute a revocation of a proxy). Any written notice of revocation or subsequent proxy should be sent to Eclipsys Corporation, 777 East Atlantic Avenue, Suite 200, Delray Beach, Florida 33483, Attention: Secretary, or hand delivered to the Secretary of Eclipsys at or before the taking of the vote at the Eclipsys Special Stockholders' Meeting. All expenses of Eclipsys' solicitation of proxies, including the cost of preparing and mailing this Joint Proxy Statement/Prospectus to Eclipsys stockholders, will be borne by Eclipsys. In addition to solicitation by use of the mails, proxies may be solicited from Eclipsys stockholders by directors, officers and employees of Eclipsys in person or by telephone, facsimile or other means of communication. Such directors, officers and employees will not be additionally compensated, but may be reimbursed for reasonable out-of-pocket expenses in connection with such solicitation. In addition, Eclipsys has engaged MacKenzie Partners, Inc., a proxy solicitation firm, to assist in the solicitation of proxies for the Eclipsys Special Stockholders' Meeting. Such firm may solicit proxies in person or by means of telephone, facsimile or other means of communication. Such firm has been engaged on customary terms and fees paid to such firm will not be material. Arrangements will also be made with brokerage houses, custodians, nominees and fiduciaries for forwarding of proxy solicitation materials to beneficial owners of shares held of record by such brokerage houses, custodians, nominees and fiduciaries, and Eclipsys will reimburse such brokerage houses, custodians, nominees and fiduciaries for their reasonable expenses incurred in connection therewith. 40
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TSI SPECIAL STOCKHOLDERS' MEETING GENERAL This Joint Proxy Statement/Prospectus is being furnished to holders of TSI Voting Common Stock in connection with the solicitation of proxies by the Board of Directors of TSI (the "TSI Board") for use at the TSI Special Stockholders' Meeting to be held on December 30, at the offices of Foley, Hoag & Eliot LLP, One Post Office Square, 16th Floor, Boston, Massachusetts 02109, commencing at 10:00 a.m., local time, and at any adjournment or postponement thereof. This Joint Proxy Statement/Prospectus and the accompanying forms of proxy are first being mailed to Stockholders of TSI on or about December 7, 1998. TSI's management does not expect a representative of TSI's accountants to attend the TSI Special Stockholders' Meeting. MATTERS TO BE CONSIDERED At the TSI Special Stockholders' Meeting, holders of TSI Voting Common Stock will be asked to consider and vote upon a proposal to approve and adopt the Merger Agreement and the Merger. BOARD OF DIRECTORS' RECOMMENDATIONS The TSI Board has unanimously approved the Merger Agreement and the Merger and recommends a vote FOR approval and adoption of the Merger Agreement and the Merger. RECORD DATE AND VOTING The TSI Board has fixed November 30, 1998 as the record date for the determination of the TSI stockholders entitled to notice of and to vote at the TSI Special Stockholders' Meeting. Accordingly, only holders of record of shares of TSI Voting and Non-Voting Common Stock on the Record Date are entitled to notice of the TSI Special Stockholders' Meeting and only holders of record of shares of TSI Voting Common Stock on the Record Date are entitled to vote at the TSI Special Stockholders' Meeting. As of the Record Date, there were outstanding and entitled to vote 18,047,762 shares of TSI Voting Common Stock (constituting all of the voting stock of TSI), which shares were held by approximately 30 holders of record. Each holder of record of shares of TSI Voting Common Stock on the Record Date is entitled to one vote per share, which may be cast either in person or by properly executed proxy, at the TSI Special Stockholders' Meeting. The presence, in person or by properly executed proxy, of the holders of a majority of the outstanding shares of TSI Voting Common Stock entitled to vote at the TSI Special Stockholders' Meeting is necessary to constitute a quorum at the TSI Special Stockholders' Meeting. The approval and adoption of the Merger Agreement and Merger will require the affirmative vote of the holders of at least two-thirds of the shares of TSI Voting Common Stock outstanding on the Record Date. Shares of TSI Voting Common Stock represented in person or by proxy will be counted for the purpose of determining whether a quorum is present at the TSI Special Stockholders' Meeting. Shares which abstain from voting as to a particular matter, and shares held by a broker or nominee in "street name" which indicates on a proxy that it does not have discretionary authority to vote as to a particular matter, will be treated as shares that are present and entitled to vote at the TSI Special Stockholders' Meeting for purposes of determining whether a quorum exists. Because the Merger Agreement must be approved by the holders of at least two-thirds of the shares of TSI Voting Common Stock outstanding on the Record Date, abstentions and broker non-votes will have the same effect as a vote against the Merger Agreement. Certain stockholders of TSI, who have voting control over outstanding shares of TSI Voting Common Stock representing 34.4% of the votes that may be cast at the TSI Special Stockholders' Meeting, have 41
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irrevocably appointed Eclipsys as proxy to vote all shares of TSI Voting Common Stock held by such stockholders in favor of the proposal to approve the Merger Agreement and Merger at the TSI Special Stockholders' Meeting. PROXIES This Joint Proxy Statement/Prospectus is being furnished to TSI stockholders in connection with the solicitation of proxies by and on behalf of the TSI Board for use at the TSI Special Stockholders' Meeting, and is accompanied by a form of proxy. All shares of TSI Voting Common Stock which are entitled to vote and are represented at the TSI Special Stockholders' Meeting by properly executed proxies received prior to or at such meeting, and not revoked, will be voted at such meeting in accordance with the instructions indicated on such proxies. If no instructions are indicated (other than in the case of broker non-votes), such proxies will be voted for approval and adoption of the Merger and the Merger Agreement. If any other matters are properly presented at the TSI Special Stockholders' Meeting for consideration, including, among other things, consideration of a motion to adjourn such meeting to another time and/or place (including, without limitation, for the purpose of soliciting additional proxies), the persons named in the enclosed forms of proxy and acting thereunder will have discretion to vote on such matters in accordance with their best judgment. Any proxy given pursuant to this solicitation may be revoked by the person giving it at any time before it is voted. Proxies may be revoked by (i) filing with the Clerk of TSI, at or before the taking of the vote at the TSI Special Stockholders' Meeting, a written notice of revocation bearing a later date than the proxy, (ii) duly executing a later dated proxy relating to the same shares and delivering it to the Clerk of TSI before the taking of the vote at the TSI Special Stockholders' Meeting or (iii) attending the TSI Special Stockholders' Meeting and voting in person (although attendance at the TSI Special Stockholders' Meeting will not in and of itself constitute a revocation of a proxy). Any written notice of revocation or subsequent proxy should be sent to Transition Systems, Inc., One Boston Place, Boston, Massachusetts 02108, Attention: Clerk, or hand delivered to the Clerk of TSI at or before the taking of the vote at the TSI Special Stockholders' Meeting. All expenses of TSI's solicitation of proxies, including the cost of mailing this Joint Proxy Statement/ Prospectus to TSI stockholders, will be borne by TSI. In addition to solicitation by use of the mails, proxies may be solicited from TSI stockholders by directors, officers and employees of TSI in person or by telephone, facsimile or other means of communication. Such directors, officers and employees will not be additionally compensated, but may be reimbursed for reasonable out-of-pocket expenses in connection with such solicitation. In addition, TSI has engaged MacKenzie Partners, Inc., a proxy solicitation firm, to assist in the solicitation of proxies for the TSI Special Stockholders' Meeting. Such firm may solicit proxies in person or by means of telephone, facsimile or other means of communication. Such firm has been engaged on customary terms and fees paid to such firm will not be material. Arrangements will also be made with brokerage houses, custodians, nominees and fiduciaries for forwarding of proxy solicitation materials to beneficial owners of shares held of record by such brokerage houses, custodians, nominees and fiduciaries, and TSI will reimburse such brokerage houses, custodians, nominees and fiduciaries for their reasonable expenses incurred in connection therewith. TSI STOCKHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR PROXY CARDS. 42
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THE MERGER THE DISCUSSION IN THIS JOINT PROXY STATEMENT/PROSPECTUS OF THE MERGER AND THE PRINCIPAL TERMS OF THE MERGER AGREEMENT IS SUBJECT TO, AND QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, THE MERGER AGREEMENT, A COPY OF WHICH IS ATTACHED TO THIS JOINT PROXY STATEMENT/PROSPECTUS AS ANNEX A AND IS INCORPORATED HEREIN BY REFERENCE. BACKGROUND TO THE MERGER In March 1998, TSI management began to consider whether, due to competitive pressures in the healthcare information technology industry, consolidation of competitors within this industry and other factors, TSI should investigate various strategic alternatives available to it, including a possible sale of TSI. On March 30, 1998, TSI retained BT Alex. Brown Incorporated ("BT Alex. Brown") to provide advisory and investment banking services to TSI with respect to its exploration of strategic alternatives, including the possible merger or sale of TSI, and authorized management and BT Alex. Brown to contact potential acquirors of TSI. From April through October, 1998, at the direction of TSI, representatives of BT Alex. Brown and TSI management had conversations from time to time with various companies concerning the possibility of a strategic alliance or business combination with TSI. These conversations were exploratory in nature and did not progress to the point of specific proposals that the TSI Board considered acceptable. On September 16, 1998, Mr. Harvey J. Wilson, the President, Chief Executive Officer and Chairman of the Board of Eclipsys, met over dinner with Mr. Robert F. Raco, the President, Chief Executive Officer and Chairman of the Board of TSI, and Ms. Christine Shapleigh, Senior Vice President of Business Development for TSI, to explore the possibility of a strategic alliance between Eclipsys and TSI. Messrs. Wilson and Raco and Ms. Shapleigh determined and agreed that there were potential strategic advantages to a combination of Eclipsys and TSI, if mutually agreeable terms could be negotiated. On September 22, 1998, representatives of Eclipsys, TSI, General Atlantic Partners, LLC ("General Atlantic") and Warburg, Pincus Ventures, L.P. ("Warburg") met to explore the possibility of an alliance between the companies. Representatives of Eclipsys made a presentation to TSI and Warburg to familiarize them with the organization, business, products and services of Eclipsys. On September 24, 1998, Mr. Wilson wrote to Mr. Raco and Mr. Patrick T. Hackett, a director of TSI and a Managing Director of Warburg, to propose a business combination between Eclipsys and TSI. On September 30 and October 1, 1998, representatives of Warburg, General Atlantic, Eclipsys, TSI and BT Alex. Brown met to discuss the possibility of a business combination. Preliminary discussions were held relating to the valuation, structure and other terms for such a combination. On October 2, 1998, TSI and Eclipsys executed a confidentiality agreement, following which both TSI and Eclipsys began to share financial and other confidential information for use by the other company in its due diligence investigation. From October 5, 1998 through October 9, 1998, representatives and advisors of Eclipsys met at TSI's offices to conduct business, financial and legal due diligence reviews of TSI. On October 8 and October 9, 1998, TSI's management made presentations to Eclipsys representatives to familiarize them with the organization, business, products and services of TSI. On October 12, 1998, an initial draft of the Merger Agreement was distributed by Hale and Dorr LLP, outside counsel to Eclipsys ("Hale and Dorr"). From October 14, 1998 through October 16, 1998, representatives and advisors of TSI met at Eclipsys' Atlanta office to conduct business, financial and legal due diligence reviews of Eclipsys and discussions with representatives of Eclipsys. On October 19, 1998, representatives of Eclipsys met with TSI customers in Ohio and California as part of the business due diligence review. On October 20, 1998 and October 21, 1998, representatives of 43
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Eclipsys met with representatives and advisors of TSI at HealthVISION's headquarters in Santa Rosa, California, to conduct due diligence reviews of HealthVISION. Since early 1998, TSI had been engaged in discussions with HealthVISION regarding the acquisition by TSI of the 80.5% of the outstanding capital stock of HealthVISION not already owned by TSI. On October 21, 1998, Foley, Hoag & Eliot LLP, outside legal counsel to TSI ("Foley Hoag"), provided written comments on the initial draft of the Merger Agreement. On October 23, 1998, representatives of TSI, Warburg, Eclipsys, General Atlantic and BT Alex. Brown met to negotiate the principal business terms of the Merger. On October 24, 1998, the Eclipsys Board met telephonically to discuss the proposed merger. The Eclipsys Board reviewed with Eclipsys management and discussed, among other things, the status of the discussions with TSI, the strategic rationale for the combination, the benefits and risks associated with the combination, the proposed financial terms and conditions of the transaction, a schedule for completing the transaction, as well as the business and the prospects of the companies and other related issues. The Eclipsys Board authorized management to continue discussions with representatives of TSI regarding a possible business combination. On October 25, 1998, a revised draft of the Merger Agreement was distributed by Hale and Dorr. On October 26 and 27, 1998, representatives of Foley Hoag conducted additional legal due diligence reviews at Eclipsys' offices in Florida. On October 27 and October 28, 1998, representatives of Eclipsys met with HealthVISION customers in Florida and New York City as part of the business due diligence review. On October 26, 1998, the TSI Board met telephonically to discuss the proposed merger. The TSI Board reviewed with management and its legal and financial advisors, among other things, the status of the discussions with Eclipsys, the business and prospects of the two companies, the rationale for the combination and its benefits and risks, the proposed financial terms of the transaction and a schedule for completing it, and other related matters. The TSI Board authorized management to continue discussions with representatives of Eclipsys regarding a possible business combination. Over the course of October 26, 27 and 28, 1998, legal counsel and the executive officers of Eclipsys and TSI and representatives of Warburg, General Atlantic and BT Alex. Brown held further discussions regarding the terms of the proposed Merger Agreement and related documents, including the terms of the proposed Voting Agreements, the termination rights contained in the proposed Merger Agreement, the conditions upon which any termination fees would be payable and the amount of such fees, the rights of Eclipsys and TSI under the proposed Merger Agreement to consider and negotiate other acquisition proposals in certain circumstances and the representations, warranties and covenants to be made by Eclipsys and TSI. In addition, the management of both companies and their financial advisors continued to have further discussions regarding valuation issues relevant to negotiation of a mutually acceptable exchange ratio for the stock of TSI and Eclipsys, as well as other terms and conditions of a possible acquisition of TSI by Eclipsys. On October 27, 1998, the Eclipsys Board met telephonically to consider and vote upon the proposed Merger Agreement and the related agreements. At this specially scheduled meeting, (i) management of Eclipsys reported that an agreement had been reached as to the principal terms of the Merger Agreement, including the Exchange Ratio for the stock of Eclipsys and TSI, (ii) the Eclipsys Board considered reports from management, legal and financial advisors as to the results of their due diligence investigation of TSI, (iii) management responded to questions regarding various aspects of the proposed Merger, (iv) management reported on the status of TSI's negotiations with HealthVISION regarding the acquisition by TSI of the remaining 80.5% of the outstanding capital stock of HealthVISION not already owned by TSI, (v) Eclipsys' legal advisors reviewed the proposed definitive terms of the Merger Agreement and related documents, (vi) Morgan Stanley & Co. Incorporated ("Morgan Stanley") made a presentation to the Eclipsys Board regarding the Exchange Ratio, reviewed its detailed financial analysis and pro forma and other information with respect to the companies and delivered its oral opinion to the 44
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effect that, as of such date, the Exchange Ratio was fair to Eclipsys from a financial point of view, which opinion was subsequently confirmed in writing (see "-- Opinions of Financial Advisors -- Eclipsys") and (vii) the Eclipsys Board, by unanimous vote of those present, approved the Merger, the Merger Agreement and related agreements. On October 28, 1998, the TSI Board met telephonically to consider and vote upon the proposed Merger and the Merger Agreement and the related agreements. At this specially scheduled meeting, (i) management of TSI reported that an agreement had been reached as to the principal terms of the Merger Agreement, including the Exchange Ratio for the stock of TSI and Eclipsys, (ii) the TSI Board considered reports from management, legal and financial advisors as to the results of their due diligence investigation of Eclipsys, (iii) management and TSI's financial and legal advisors responded to questions regarding various aspects of the proposed Merger, (iv) TSI's legal advisors held discussions regarding the TSI Board's fiduciary duties in considering a business combination and reviewed proposed definitive terms of the Merger Agreement and related documents, including the Voting Agreements, (v) BT Alex. Brown reviewed with the TSI Board the financial analyses performed by BT Alex. Brown in connection with its evaluation of the Exchange Ratio and delivered to the TSI Board its oral opinion (which was subsequently confirmed by delivery of a written opinion dated October 29, 1998, the date of execution of the Merger Agreement) to the effect that, as of the date of such opinion and based upon and subject to certain matters stated therein, the Exchange Ratio was fair, from a financial point of view, to the holders of TSI Voting and Non-Voting Common Stock (see "-- Opinions of Financial Advisors -- TSI") and (vi) the TSI Board approved the Merger, the Merger Agreement and related agreements. At this meeting, the TSI Board also approved the HealthVISION Acquisition. In the evening of October 28, 1998, TSI and HealthVISION executed the definitive agreement relating to the acquisition by TSI of the 80.5% of the outstanding stock of HealthVISION not already owned by TSI (the "HealthVISION Acquisition"). Early in the morning of October 29, 1998, the final version of the Merger Agreement was distributed to and executed by TSI, Eclipsys and Sub and Voting Agreements were executed by certain management personnel and a principal stockholder of TSI and by certain principal stockholders of Eclipsys. Prior to the opening of trading on the Nasdaq National Market, Eclipsys and TSI issued a joint press release announcing the Merger. RECOMMENDATIONS OF THE BOARDS OF DIRECTORS The Eclipsys Board has, by unanimous vote of those present, determined that the Merger is in the best interests of Eclipsys and its stockholders and recommends that the stockholders of Eclipsys vote "FOR" approval of the Eclipsys Voting Proposal for the reasons set forth below. The TSI Board has unanimously determined that the Merger is in the best interests of TSI and its stockholders and recommends that the stockholders of TSI vote "FOR" approval and adoption of the Merger and the Merger Agreement for the reasons set forth below. REASONS FOR THE MERGER JOINT REASONS FOR THE MERGER We believe that the Merger, by combining the complementary product offerings, customer bases and other resources of our companies, will position the combined company to enjoy greater growth and earnings than either company would have experienced individually. The Eclipsys and TSI Boards identified a number of potential benefits of the Merger which they believe could contribute to the success of the combined company and therefore benefit the stockholders of both companies, including the following: - The Boards believe that the Merger will enable the combined company to offer a broader range of products, product features and technical solutions for customers, enhancing the competitive strength of the combined company and increasing its ability to satisfy the requirements of existing and new customers. 45
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- The Boards believe that the Merger will combine the highly complementary customer bases of the two companies, resulting in more diverse and stronger revenue sources and an enhanced ability to cross-market existing products of each company to the customer base of the other company, as well as the ability to market new products to a larger combined customer base. - The Boards believe that the Merger will enable the combined company to achieve efficiencies and economies of scale in product development, sales and marketing, customer service, administration and other areas, which could not be achieved by either company independently. - The Boards believe that the Merger, by providing the combined company with substantially greater financial and other resources, will enhance the opportunity for the potential realization of the strategic objectives of both companies and increase the combined company's ability to compete more effectively in the highly competitive healthcare information technology industry. ECLIPSYS' REASONS FOR THE MERGER In reaching its conclusion to approve the Merger Agreement, the Eclipsys Board considered the factors described above under "-- Joint Reasons for the Merger," as well as the opportunity of the Eclipsys stockholders to participate in the potential growth of the combined company after the Merger. In the course of its deliberations during the Eclipsys Board meetings held on October 24 and October 27, 1998, the Eclipsys Board considered and reviewed with management a number of factors relevant to the Merger, including, but not limited to, the following: (i) historical information concerning Eclipsys' and TSI's respective businesses, prospects, financial performance and condition, operations, technology, management and competitive position, including public reports concerning results of operations filed during the most recent fiscal year and fiscal quarter for each company with the Securities and Exchange Commission (the "Commission"); (ii) the financial condition, results of operations and businesses of Eclipsys and TSI before and after giving effect to the Merger; (iii) current financial market conditions and historical market prices, volatility and trading information with respect to the TSI Voting Common Stock and the Eclipsys Voting Common Stock; (iv) the consideration to be received by TSI's stockholders in the Merger and the relationship between the market value of the Eclipsys Voting Common Stock to be issued in exchange for each share of TSI Voting and Non-Voting Common Stock and a comparison of comparable merger transactions; (v) the belief that the terms of the Merger Agreement, including the parties' representations, warranties and covenants, and the conditions to their respective obligations, are reasonable; (vi) the prospects of Eclipsys as an independent company; (vii) detailed financial analysis and pro forma and other information with respect to the companies presented by Morgan Stanley to the Eclipsys Board, including Morgan Stanley's opinion that, as of such date, the Exchange Ratio was fair to Eclipsys from a financial point of view (a copy of this opinion is annexed hereto as Annex B and stockholders are urged to review it carefully); and (viii) reports from management, legal and financial advisors as to the results of the due diligence investigation of TSI. The Eclipsys Board also considered the terms of the proposed Merger Agreement, including the possible effects of the provisions regarding termination fees. In addition, the Eclipsys Board noted that the Merger is expected to be accounted for as a pooling of interests under U.S. GAAP and that no goodwill is expected to be created on the books of Eclipsys as a result thereof. The Eclipsys Board also considered a number of potential risks relating to the Merger, including (i) the risk that the synergies and benefits sought in the Merger would not be fully achieved, (ii) the risk that the Merger would not be consummated, and the effect of the public announcement of the Merger on the market price of Eclipsys Voting Common Stock, (iii) the risk that the announcement of the Merger would result in a certain degree of disruption in Eclipsys' and TSI's marketing efforts, (iv) the substantial charges expected to be incurred by Eclipsys in connection with the Merger and (v) various other risks, including the risks described under "Risk Factors" herein. The Eclipsys Board believed that these risks were outweighed by the potential benefits to be realized from the Merger. The foregoing discussion of the information and factors considered by the Eclipsys Board is not intended to be exhaustive but is believed to include all material factors considered by the Eclipsys Board. 46
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In view of the wide variety of information and factors considered, the Eclipsys Board did not find it practical to, and did not, assign any relative or specific weights to the foregoing factors, and individual directors may have given differing weights to different factors. TSI'S REASONS FOR THE MERGER In reaching its conclusion to approve the Merger Agreement, the TSI Board considered the factors described above under "-- Joint Reasons for the Merger," as well as the opportunity of the TSI stockholders to participate in the potential growth of the combined company after the Merger. In the course of its deliberations during TSI Board meetings held on October 26 and 28, 1998, the TSI Board considered and reviewed with management a number of factors relevant to the Merger, including, but not limited to, the following: (i) historical information concerning TSI's and Eclipsys' respective businesses, prospects, financial performance and condition, operations, technology, management and competitive position, including public reports concerning results of operations during the most recent fiscal year and fiscal quarter for each company with the Commission; (ii) the financial condition, results of operations and businesses of TSI and Eclipsys before and after giving effect to the Merger; (iii) current financial market conditions and historical market prices, volatility and trading information with respect to the TSI Voting Common Stock and the Eclipsys Voting Common Stock and the limited trading history of Eclipsys Voting Common Stock; (iv) the consideration to be received by TSI's stockholders in the Merger and the relationship between the market value of the Eclipsys Voting Common Stock to be issued in exchange for each share of TSI Voting and Non-Voting Common Stock and a comparison of comparable merger transactions; (v) the belief that the terms of the Merger Agreement, including the parties' representations, warranties and covenants, and the conditions to their respective obligations, are reasonable; (vi) the prospects of TSI as an independent company; (vii) the potential for other third parties to enter into strategic relationships with or to acquire TSI; (viii) reports from management, legal and financial advisors as to the results of TSI's due diligence investigation of Eclipsys; (ix) the financial presentation of BT Alex. Brown to the TSI Board, including its opinion to the effect that, as of the date of such opinion and based upon and subject to certain matters stated therein, the Exchange Ratio was fair, from a financial point of view, to the holders of TSI Voting and Non-Voting Common Stock; and (x) the impact of the Merger on TSI's customers and employees. The TSI Board also considered the terms of the proposed Merger Agreement regarding TSI's rights to consider and negotiate other acquisition proposals in certain circumstances, as well as the possible effects of the provisions regarding termination fees. The TSI Board also considered a number of potential risks relating to the Merger, including, but not limited to: (i) the risk that the potential benefits sought in the Merger might not be fully realized; (ii) the possibility that the Merger might not be consummated and the effect of the public announcement of the Merger on (a) TSI's sales, operating results and stock price, (b) TSI's ability to attract and retain key management, sales, marketing, product development and technical personnel and (c) progress of certain development projects; (iii) the substantial charges to be incurred in connection with the Merger, including costs of integrating the businesses and transaction expenses arising from the Merger; (iv) the risk that despite the efforts of the Surviving Corporation, key technical and management personnel might not remain employed by the Surviving Corporation; (v) risks associated with fluctuations in Eclipsys' stock price prior to closing of the Merger; and (vi) various other risks, including the risks described under "Risk Factors" herein. The TSI Board believed that these risks were outweighed by the potential benefits of the Merger. The foregoing discussion of the information and factors considered by the TSI Board is not intended to be exhaustive but is believed to include all material factors considered by the TSI Board. In view of the wide variety of information and factors considered, the TSI Board did not find it practical to, and did not, assign any relative or specific weights to the foregoing factors, and individual directors may have given differing weights to different factors. 47
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OPINIONS OF FINANCIAL ADVISORS ECLIPSYS Eclipsys retained Morgan Stanley to render a financial opinion letter (the "Morgan Stanley Opinion") to the Eclipsys Board in connection with the Merger and related matters based upon Morgan Stanley's qualifications, expertise and reputation. On October 28, 1998, Morgan Stanley rendered an oral opinion, which was subsequently confirmed in writing, to the Eclipsys Board that, as of such date, and based upon and subject to the considerations set forth in the written opinion, the Exchange Ratio pursuant to the Merger Agreement is fair from a financial point of view to Eclipsys. THE FULL TEXT OF THE MORGAN STANLEY OPINION, DATED AS OF OCTOBER 28, 1998, WHICH SETS FORTH, AMONG OTHER THINGS, THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED AS ANNEX B TO THIS JOINT PROXY STATEMENT/ PROSPECTUS. THE MORGAN STANLEY OPINION IS DIRECTED TO THE ECLIPSYS BOARD AND THE FAIRNESS OF THE EXCHANGE RATIO PURSUANT TO THE MERGER AGREEMENT FROM A FINANCIAL POINT OF VIEW TO ECLIPSYS AS OF THE DATE OF SUCH OPINION AND DOES NOT ADDRESS ANY OTHER ASPECT OF THE MERGER, NOR DOES IT CONSTITUTE A RECOMMENDATION TO ANY ECLIPSYS STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE ECLIPSYS SPECIAL STOCKHOLDERS' MEETING HELD IN CONNECTION WITH THE MERGER. THE SUMMARY OF THE MORGAN STANLEY OPINION SET FORTH IN THIS JOINT PROXY STATEMENT/ PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE MORGAN STANLEY OPINION ATTACHED AS ANNEX B HERETO. STOCKHOLDERS OF ECLIPSYS ARE URGED TO, AND SHOULD, READ THE MORGAN STANLEY OPINION CAREFULLY AND IN ITS ENTIRETY. In arriving at the Morgan Stanley Opinion, Morgan Stanley, among other things: (i) reviewed certain publicly available financial statements and other information of TSI and Eclipsys; (ii) reviewed certain internal financial statements and other financial and operating data concerning TSI and Eclipsys prepared by the managements of TSI and Eclipsys, respectively; (iii) discussed the past and current operations and financial condition and the prospects of TSI with senior executives of TSI; (iv) discussed the past and current operations and financial condition and the prospects of Eclipsys, including information relating to certain strategic, financial and operational benefits anticipated from the Merger, with senior executives of Eclipsys; (v) discussed with the senior managements of TSI and Eclipsys certain research analyst projections for TSI and Eclipsys, respectively; (vi) reviewed the pro forma impact of the Merger on Eclipsys' earnings per share and other financial ratios; (vii) reviewed the reported prices and trading activity for the TSI Voting Common Stock and the Eclipsys Voting Common Stock; (viii) compared the financial performance of TSI and Eclipsys and the prices and trading activity of the TSI Voting Common Stock and the Eclipsys Voting Common Stock with that of certain other comparable publicly-traded companies and their securities; (ix) reviewed the financial terms, to the extent publicly available, of certain comparable acquisition transactions; (x) participated in discussions among representatives of TSI and Eclipsys and their financial and legal advisors; (xi) reviewed the draft Merger Agreement dated October 21, 1998 and certain related documents; and (xii) performed such other analyses as Morgan Stanley deemed appropriate. In arriving at the Morgan Stanley Opinion, Morgan Stanley assumed and relied upon without independent verification the accuracy and completeness of the information reviewed by Morgan Stanley for the purposes of its opinion. With respect to the financial projections, including information relating to certain strategic, financial and operational benefits anticipated from the Merger, Morgan Stanley assumed that they were reasonably prepared on bases reflecting the best currently available estimates and judgments of the future financial performance of TSI and Eclipsys, respectively. In addition, Morgan Stanley assumed that the Merger will be consummated in accordance with the terms set forth in the Merger Agreement, including, among other things, that the Merger would be accounted for as a "pooling-of-interests" business 48
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combination in accordance with U.S. GAAP and the Merger will be treated as a tax-free reorganization and/or exchange pursuant to the Code. Morgan Stanley did not make any independent valuation or appraisal of the assets or liabilities of TSI, nor was Morgan Stanley furnished with any such appraisals. The Morgan Stanley Opinion is necessarily based on economic, market and other conditions as in effect on, and the information made available to Morgan Stanley as of, the date of the Morgan Stanley Opinion. The following is a summary of certain of the financial analyses performed by Morgan Stanley in connection with its rendering the Morgan Stanley Opinion to the Eclipsys Board on October 28, 1998. Historical Common Stock Performance. Morgan Stanley's analysis of TSI Voting Common Stock performance consisted of an historical analysis of closing prices and trading volumes over the period from April 18, 1996 to October 23, 1998. During that period, based on closing prices on the Nasdaq National Market, TSI Voting Common Stock achieved a high closing price of $35.63 on May 21, 1996 and a low closing price of $6.50 on October 7, 1998. Additionally, Morgan Stanley noted that TSI Voting Common Stock closed at a price of $8.75 on October 23, 1998. Morgan Stanley's analysis of Eclipsys Voting Common Stock performance consisted of an historical analysis of closing prices and trading volumes over the period from August 7, 1998 (the date of the Eclipsys IPO) to October 23, 1998. During that period, based on closing prices on the Nasdaq National Market, Eclipsys Voting Common Stock achieved a high closing price of $25.45 on October 20, 1998 and a low closing price of $11.88 on August 31, 1998. Morgan Stanley noted that Eclipsys Voting Common Stock closed at a price of $24.88 on October 23, 1998. Comparative Stock Price Performance. Morgan Stanley performed an historical analysis of closing prices from August 7, 1997 to October 23, 1998 of TSI Voting Common Stock, the S&P 500 Index and an index of comparable healthcare information services companies ("Comparable Companies") consisting of Cerner Corp., HBO & Co., IDX Systems Corp. and SMS. Morgan Stanley observed that over this period, TSI Voting Common Stock decreased 65%, the S&P 500 Index increased 4% and the index of the Comparable Companies increased 19%. Morgan Stanley also performed an historical analysis of closing prices from August 7, 1998 to October 23, 1998 of Eclipsys Voting Common Stock, the S&P 500 Index and the Comparable Companies. Morgan Stanley observed that over the period from August 7, 1998 to October 23, 1998, Eclipsys Voting Common Stock increased 19%, the S&P 500 Index decreased 10% and the index of Comparable Companies decreased 10%. Comparable Public Company Analysis. As part of its analysis, Morgan Stanley compared certain publicly available financial information of certain comparable companies, including HBO & Co., IDX Systems Corp., Medical Manager Corporation, Cerner Corp., Quadramed, MECON and SMS ("Information Services Comparable Companies"). Morgan Stanley then compared this information to the financial performance of TSI and Eclipsys. Such financial information included price to earnings multiples, the ratio of the price to earnings multiple to the forecasted long-term earnings growth rate, and the aggregate value to revenue multiple, based on First Call median EPS forecasts and research analysts' mid- range and low estimates of forward operating performance. Such analyses indicated that as of October 23, 1998 and based on the mid-range estimates, TSI Voting Common Stock traded at 20.6 times mid-range forecasted earnings for the calendar year 1998, 16.2 times mid-range forecasted earnings for the calendar year 1999, (representing a multiple of 0.6 times its forecasted, long-term earnings growth rate), and aggregate value represented 2.9 times mid-range forecasted revenues for the calendar year 1998. In addition, the analyses indicated that as of October 23, 1998 and based on the mid-range estimates, Eclipsys Voting Common Stock traded at 77.7 times forecasted earnings for the calendar year 1998, 42.9 times forecasted earnings for the calendar year 1999, (representing a multiple of 2.1 times its forecasted, long-term earnings growth rate), and market capitalization represented 4.3 times forecasted revenues for the calendar year 1998. These multiples compared to a range of multiples based on 1998 forecasted earnings (16.3 to 33.7 times), 1999 earnings (13.0 to 17.0 times), the ratio of the price to 1999 earnings multiple to the forecasted long-term growth 49
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rates (0.7 to 1.2 times), and multiple of aggregate value to forecasted revenues (1.3 to 6.8 times) for the Information Services Comparable Companies. No company utilized in the comparable public company analysis or the comparable stock price performance analysis is identical to TSI or Eclipsys. Accordingly, an analysis of the results of the foregoing necessarily involves complex considerations and judgments concerning differences in financial and operating characteristics of TSI or Eclipsys and other factors that could affect the public trading value of the companies to which they are being compared. In evaluating the comparable companies, Morgan Stanley made judgments and assumptions with regard to industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of TSI or Eclipsys, such as the impact of competition on TSI or Eclipsys and the industry generally, industry growth and/or technological change and the absence of any material adverse change in the financial condition and prospects of TSI or Eclipsys or the industry or in the financial markets in general. Mathematical analysis (such as determining the mean or median) is not, in itself, a meaningful method of using comparable company data. Discounted Equity Analysis. Morgan Stanley performed an analysis of the present value per share of TSI Voting Common Stock's respective future trading prices based on ranges of the following assumptions: a range of earnings per share estimates for the years 2000 and 2001; illustrative multiples of earnings per share, ranging from 16.0 to 20.0; and illustrative discount rates, ranging from 12.0% to 18.0%. Based on these assumptions, Morgan Stanley calculated the present value of future theoretical trading values, ranging from approximately $6 per share to $16 per share. Analysis of Selected Precedent Transactions. Using publicly available information, Morgan Stanley reviewed the terms of certain announced, pending or completed healthcare information services acquisition transactions (collectively, the "Healthcare Information Services Transactions"). For the Healthcare Information Services Transactions, the median multiple of aggregate value to trailing revenues was approximately 4.0. No transaction utilized as a comparison in the analysis of selected precedent transactions is identical to the Merger. Accordingly, an analysis of the results of the foregoing necessarily involves complex considerations and judgments concerning differences in financial and operating characteristics and other factors that would affect the acquisition value of the companies to which it is being compared. In evaluating the precedent transactions, Morgan Stanley made judgments and assumptions with regard to industry performance, global business, economic, market and financial conditions and other matters, many of which are beyond the control of TSI, such as the impact of competition on TSI and the industry generally, and the absence of any adverse material change in the financial conditions and prospects of TSI or the industry or the financial markets in general. Mathematical analysis (such as determining the mean or median) is not, in itself, a meaningful method of using precedent transactions data. Exchange Ratio Analysis. Morgan Stanley analyzed the ratio of closing prices per share of TSI Voting Common Stock and Eclipsys Voting Common Stock from August 7, 1998 to October 23, 1998. Morgan Stanley observed that the implied exchange ratio had averaged 0.44 since August 7, 1998, 0.39 over the last month period prior to October 23, 1998, and 0.39 over the last two weeks prior to October 23, 1998. Morgan Stanley also observed that the implied exchange ratio based on the closing market prices of TSI Voting Common Stock and Eclipsys Voting Common Stock on October 23, 1998 was 0.35. Pro Forma Analysis of the Merger. Morgan Stanley performed certain pro forma analyses of the Merger on the earnings per share of the combined company in 1999 and 2000. The pro forma results were based on projected earnings and cash flow derived from First Call estimates for TSI and Eclipsys. The pro forma analysis also took into account the synergies and cost savings expected to be derived from the Merger as estimated by management of Eclipsys. Morgan Stanley noted that the Merger would be accretive to Eclipsys' earnings per share in 1999 and 2000. 50
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The preparation of a fairness opinion is a complex process and is not necessarily susceptible to a partial analysis or summary description. In arriving at its opinion, Morgan Stanley considered the results of all of its analyses as a whole and did not attribute any particular weight to any particular analysis or factor considered by it. Furthermore, selecting any portion of Morgan Stanley's analyses, without considering all analyses, would create an incomplete view of the process underlying the Morgan Stanley Opinion. In addition, Morgan Stanley may have deemed various assumptions more or less probable than other assumptions, so that the ranges of valuations resulting from any particular analysis described above should not be taken to be Morgan Stanley's view of the actual value of TSI or Eclipsys. In performing its analysis, Morgan Stanley made numerous assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond the control of TSI or Eclipsys. The analyses performed by Morgan Stanley are not necessarily indicative of actual values, which may be significantly more or less favorable than suggested by such analyses. Such analyses were prepared solely as a part of Morgan Stanley's analysis of the fairness of the exchange ratio pursuant to the Merger Agreement from a financial point of view to Eclipsys and were provided to the Eclipsys Board in connection with the delivery of the Morgan Stanley Opinion. The analyses do not purport to be appraisals or to reflect the prices at which TSI or Eclipsys might actually be sold. In addition, as described above, the Morgan Stanley Opinion was one of many factors taken into consideration by the Eclipsys Board in making its determination to approve the Merger. Morgan Stanley is an internationally recognized investment banking and advisory firm. Morgan Stanley, as part of its investment banking business, is regularly engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, competitive biddings, secondary distributions of listed and unlisted securities, private placements and valuations for corporate, estate and other purposes. In the ordinary course of its trading, brokerage and financing activities, Morgan Stanley and its affiliates may, at any time, have a long or short position in, and buy and sell the debt or equity securities and senior loans of TSI or Eclipsys for its account or the account of its customers. Morgan Stanley and its affiliates have, in the past, provided financial advisory services to Eclipsys and have received fees for the rendering of such services. Pursuant to a letter agreement dated October 23, 1998 between Eclipsys and Morgan Stanley, Eclipsys has agreed to pay Morgan Stanley a fee for rendering the Morgan Stanley Opinion to the Eclipsys Board in connection with the business combination. In addition, Eclipsys has agreed to reimburse Morgan Stanley for its expenses related to the engagement and to indemnify Morgan Stanley and its affiliates, their respective directors, officers, agents and employees and each person, if any, controlling Morgan Stanley or any of its affiliates against certain liabilities, including liabilities under federal securities laws, and expenses, related to or arising out of Morgan Stanley's engagement and the transactions in connection therewith. TSI TSI engaged BT Alex. Brown to act as its exclusive financial advisor in connection with the Merger. On October 28, 1998, at a meeting of the TSI Board held to evaluate the proposed Merger, BT Alex. Brown rendered to the TSI Board an oral opinion (which opinion was subsequently confirmed by delivery of a written opinion dated October 29, 1998, the date of execution of the Merger Agreement) to the effect that, as of the date of such opinion and based upon and subject to certain matters stated therein, the Exchange Ratio was fair, from a financial point of view, to the holders of TSI Voting and Non-Voting Common Stock. THE FULL TEXT OF THE WRITTEN OPINION OF BT ALEX. BROWN DATED OCTOBER 29, 1998, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS OF THE REVIEW UNDERTAKEN, IS ATTACHED AS ANNEX C TO THIS JOINT PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE. BT ALEX. BROWN'S OPINION IS DIRECTED TO THE TSI BOARD, ADDRESSES ONLY THE FAIRNESS OF THE EXCHANGE RATIO FROM A FINANCIAL POINT OF VIEW, AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW 51
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SUCH STOCKHOLDER SHOULD VOTE AT THE TSI SPECIAL STOCKHOLDERS' MEETING. THE SUMMARY OF THE OPINION OF BT ALEX. BROWN IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION ATTACHED AS ANNEX C HERETO. HOLDERS OF TSI VOTING AND NON-VOTING COMMON STOCK ARE URGED TO, AND SHOULD, READ THE BT ALEX. BROWN OPINION CAREFULLY AND IN ITS ENTIRETY. In connection with BT Alex. Brown's role as financial advisor to TSI, and in arriving at its opinion, BT Alex. Brown reviewed certain publicly available financial and other information concerning TSI and Eclipsys and certain internal analyses and other information furnished to or discussed with BT Alex. Brown by TSI, Eclipsys and their respective advisors. BT Alex. Brown also held discussions with members of the senior management of TSI and Eclipsys regarding the business and prospects of their respective companies and the joint prospects of a combined company. In addition, BT Alex. Brown (i) reviewed the reported prices and trading activity for TSI Voting Common Stock and Eclipsys Voting Common Stock, (ii) compared certain financial and stock market information for TSI and Eclipsys with similar information for certain other companies whose securities are publicly traded, (iii) reviewed the financial terms of certain recent business combinations which BT Alex. Brown deemed comparable in whole or in part, (iv) reviewed the terms of the Merger Agreement, and (v) performed such other studies and analyses and considered such other factors as BT Alex. Brown deemed appropriate. In connection with its engagement, BT Alex. Brown was authorized to approach, and held discussions with, certain third parties to solicit indications of interest with respect to the acquisition of TSI. BT Alex. Brown did not assume responsibility for independent verification of, and did not independently verify, any information, whether publicly available or furnished to BT Alex. Brown, concerning TSI, Eclipsys and the combined company, including, without limitation, any financial information, forecasts or projections considered in connection with the rendering of its opinion. Accordingly, for purposes of its opinion, BT Alex. Brown assumed and relied upon the accuracy and completeness of all such information and BT Alex. Brown did not conduct a physical inspection of any of the properties or assets, and did not prepare or obtain any independent evaluation or appraisal of any of the assets or liabilities, of TSI or Eclipsys. With respect to financial forecasts and projections made available to BT Alex. Brown and used in its analyses, BT Alex. Brown assumed that they were prepared on bases reflecting reasonable estimates and judgments as to the matters covered thereby. In rendering its opinion, BT Alex. Brown expressed no view as to the reasonableness of such forecasts and projections or the assumptions on which they are based. BT Alex. Brown's opinion was necessarily based upon economic, market and other conditions as in effect on, and the information made available to BT Alex. Brown as of, the date of its opinion. For purposes of rendering its opinion, BT Alex. Brown assumed that, in all respects material to its analysis, the representations and warranties of TSI, Eclipsys and Sub contained in the Merger Agreement are true and correct, TSI, Eclipsys and Sub will each perform all of the covenants and agreements to be performed by it under the Merger Agreement and all conditions to the obligations of each of TSI, Eclipsys and Sub to consummate the Merger will be satisfied without any waiver thereof. BT Alex. Brown also assumed that all material governmental, regulatory or other approvals and consents required in connection with the consummation of the Merger will be obtained and that in connection with obtaining any necessary governmental, regulatory or other approvals and consents, or any amendments, modifications or waivers to any agreements, instruments or orders to which either TSI or Eclipsys is a party or is subject or by which it is bound, no limitations, restrictions or conditions will be imposed or amendments, modifications or waivers made that would have a material adverse effect on TSI or Eclipsys or materially reduce the contemplated benefits of the Merger to TSI. In addition, BT Alex. Brown was informed by the TSI Board, and accordingly for purposes of rendering its opinion BT Alex. Brown assumed, that the Merger will qualify as a tax-free reorganization for federal income tax purposes and will be accounted for as a pooling-of-interests. BT Alex. Brown did not express an opinion as to the price at which Eclipsys Voting Common Stock will trade at any time. No other limitations were imposed by the TSI Board upon 52
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BT Alex. Brown with respect to the investigations made or the procedures followed by it in rendering its opinion. The following is a summary of the material analyses underlying BT Alex. Brown's opinion given to the TSI Board in connection with the Merger: Analysis of Selected Public Companies. BT Alex. Brown compared certain financial and stock market information for TSI and the following selected publicly held companies in the healthcare information technology industry: DAOU Systems, Inc., HCIA Inc., Healthcare Recoveries, Inc., Health Management Systems, Inc., Mecon, Inc., National Research Corporation, Oacis Healthcare Holdings Corp., ProxyMed, Inc., and Sunquest Information Systems, Inc. (collectively, the "Selected Companies"). BT Alex. Brown calculated equity market values as multiples of, among other things, latest 12 months and estimated calendar years 1998 and 1999 net income, and adjusted market values (equity market value, plus debt, less cash) as multiples of, among other things, latest 12 months EBITDA and earnings before interest and taxes ("EBIT"). All multiples were based on closing stock prices on October 23, 1998. Net income estimates for TSI and the Selected Companies were based on analysts' estimates as reported by I/B/E/S, a market research database. This analysis indicated for the Selected Companies a range of (i) implied equity market value multiples of latest 12 months and estimated calendar 1998 and 1999 net income of 12.0x to 32.8x (with a mean of 22.6x), 10.2x to 28.4x (with a mean of 17.2x) and 6.7x to 18.4x (with a mean of 12.1x), respectively, and (ii) implied adjusted market value multiples of latest 12 months revenues, EBITDA and EBIT of 0.5x to 6.0x (with a mean of 1.7x), 3.2x to 11.7x (with a mean of 7.5x) and 4.7x to 20.0x (with a mean of 11.7x), respectively. Based on the closing price of Eclipsys Voting Common Stock on October 23, 1998, the Exchange Ratio equated to implied multiples for TSI of latest 12 months and estimated calendar 1998 and 1999 net income of 36.3x, 24.0x and 18.0x, respectively, and latest 12 months revenues, EBITDA and EBIT of 4.4x, 12.0x and 13.3x, respectively. Analysis of Recent Mergers and Acquisitions. BT Alex. Brown reviewed the purchase prices and implied transaction multiples in eight selected merger and acquisition transactions effected in the healthcare information technology industry since January 1, 1995 (the "Selected Transactions"). All multiples were based on publicly available information at the time of announcement of the relevant transaction. BT Alex. Brown calculated equity purchase price multiples of, among other things, latest 12 months and one-year forward net income, and adjusted purchase price multiples of latest 12 months revenues, EBITDA and EBIT. This analysis indicated for the Selected Transactions a range of (i) implied equity purchase price multiples of latest 12 months and one-year forward net income of 21.9x to 64.7x (with a mean of 42.9x) and 20.8x to 43.7x (with a mean of 32.0x), respectively, and (ii) implied adjusted purchase price multiples of latest 12 months revenues, EBITDA and EBIT of 1.5x to 3.4x (with a mean of 2.3x), 6.3x to 25.6x (with a mean of 17.5x) and 9.1x to 40.4x (with a mean of 24.9x), respectively. Based on the closing price of Eclipsys Voting Common Stock on October 23, 1998, the Exchange Ratio equated to implied multiples for TSI of latest 12 months and one-year forward net income of 36.3x and 19.1x, respectively, and latest 12 months revenues, EBITDA and EBIT of 4.4x, 12.0x and 13.3x, respectively. Discounted Cash Flow Analyses. BT Alex. Brown performed separate discounted cash flow analyses for each of TSI and Eclipsys to estimate the present value of the stand-alone, unlevered, after-tax free cash flows that each of TSI and Eclipsys could generate over the fiscal years 1999 through 2003, based on extrapolated analysts' estimates as reported by I/B/E/S. The stand-alone discounted cash flow analysis was determined by (i) adding (x) the present value of the projected free cash flows over the fiscal years 1999 through 2003 and (y) the present value of the estimated terminal values in fiscal year 2003 and (ii) subtracting the current net debt for TSI and Eclipsys, respectively. The range of estimated terminal values for TSI and Eclipsys was calculated by applying terminal value multiples ranging from 6.5x to 8.5x for TSI and 15.0x to 17.0x for Eclipsys to the projected fiscal year 2003 EBITDA of TSI and Eclipsys, respectively. The cash flows and terminal values were discounted to present value using discount rates ranging from 17% to 19% for TSI and discount rates ranging from 15% to 17% for Eclipsys. This analysis yielded an implied equity reference range for Eclipsys Voting Common Stock of approximately $31.03 to $37.20 per share, as compared to the closing price of Eclipsys Voting Common Stock on October 23, 1998 53
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of $24.88. This analysis yielded an implied equity reference range for TSI Voting Common Stock of approximately $11.62 to $14.52 per share, as compared to the equity value implied by the Exchange Ratio of approximately $13.06 based on the closing price of Eclipsys Voting Common Stock on October 23, 1998. Premium Analysis. BT Alex. Brown analyzed, among other things, the (i) premiums paid in 100 change of control transactions having transaction values of between approximately $100 and $400 million effected since January 1, 1996, which indicated a range of premiums, based on the target company's stock price one day and one month prior to public announcement of the transaction, of approximately (26.7)% to 88.9% (with a mean of 26.7%) and (21.7)% to 105.6% (with a mean of 38.4%), respectively, (ii) premiums paid in 22 change of control transactions involving healthcare companies having transaction values between approximately $100 million and $400 million, which indicated a range of premiums, based on the target company's stock price one day and one month prior to public announcement of the transaction, of approximately (26.7)% to 80.5% (with a mean of 25.5%) and (17.5)% to 87.2% (with a mean of 41.1%), respectively, and (iii) premiums paid in four change of control transactions involving healthcare information technology companies having transaction values between approximately $83 million and $177 million, which indicated a range of premiums, based on the target company's stock price one day and one month prior to public announcement of the transaction, of approximately 1.4% to 38.6% (with a mean of 15.5%) and 14.2% to 78.3% (with a mean of 40.8%), respectively. The implied premiums payable in the Merger based on the closing price of Eclipsys Voting Common Stock one day and one month prior to public announcement of the Merger were approximately 49.3% and 44.0%, respectively. Historical Exchange Ratio Analysis. BT Alex. Brown compared the Exchange Ratio with the ratio of the closing prices of TSI Voting Common Stock and Eclipsys Voting Common Stock on October 23, 1998 and the historical ratio of the average daily closing prices of TSI Voting Common Stock and Eclipsys Voting Common Stock over the five-day, 10-day, 20-day, 30-day, 40-day and 50-day periods ended October 23, 1998 (collectively, the "Market Exchange Ratios"). The Market Exchange Ratios on October 23, 1998 and during such periods were 0.3518, 0.3672, 0.3831, 0.3809, 0.4033, 0.4172 and 0.4295, respectively, as compared to the Exchange Ratio of 0.525. The implied premiums derived by comparing the Market Exchange Ratios to the Exchange Ratio do not necessarily reflect the underlying market value of either TSI Voting Common Stock or Eclipsys Voting Common Stock or how the TSI Voting Common Stock, Eclipsys Voting Common Stock or the common stock of the pro forma combined company may trade in the future. Pro Forma Merger Analysis. BT Alex. Brown analyzed, among other things, the pro forma effects of the Merger on the earnings per share (the "EPS") of Eclipsys in calendar years 1999 and 2000 based on analysts' estimates as reported by I/B/E/S, both before and after giving effect to certain cost savings and other potential synergies anticipated by the managements of TSI and Eclipsys to result from the Merger (excluding non-recurring costs resulting from the Merger). This analysis indicated that the Merger could be accretive to the EPS of Eclipsys in each of the calendar years analyzed both before and after giving effect to potential synergies and other cost savings anticipated by the managements of TSI and Eclipsys to result from the Merger (excluding non-recurring costs resulting from the Merger). BT Alex. Brown also analyzed the potential pro forma effect of the Merger on TSI's EPS during calendar years 1999 and 2000 relative to TSI on a stand-alone basis. This analysis indicated that the Merger could be dilutive to TSI's EPS in calendar years 1999 and 2000. The actual operating or financial results achieved by the pro forma combined company may vary from projected results and variations may be material as a result of business and operational risks, the timing and amount of synergies, the costs associated with achieving such synergies and other factors. Contribution Analysis. BT Alex. Brown analyzed the relative contributions of TSI and Eclipsys to, among other things, the net income, revenues, EBITDA and EBIT of the pro forma combined company for the 12 month period ended June 30, 1998, the estimated net income of the pro forma combined company for calendar years 1999 and 2000 based on analysts' estimates as reported by I/B/E/S and the estimated book value of the pro forma combined company as of June 30, 1998, and compared such contributions to the pro forma ownership of the current holders of TSI Common Stock in the pro forma 54
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combined company. This analysis indicated that (i) for the 12 month period ended June 30, 1998, TSI would have contributed approximately 29.5% of revenues, 44.9% of EBITDA and 100.0% of EBIT for the pro forma combined company; (ii) in calendar years 1999 and 2000, TSI would contribute approximately 52.9% and 48.9%, respectively, of the net income for the pro forma company, and (iii) as of June 30, 1998, TSI would contribute approximately 62.0% of book value for the pro forma combined company. A contribution percentage for the latest 12 month period net income was not meaningful as the pro forma combined company had negative data for such operating measure. Based on the Exchange Ratio of 0.525, current holders of TSI Voting and Non-Voting Common Stock would own approximately 32.7% of the pro forma combined company upon consummation of the Merger. Other Factors. In rendering its opinion, BT Alex. Brown also reviewed and considered, among other things: (i) historical and projected financial data for TSI and Eclipsys; (ii) historical market prices and trading volumes for TSI Voting Common Stock and Eclipsys Voting Common Stock and the relationship between movements in TSI Voting Common Stock, the movements in the common stock of the Selected Companies and movements in the S&P 500 Index and (iii) selected analysts' reports on TSI and Eclipsys, including EPS and growth rate estimates of such analysts for TSI and Eclipsys. The summary set forth above does not purport to be a complete description of the opinion of BT Alex. Brown to the TSI Board or the financial analyses performed and factors considered by BT Alex. Brown in connection with its opinion. The preparation of a fairness opinion is a complex analytic process involving various determinations as to the most appropriate and relevant methods of financial analyses and the application of those methods to the particular circumstances and, therefore, such an opinion is not readily susceptible to summary description. BT Alex. Brown believes that its analyses and the summary set forth above must be considered as a whole and that selecting portions of its analyses, without considering all analyses, or selecting portions of the above summary, without considering all factors and analyses, could create a misleading or incomplete view of the processes underlying such analyses and opinion. In performing its analyses, BT Alex. Brown made numerous assumptions with respect to industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of TSI and Eclipsys. No company, transaction or business used in such analyses as a comparison is identical to TSI, Eclipsys, the pro forma combined company or the proposed Merger, nor is an evaluation of the results of such analyses entirely mathematical; rather, such analyses involve complex considerations and judgments concerning financial and operating characteristics and other factors that could affect the Merger, public trading or other values of the companies, business segments or transactions being analyzed. The estimates contained in such analyses and the ranges of valuations resulting from any particular analysis are not necessarily indicative of actual values or future results, which may be significantly more or less favorable than those suggested by such analyses. In addition, analyses relating to the value of businesses or securities do not purport to be appraisals or to reflect the prices at which businesses or securities actually may be sold. Accordingly, such analyses and estimates are inherently subject to substantial uncertainty. The type and amount of consideration payable in the Merger was determined through negotiation between TSI and Eclipsys. Although BT Alex. Brown provided financial advice to TSI during the course of these negotiations, the decision to enter into the Merger was solely that of the TSI Board. BT Alex. Brown's opinion and financial analyses were only one of many factors considered by the TSI Board in its evaluation of the proposed Merger and should not be viewed as determinative of the views of the TSI Board or the management of TSI with respect to the Exchange Ratio or the Merger. Pursuant to the terms of BT Alex. Brown's engagement, TSI has agreed to pay BT Alex. Brown an aggregate financial advisory fee equal to 0.8% of the aggregate consideration (including liabilities assumed) payable in connection with the Merger, a significant portion of which is contingent upon consummation of the Merger. In addition, TSI has agreed to reimburse BT Alex. Brown for its reasonable travel and other out-of-pocket expenses, including reasonable fees and disbursements of counsel, and to indemnify BT Alex. Brown and certain related parties against certain liabilities, including certain liabilities under the federal securities laws, relating to, or arising out of, its engagement. 55
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BT Alex. Brown is an internationally recognized investment banking firm and, as a customary part of its investment banking business, is engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, private placements and valuations for estate, corporate and other purposes. TSI selected BT Alex. Brown based on BT Alex. Brown's reputation, expertise and familiarity with TSI. BT Alex. Brown and its affiliates have in the past provided financial services to TSI unrelated to the proposed Merger, for which services BT Alex. Brown and its affiliates have received compensation. BT Alex. Brown maintains a market in TSI Voting Common Stock and regularly publishes research reports regarding the businesses and securities of TSI and other publicly traded companies in the healthcare information technology industry. In the ordinary course of business, BT Alex. Brown may actively trade or hold the securities and other instruments and obligations of TSI and Eclipsys for its own account and the accounts of customers and, accordingly, may at any time hold a long or short position in such securities, instruments or obligations. INTERESTS OF CERTAIN PERSONS IN THE MERGER If the Merger is completed, two directors of TSI, Robert F. Raco and Patrick T. Hackett will be appointed to serve on the Eclipsys Board of Directors. Eclipsys has agreed to certain indemnification and insurance arrangements for existing and former directors and officers of TSI. From and after the Effective Time, Eclipsys has agreed to, and will cause the Surviving Corporation to agree to, indemnify each present and former director and officer of TSI against any costs or expenses incurred in connection with claims arising out of or pertaining to matters occurring prior to the Effective Time. In addition, for a period of three years after the Effective Time, Eclipsys has agreed to cause the Surviving Corporation to maintain a directors' and officers' liability insurance policy for the benefit of the directors and officers of TSI who were covered by TSI's policy immediately prior to the Effective Time, with coverage in an amount and scope at least as favorable as TSI's existing coverage; provided that neither Eclipsys nor the Surviving Corporation shall be required to expend in excess of 200% of the annual premium paid by TSI as of the date of the Merger Agreement for such coverage except to the extent any excess amount is attributable to Eclipsys' claims history or price increases in the market that are unrelated to TSI specifically. If the premium at any time exceeds such limitation, the Surviving Corporation will maintain insurance policies that provide the maximum and best coverage available at an annual premium equal to such limitation. If any legal action has been pending at any time subsequent to the second anniversary of the Effective Time against any person currently covered by TSI's directors' and officers' liability insurance policy and such pending action would be covered in whole or in part by such policy, the Surviving Corporation will continue to maintain such policy in effect (subject to the limitations above) until the fifth anniversary of the Effective Time. In addition, Eclipsys has agreed to arrange for certain registration rights for Warburg following the Merger. See "Description of Eclipsys Capital Stock -- Registration Rights." OWNERSHIP AND VOTING OF STOCK As of the Record Date, directors and executive officers of Eclipsys and their affiliates may be deemed to have voting control over approximately 59.4% of the outstanding shares of Eclipsys Voting Common Stock. See "Principal Stockholders of Eclipsys." As of the Record Date, directors and executive officers of TSI and their affiliates may be deemed to have voting control over approximately 34.9% of the outstanding shares of TSI Voting Common Stock. See "Principal Stockholders of TSI." Warburg, Pincus Ventures, L.P., Robert F. Raco, Christine Shapleigh and Donald C. Cook have each entered into Voting Agreements, dated as of October 29, 1998, with Eclipsys pursuant to which they have agreed to vote all shares of TSI Voting Common Stock over which they exercise voting control (an aggregate of 6,212,583 shares of TSI Voting Common Stock on the Record Date) in favor of approval and adoption of the Merger Agreement and the Merger. General Atlantic Partners 28, L.P., General Atlantic Partners 38, L.P., General Atlantic Partners 47, L.P., General Atlantic Partners 48, L.P., GAP Coinvestment Partners, L.P., Harvey J. Wilson, Wilfam 56
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Ltd. and Partners HealthCare System, Inc. have each entered into Voting Agreements, dated as of October 29, 1998, with TSI pursuant to which they have agreed to vote all shares of Eclipsys Voting Common Stock over which they exercise voting control (an aggregate of 10,470,508 shares of Eclipsys Voting Common Stock on the Record Date) in favor of the Eclipsys Voting Proposal. ACCOUNTING TREATMENT The Merger is intended to qualify as a pooling of interests for financial reporting purposes under U.S. GAAP. Under this method of accounting, the recorded assets and liabilities of Eclipsys and TSI will be carried forward to the combined company at their recorded amounts. The reported operating results of the separate companies for periods prior to the combination will be combined and restated as the operating results of the combined company. A condition to the Merger is that Eclipsys and TSI each shall have received a letter at the closing of the Merger from PricewaterhouseCoopers LLP regarding its concurrence, as of the date of the letter, with the conclusions of management as to the appropriateness of pooling-of-interests accounting treatment, under Accounting Principles Board Opinion No. 16 and related interpretations, for the Merger. Each of the affiliates of Eclipsys and TSI has executed a written agreement to the effect that such person will not transfer shares of common stock of either Eclipsys or TSI during the period beginning 30 days prior to the Effective Time and ending on the date that Eclipsys publishes financial statements which reflect 30 days of combined operations of Eclipsys and TSI (which agreements relate to the ability of Eclipsys to account for the Merger as a pooling of interests). CERTAIN FEDERAL INCOME TAX CONSIDERATIONS The following discussion addresses the material federal income tax considerations of the Merger that are applicable to holders of TSI Voting and Non-Voting Common Stock. TSI stockholders should be aware that this section does not deal with all federal income tax considerations that may be relevant to particular TSI stockholders in light of their particular circumstances, such as stockholders who are dealers in securities, who are foreign persons or who acquired their TSI Voting or Non-Voting Common Stock through stock option or stock purchase programs or in other compensatory transactions or who otherwise hold convertible securities, options or warrants. In addition, the following discussion does not address the tax consequences of transactions effectuated prior to or after the Merger (whether or not such transactions are in connection with the Merger), including, without limitation, the exercise of options, warrants or other rights to purchase TSI Voting or Non-Voting Common Stock in anticipation of the Merger. Finally, no foreign, state or local tax considerations are addressed herein. ACCORDINGLY, TSI STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM. The following discussion is based on the Internal Revenue Code of 1986, as amended (the "Code"), applicable Treasury Regulations, judicial authority and administrative rulings and practice, all as of the date hereof. The Internal Revenue Service (the "IRS") is not bound by such discussion and is not precluded from adopting a contrary position. In addition, there can be no assurance that future legislative, judicial or administrative changes or interpretations will not adversely affect the accuracy of the statements and conclusions set forth herein. Any such changes or interpretations could be applied retroactively and could affect the tax consequences of the Merger to Eclipsys, TSI and their respective stockholders. The Merger is intended to constitute a "reorganization" within the meaning of Section 368(a) of the Code (a "Reorganization"). Assuming the Merger is a Reorganization, then, subject to the assumptions, limitations and qualifications referred to herein, the Merger should result in the following federal income tax consequences: (a) No gain or loss will be recognized by the holders of TSI Voting and Non-Voting Common Stock upon the receipt of Eclipsys Voting Common Stock solely in exchange for such TSI Voting and Non-Voting Common Stock in the Merger (except to the extent of cash received in lieu of fractional shares). 57
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(b) The aggregate tax basis of the Eclipsys Voting Common Stock so received by TSI stockholders in the Merger (including any fractional share of Eclipsys Voting Common Stock not actually received) will be the same as the aggregate tax basis of the TSI Voting and Non-Voting Common Stock surrendered in exchange therefor. (c) The holding period of the Eclipsys Voting Common Stock received by each TSI stockholder in the Merger will include the holding period for the TSI Voting and Non-Voting Common Stock surrendered in exchange therefor, provided that the TSI Voting and Non-Voting Common Stock so surrendered is held as a capital asset. (d) Cash payments received by holders of TSI Voting and Non-Voting Common Stock in lieu of a fractional share will be treated as received in redemption of such fractional share, subject to the provisions of Section 302 of the Code, as if such fractional share of Eclipsys Voting Common Stock had been issued in the Merger and then redeemed by Eclipsys. (e) Each of Eclipsys, Sub and TSI will be a party to the Reorganization and as such will not recognize gain or loss solely as a result of the Merger. Neither Eclipsys nor TSI has requested a ruling from the IRS in connection with the Merger. However, it is a condition of the respective obligations of Eclipsys and TSI to consummate the Merger that such parties receive opinions from their respective counsel (the "Tax Opinions") to the effect that, for federal income tax purposes, the Merger will constitute a Reorganization. These Tax Opinions neither bind the IRS nor preclude the IRS from adopting a contrary position. The Tax Opinions will be subject to certain assumptions and qualifications and will be based on the truth and accuracy of certain representations of Eclipsys, TSI and Sub and certain stockholders of TSI. A successful IRS challenge to the Reorganization status of the Merger would result in a TSI stockholder recognizing gain or loss with respect to each share of TSI Voting and Non-Voting Common Stock surrendered equal to the difference between the stockholder's basis in such share and the fair market value, as of the Effective Time, of the Eclipsys Voting Common Stock received in exchange therefor. In such event, a stockholder's aggregate basis in the Eclipsys Voting Common Stock so received would equal its fair market value, and the stockholder's holding period for such stock would begin the day after the Merger. REGULATORY APPROVALS Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act") and the rules promulgated thereunder by the Federal Trade Commission (the "FTC"), the Merger may not be consummated until notifications have been given and certain information has been furnished to the FTC and the Antitrust Division of the Department of Justice (the "Antitrust Division") and specified waiting period requirements have been satisfied. Early termination of the waiting period under the HSR Act was granted on November 24, 1998. At any time before or after consummation of the Merger, and notwithstanding that the HSR Act waiting period has terminated, the Antitrust Division or the FTC could take such action under the antitrust laws as it deems necessary or desirable in the public interest, including seeking to enjoin the consummation of the Merger or seeking divestiture of assets of Eclipsys or TSI. At any time before or after the Effective Time of the Merger, and notwithstanding that the HSR Act waiting period has terminated, any state could take such action under its antitrust laws as it deems necessary or desirable in the public interest. Such action could include seeking to enjoin the consummation of the Merger or seeking divestiture of assets of Eclipsys or TSI. Private parties may also seek to take legal action under the antitrust laws under certain circumstances. Based on information available to them, Eclipsys and TSI believe that the Merger can be effected in compliance with federal and state antitrust laws. However, there can be no assurance that a challenge to the consummation of the Merger on antitrust grounds will not be made or that, if such a challenge were made, Eclipsys and TSI would prevail or would not be required to accept certain conditions, including the divestitures of assets, in order to consummate the Merger. 58
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FEDERAL SECURITIES LAW CONSEQUENCES All shares of Eclipsys Voting Common Stock received by TSI stockholders in the Merger will be freely transferable, except that shares of Eclipsys Voting Common Stock received by persons who are deemed to be "affiliates" of TSI prior to the Merger may be resold by them only in transactions permitted by the resale provisions of Rule 145 promulgated under the Securities Act of 1933, as amended (the "Securities Act") (or Rule 144 in the case of such persons who become affiliates of Eclipsys) or otherwise in compliance with (or pursuant to an exemption from) the registration requirements of the Securities Act. Persons deemed to be affiliates of Eclipsys or TSI are those individuals or entities that control, are controlled by, or are under common control with, such party and generally include executive officers and directors of such party as well as certain principal stockholders of such party. The Merger Agreement requires TSI to use its best efforts to cause each of its affiliates to execute a written agreement to the effect that such person will not offer or sell or otherwise dispose of any of the shares of Eclipsys Voting Common Stock issued to such person in or pursuant to the Merger except in compliance with the Securities Act and the rules and regulations promulgated by the Commission thereunder. This Joint Proxy Statement/Prospectus does not cover any resales of Eclipsys Voting Common Stock received by affiliates of TSI in the Merger. STOCK MARKET QUOTATION It is a condition to the Merger that the shares of Eclipsys Voting Common Stock to be issued pursuant to the Merger Agreement be approved for quotation on the Nasdaq National Market, subject to official notice of issuance. An application for listing the shares of Eclipsys Voting Common Stock on the Nasdaq National Market has been filed. APPRAISAL RIGHTS TSI stockholders voting against the Merger and the Merger Agreement who have filed with TSI prior to the stockholder vote at the TSI Special Stockholders' Meeting a written objection to the Merger along with a statement that they intend to demand payment for their shares are entitled under the Massachusetts Business Corporation Law to seek an appraisal of the fair value of their shares. No such shares will be converted into shares of Eclipsys Voting Common Stock as part of the Merger. If a TSI stockholder has not properly notified TSI prior to the stockholder vote at the TSI Special Stockholders' Meeting, has withdrawn the demand for appraisal or has voted in favor of the Merger, such stockholder's shares will be converted into shares of Eclipsys Voting Common Stock in accordance with the terms of the Merger Agreement. Under the Delaware General Corporation Law, the Eclipsys stockholders are not entitled to dissenters' appraisal rights in connection with the Merger because Eclipsys is not a constituent corporation in the Merger. 59
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UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS The following unaudited pro forma condensed combined financial statements reflect adjustments to the historical consolidated balance sheets and statements of operations of Eclipsys and TSI to give effect to the Merger, using the pooling-of-interests method of accounting for business combinations, and to certain other acquisitions by Eclipsys and TSI as discussed below. The unaudited pro forma condensed combined statements of operations for the years ended December 31, 1995, 1996 and 1997 and for the nine months ended September 30, 1998 assume the Merger was effected on January 1, 1995. Eclipsys' December 31 fiscal year end consolidated financial statements have been combined with TSI's September 30 fiscal year end consolidated financial statements. Eclipsys' unaudited consolidated financial statements for the nine months ended September 30 have been combined with TSI's unaudited consolidated financial statements for the nine months ended June 30. The unaudited pro forma combined condensed financial information of Eclipsys for the year ended December 31, 1997 and the nine months ended September 30, 1998 includes adjustments to give effect to: - the Alltel Acquisition - the SDK Acquisition - the Emtek Acquisition - the return by AIS to Eclipsys for cancellation of 11,000 shares of Redeemable Preferred Stock in return for extinguishing claims against AIS related to the Alltel Acquisition (the "AIS Settlement") - the MSA Buyout - the issuance of shares of Convertible Preferred Stock for total consideration of $9.0 million in February 1998 (the "1998 Preferred Stock Issuance") and the use of the proceeds therefrom to repay $9.0 million under the Term Loan - the scheduled repayment in April 1998 (the "SDK Partial Repayment") of $4.0 million of principal and accrued interest of the $7.6 million of SDK Notes - the January 1998 scheduled $2.0 million payment to AIS under the MSA - borrowings under the Revolver to fund the MSA Buyout and the Simione Investment - the conversion of Eclipsys' Convertible Preferred Stock in connection with the Eclipsys IPO - the Eclipsys IPO and the use of a portion of the proceeds therefrom to repay the outstanding balance under the Revolver and the remaining outstanding balance under the SDK Notes and to redeem the remaining Redeemable Preferred Stock with a face value of $34.5 million The unaudited pro forma condensed combined balance sheet at September 30, 1998 reflects the Eclipsys September 30, 1998 balance sheet combined with the TSI June 30, 1998 balance sheet, adjusted for the HealthVISION Acquisition and to conform to the Eclipsys financial presentation. Eclipsys acquired Alltel effective January 24, 1997 for an aggregate purchase price of $201.5 million, including liabilities assumed of $58.4 million and after giving effect to the cancellation of 4,500 shares of Redeemable Preferred Stock held by Alltel related to an October 1997 settlement of certain matters related to the acquisition. Consideration paid consisted of $104.8 million in cash, 15,500 shares of Redeemable Preferred Stock valued at approximately $10.3 million, 2,077,497 shares of Convertible Preferred Stock valued at approximately $26.1 million, deferred payments due under the MSA over four years valued at $9.5 million and transaction costs of approximately $2.0 million. Eclipsys acquired SDK effective June 26, 1997 for an aggregate purchase price of $16.5 million, including 499,997 shares of Eclipsys Voting Common Stock valued at approximately $3.2 million, $2.2 million in cash, the SDK Notes aggregating $7.6 million and assumed liabilities of approximately $3.5 million. Eclipsys acquired Emtek effective January 30, 1998 for an aggregate purchase price of approximately $11.7 million, including 1,000,000 shares of Eclipsys Voting Common Stock valued at $9.1 million and 60
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liabilities assumed of approximately $12.3 million. In addition, Motorola agreed to pay Eclipsys $9.6 million in cash for working capital purposes. The unaudited pro forma combined condensed financial information of TSI for the year ended September 30, 1997 and the nine months ended June 30, 1998 includes adjustments to give effect to the HealthVISION Acquisition. On December 3, 1998, TSI completed its acquisition of the remaining 80.5% of HealthVISION not already owned by TSI for cash in the amount of $25.6 million, plus an earn-out of up to $10.8 million if specified milestones are met. The acquisition will be accounted for under the purchase method of accounting, reflecting an estimated aggregate purchase price, including TSI's initial 1997 investment, of $40.7 million, which includes $6.4 million previously paid by TSI and $9.3 million of assumed liabilities, net of cash acquired. The results of operations of HealthVISION will be included in TSI's financial statements from the date of acquisition. The pro forma and pro forma combined adjustments are based upon available information and certain assumptions that Eclipsys and TSI believes are reasonable under the circumstances. The unaudited pro forma combined condensed financial information should be read in conjunction with the historical financial statements of Eclipsys, TSI, Alltel, SDK and HealthVISION and the respective notes thereto, "Management's Discussion and Analysis of Financial Condition and Results of Operations of Eclipsys" and the other financial information included herein. The unaudited pro forma combined condensed financial information is provided for information purposes only and does not purport to be indicative of the results which would have been obtained had the Merger been completed on the date indicated or which may be expected to occur in the future. 61
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UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 [Enlarge/Download Table] PRO FORMA PRO FORMA ECLIPSYS(1) TSI(2)(3) ADJUSTMENTS COMBINED ----------- ----------- ----------- --------- (IN THOUSANDS EXCEPT PER SHARE DATA) Revenues: Systems and services............................ $-- $27,386 2$7,386 Costs and expenses: Cost of systems and services revenues........... -- 7,471 7,471 Marketing and sales............................. -- 3,967 3,967 Research and development........................ -- 2,724 2,724 General and administrative...................... -- 2,299 2,299 Depreciation and amortization................... -- 1,379 1,379 --- ------- ----- Total costs and expenses................ -- 17,840 17,840 --- ------- ----- Income from operations............................ -- 9,546 9,546 Interest income, net.............................. -- (429) (429) --- ------- ----- Income before income tax provision.............. -- 9,975 9,975 Income tax provision.............................. -- (4,349) (4,349) --- ------- ----- Net income........................................ -- 5,626 5,626 Net income available to common stockholders....... $-- $ 5,626 $5,626 === ======= ===== Net income available to common stockholders per share: Basic........................................... $-- $ 0.19 $0.36 Diluted......................................... $-- $ 0.19 $0.36 Weighted average common shares outstanding: Basic........................................... -- 30,060 15,781(4) Diluted......................................... -- 30,060 15,781(4) --------------- (1) Eclipsys was formed in December 1995 and commenced operations in 1996. Accordingly, the Unaudited Pro Forma Condensed Combined Statement of Operations only reflects the operating results of TSI. (2) Reflects the operations of TSI for the fiscal year ended September 30, 1995. (3) The statement of operations data for TSI reflects the reclassification of certain costs and expenses, principally depreciation and amortization, to conform to the presentation of Eclipsys' consolidated statement of operations. (4) Gives effect to the conversion in the Merger of TSI common share equivalents into Eclipsys common share equivalents based on the 0.525 Exchange Ratio. 62
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UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 [Enlarge/Download Table] PRO FORMA PRO FORMA ECLIPSYS TSI(1) ADJUSTMENTS COMBINED -------- ----------- ----------- --------- (IN THOUSANDS EXCEPT PER SHARE DATA) Revenues: Systems and services....................... $ -- $34,269 $34,269 Costs and expenses: Cost of systems and services revenues...... -- 9,313 9,313 Marketing and sales........................ 770 4,424 5,194 Research and development................... 1,704 3,192 4,896 General and administrative................. 603 2,315 2,918 Compensation charge........................ -- 3,024 3,024 Depreciation and amortization.............. 32 1,443 1,475 ------- ------- ------- Total costs and expenses.............. 3,109 23,711 26,820 ------- ------- ------- Income (loss) from operations................... (3,109) 10,558 7,449 Interest expense (income), net.................. (156) (53) (209) ------- ------- ------- Income (loss) before income tax provision................................ (2,953) 10,611 7,658 Income tax provision............................ -- (4,324) (4,324) ------- ------- ------- Income (loss) before extraordinary item......... (2,953) 6,287 3,334 Extraordinary item: Loss on early extinguishment of debt, net of taxes................................. -- (2,149) (2,149) ------- ------- ------- Net income (loss)............................... (2,953) 4,138 1,185 Dividends on Series A non-voting preferred stock......................................... -- (593) (593) ------- ------- ------- Income (loss) available to common stockholders.................................. $(2,953) $ 3,545 $ 592 ======= ======= ======= Income (loss) before extraordinary item available to common stockholders per share(2): Basic...................................... $ (0.98) $ 0.43 $ 0.28 Diluted.................................... $ (0.98) $ 0.35 $ 0.24 Net income (loss) per common share: Basic...................................... $ (0.98) $ 0.27 $ 0.06 Diluted.................................... $ (0.98) $ 0.22 $ 0.05 Weighted average common shares outstanding: Basic...................................... 3,022 13,214 9,959(3) Diluted.................................... 3,022 16,137 11,494(3) --------------- (1) Represents the historical results of operations of TSI for the fiscal year ended September 30, 1996 and reflects the reclassification of certain costs and expenses, principally depreciation and amortization, to conform to the presentation of Eclipsys' consolidated statement of operations. (2) TSI and Pro Forma Combined information represents income before extraordinary item after reflecting accretion of $593,000 of dividends on TSI non-voting preferred stock. (3) Gives effect to the conversion in the Merger of TSI common share equivalents into Eclipsys common share equivalents based on the 0.525 Exchange Ratio. 63
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UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 [Enlarge/Download Table] ECLIPSYS --------------------------------------------------------------------- ACQUISITION AND OTHER ECLIPSYS ECLIPSYS ALLTEL(1) SDK(2) EMTEK(3) ADJUSTMENTS PRO FORMA TSI(4) ---------- --------- ------ -------- ----------- --------- -------- (IN THOUSANDS EXCEPT PER SHARE DATA) Revenues: Systems and services............. $ 89,722 $ 6,064 $3,037 $14,274 $113,097 $44,565 Hardware......................... 4,355 122 486 8,464 13,427 -- --------- ------- ------ -------- -------- ------- Total revenues............. 94,077 6,186 3,523 22,738 126,524 44,565 --------- ------- ------ -------- -------- ------- Costs and expenses: Cost of systems and services revenues....................... 77,083 4,277 2,193 11,459 $ 341(7) 95,353 11,834 Cost of hardware revenues........ 2,953 104 340 7,394 10,791 -- Marketing and sales.............. 13,662 660 336 6,235 20,893 6,805 Research and development......... 15,714 794 -- 12,804 29,312 3,725 General and administrative....... 5,672 621 992 6,671 13,956 3,829 Depreciation and amortization.... 9,710 568 -- 904 703(7) 11,885 1,632 Write off of in-process research and development(9)............. 99,189 -- -- -- (99,189) -- 6,293 --------- ------- ------ -------- -------- ------- Total costs and expenses... 223,983 7,024 3,861 45,467 182,190 34,118 --------- ------- ------ -------- -------- ------- Income (loss) from operations...... (129,906) (838) (338) (22,729) (55,666) 10,447 Interest expense (income), net..... 1,154 379 (19) -- (1,683)(10) (169) (2,501) Foreign currency transaction loss............................. -- -- -- -- -- -- --------- ------- ------ -------- -------- ------- (131,060) (1,217) (319) (22,729) (55,497) 12,948 Income tax benefit (provision)..... -- 437 -- -- (437)(12) -- (7,629) --------- ------- ------ -------- -------- ------- Net income (loss)(14).............. (131,060) (780) (319) (22,729) (55,497) 5,319 Dividends and accretion on mandatorily redeemable preferred stock............................ (5,850) -- -- -- 5,850 (15) -- -- Preferred stock conversion(17)..... (3,105) -- -- -- (3,105) -- --------- ------- ------ -------- -------- ------- Net income (loss) available to common stockholders..................... $(140,015) $ (780) $(319) $(22,729) $(58,602) $ 5,319 ========= ======= ====== ======== ======== ======= Net income (loss) available to common stockholders per share: Basic............................ $ (39.73) $ (2.98) $ 0.31 Diluted.......................... $ (39.73) $ (2.98) $ 0.27 Weighted average common shares outstanding: Basic............................ 3,524 19,638 17,435 Diluted.......................... 3,524 19,638 19,977 HEALTH- PRO FORMA PRO FORMA VISION(5) ADJUSTMENTS COMBINED --------- ----------- --------- (IN THOUSANDS EXCEPT PER SHARE DATA) Revenues: Systems and services............. $ 8,607 $ (500)(6) $165,769 Hardware......................... 547 13,974 -------- -------- Total revenues............. 9,154 179,743 -------- -------- Costs and expenses: Cost of systems and services revenues....................... 4,814 10,990 (8) 122,991 Cost of hardware revenues........ 398 11,189 Marketing and sales.............. 4,498 32,196 Research and development......... 6,189 (5)(6) 39,221 General and administrative....... 1,907 19,692 Depreciation and amortization.... 1,612 15,129 Write off of in-process research and development(9)............. -- 6,293 -------- -------- Total costs and expenses... 19,418 246,711 -------- -------- Income (loss) from operations...... (10,264) (66,968) Interest expense (income), net..... 3 1,280 (11) (1,387) Foreign currency transaction loss............................. 10 10 -------- -------- (10,277) (65,591) Income tax benefit (provision)..... (75) 7,704 (13) -- -------- -------- Net income (loss)(14).............. (10,352) (65,591) Dividends and accretion on mandatorily redeemable preferred stock............................ (795) 795 (16) Preferred stock conversion(17)..... -- (3,105) -------- -------- Net income (loss) available to common stockholders..................... $(11,147) $(68,696) ======== ======== Net income (loss) available to common stockholders per share: Basic............................ $ (2.39) Diluted.......................... $ (2.39) Weighted average common shares outstanding: Basic............................ 28,791(18) Diluted.......................... 28,791(18) 64
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--------------- (1) Represents the historical results of operations of Alltel for the period from January 1, 1997 through January 23, 1997. (2) Represents the historical results of operations of SDK from January 1, 1997 through June 26, 1997. (3) Represents the historical results of operations of Emtek from January 1, 1997 through December 31, 1997. (4) Represents the historical results of operations of TSI for the year ended September 30, 1997 and reflects the reclassification of certain costs and expenses, principally depreciation and amortization, to conform to the presentation of Eclipsys' historical consolidated statement of operations. (5) Represents the historical results of operations of HealthVISION for the year ended December 31, 1997 and reflects the reclassification of certain costs and expenses, principally depreciation and amortization, to conform to the presentation of Eclipsys' historical consolidated statement of operations. (6) Represents the elimination of certain intercompany transactions between TSI and HealthVISION. (7) Represents adjustments for amortization expense related to the Eclipsys Acquisitions and the Alltel Renegotiation as if they had occurred January 1, 1997 as follows (in thousands): [Download Table] ALLTEL SDK EMTEK TOTAL ------ ----- ------- ------- MSA............................................ $ 200 $ -- $ -- $ 200 Amortization of capitalized software reflected in the historical accounts prior to the Eclipsys Acquisitions........................ (377) (197) (1,794) (2,368) Acquired technology.......................... 1,763 321 425 2,509 ------ ----- ------- ------- $1,586 $ 124 $(1,369) $ 341 ====== ===== ======= ======= Ongoing customer relationships................. $ 181 $ -- $ -- $ 181 Goodwill....................................... 66 456 -- 522 ------ ----- ------- ------- $ 247 $ 456 $ -- $ 703 ====== ===== ======= ======= The Eclipsys Acquisitions were accounted for using the purchase method of accounting and accordingly the net assets acquired have been recorded at estimated fair value on the date of acquisition and the historical statement of operations data of Eclipsys reflect the results of operations from these businesses from the date acquired. In connection with the Eclipsys Acquisitions, Eclipsys acquired intangible assets as follows (in thousands): [Enlarge/Download Table] VALUE FIRST YEAR AMORTIZATION ------------------------- ------------------------- ALLTEL SDK EMTEK ALLTEL SDK EMTEK ------- ------ ------ -------- ----- ------ Acquired technology.............. $42,312 $3,205 $2,125 $21,156 $641 $425 Management and service agreement...................... 9,543 -- -- 2,386 -- -- ------- ------ ------ ------- ---- ---- $51,855 $3,205 $2,125 $23,542 $641 $425 ======= ====== ====== ======= ==== ==== Ongoing customer relationships... $10,846 $ -- $ -- $ 2,169 $ -- $ -- Goodwill......................... 8,997 4,553 -- 788 911 -- ------- ------ ------ ------- ---- ---- $19,843 $4,553 $ -- $ 2,957 $911 $ -- ======= ====== ====== ======= ==== ==== The acquired technology costs are being amortized annually over three to five years either on a straight line basis or, if greater, based on the ratio that current revenues bear to total anticipated revenues attributable to the applicable product. Ongoing customer relationships are being amortized over five years. Goodwill is being amortized over five to twelve years. (8) Represents an adjustment to record amortization of acquired technology recorded in connection with the HealthVISION Acquisition as if the transaction had closed on October 1, 1996. In 65
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connection with this transaction, TSI will record an acquired technology asset of $33.0 million. This asset will be amortized over its estimated useful life of three years. (9) In connection with the Alltel and SDK acquisitions, Eclipsys wrote-off in-process research and development of $92.2 million and $7.0 million, respectively, related to the appraised values of certain in-process research and development acquired in these acquisitions. In connection with TSI's acquisition of Vital Software, Inc., TSI wrote-off in-process research and development of $6.3 million related to the appraised value of certain in-process research and development acquired in this acquisition. Based on the preliminary results of an appraisal, TSI anticipates recording a $2.5 million write-off of in-process research and development in conjunction with the HealthVISION Acquisition. TSI will record this write-off in the period in which the transaction closes. The value of in-process research and development was determined by estimating the costs to develop the in-process projects into commercially viable products, estimating the resulting net cash flows from such projects, and discounting the net cash flows back to their present values. This evaluation considered the inherent difficulties and uncertainties of completing the development projects and the risks related to the viability of and potential changes in future target markets. The estimated costs to be incurred to complete the development of the in-process research and development into commercially viable products is $2.7 million. (10) Includes adjustments to net interest expense to give effect to the following (in thousands): [Download Table] Interest income foregone on $2.2 million cash paid for SDK Acquisition for the period from January 1, 1997 through June 25, 1997................................. $ 94 Additional interest expense on $20.6 million of borrowings under the Revolver to fund the MSA Buyout, SDK Partial Repayment and Simione Investment as if they had occurred on January 1, 1997.................. 1,752 Additional interest expense on the SDK Notes as if they had been issued on January 1, 1997.................... 360 Reduction of interest expense on $3.8 million of SDK Notes as if the SDK Partial Repayment had occurred as of January 1, 1997.................................... (360) Reduction of interest expense as a result of the elimination of the accretion of the discount recorded in connection with the MSA as if MSA Buyout had occurred as of January 1, 1997........................ (563) Reduction of interest expense from the cancellation of payables to AIS as if the Alltel Acquisition had occurred as of January 1, 1997 (interest calculated on average payables balance of $56.8 million at an annual interest rate of 8%).................................. (379) Reduction of interest expense on the Term Loan as if the 1998 Preferred Stock Issuance had occurred as January 1, 1997....................................... (850) Repayment of a portion of the pro forma balance of the Revolver as if it had occurred as of January 1, 1997.................................................. (1,377) Repayment of the pro forma balance of the SDK Notes as if it had occurred as of January 1, 1997.............. (360) ------- $(1,683) ======= (11) Represents an adjustment to reduce interest income of TSI as if the HealthVISION Acquisition had occurred on October 1, 1996. (12) Represents an adjustment to reduce the income tax benefit related to Alltel for the period from January 1, 1997 through January 23, 1997 as if the Alltel Acquisition had occurred on January 1, 1997. (13) Represents an adjustment to eliminate the income tax provision as if the HealthVISION Acquisition had occurred on October 1, 1996. 66
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(14) Eclipsys has not recorded any benefit for income taxes as management believes at December 31, 1997 it is more likely than not that Eclipsys net deferred tax assets will not be realized. Accordingly, Eclipsys has recorded a valuation allowance against its total net deferred tax assets. (15) Represents the reduction of $1.1 million in the dividends and accretion on Eclipsys Redeemable Preferred Stock held by AIS after giving effect to the AIS Settlement and the reduction of $4.7 million in the dividends and accretion on the Redeemable Preferred Stock with a face value of $34.5 million as if the proceeds of the Eclipsys IPO were utilized to redeem 34,500 shares of the Redeemable Preferred Stock on January 1, 1997. (16) Represents the reduction of $795,000 in the dividends and accretion on the redeemable preferred stock of HealthVISION as if the HealthVISION Acquisition had taken place on October 1, 1996. (17) Represents a charge related to the January 1997 conversion of Series A Convertible Preferred Stock to Series F Convertible Preferred Stock. (18) Gives effect to the conversion in the Merger of TSI common share equivalents into Eclipsys common share equivalents based on the 0.525 Exchange Ratio. 67
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UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 [Enlarge/Download Table] ECLIPSYS ----------------------------------------------- ACQUISITION AND OTHER ECLIPSYS HEALTH- PRO FORMA PRO FORMA ECLIPSYS EMTEK(1) ADJUSTMENTS PRO FORMA TSI(2) VISION(3) ADJUSTMENTS COMBINED -------- -------- ----------- --------- ------- --------- ----------- --------- (IN THOUSANDS EXCEPT PER SHARE DATA) Revenues: Systems and services............ $ 88,541 $ 705 $ 89,246 $33,946(4) $ 9,416 (675)(5) $131,933 Hardware.............. 9,202 275 9,477 -- -- 9,477 -------- ------- -------- ------- ------- -------- Total revenues.... 97,743 980 98,723 33,946 9,416 141,410 -------- ------- -------- ------- ------- -------- Costs and expenses: Cost of systems and services revenues............ 53,196 744 (77)(6) 53,863 10,316 3,645 8,243(7) 76,067 Cost of hardware revenues............ 7,825 245 8,070 -- -- 8,070 Marketing and sales... 13,945 580 14,525 5,911 3,251 23,687 Research and development......... 19,267 738 20,005 4,273 4,951 (227)(5) 29,002 General and administrative...... 4,580 276 4,856 2,505 2,027 9,388 Depreciation and amortization........ 7,937 87 8,024 1,329 597 9,950 Write-off of MSA(8)... 7,193 -- (7,193) -- -- -- -- -------- ------- -------- ------- ------- -------- Total costs and expenses........ 113,943 2,670 109,343 24,334 14,471 156,164 -------- ------- -------- ------- ------- -------- Income (loss) from operations.............. (16,200) (1,690) (10,620) 9,612 (5,055) (14,754) Interest expense (income), net..................... 628 -- (379)(9) 249 (2,285) 176 953(10) (907) Foreign currency transaction loss........ -- -- -- -- 28 28 -------- ------- -------- ------- ------- -------- (16,828) (1,690) (10,869) 11,897 (5,259) (13,875) Income tax benefit (provision)............. -- -- -- (4,759) (87) 4,846(11) -- -------- ------- -------- ------- ------- -------- Net income (loss)(12)..... (16,828) (1,690) (10,869) 7,138 (5,346) (13,875) Dividends and accretion on mandatorily redeemable preferred stock......... (10,928) -- 10,928(13) -- -- (621) 621(14) -- -------- ------- -------- ------- ------- -------- Net income (loss) available to common stockholders..... $(27,756) $(1,690) $(10,869) $ 7,138 $(5,967) $(13,875) ======== ======= ======== ======= ======= ======== Net income (loss) available to common stockholders per share: Basic................. $ (3.41) $ (0.55) $ 0.39 $ (0.47) Diluted............... $ (3.41) $ (0.55) $ 0.35 $ (0.47) Weighted average common shares outstanding: Basic................. 8,133 19,805 18,153 29,335(15) Diluted............... 8,133 19,805 20,459 29,335(15) --------------- (1) Represents the historical results of operations of Emtek for the period from January 1, 1998 through January 30, 1998. (2) Represents the historical results of operations of TSI for the nine months ended June 30, 1998 and reflects the reclassification of certain costs and expenses, principally depreciation and amortization, to conform to the presentation of Eclipsys' historical consolidated statement of operations. (3) Represents the historical results of operations of HealthVISION for the nine months ended September 30, 1998. (4) AICPA Statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition," will be effective for TSI transactions beginning in the first quarter of TSI's 1999 fiscal year. TSI is analyzing the impact of SOP 97-2, which may cause a deferral of revenue. After the consummation of the Merger, SOP 97-2 will be applied to TSI transactions beginning on January 1, 1998 in order to conform to Eclipsys' date of adoption of SOP 97-2. No pro forma adjustment has been made to the pro forma combined statement of operations to reflect the impact of adoption of SOP 97-2. See Note 2 of Notes to Consolidated Financial Statements of TSI. (5) Represents the elimination of certain intercompany transactions between TSI and HealthVISION. 68
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(6) Represents adjustments for amortization expense related to the Emtek Acquisition as if it had occurred January 1, 1997 as follows (in thousands): [Download Table] Amortization of capitalized software development costs reflected in the historical accounts prior to the Emtek Acquisition..................................... $(145) Acquired technology......................................... 68 ----- Total.............................................. $ (77) ===== (7) Represents an adjustment to record amortization of acquired technology recorded in connection with the HealthVISION Acquisition as if the transaction had closed on October 1, 1997. (8) In connection with the MSA Buyout, Eclipsys recorded a charge of $7.2 million in 1998. See Note 13 of Notes to Eclipsys' Consolidated Financial Statements. Adjustments represent the elimination of this non-recurring charge. (9) Includes adjustments to net interest expense to give effect to the following (in thousands): [Download Table] Additional interest expense on $18.6 million of borrowings under the Revolver to fund the MSA Buyout, SDK Partial Repayment and Simione Investment if they had occurred on January 1, 1997........................................... $ 395 Reduction of interest expense on $3.8 million of SDK Notes as if the SDK Partial Repayment had occurred on January 1, 1997...................................................... (90) Reduction of interest expense as a result of the elimination of the accretion of the discount recorded in connection with the MSA as if the MSA Buyout had occurred as of January 1, 1997........................................... (129) Reduction of interest expense on the Term Loan as if the 1998 Preferred Stock Issuance had occurred as of January 1, 1997................................................... (70) Reduction of interest expense as a result of the repayment of the pro forma balance of the Revolver as if it had occurred as of January 1, 1997............................ (395) Reduction of interest expense as a result of the repayment of the pro forma balance of the SDK Notes as if it had occurred on January 1, 1997............................... (90) ----- Total............................................. $(379) ===== (10) Represents an adjustment to reduce interest income of TSI as if the HealthVISION Acquisition had occurred on October 1, 1997. (11) Represents an adjustment to reduce the income tax provision as if the HealthVISION Acquisition had occurred on October 1, 1997. (12) Eclipsys has not recorded any benefit for income taxes as management believes, based on evidence available at December 31, 1997 and September 30, 1998, it is more likely than not that Eclipsys' net deferred tax assets will not be realized. Accordingly, Eclipsys has recorded a valuation against its total net deferred tax asset. (13) Represents the reduction of $ 181,000 in the dividends and accretion on Redeemable Preferred Stock held by AIS after giving effect to the AIS Settlement as if it had occurred on January 1, 1997 and the reduction of $10.8 million in the dividends and accretion on the Redeemable Preferred Stock with a face value of $34.5 million as if the proceeds of the Eclipsys IPO were utilized to redeem 34,500 shares of the Redeemable Preferred Stock on January 1, 1998. (14) Represents the reduction of $621,000 in the dividends and accretion on the redeemable preferred stock of HealthVISION as if the HealthVISION Acquisition had taken place on October 1, 1997. (15) Gives effect to the conversion in the Merger of TSI common share equivalents into Eclipsys common share equivalents based on the 0.525 Exchange Ratio. 69
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UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET [Enlarge/Download Table] ADJUSTMENTS FOR SEPTEMBER 30, JUNE 30, THE 1998 1998 HEALTHVISION ADJUSTMENTS PRO FORMA ECLIPSYS TSI ACQUISITION(1) FOR THE MERGER COMBINED ------------- -------- ---------------- -------------- --------- (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents.......... $ 12,309 $65,179 $(25,038) $ 52,450 Accounts receivable, net........... 40,443 19,662 3,696 63,801 Inventory.......................... 539 -- 539 Other current assets............... 9,757 1,179 802 11,738 Deferred income taxes.............. 853 853 --------- ------- --------- Total current assets............ 63,048 86,873 129,381 --------- ------- --------- Property and equipment, net.......... 10,530 1,638 770 12,938 Capitalized software development costs, net......................... 4,277 1,410 5,687 Acquired technology, net............. 18,798 1,219 32,970 52,987 Intangible assets, net............... 15,559 674 (400) 15,833 Other assets......................... 9,479 6,000 (6,000) 9,479 --------- ------- --------- $ 121,691 $97,814 $ 226,305 ========= ======= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable................... $ -- $ 1,334 $ 401 $(1,735)(2) $ -- Accrued liabilities................ -- 3,717 750 (4,467)(2) -- Income taxes payable............... -- 2,871 2,871 Deferred revenue................... 39,211 7,676 6,660 53,547 Other current liabilities.......... 32,411 -- 1,442 6,202(2) 40,055 --------- ------- --------- Total current liabilities....... 71,622 15,598 96,473 --------- ------- --------- Deferred revenue..................... 7,789 -- 7,789 Other long-term liabilities.......... 3,713 -- 3,713 Deferred income taxes................ -- 496 496 --------- ------- --------- Total liabilities............... 83,124 16,094 108,471 --------- ------- --------- Shareholders' equity: Common stock, voting............... 193 179 (92)(3) 280 Common stock, non-voting........... 9 4 (4)(3) 9 Non-voting common stock warrant.... -- 395 395 Additional paid-in capital......... 189,341 47,778 96(3) 237,215 Unearned compensation.............. (196) -- (196) Retained earnings (accumulated deficit)........... (150,841) 33,364 (2,453) (119,930) Accumulated other comprehensive income.......................... 61 -- 61 --------- ------- --------- Total shareholders' equity...... 38,567 81,720 117,834 --------- ------- --------- Total liabilities and shareholders' equity.......... $ 121,691 $97,814 $ 226,305 ========= ======= ========= --------------- (1) Represents an entry to record the HealthVISION Acquisition as of June 30, 1998. (2) Represents adjustments to reclassify accounts payable and accrued liabilities as other current liabilities in order to conform TSI's financial presentation to that of Eclipsys. (3) Represents an adjustment to reflect the issuance of approximately 9.6 million shares in connection with the Merger. 70
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THE MERGER AGREEMENT The following is a brief summary of certain provisions of the Merger Agreement, a copy of which is attached as Annex A to this Joint Proxy Statement/Prospectus and is incorporated herein by reference. Such summary is qualified in its entirety by reference to the Merger Agreement. Stockholders of Eclipsys and TSI are urged to read the Merger Agreement in its entirety for a more complete description of the terms and conditions of the Merger. GENERAL The Merger Agreement provides that, following the approval of the Eclipsys Voting Proposal by the stockholders of Eclipsys, the approval and adoption of the Merger and the Merger Agreement by the stockholders of TSI, and the satisfaction or waiver of the other conditions to the Merger, Sub will be merged with and into TSI, with TSI continuing as the Surviving Corporation, which will be a wholly owned subsidiary of Eclipsys. If all conditions to the Merger are satisfied or waived, the Merger will become effective at the time (the "Effective Time") of the filing by TSI and Sub of duly executed Articles of Merger with the Secretary of State of the Commonwealth of Massachusetts or at such time thereafter as shall be provided in the Articles of Merger. CONVERSION OF SHARES Upon consummation of the Merger, pursuant to the Merger Agreement, each issued and outstanding share of TSI Voting and Non-Voting Common Stock (other than shares owned by TSI as treasury stock or by Eclipsys, Sub or any other wholly owned subsidiary of Eclipsys, all of which will be cancelled, and other than shares, if any, as to which dissenters rights, if any, are perfected in accordance with Section 2.01(d) of the Merger Agreement) will be converted into 0.525 shares of Eclipsys Voting Common Stock. Based upon the number of outstanding shares of Eclipsys Voting and Non-Voting Common Stock and TSI Voting and Non-Voting Common Stock as of the Record Date, the stockholders of TSI immediately prior to the consummation of the Merger will own approximately 33.7% of the outstanding shares of Eclipsys Voting Common Stock immediately following consummation of the Merger on a fully diluted basis (assuming exercise of all warrants and stock options of both TSI and Eclipsys that are exercisable on or before December 31, 1998 and assuming conversion of all shares of Eclipsys Non-Voting Common Stock into Eclipsys Voting Common Stock). If a holder of shares of TSI Voting or Non-Voting Common Stock would be entitled to receive a number of shares of Eclipsys Voting Common Stock that includes a fraction, then, in lieu of the fractional share, such holder will be entitled to receive cash in an amount equal to such fractional share multiplied by the average of the last reported sale price of Eclipsys Voting Common Stock, as reported on the Nasdaq National Market on each of the ten trading days immediately preceding the closing date of the Merger. Each share of the Common Stock of Sub issued and outstanding immediately prior to the Effective Time will be converted into one share of common stock of TSI as the Surviving Corporation. As soon as reasonably practicable after the Effective Time, BankBoston, N.A. (the "Exchange Agent") will mail transmittal forms and exchange instructions to each holder of record of TSI Voting and Non-Voting Common Stock to be used to surrender and exchange certificates formerly evidencing shares of TSI Voting and Non-Voting Common Stock for certificates evidencing the shares of Eclipsys Voting Common Stock to which such holder has become entitled. After receipt of such transmittal forms, each holder of certificates formerly representing TSI Voting and Non-Voting Common Stock will be able to surrender such certificates to the Exchange Agent, and each such holder will receive in exchange therefor certificates evidencing the number of whole shares of Eclipsys Voting Common Stock to which such holder is entitled and any cash which may be payable in lieu of a fractional share of Eclipsys Voting Common Stock. TSI STOCKHOLDERS SHOULD NOT SEND IN THEIR STOCK CERTIFICATES UNTIL THEY RECEIVE A TRANSMITTAL FORM. 71
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After the Effective Time, each certificate formerly representing TSI Voting and Non-Voting Common Stock, until so surrendered and exchanged, shall be deemed, for all purposes, to evidence only the right to receive the number of whole shares of Eclipsys Voting Common Stock which the holder of such certificate is entitled to receive in the Merger and any cash payment in lieu of a fractional share of Eclipsys Voting Common Stock. The holder of such unexchanged certificate will not be entitled to receive any dividends or other distributions declared or made by Eclipsys with a record date after the Effective Time with respect to Eclipsys Voting Common Stock until the certificate has been exchanged. Subject to applicable laws, following surrender of such certificates, such dividends and distributions, together with any cash payment in lieu of a fractional share of Eclipsys Voting Common Stock, will be paid without interest. REPRESENTATIONS AND WARRANTIES The Merger Agreement contains various customary representations and warranties relating to, among other things: (a) due organization, valid existence and good standing of each of Eclipsys, TSI and each of their respective subsidiaries and certain similar corporate matters; (b) the capital structure of each of Eclipsys, TSI and Sub; (c) the authorization, execution, delivery and enforceability of the Merger Agreement, the consummation of the transactions contemplated by the Merger Agreement and related matters; (d) conflicts under their respective charters or bylaws, required consents or approvals and violations of any instruments or law; (e) documents and financial statements filed by each of Eclipsys and TSI with the Commission and the accuracy of information contained therein; (f) undisclosed liabilities; (g) the absence of certain material adverse events, changes or other actions (although Eclipsys and TSI have both agreed that the failure of either company to achieve any level of revenue and earnings at any time shall not of itself constitute a material adverse change); (h) taxes and tax returns; (i) properties; (j) intellectual property; (k) agreements, contracts and commitments; (l) litigation; (m) environmental matters; (n) compliance with laws; (o) accounting and tax matters relating to the Merger; (p) the accuracy of information supplied by each of Eclipsys, TSI and Sub in connection with this Joint Proxy Statement/Prospectus and the registration statement of which it is a part (the "Registration Statement"); (q) labor matters; (r) employee benefit plans; (s) insurance; (t) the absence of existing discussions by TSI or Eclipsys with other parties with respect to an Acquisition Proposal (as defined under "-- No Solicitation" below) (other than discussions regarding the acquisition by TSI of the capital stock of HealthVISION not owned by TSI); (u) opinions of financial advisors; (v) the inapplicability of certain provisions of the General Laws of Massachusetts, in the case of TSI, to the Merger and related transactions; and (w) the interim operations of TSI and Sub. CERTAIN COVENANTS Pursuant to the Merger Agreement, each of Eclipsys and TSI has agreed that, during the period from the date of the Merger Agreement until the Effective Time, except as otherwise consented to in writing by the other party or as contemplated by the Merger Agreement, it and each of its respective subsidiaries will, among other things: (a) carry on its business in the ordinary course in substantially the same manner as previously conducted; (b) pay its debts and taxes and perform other obligations when due subject to good faith disputes over such debts, taxes or obligations; (c) use all reasonable efforts consistent with past practices and policies to preserve intact its present business organization, management team and business relationships; (d) not accelerate, amend or change the period of exercisability of options or restricted stock granted under any employee stock plan or authorize cash payments in exchange for any options granted under any employee stock plan, except as required pursuant to the plan or any related agreements; (e) not declare or pay any dividends on or make other distributions in respect of any of its capital stock, not effect certain other changes in its capitalization, and not purchase or otherwise acquire, directly or indirectly, any shares of its capital stock except from former employees, directors and consultants in accordance with agreements providing for the repurchase of shares in connection with the termination of service; (f) not issue or sell, or authorize or propose the issuance or sale of, any shares of its capital stock or securities convertible into shares of its capital stock, or any subscriptions, rights, warrants or options to acquire, or other agreements obligating it to issue any such shares or other convertible securities, subject to certain exceptions; (g) not make any material acquisitions, subject to certain exceptions; (h) not sell, lease, 72
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license or otherwise dispose of material properties or assets outside the ordinary course of business; (i) not increase the compensation payable to its officers or employees (except for increases to non-officer employees consistent with past practices), grant additional severance or termination pay or enter into employment or severance agreements, enter into any collective bargaining agreement or establish, adopt, enter into or amend any plan for the benefit of its directors, officers, or employees; (j) not amend its charter or bylaws, except as contemplated by the Merger Agreement; and (k) not take, or agree in writing or otherwise to take, any of the actions described in (a) through (j) above. In addition, TSI has agreed that, during the period from the date of the Merger Agreement until the Effective Time, except as otherwise consented to in writing by Eclipsys or as contemplated by the Merger Agreement, it and each of its respective subsidiaries will not: (a) incur indebtedness for money borrowed other than pursuant to credit agreements in effect as of the date of the Merger Agreement; (b) initiate, compromise or settle any material litigation or arbitration except in connection with the Merger Agreement or the transactions contemplated thereby; (c) except in the ordinary course of business modify, amend or terminate any material contracts or release material rights or claims; or (d) except as required by generally accepted accounting principles, change its methods of accounting. Pursuant to the Merger Agreement, Eclipsys and TSI each have agreed to use their respective best efforts to (a) take all appropriate action to consummate the transactions contemplated by the Merger Agreement as promptly as practical, (b) obtain any consents, licenses, permits, waivers, approvals, authorizations or orders from governmental entities or other third parties required in connection with the transactions contemplated by the Merger Agreement and (c) make all necessary filings and submissions with respect to the transactions contemplated by the Merger Agreement under federal and state securities laws, antitrust laws and other applicable laws. Eclipsys and TSI have also agreed to use their respective best efforts to obtain any governmental clearances required under antitrust laws for the closing of the Merger. Neither Eclipsys nor TSI, nor any of their respective subsidiaries, are required either to divest any of their businesses, product lines or assets or take other action that would reasonably be expected to have a material adverse effect on such company. NO SOLICITATION The Merger Agreement provides that neither Eclipsys nor TSI will, directly or indirectly, through any officer, director, employee, financial advisor, representative or agent, (a) solicit, initiate or encourage any inquiries or proposals that constitute, or could reasonably be expected to lead to, a proposal or offer for a merger, consolidation, business combination, sale of substantial assets, sale of shares of capital stock (including without limitation by way of a tender offer) or similar transaction involving such parties or any of their respective subsidiaries, other than the transactions contemplated by the Merger Agreement and, in the case of Eclipsys, certain permitted acquisitions (any of the foregoing inquiries or proposals being referred to as an "Acquisition Proposal"), (b) engage in negotiations or discussions concerning, or provide any non-public information to any person or entity relating to, any Acquisition Proposal, or (c) agree to or recommend any Acquisition Proposal; provided, however, that nothing contained in the Merger Agreement shall prevent Eclipsys or TSI, or their respective Boards of Directors, from (i) furnishing non-public information to, or entering into discussions or negotiations with, any person or entity in connection with an unsolicited bona fide written Acquisition Proposal by such person or entity or recommending an unsolicited bona fide written Acquisition Proposal to the stockholders of the respective company, if and only to the extent that (1) the Board of Directors of such company believes in good faith (after consultation with its financial advisor) that such Acquisition Proposal is reasonably capable of being completed on the terms proposed and, after taking into account, among other relevant factors, the strategic benefits anticipated to be derived from the Merger and the long-term prospects of TSI and Eclipsys as a combined company, would, if consummated, result in a transaction more favorable to the stockholders of such company than the transaction contemplated by the Merger Agreement (any such more favorable Acquisition Proposal being referred to as a "Superior Proposal") and such Board of Directors determines in good faith after consultation with outside legal counsel that such action is necessary for such Board of Directors to comply with its fiduciary duties to stockholders under applicable law and (2) prior to furnishing such non-public 73
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information to, or entering into discussions or negotiations with, such person or entity, such Board of Directors receives from such person or entity an executed confidentiality agreement with terms no less favorable to such party than those contained in the confidentiality agreement dated October 2, 1998, between Eclipsys and TSI; or (ii) complying with Rule 14e-2 promulgated under the Exchange Act with regard to an Acquisition Proposal. Each of Eclipsys and TSI has agreed to notify the other party (orally and in writing) immediately after receipt by such party or an advisor to such party of any Acquisition Proposal or request for non-public information in connection with an Acquisition Proposal or for access to the properties, books or records of such party by any person or entity that informs such party that it is considering making, or has made, an Acquisition Proposal. In addition to indicating in reasonable detail the identity of any offeror and the terms and conditions of any proposal, each of Eclipsys and TSI has agreed to continue to keep the other party informed on a current basis of the status of any discussions and the terms being discussed or negotiated. RELATED MATTERS AFTER THE MERGER At the Effective Time, Sub will be merged with and into TSI, and TSI will be the surviving corporation and a wholly owned subsidiary of Eclipsys. Each share of Common Stock of Sub issued and outstanding immediately prior to the Effective Time will be converted into and exchanged for one validly issued, fully paid and nonassessable share of common stock of the Surviving Corporation. The Articles of Organization of Sub, as in effect immediately prior to the Effective Time, will become the Articles of Organization of the Surviving Corporation (except that the name of the company shall change to Transition Systems, Inc.). The Bylaws of Sub, as in effect immediately prior to the Effective Time, will become the Bylaws of the Surviving Corporation (except that the name of the company shall change to Transition Systems, Inc.). After the Effective Time, all shares of TSI Voting Common Stock will cease to be listed on the Nasdaq National Market, and the Surviving Corporation will terminate the registration of TSI Voting Common Stock under the Exchange Act. STOCK OPTIONS AND WARRANTS; EMPLOYEE STOCK PLANS At the Effective Time, each outstanding option to purchase shares of TSI Voting Common Stock (a "TSI Stock Option"), whether vested or unvested, will be deemed to constitute an option to acquire, on the same terms and conditions as were applicable under such TSI Stock Option, the number of shares of Eclipsys Voting Common Stock (rounded down to the nearest whole number) as the holder of such TSI Stock Option would have received had such holder exercised such option in full immediately prior to the Effective Time (thereby being subject to the Exchange Ratio calculations). The exercise price per share of each such option, as so converted, will be equal to (x) the aggregate exercise price for the shares of TSI Voting Common Stock otherwise purchasable pursuant to such TSI Stock Option immediately prior to the Effective Time divided by (y) the number of whole shares of Eclipsys Voting Common Stock deemed purchasable pursuant to such TSI Stock Option as determined above. As of November 30, 1998, options to acquire 3,420,540 shares of TSI Voting Common Stock were outstanding. Of these, options to purchase 2,366,257 shares of TSI Voting Common Stock will be exercisable as of December 31, 1998. Eclipsys has agreed to reserve for issuance a sufficient number of shares of Eclipsys Voting Common Stock for delivery upon exercise of the TSI Stock Options assumed as described above. As soon as practicable after the Effective Time, Eclipsys will file a registration statement on Form S-8 with respect to the shares of Eclipsys Voting Common Stock subject to such options and will use its best efforts to maintain the effectiveness of such registration statement for so long as such options remain outstanding. At the Effective Time, each outstanding warrant to purchase shares of TSI Non-Voting Common Stock (a "TSI Warrant") will be deemed to constitute a warrant to acquire, on the same terms and conditions as were applicable under such TSI Warrant, the number of shares of Eclipsys Voting Common 74
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Stock as the holder of such TSI Warrant would have received had such holder exercised such warrant in full immediately prior to the Effective Time (thereby being subject to the Exchange Ratio calculations). The exercise price per share of each such warrant, as so converted, will be equal to (x) the aggregate exercise price for the shares of TSI Non-Voting Common Stock otherwise purchasable pursuant to such TSI Warrant immediately prior to the Effective Time divided by (y) the number of whole shares of Eclipsys Voting Common Stock deemed purchasable pursuant to such TSI Warrant as determined above. As of November 30, 1998, warrants to acquire 297,928 shares of TSI Non-Voting Common Stock were outstanding. Eclipsys has agreed to reserve for issuance a sufficient number of shares of Eclipsys Voting Common Stock for delivery upon exercise of the TSI Warrants assumed as described above. TSI has agreed to terminate its Employee Stock Purchase Plan (the "TSI Stock Purchase Plan") in accordance with its terms as of or prior to the Effective Time, provided that such termination will not affect the rights of the plan's participants to purchase shares in the current offering period, which commenced on October 1, 1998 and terminates on March 31, 1999. If the Merger is closed before March 31, 1999, participants in the current offering under the TSI Stock Purchase Plan will have the right on March 31, 1999 to apply approximately $90,000 of deferred salary to the purchase of shares of Eclipsys Voting Common Stock (up to an aggregate of 14,227 shares) at an exercise price per share equal to the lower of $12.75 or 85% of the market value (determined in accordance with the TSI Stock Purchase Plan) of Eclipsys Voting Common Stock as of March 31, 1999, all subject to and in accordance with the terms of the TSI Stock Purchase Plan. After the Effective Time, Eclipsys will file a registration statement on Form S-8 with respect to the shares of Eclipsys Voting Common Stock issuable upon such purchase. DIRECTOR AND OFFICER INDEMNIFICATION The Merger Agreement provides that, from and after the Effective Time, Eclipsys and the Surviving Corporation will indemnify and hold harmless each present and former director and officer of TSI against all costs or expenses (including attorneys' fees), judgments, fines, losses, claims, damages, liabilities or amounts paid in settlement incurred in connection with any claim, action, suit, proceeding or investigation arising out of or pertaining to any matter existing or occurring at or prior to the Effective Time, whether asserted or claimed prior to, or at or after the Effective Time, to the fullest extent permitted under Massachusetts law. Eclipsys and the Surviving Corporation shall also be obligated to advance expenses as incurred to the fullest extent permitted under applicable law, provided the person to whom expenses are advanced provides an undertaking to repay such advances if it is ultimately determined that such person is not entitled to indemnification. For a period of three years after the Effective Time, Eclipsys shall cause the Surviving Corporation to maintain in effect (to the extent available in the market) a directors' and officers' liability insurance policy covering those persons who are covered as of the date of the Merger Agreement by TSI's directors' and officers' liability insurance policy, with coverage in an amount and scope at least as favorable as TSI's existing coverage; provided that neither Eclipsys nor the Surviving Corporation shall be required to expend in excess of 200% of the annual premium paid by TSI as of the date of the Merger Agreement for such coverage except to the extent any excess amount is attributable to Eclipsys' claims history or price increases in the market for such insurance that are unrelated to TSI specifically. If the premium at any time exceeds such limitation, the Surviving Corporation will maintain insurance policies that provide the maximum and best coverage available at an annual premium equal to such limitation. If any legal action had been pending at any time subsequent to the second anniversary of the Effective Time against any person currently covered by TSI's directors' and officers' liability insurance policy and such pending action would be covered in whole or in part by such policy, the Surviving Corporation will continue to maintain such policy in effect (subject to the limitations above) until the fifth anniversary of the Effective Time. CONDITIONS The respective obligations of Eclipsys and TSI to effect the Merger are subject to the satisfaction (or waiver) of the following conditions: (a) the Merger and the Merger Agreement shall have been approved by the holders of two-thirds of the outstanding shares of TSI Voting Common Stock and the Eclipsys 75
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Voting Proposal shall have been approved and adopted by the holders of a majority of the shares of Eclipsys Voting Common Stock represented in person or by proxy and voting at the Eclipsys Special Stockholders' Meeting; (b) the waiting period applicable to the consummation of the Merger under the HSR Act shall have expired or been terminated; (c) all material governmental authorizations, consents, orders or approvals shall have been obtained; (d) the Registration Statement shall have become effective and shall not be the subject of a stop order or proceedings seeking a stop order; (e) no order, injunction or judgment, or statute, rule or regulation, shall be in effect that makes the Merger illegal or otherwise prohibits the consummation of the Merger; and (f) Eclipsys and TSI each shall have received a letter from PricewaterhouseCoopers LLP regarding its concurrence, as of the date of the letter, with management's conclusions as to the appropriateness of accounting for the Merger as a pooling of interests under Accounting Principles Board Opinion No. 16. In addition, the obligations of Eclipsys and Sub to effect the Merger are subject to the satisfaction of the following conditions: (a) the representations and warranties of TSI in the Merger Agreement (including the representation that there has been no Material Adverse Change, as defined below, as to TSI) shall be true and correct as of the date of the Merger Agreement and (except to the extent such representations and warranties speak as of an earlier date) as of the Closing Date as though made on and as of the Closing Date, except for changes contemplated by the Merger Agreement and, in the case of breaches which are not qualified as to materiality, where the failure to be so true and correct individually or in the aggregate have not had and are not reasonably likely to have a material adverse effect upon either TSI or the consummation of the transactions contemplated by the Merger Agreement (the "TSI Representation Bringdown Condition"); (b) TSI shall have performed in all material respects all obligations required to be performed by it under the Merger Agreement at or prior to the Closing Date (the "TSI Covenant Condition"); (c) Eclipsys shall have received a written legal opinion from its counsel to the effect that the Merger will be treated for federal income tax purposes as a reorganization within the meaning of Section 368(a) of the Code; and (d) the total number of shares of TSI Voting or Non-Voting Common Stock as to which appraisal rights have been perfected shall not be greater than 5% of the total number of shares of TSI Voting and Non-Voting Common Stock outstanding immediately prior to the Effective Date. The Merger Agreement defines a "Material Adverse Change" for either TSI or Eclipsys as a material adverse change in the financial condition, results of operations, cash flows, business or property of the respective company and its subsidiaries, taken as a whole (other than changes that are the effect or result of economic factors affecting the economy as a whole or economic or market factors affecting the healthcare information systems industry generally), except that the failure of either company to achieve any level of revenues and earnings at any time does not of itself constitute a Material Adverse Change. The obligations of TSI to effect the Merger are subject to the satisfaction of the following conditions: (a) the representations and warranties of each of Eclipsys and Sub in the Merger Agreement (including the representation that there has been no Material Adverse Change as to Eclipsys and Sub) shall be true and correct as of the date of the Merger Agreement and (except to the extent such representations and warranties speak as of an earlier date) as of the Closing Date as though made on and as of the Closing Date, except for changes contemplated by the Merger Agreement and, in the case of breaches which are not qualified as to materiality, where the failure to be so true and correct individually or in the aggregate have not had and are not reasonably likely to have a material adverse effect upon either Eclipsys or the consummation of the transactions contemplated by the Merger Agreement (the "Eclipsys Representation Bringdown Condition"); (b) Eclipsys and Sub shall have performed in all material respects all obligations required to be performed by them under the Merger Agreement at or prior to the Closing Date (the "Eclipsys Covenant Condition"); (c) TSI shall have received a written legal opinion from its counsel to the effect that the Merger will be treated for federal income tax purposes as a tax-free reorganization within the meaning of Section 368(a) of the Code; (d) Eclipsys shall have entered into an agreement with Warburg, Pincus Ventures, L.P., a TSI stockholder, granting such stockholder certain registration rights; and (e) the shares of Eclipsys Voting Common Stock to be issued in the Merger shall have been approved for listing on the Nasdaq National Market. 76
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TERMINATION; TERMINATION FEES AND EXPENSES The Merger Agreement may be terminated at any time prior to the Effective Time, whether before or after approval of the matters presented in connection with the Merger by the stockholders of Eclipsys and TSI: (a) by mutual written consent of Eclipsys and TSI; or (b) by either Eclipsys or TSI if the Merger shall not have been consummated by April 30, 1999 (the "Outside Date") (provided that the right to terminate the Merger Agreement under this clause shall not be available to any party whose failure to fulfill any obligation under the Merger Agreement has been the cause of or resulted in the failure of the Merger to occur on or before such date); or (c) by either Eclipsys or TSI if a Governmental Entity (as defined in the Merger Agreement) or a court of competent jurisdiction shall have issued a nonappealable final order, decree or ruling or taken any other nonappealable final action, in each case having the effect of permanently restraining, enjoining or otherwise prohibiting the Merger; or (d) by Eclipsys if at the TSI Special Stockholders' Meeting (including any adjournment or postponement), the requisite vote of the stockholders of TSI in favor of the Merger and the Merger Agreement shall not have been obtained; or by TSI if at the Eclipsys Special Stockholders' Meeting (including any adjournment or postponement), the requisite vote of the stockholders of Eclipsys in favor of the Eclipsys Voting Proposal shall not have been obtained; or (e) by Eclipsys, if (i) the Board of Directors of TSI shall have withdrawn or modified in a manner adverse to Eclipsys its recommendation of the Merger Agreement or the Merger; (ii) the Board of Directors of TSI shall have recommended to the stockholders of TSI an Alternative Transaction (as defined below); (iii) a tender offer or exchange offer for 15% or more of the outstanding shares of TSI Voting Common Stock is commenced (other than by Eclipsys or an affiliate of Eclipsys) and the Board of Directors of TSI recommends that the stockholders of TSI tender their shares in such tender or exchange offer; or (iv) for any reason TSI fails to call and hold the TSI Special Stockholders' Meeting by the Outside Date (provided that Eclipsys' right to terminate the Merger Agreement under this clause (iv) is not available if at such time TSI would be entitled to terminate the Merger Agreement because of a breach by Eclipsys or Sub as described in paragraph (h) below); or (f) by TSI, if (i) the Board of Directors of Eclipsys shall have withdrawn or modified its recommendation of the Merger Agreement, the Merger or the Eclipsys Voting Proposal; (ii) the Board of Directors of Eclipsys shall have recommended to the stockholders of Eclipsys an Alternative Transaction (as defined below); (iii) a tender offer or exchange offer for 15% or more of the outstanding shares of Eclipsys Voting Common Stock is commenced (other than by TSI or an affiliate of TSI) and the Board of Directors of Eclipsys recommends that the stockholders of Eclipsys tender their shares in such tender or exchange offer; or (iv) for any reason Eclipsys fails to call and hold the Eclipsys Special Stockholders' Meeting by the Outside Date (provided that TSI's right to terminate the Merger Agreement under this clause (iv) is not available if at such time Eclipsys would be entitled to terminate the Merger Agreement because of a breach by TSI as described in paragraph (h) below); or (g) by TSI, if the TSI Board accepts or approves a Superior Proposal (as defined under "-- No Solicitation" above), or recommends a Superior Proposal to the TSI stockholders; or (h) by Eclipsys or TSI, if there has been a breach of any representation, warranty, covenant or agreement on the part of the other party set forth in the Merger Agreement, which breach causes the TSI Representation Bringdown Condition or the TSI Covenant Condition (in the case of a termination by Eclipsys) or the Eclipsys Representation Bringdown Condition or the Eclipsys Covenant Condition (in the case of a termination by TSI) not to be satisfied and such breach shall 77
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not have been cured within 20 business days following receipt by the breaching party of written notice of the breach from the other party. In the event of any termination of the Merger Agreement by either as provided above, the Merger Agreement will immediately become void and there will be no liability or obligation on the part of Eclipsys or TSI or their respective officers, directors, stockholders or affiliates, except with respect to the payment of certain fees and expenses as described below. Except as described below, whether or not the Merger is consummated, all fees, costs and expenses incurred in connection with the Merger Agreement and the transactions contemplated thereby (other than expenses (other than attorneys' fees) incurred with respect to the printing and filing of this Joint Proxy Statement/Prospectus and the Registration Statement, including exhibits and financial statements, which shall be shared equally) shall be paid by the party incurring such expenses. TSI has agreed to pay Eclipsys up to $2,000,000 as reimbursement for expenses of Eclipsys actually incurred relating to the transactions contemplated by the Merger Agreement prior to termination (including fees and expenses of Eclipsys' counsel, accountants and financial advisors, but excluding any discretionary fees paid to such financial advisors), upon the termination of the Merger Agreement by Eclipsys under the circumstances described in paragraphs (d), (e) or (h) above or by TSI under the circumstances described in paragraph (g) above. TSI has also agreed to pay Eclipsys a termination fee of $9,100,000, less amounts reimbursed for expenses as described in the previous paragraph (the "Eclipsys Termination Fee"), upon the earliest to occur of the following events: (i) termination of the Merger Agreement by Eclipsys under the circumstances described in paragraph (e) above; (ii) the termination of the Merger Agreement by Eclipsys under the circumstances described in paragraph (h) above after a breach by TSI of certain designated covenants set forth in the Merger Agreement; (iii) consummation of an Alternative Transaction with respect to TSI within 12 months following the failure to receive the requisite vote for approval of the Merger by the stockholders of TSI at the TSI Special Stockholders' Meeting if, at the time of such failure, there shall have been announced any Alternative Transaction relating to TSI which shall not have been absolutely and unconditionally withdrawn and abandoned or (iv) the termination of the Merger Agreement by TSI because TSI's Board had accepted, approved or recommended a Superior Proposal to the TSI Stockholders. Eclipsys has agreed to pay TSI up to $2,000,000 as reimbursement for expenses of TSI actually incurred relating to the transactions contemplated by the Merger Agreement prior to termination (including fees and expenses of TSI's counsel, accountants and financial advisors, but excluding any discretionary fees paid to such financial advisors), upon the termination of the Merger Agreement by TSI under the circumstances described in paragraphs (d), (f) and (h) above. Eclipsys has agreed to pay TSI a termination fee of $9,100,000, less amounts reimbursed for expenses as described in the previous paragraph (the "TSI Termination Fee"), upon the earliest to occur of the following events: (i) termination of the Merger Agreement by TSI under the circumstances described in paragraph (f) above; (ii) termination of the Merger Agreement by TSI under the circumstances described in paragraph (h) above after a breach by Eclipsys of certain designated covenants set forth in the Merger Agreement; or (iii) consummation of an Alternative Transaction with respect to Eclipsys within 12 months following the failure to receive the requisite vote for approval of Eclipsys Voting Proposal by the stockholders of Eclipsys at the Eclipsys Special Stockholders' Meeting if, at the time of such failure, there shall have been announced any Alternative Transaction relating to Eclipsys which shall not have been absolutely and unconditionally withdrawn and abandoned. As used in the Merger Agreement, "Alternative Transaction" means any of (i) a transaction (other than certain permitted acquisitions by Eclipsys) pursuant to which any person (or group of persons), other than Eclipsys or TSI or their respective affiliates (a "Third Party"), acquires more than 15% of the outstanding shares of TSI Voting Common Stock or Eclipsys Voting Common Stock, as the case may be, pursuant to a tender offer or exchange offer or otherwise, (ii) a merger or other business combination 78
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involving Eclipsys or TSI pursuant to which any Third Party acquires more than 15% of the outstanding shares of TSI Voting Common Stock or Eclipsys Voting Common Stock, as the case may be, or the entity surviving such merger or business combination, (iii) any other transaction (other than certain permitted acquisitions by Eclipsys) pursuant to which any Third Party acquires control of assets (including for this purpose the outstanding equity securities of subsidiaries of Eclipsys or TSI, and the entity surviving any merger or business combination including any of them) of Eclipsys or TSI having a fair market value equal to more than 15% of the fair market value (as determined by the Board of Directors of Eclipsys or TSI, as the case may be, in good faith) of all the assets of Eclipsys or TSI and its subsidiaries, taken as a whole, as the case may be, immediately prior to such transaction or (iv) any public announcement of a proposal, plan or intention to do any of the foregoing or any agreement to engage in any of the foregoing. If applicable, any expenses and fees payable as described above shall be paid within one business day after the first to occur of the relevant termination events. Payment of the Eclipsys Termination Fee or the TSI Termination Fee, as the case may be, constitutes liquidated damages and is the sole and exclusive remedy to the other party for any losses, damages, claims, costs or expenses arising from the occurrence of any event giving rise to the obligation to make such payment. AMENDMENT AND WAIVER The Merger Agreement may be amended by the respective Boards of Directors of Eclipsys or TSI at any time before or after approval by the stockholders of either party of the matters presented in connection with the Merger. After any such stockholder approval, however, no amendment may be taken which by law requires further approval by such stockholders until such further approval has been obtained. At any time prior to the Effective Time, Eclipsys or TSI, by action taken or authorized by their respective Boards of Directors, may (i) extend the time for the performance of any of the obligations or other acts of the other company, (ii) waive any inaccuracies in the representations and warranties of the other company contained in the Merger Agreement or in any document delivered pursuant hereto and (iii) waive compliance with any of the agreements or conditions contained therein. 79
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BUSINESS OF ECLIPSYS The information in this section relates to the business of Eclipsys as it is currently conducted without giving effect to the Merger. OVERVIEW Eclipsys is a healthcare information technology company delivering solutions that enable healthcare providers to achieve improved clinical, financial and administrative outcomes. Eclipsys offers an integrated suite of healthcare products in four critical areas -- clinical management, access management, patient financial management and enterprise data warehouse and analysis. These products can be purchased in combination to provide an enterprise-wide solution or individually to address specific needs. 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 reduces overall cost of ownership and increases 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 was formed in December 1995 and has grown primarily through its three acquisitions, all completed since January 1997. These acquisitions, together with internally generated growth, have resulted in revenues of $126.5 million in 1997 on the pro forma basis described herein. Eclipsys markets its products primarily to large hospitals, academic medical centers and integrated healthcare delivery networks. Eclipsys has one or more of its products installed or being installed in over 350 facilities. To provide direct and sustained customer contact, Eclipsys maintains decentralized sales, implementation and customer support teams in each of its five North American regions. Eclipsys' field sales force has an average of 18 years of experience in the healthcare industry. COMPETITIVE STRENGTHS Eclipsys believes that its products and services, focus on physicians' needs, leading technology, strategic relationships, management team and well-positioned customer base are competitive strengths that will enable it to capitalize on continued opportunities for growth. - Comprehensive Product Offering. Through both acquisitions and internal development, Eclipsys has assembled a comprehensive suite of products that perform core functions in the four areas Eclipsys believes are most critical to its customers -- clinical management, access management, patient financial management and enterprise data warehouse and analysis. Eclipsys' individual products can be integrated to provide a comprehensive healthcare information technology solution. Eclipsys' product strategy has been to acquire or develop industry-leading products in each core category and then integrate them to provide a comprehensive healthcare information technology solution. - Physician-Oriented Products. Eclipsys' clinical products are designed to reflect and support the way physicians work, and include features such as alerts, reminders, just-in-time clinical decision support, sub-second response times, an intuitive graphical user interface, continuous event monitoring and a customizable rules and protocol engine. This focus on physicians is important because Eclipsys believes that they are key decision makers in the trend toward the use of healthcare information technology solutions to improve work processes and outcomes across the continuum of healthcare delivery. - Leading Technology. Eclipsys has recently announced the development of, and has commenced migrating its products to, its new SOLA architecture. SOLA is a browser-enabled, multi-tiered, database-neutral architecture that supports multiple platforms and can be used across a broad range of computing environments from client-server systems to legacy mainframes. SOLA is designed to facilitate the integration of Eclipsys' products with its customers' existing systems, as well as with future products developed or acquired by Eclipsys. 80
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- Strategic Relationships. One of Eclipsys' important strategic relationships is with Partners, including two of its hospital subsidiaries, Brigham and MGH. This relationship provides intensive physician-driven research and development for new and existing products, testing and development support. In addition, Brigham and MGH, academic medical centers affiliated with Harvard Medical School, provide potential forums for training future users and customers. Eclipsys also has relationships with other academic medical centers, which also provide testing and development support. - Proven Management Team with Successful Track Record. Eclipsys' senior management team averages over 22 years in the healthcare and information technology industries and includes four former chief executive officers. Harvey J. Wilson, Chairman of the Board, President and Chief Executive Officer of Eclipsys, was a co-founder of SMS. Eclipsys believes that the range and depth of its senior management team position it to address the evolving requirements of its customers and to manage the growth required to meet its strategic goals. - Well-positioned Customer Base. Eclipsys' customers include large hospitals, integrated healthcare delivery networks and academic medical centers. Eclipsys believes that these entities are generally the first to adopt new technology and are the drivers of industry consolidation. Management believes that Eclipsys' commitment to quality, innovation, rapid product implementation and ongoing customer support has enabled it to build and maintain strong and stable customer relationships and positions it to capitalize on the opportunities for growth within its existing customer base. At December 31, 1997, Eclipsys had a backlog of approximately $108 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of Eclipsys -- Backlog." INDUSTRY In recent years, the healthcare industry has undergone, and is continuing to undergo, radical and rapid change. The increasing cost of providing healthcare has led the government sector, followed by the private sector, to develop new payment mechanisms that encourage healthcare providers to contain costs. This has caused the provider reimbursement environment to move away from the indemnity model, characterized by fee-for-service arrangements and traditional indemnity insurance, toward the managed-care model, in which providers are aligned within networks and healthcare delivery must follow plan-established rules to qualify for reimbursement. As a result, the emphasis of healthcare providers has shifted from providing care regardless of cost to providing high-quality care in the most cost-effective manner possible. Many providers are realizing that the traditional method of cost containment -- cutting expenses -- is not by itself enough to maintain their competitiveness in the face of these pressures. Management believes that providers must also improve the processes by which healthcare is provided, including improving the quality of care, the efficiency with which it is delivered and patient satisfaction. In particular, healthcare providers are focusing on avoiding costly adverse clinical events. The pressures to achieve successful clinical outcomes more efficiently while managing costs more effectively has led to significant industry consolidation, as healthcare providers seek to offer and control the full continuum of healthcare. The result has been the development of large integrated healthcare delivery networks. These are comprehensive vertical networks of healthcare providers, typically organized around an anchor hospital, and include physicians, outpatient facilities, laboratories, radiology facilities, home healthcare providers and long-term and rehabilitative facilities. As these networks grow larger and more dispersed, the challenge of effectively managing and delivering information throughout the enterprise also increases. Traditional healthcare information systems are limited in their ability to support restructuring of healthcare delivery processes or the evolving requirements of integrated healthcare delivery networks. Such systems have generally been financially oriented, focusing primarily on the ability to capture charges and generate bills. Many information technology vendors have attempted to apply their existing financially oriented systems to meet the demand for clinical solutions. However, because these systems were not originally developed to address clinical requirements, they often lack the basic structure and functionality 81
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to support better overall management of costs, care quality, outcome measurement and patient satisfaction across the healthcare delivery continuum. Moreover, because these vendors historically developed and marketed such systems primarily to financial managers, physicians, who influence a significant portion of variable healthcare costs, were often excluded from the design of healthcare information systems and from the system selection process. In addition, traditional systems were typically designed to operate in a single facility, which has made them less effective in today's widely dispersed integrated healthcare delivery networks. The growth of the managed care environment and the rise of integrated healthcare delivery networks has created an opportunity for new healthcare information technology products and services. Healthcare providers are increasingly demanding integrated solutions that offer all of the core functions required to manage the entire healthcare delivery process. These core functions include clinical management, access management and patient financial management functions. In addition, large and widely spread healthcare delivery networks require data warehouse and analysis tools that permit them to effectively extract and analyze data located throughout the enterprise, both to measure clinical results and return on investment and to support process improvement. These solutions must also allow providers to preserve their investment in existing legacy applications and technologies, which often are significant and vary from facility to facility. Finally, physician utilization is necessary for a healthcare information technology solution to improve clinical outcomes. Eclipsys believes that physician utilization will increase as information technology solutions provide greater functionality, including alerts, reminders, sub-second response times, just-in-time clinical decision support, an intuitive graphical user interface and the ability to log on to the system remotely. Historically, the healthcare industry has invested relatively less in technology compared to certain other industries. Eclipsys believes that healthcare providers are realizing that a relatively small investment in healthcare information technology can significantly reduce variable costs. As a result of industry trends, healthcare providers are making significant investments in healthcare information technology solutions that capitalize on evolving information management technologies. Industry analysts estimate that healthcare organizations spent approximately $17 billion in 1997 for information technology solutions, and anticipate that such expenditures will increase to approximately $28 billion annually by 2002. STRATEGY Eclipsys' objective is to become the leading provider of healthcare information technology solutions to meet the needs of the healthcare industry as it consolidates and evolves. Key elements of Eclipsys' strategy to achieve this objective include: Provide Comprehensive, Integrated Healthcare Information Technology Solutions. Eclipsys is focusing on providing a full suite of clinical management, access management, patient financial management and enterprise data warehouse and analysis solutions. Eclipsys' products are designed to be: - responsive to physicians' needs for alerts, reminders, sub-second response times, continuous event monitoring and practice-specific clinical information, rules, and protocols which provide just-in-time clinical decision support; - outcomes-oriented, so customers can easily determine clinical benefits and return on investment; and - user-friendly through an intuitive graphical user interface. Eclipsys believes that its healthcare information technology solutions facilitate the clinical and business decision process, enabling its customers to improve their overall work processes, clinical outcomes and return on investment. Further Penetrate Existing Customer Base. Eclipsys believes there is a significant opportunity to sell its integrated healthcare technology solutions to its existing customers. Eclipsys has at least one of its products installed or being installed at over 350 facilities. Of these customers, only a few have an 82
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enterprise-wide healthcare information system. Eclipsys believes that it is well-positioned to capitalize on the growth opportunity within its existing customer base as a result of several factors: - its broad, integrated product suite; - the ability of its products to work with a customer's existing information systems; - the ability to document clinical benefits and return on investment; - management's industry experience and relationships; - alignment of its pricing and payment schedule with the value received by its customers; and - its ongoing customer support and service programs. Employ a Targeted Marketing Approach. Eclipsys' target market primarily includes large hospitals, integrated healthcare delivery networks and academic medical centers. Eclipsys believes that these entities are the first to adopt new technology and are the drivers of industry consolidation. As the size and complexity of these customers grow, their need for integrated information technology solutions increases. Eclipsys has identified potential new customers, including those who are currently relying on legacy systems that lack the functions and features such customers require, and is targeting decision makers within these entities. In particular, Eclipsys believes that physicians are becoming increasingly involved in the information technology selection process as recent technological developments and the impact of managed care have increased the utility of information systems to physicians. Eclipsys believes that its clinically oriented, physician-designed products provide it with an advantage as it competes for business. Eclipsys also leverages the extensive industry experience of its senior management and sales force, as well as its strategic relationships with leading institutions such as Brigham and MGH, to pursue this opportunity. Continue to Enhance and Develop New Solutions. Eclipsys intends to continue upgrading existing products and developing new solutions to meet the evolving healthcare information needs of its customers. For example, Eclipsys is currently focusing on migrating its products to its new SOLA architecture, which is designed to facilitate the integration of new and existing applications as they are developed or acquired by Eclipsys with legacy systems of its customers. Eclipsys has a team of more than 300 internal research, development and technical support professionals dedicated to developing, enhancing, supporting and commercializing new and enhanced healthcare information technology products. Eclipsys also has an exclusive right of first offer to commercialize new information technologies developed in connection with Partners. In addition, Eclipsys' relationship with Partners allows it to test new and existing products in a potential forum that provides feedback from medical and administrative users, which Eclipsys believes gives it a competitive advantage in developing new products. Pursue Selected Acquisitions and Investments. Eclipsys intends to continue pursuing selected acquisitions and investments that will enhance its product line, customer base, technological capabilities and management team. Historically, Eclipsys has experienced significant growth through acquisitions, and intends to continue to target acquisitions and investments that will help it achieve its overall strategic goals. Eclipsys also believes that such transactions will provide it with the opportunity to leverage its existing sales, marketing and development teams and offer the potential to achieve operating synergies across the organization. PRODUCTS Eclipsys' products perform the core information technology functions required by integrated healthcare delivery networks and other healthcare providers across the entire continuum of healthcare. These functions include (i) clinical management, (ii) access management, (iii) patient financial management and (iv) enterprise data warehouse and analysis. - Clinical Management products assist the physician and other clinicians in making clinical decisions throughout the care process. These systems give physicians and other clinicians immediate access to 83
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complete and up-to-date patient records at all stages, enable physicians to enter on-line orders for specialized services, such as radiology or laboratory testing and prescriptions, provide clinical rules to facilitate clinical decisions and alert the physician to potential adverse reactions. - Access Management products provide access to patient information from any point in the healthcare delivery system and coordinate the gathering of additional patient data at each stage of the patient encounter. Access management also coordinates the scheduling of patient appointments throughout the treatment process. - Patient Financial Management products coordinate compliance with managed-care contract reimbursement terms, patient billing and collection and third-party reimbursement. These products support the growing trend toward the centralized business office, which manages compliance with managed-care contracts across the entire healthcare enterprise and for all stages of the healthcare continuum. - Enterprise Data Warehouse and Analysis products facilitate the extraction and analysis of all data collected throughout the organization to support reporting, strategic planning and decision-making functions. Eclipsys offers products under the Sunrise name in each of these four core areas. These products enable Eclipsys to offer a comprehensive line of core applications that can be purchased individually or combined to form a fully integrated single-source information technology solution. Most of Eclipsys' products are functional in several different healthcare settings, including ambulatory care, critical care and acute care. The Sunrise Access Management suite, the Sunrise Patient Financial Management suite and the Sunrise Enterprise Data Warehouse are generally available to Eclipsys' customers. Most of the key functionalities of the Sunrise Clinical Management suite are currently available in Eclipsys' heritage products. Eclipsys is in the process of integrating these key functionalities into the Sunrise Clinical Management suite, which is currently in field trials and is expected to be generally available to customers in 1999. SUNRISE CLINICAL MANAGEMENT Sunrise Clinical Management is a physician-oriented application that provides patient information to the physician and other clinicians at the point-of-care anywhere in the healthcare continuum, allows a physician to quickly and efficiently enter orders directly into the system and provides clinical decision support at the time of order entry. The functionality of the Sunrise Clinical Management suite is derived from the Alltel TDS 7000 Series, Emtek's Continuum 2000 application and the BICS program developed at Brigham and licensed from Partners. Eclipsys has selected the best features of these heritage programs to integrate into its Sunrise Clinical Management suite. Eclipsys continues to enhance and support these heritage products for its installed customer base in order to allow these customers to make the transition to the Sunrise Clinical Management suite over time. Sunrise Clinical Management includes the following features: - Clinical Data Repository, which permanently stores clinical and financial information into patient care records that are easily and quickly accessible in ambulatory, acute care and other healthcare settings. - Clinical View, which provides physicians with access to patient information, such as complete patient records covering treatments at both ambulatory and acute care facilities, whether they are accessing the records from within the healthcare facility or a remote location. - Clinical Documentation, which gathers and presents organized, accurate and timely patient information. The application creates an electronic patient chart, accepting and arranging input from caregivers, laboratories or monitoring equipment. 84
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- Order Entry, Communication and Management, which enables physicians to enter on-line prescriptions and orders for laboratory or diagnostic tests or procedures. The application also routes the order to the appropriate department or party within the organization for fulfillment. - SOLAssistant, which is a clinical decision support system that is activated automatically during the order entry process. This sophisticated system provides real-time guidance to physicians by alerting them to possible problems with or conflicts between newly entered orders and existing patient information using the system's rules database. A comprehensive set of clinical rules developed by physicians is available with SOLAssistant. Customers can modify these existing rules or can develop their own clinical rules. - SOLAsentry, which is a continuous event monitoring system. SOLAsentry triggers alerts, which can include e-mail or pager notification, upon the occurrence of a specified change in a patient's condition or any other physician-designated event, such as the delivery of unfavorable laboratory results. The application tracks new patient data, relates it to information already in the system for that patient, identifies significant new relationships, alerts the physician to the changed relationship and prompts corrective actions on a real-time basis. - Clinical Pathways and Scheduled Activities List, which provide access to standardized patient care profiles and assist in the scheduling and monitoring of procedures. These applications provide listings of clinical treatment procedures for individual patient care and generates scheduled activities lists in each department based on information from those lists. This allows the resources of a department to be deployed in the most effective and efficient manner. Eclipsys is currently developing a clinical reporting application, which will provide periodic reports to physicians enabling them to identify their practice group's clinical performance. Eclipsys is also developing referral and medical management features, which will allow a physician to refer a patient instantly to another healthcare provider with appropriate patient information attached to the referral. Eclipsys' heritage clinical management products are installed or in the process of being installed at more than 250 facilities. SUNRISE ACCESS MANAGEMENT Sunrise Access Management enables the healthcare provider to identify the patient at any point in the healthcare delivery system and to collect and maintain patient information throughout the entire continuum of patient care on an enterprise-wide basis. The single database structure of Sunrise Access Management permits simultaneous access to the entire patient record from any terminal on the system. The Sunrise Access Management suite is based primarily on the products acquired in the SDK Acquisition, which Eclipsys has integrated with its other product offerings and has continued to enhance. The elements of Sunrise Access Management include: - Patient Registration/ADT, which is used to register a patient in an ambulatory setting, and to admit, discharge and transfer patients in an acute care setting. Patient information -- such as demographics, personal contacts, primary-care provider, allergies or medications, health history, employment and insurance coverage -- is taken at the patient's initial visit and is immediately accessible on-line to all authorized personnel across the enterprise. Subsequent visits require only confirmation and updates as necessary. Visit-specific information, such as the date and the reason for the visit, the care provided and the caregivers providing service, is collected at each visit. - Patient Scheduling and Resource Management, which is used to schedule patient appointments across an organization from any location within the enterprise. The application has the flexibility to provide for patient preferences and resource availability. - Enterprise Master Person Index, which is a single index of all patients and healthcare plan members within a healthcare provider's system. Records can be accessed from the index by searching a 85
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variety of characteristics, such as name, Social Security number or other demographic data, including a combination of several characteristics. Sunrise Access Management also includes managed care support features such as verifying insurance eligibility on-line and compliance with managed care plan rules and procedures, as well as medical records abstracting, which compiles patient data into statistical information. The integrated nature of Sunrise Access Management allows healthcare providers to complete pre-registration as part of the scheduling process and view patient records from multiple sites within an enterprise. This eliminates the generation of redundant records, thereby saving both patient and caregiver time, and permits the efficient scheduling of resources throughout the organization. Eclipsys' access management products are installed or in the process of being installed at over 70 facilities. SUNRISE PATIENT FINANCIAL MANAGEMENT Sunrise Patient Financial Management uses a single, integrated database for patient accounting processes, including the automatic generation of patient billing and accounts receivable functions, a system of reimbursement management to monitor receivables, the automation of collection activities and contract compliance analysis, as well as follow-up processing and reporting functions. Billing and receivables management activities are automated through rules-based processing and can be customized to reflect each organization's specific procedures. This product suite supports the growing trend toward the centralized business offices for multiple entities, which improves compliance with managed care contracts across the entire enterprise and at all stages of the healthcare delivery continuum. The Sunrise Patient Financial Management suite is based primarily on the products acquired in the SDK Acquisition, which Eclipsys has integrated with its other product offerings and has continued to enhance. Sunrise Patient Financial Management includes the following functions: - Patient Accounting, which automates the patient billing and accounts receivable functions. For bill generation, the application incorporates rules-based calculations of expected reimbursement and provides users with the option for automatic generation of contractual allowances at the time of billing or the time of payment. Rules may be generated for each insurance plan accepted by an organization. Receivables management functions include account write-offs, on-line work lists of accounts requiring follow-up, extensive account comments and standard and ad hoc reporting. Paperless processing is achieved through real-time inquiry, editing, sorting, reporting, commenting and updating from other applications, including modules in Sunrise Access Management and Sunrise Clinical Management. - Contract Management, which includes a repository for the payment terms, restrictions, approval requirements and other rules and regulations of each insurance plan and managed care contract accepted by an organization. Contract Management is used in conjunction with other Sunrise products to ensure that patient care complies with these rules and regulations. - Reimbursement Management, which facilitates monitoring receivables, performing collection activity, reconciling with third parties and analyzing contract compliance and performance. - Executive Information System, which provides immediate access to the data contained in the Patient Financial Management database. Executive Information System provides reports in tabular or graphic formats. Eclipsys' patient financial management products are installed or in the process of being installed at over 75 facilities. SUNRISE ENTERPRISE DATA WAREHOUSE Sunrise Enterprise Data Warehouse, which consolidates data from different systems, including all of a client's legacy and third-party systems, into a single database to facilitate and support data gathering and 86
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analysis throughout an organization. This application enables users to analyze collected data, identify sources of the data, automate data extraction, map and load data into relational tables for detailed analysis, assure the consistency of data across systems and support timely, accurate analysis and reporting of data for specific applications. Enterprise Data Warehouse is able to house data from other systems and supports data-mining techniques, allowing a customer to gather data from all of the organization's systems. Customers can build customized reports using the collected data, reducing the need for additional software and training. Sunrise Enterprise Data Warehouse is an important component of the customers' ability to measure and document improved clinical outcomes and return on investment. OTHER PRODUCTS Eclipsys' other products include OpenHUB and Orion, both of which Eclipsys distributes under a license. OpenHUB is Eclipsys' interface engine, which provides a fast, flexible means of integrating systems and data, allowing an organization to select the best data processing solution regardless of the hardware or software platforms. Orion is an electronic document and workflow management product that permits providers to reduce their dependency on paper communications, thereby improving workflow processes and reducing the risk of lost or inaccurate records. In connection with Eclipsys' investment in Simione, Eclipsys and Simione have entered into a Remarketing Agreement pursuant to which Eclipsys has the right to distribute certain Simione software products designed for home healthcare providers. See "Management's Discussion and Analysis of Eclipsys -- Overview." In connection with providing healthcare information technology solutions, Eclipsys also sells hardware to its customers. SOLA ARCHITECTURE Eclipsys has recently announced the development of, and has commenced migrating its products to, its new SOLA architecture, which Eclipsys believes will facilitate integration, enhance automation, increase reliability and improve security and workflow processes. SOLA draws on a thin-client architecture to integrate business logic with an intuitive graphical user interface thereby enhancing automation and reducing the cost of ownership. This thin-client architecture enables the user interface to be improved without disturbing the core application set and facilitates integration of Eclipsys' products with new operating systems, display environments and devices. SOLA also features a high performance rules engine to implement a sizable portion of the business logic for Eclipsys' products. These rules guide clinical and business workflow, clinical decision support for order entry, clinical and financial event monitoring and screen logic, enabling structured development of new applications while maintaining consistency across applications. Because the rules are managed and stored as data, customers are able to update the business logic without modifying and distributing new code. This enables customers to reduce programming expenses, while enhancing the flexibility of Eclipsys' applications and facilitating their rapid adoption. SOLA features a seamless and consistent architecture which promotes reliability for mission-critical applications and fault tolerance. The SOLA architecture also uses advanced technology to maintain security across the Internet and organization Intranets. This ability to support secure communications and incorporate reliable protocols for authenticating users and services permits the confidentiality of patient information to be maintained. Certain products being migrated to the SOLA architecture are currently undergoing field trials in several locations. SERVICES Drawing on the functionality and flexibility of its software products, Eclipsys offers a range of professional services as part of its healthcare information technology solutions. These services include outsourcing, remote processing and network services. 87
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OUTSOURCING SERVICES Outsourcing Services typically involve Eclipsys assuming the management of the customer's entire information technology function on-site using Eclipsys' employees. Outsourcing Services include Facilities Management, Network Outsourcing and Transition Management. Facilities Management enables customers to improve their information technology operations by having Eclipsys assume responsibility for all aspects of the customer's information technology operations, from equipment to human resources. Network Outsourcing provides customers with total healthcare information network support, relieving the customer of the need to secure and maintain expensive resources in a rapidly changing technological environment. Transition Management offers customers a solution for migrating their information technology to new processes, technologies or platforms without interfering with the existing rules and initiatives critical to the delivery of healthcare. REMOTE PROCESSING SERVICES Remote Processing Services include complete processing of an enterprise's applications from Eclipsys' site using Eclipsys' equipment and personnel. This service frees an organization from having to maintain the environment, equipment and technical staff required for systems processing and offers support for an organization's fault management, configuration management and utilization management processes. NETWORK SERVICES Network Services is a comprehensive package of services allowing Eclipsys' customers to receive critical data quickly and accurately without incurring a substantial increase in cost. Eclipsys assesses changes in network utilization and function, forecasts any necessary upgrades to accommodate growth of the customer and designs any changes necessary to provide the customer with the required performance and functionality. Eclipsys offers its services in various forms ranging from on-site assistance on a time and expense basis to complete turnkey project deliveries with guaranteed fixed price rates and outcomes. IMPLEMENTATION, PRODUCT SUPPORT AND TRAINING Eclipsys believes that a high level of service and support is critical to its success. Furthermore, Eclipsys believes that a close and active service and support relationship is important to customer satisfaction and provides Eclipsys with important information regarding evolving customer requirements and additional sales opportunities. To facilitate successful product implementation, Eclipsys' consultants assist customers with initial installation of a system, conversion of a customer's historical data and ongoing training and support. This also includes Year 2000 consulting, programming and conversion services to help customers prepare for transition and to address Year 2000 compliance and performance issues. In addition, 24-hour telephone support is available and Eclipsys offers electronic distribution to provide clients the latest information regarding Eclipsys' products. Eclipsys also provides regular maintenance releases to its customers. Eclipsys' service and support activities are supplemented by comprehensive training programs, including introductory training courses for new customers and seminars for existing customers, to educate them about the capabilities of Eclipsys' systems. PRICING Historically, Eclipsys has employed a traditional software pricing and payment model in which the entire software license fee is payable upon commencement of the license, service fees are paid as performed and maintenance fees, typically equal to a fixed percentage of the license fee, are paid over the life of the license. More recently, Eclipsys has begun to offer a variety of creative pricing models in 88
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furtherance of its philosophy that pricing and payment schedules should be closely aligned with the value received by the customer. Eclipsys encourages customers to elect a payment schedule that spreads software license payments, together with service fees and maintenance fees on a bundled basis, regularly over the life of the license. In addition, Eclipsys has commenced offering software license and maintenance fees that vary with the amount of patient traffic serviced by the customer, enabling the customer to analyze the cost on a per-case basis. Eclipsys also encourages customers to consider pricing models in which Eclipsys' primary compensation takes the form of sharing in cost savings or other performance benefits realized by the customer. The pricing of Eclipsys' contracts can vary significantly, depending upon the pricing model, product configuration and features, and implementation. CUSTOMERS, MARKETING AND SALES Eclipsys' marketing and sales efforts focus on large hospitals, integrated healthcare delivery networks and academic medical centers. Eclipsys sells its products and services in North America exclusively through its direct sales force. To provide direct and sustained customer contact, management of the sales force is decentralized, with the five Regional Presidents having primary responsibility for sales and marketing within their regions. Some multi-region accounts are managed by national account representatives. Within each region, the direct sales force is generally organized into two groups, one focused principally on generating sales to new customers and the other focused on additional sales to existing customers. The direct sales force works closely with Eclipsys' implementation and product line specialists. Eclipsys' field sales force has an average of 18 years of experience in the healthcare industry. A significant component of compensation for all direct sales personnel is performance based, although Eclipsys bases quotas and bonuses on a number of factors in addition to actual sales, including customer satisfaction and accounts receivable performance. Eclipsys has customers in Belgium, France, the Netherlands, the United Kingdom and Japan. International sales representatives generally report to the Regional President of the International Region and are responsible for all customers within their sales regions. Eclipsys may also use sales agents to market its products internationally. RESEARCH AND DEVELOPMENT Eclipsys believes that its future success depends in large part on its ability to maintain and enhance its current product line, develop new products, maintain technological competitiveness and meet an expanding range of customer requirements. A significant portion of Eclipsys' research and development and product testing effort is performed in conjunction with physicians at Brigham, MGH and other academic medical centers. Eclipsys' current development efforts are focused on the migration of its products to the SOLA architecture and the development of additional functionality and applications for its existing products. Eclipsys believes that the open, integrated nature of its SOLA architecture will facilitate the development of applications without the need for major rewriting or reconfiguration of code. As of October 31, 1998, Eclipsys' research, development and technical support organization consisted of more than 271 employees. Eclipsys' research and development expenses were $29.3 million for 1997, on the pro forma basis described herein. COMPETITION The market for Eclipsys' products and services is intensely competitive and is characterized by rapidly changing technology, evolving user needs and the frequent introduction of new products. Eclipsys' principal competitors include Cerner Corp., HBO & Company, IDX Systems Corp. and SMS. Eclipsys also faces competition from providers of practice management systems, general decision support and database systems and other segment-specific applications, as well as from healthcare technology consultants. A number of Eclipsys' competitors are more established, benefit from greater name recognition and have substantially greater financial, technical and marketing resources than Eclipsys. Eclipsys also expects that competition will continue to increase as a result of consolidation in both the information technology and healthcare industries. Eclipsys believes that the principal factors affecting competition in the healthcare 89
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information technology market include product functionality, performance, flexibility and features, use of open standards technology, quality of service and support, company reputation, price and overall cost of ownership. See "Risk Factors -- Competition." PROPRIETARY RIGHTS Eclipsys is dependent upon its proprietary information and technology. Eclipsys relies primarily on a combination of copyright, trademark and trade secret laws and license agreements to establish and protect its rights in its software products and other proprietary technology. Eclipsys requires third-party consultants and contractors to enter into nondisclosure agreements to limit use of, access to and distribution of its proprietary information. In addition, Eclipsys currently requires employees who receive option grants under any of its stock plans to enter into nondisclosure agreements. There can be no assurance that Eclipsys' means of protecting its proprietary rights will be adequate to prevent misappropriation. The laws of some foreign countries may not protect Eclipsys' proprietary rights as fully or in the same manner as do the laws of the United States. Also, despite the steps taken by Eclipsys to protect its proprietary rights, it may be possible for unauthorized third parties to copy aspects of Eclipsys' products, reverse engineer such products or otherwise obtain and use information that Eclipsys regards as proprietary. In certain limited instances, customers can access source code versions of Eclipsys' software, subject to contractual limitations on the permitted use of such source code. Although Eclipsys' license agreements with such customers attempt to prevent misuse of the source code, the possession of Eclipsys' source code by third parties increases the ease and likelihood of potential misappropriation of such software. Furthermore, there can be no assurance that others will not independently develop technologies similar or superior to Eclipsys' technology or design around the proprietary rights owned by Eclipsys. EMPLOYEES As of October 31, 1998, Eclipsys employed 1,005 people, including 271 in research, development and technical support, 528 in operations, 122 in marketing and sales, 68 in finance and administration and 16 in international operations. The success of Eclipsys depends on its continued ability to attract and retain highly skilled and qualified personnel. Competition for such personnel is intense in the information technology industry, particularly for talented software developers, service consultants, and sales and marketing personnel. There can be no assurance that Eclipsys will be able to attract and retain qualified personnel in the future. Eclipsys' employees are not represented by any labor unions. Eclipsys considers its relations with its employees to be good. FACILITIES Eclipsys is headquartered in Delray Beach, Florida, where it leases office space under two separate leases expiring in March 2000 and July 2002. In addition, Eclipsys maintains leased office space in Little Rock, Arkansas; Newport Beach, California; San Jose, California; Atlanta, Georgia; Oak Brook, Illinois; Boston, Massachusetts; Albany, New York; Saratoga Springs, New York; Roseland, New Jersey; Malvern, Pennsylvania; and Pittsburgh, Pennsylvania within the United States and Brussels, Belgium; Paris, France; and London, United Kingdom. These leases expire at various times ranging from June 1998 to June 2009. Aggregate rental payments under all of Eclipsys' leases were $4.1 million in 1997. LEGAL PROCEEDINGS Eclipsys is involved from time to time in routine litigation that arises in the ordinary course of its business, but is not currently involved in any litigation that Eclipsys believes could reasonably be expected to have a material adverse effect on Eclipsys. 90
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ECLIPSYS MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The current executive officers and directors of Eclipsys, their respective ages as of October 31, 1998 and their positions with Eclipsys are as follows: [Enlarge/Download Table] NAME AGE POSITION ---- --- -------- Harvey J. Wilson........... 59 President, Chief Executive Officer and Chairman of the Board of Directors James E. Hall.............. 65 Senior Vice President, Field Operations and Chief Operating Officer Robert J. Vanaria.......... 52 Senior Vice President, Administration, Chief Financial Officer and Treasurer T. Jack Risenhoover, II.... 33 Vice President, General Counsel and Secretary Steven A. Denning(1)....... 50 Director G. Fred DiBona(1).......... 47 Director Eugene Fife(1)............. 58 Director William E. Ford(2)......... 37 Director Jay B. Pieper(2)........... 55 Director Richard D. Severns(2)...... 52 Director --------------- (1) Member of the Executive Development and Compensation Committee. (2) Member of the Audit Committee. Harvey J. Wilson, Eclipsys' founder, has served as President, Chief Executive Officer and Chairman of the Eclipsys Board since Eclipsys was formed in December 1995. From January 1993 to December 1995, Mr. Wilson invested privately in software and technology companies. Mr. Wilson was a co-founder of SMS, a healthcare information systems provider. Mr. Wilson is a director of Philadelphia Suburban Corporation, a water utility company. James E. Hall has served as Senior Vice President, Field Operations and Chief Operating Officer since January 1997. From August 1995 to January 1997, Mr. Hall was Senior Vice President of Sales and Marketing for Multimedia Medical Systems, Inc., a telemedicine company ("MMS"). From January 1991 to August 1995, Mr. Hall was President of Asia Pacific Partners Ltd., a consulting firm. Robert J. Vanaria has served as Senior Vice President, Administration, Chief Financial Officer and Treasurer since December 1997. From March 1995 to December 1997, Mr. Vanaria was Senior Vice President and Chief Financial Officer of Greenwich Air Services, Inc., an aviation services subsidiary of General Electric Company. From September 1994 to February 1995, Mr. Vanaria was a self-employed business consultant. From March 1982 to August 1994, Mr. Vanaria was Senior Vice President and Chief Financial Officer of Foamex International, Inc., a manufacturing company. T. Jack Risenhoover, II has served as Vice President and General Counsel since February 1997. From May 1994 to January 1997, Mr. Risenhoover was general counsel for The Right Angle, Inc., a marketing firm. Mr. Risenhoover was awarded his J.D. from Vanderbilt University School of Law in April 1994. Steven A. Denning has served on the Eclipsys Board since March 1997. Mr. Denning is a Managing Member of General Atlantic Partners, LLC, an equity fund that invests worldwide in software and information technology companies, and has been with General Atlantic since 1980. Mr. Denning is also a director of GT Interactive Software Corp., an interactive entertainment software development company. G. Fred DiBona has served on the Eclipsys Board since May 1996. Since 1990, Mr. DiBona has been the President and Chief Executive Officer of Independence Blue Cross and its subsidiaries. Mr. DiBona is also a director of Magellan Health Services, Inc., a specialized managed healthcare company; PECO Energy Company, a public energy company; Philadelphia Suburban Corporation, a water utility company; Tasty Baking Company, a packaged foods company; and the Pennsylvania Savings Bank. 91
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Eugene Fife has served on the Eclipsys Board since May 1997. Since September 1996, Mr. Fife has been the President and Chief Executive Officer of MMS. Mr. Fife was a general partner in Goldman Sachs & Co. from June 1970 to November 1995, at which time he became a limited partner. Mr. Fife remains a limited partner in Goldman Sachs & Co. Mr. Fife is also a director of Baker, Fentress Company, an investment company. William E. Ford has served on the Eclipsys Board since May 1996. Mr. Ford is a Managing Member of General Atlantic Partners, LLC and has been with General Atlantic since 1991. Mr. Ford also serves as a director of GT Interactive Software Corp., an interactive entertainment software company; MAPICS, Inc., a resources planning software applications company; Envoy Corporation, an electronic data processing company; LHS Group Inc., a billing solutions company; and E-Trade Group, Inc., an on-line discount broker. Jay B. Pieper has served on the Eclipsys Board since May 1996. Since May 1995, Mr. Pieper has served as Vice President of Corporate Development and Treasury Affairs for Partners. From March 1986 to May 1995, Mr. Pieper was Senior Vice President and Chief Financial Officer for Brigham. Richard D. Severns has served on the Eclipsys Board since January 1998. Mr. Severns has been Senior Vice President and Director of Finance for the GM Network Services and Strategy Group of Motorola since August 1991. Each officer of Eclipsys serves at the discretion of the Eclipsys Board and holds office until his or her successor is elected and qualified or until his or her earlier resignation or removal. There are no family relationships among any of the directors or executive officers of Eclipsys. TSI DESIGNATED DIRECTORS The Eclipsys Board has voted to expand the size of the Board so that, following the Merger, the Board will consist of nine directors. The Board has appointed the following two current directors of TSI to fill the two vacancies on the Eclipsys Board, subject to completion of the Merger: [Download Table] NAME AGE POSITION ---- --- -------- Robert F. Raco..................... 61 Director Patrick T. Hackett................. 36 Director Robert F. Raco has been nominated for election to the Eclipsys Board of Directors of the Eclipsys Special Stockholders' Meeting, subject to completion of the Merger. Mr. Raco has been President and Chief Executive Officer of Transition Systems, Inc. since 1990 and has served as a director of TSI since 1986. Mr. Raco joined TSI at its inception and served as Executive Vice President and Chief Operating Officer from 1986 to 1989. Mr. Raco previously served as Vice President of Information Services at New England Medical Center, Inc. until 1990. Mr. Raco has more than twenty years of experience in the information processing field. Patrick T. Hackett has been nominated for election to the Eclipsys Board of Directors of the Eclipsys Special Stockholders' Meeting, subject to completion of the Merger. Mr. Hackett has been a Managing Director of Warburg, Pincus & Co. since 1994. Mr. Hackett was an Associate at Warburg, Pincus & Co. from 1990 to 1991 and a Vice President from 1991 to 1993. Mr. Hackett has served as a director of TSI since January 1996. He is also a director of Coventry Corporation, a managed healthcare company, VitalCom Inc., a healthcare computer networking company and several private companies. CLASSIFIED BOARD The Eclipsys Board is divided into three classes, each of whose members will serve for a staggered three-year term. The Eclipsys Board currently consists of two Class I Directors (Messrs. Fife and Ford), two Class II Directors (Messrs. Pieper and Severns) and three Class III Directors (Messrs. Denning, DiBona and Wilson). If the merger is completed, the Eclipsys Board will consist of three Class I Directors (the existing Class I Directors plus Mr. Raco), three Class II Directors (the existing Class II Directors plus Mr. Hackett) and three Class III Directors. At each annual meeting of stockholders, a class of directors is elected for a three-year term to succeed the directors of the same class whose terms are then 92
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expiring. The terms of the Class I Directors, Class II Directors and Class III Directors expire upon the election and qualification of successor directors at the annual meeting of Eclipsys stockholders held during the calendar years 1999, 2000 and 2001, respectively. OBSERVER RIGHTS Subject to certain conditions, Motorola has the right under the Second Amended and Restated Stockholders' Agreement dated January 24, 1998, by and among Eclipsys and certain stockholders of Eclipsys (the "Stockholders Agreement") to have an observer present at all regular and special meetings of the Eclipsys Board so long as it owns at least 3.5% of the total number of shares of Eclipsys Voting Common Stock outstanding (on an as converted and as exercised basis). COMMITTEES OF THE BOARD OF DIRECTORS The Eclipsys Board has an Executive Development and Compensation Committee composed of Messrs. Denning (Chairman), DiBona and Fife, which makes recommendations concerning salaries and incentive compensation for executive officers of Eclipsys and administers and grants stock options and awards pursuant to the Eclipsys' stock option plans, and an Audit Committee composed of Messrs. Pieper (Chairman), Ford and Severns, which reviews the results and scope of the audit and other services provided by the Eclipsys' independent public accountants. Mr. Harvey J. Wilson is an ex-officio member of both the Audit Committee and the Executive Development and Compensation Committee. DIRECTOR COMPENSATION Directors of Eclipsys are reimbursed for any expenses incurred in connection with attendance at meetings of the Eclipsys Board or any committee of the Eclipsys Board, but are not otherwise compensated for such service. On April 8, 1998, the seven non-employee directors of Eclipsys were each granted a non-qualified stock option to purchase 13,333 shares of Eclipsys Voting Common Stock at a purchase price of $13.50 per share under the Eclipsys' 1998 Stock Incentive Plan. These options vest annually over a four year period. See "-- Stock Plans." EXECUTIVE COMPENSATION The following table set forth the total compensation paid or accrued for the year December 31, 1997 for Eclipsys' Chief Executive Officer and its two other executive officers whose total annual salary and bonus exceeded $100,000 for 1997 (together, the "Named Executive Officers"): SUMMARY COMPENSATION TABLE [Enlarge/Download Table] LONG-TERM COMPENSATION ------------ ANNUAL COMPENSATION SECURITIES ------------------- UNDERLYING NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS(1) --------------------------- ------ ----- ---------- Harvey J. Wilson........................................... $150,000(2) -- -- Chairman of the Board, President and Chief Executive Officer James E. Hall.............................................. 177,971 $ 50,000 50,000 Senior Vice President, Field Operations and Chief Operating Officer Robert J. Vanaria.......................................... 7,692(3) 150,000 99,999 Senior Vice President, Administration and Chief Financial Officer --------------- (1) Represents the number of shares covered by options to purchase shares of Eclipsys Voting Common Stock granted during 1997. (2) Includes $84,000 of deferred compensation. (3) Mr. Vanaria joined Eclipsys in December 1997. 93
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Stock Option Grants The following table sets forth grants of stock options to each of the Named Executive Officers during the year ended December 31, 1997. OPTION GRANTS IN LAST FISCAL YEAR [Enlarge/Download Table] INDIVIDUAL GRANTS ------------------------------------------------------- POTENTIAL REALIZABLE PERCENT OF VALUE AT ASSUMED NUMBER OF TOTAL ANNUAL RATES OF STOCK SECURITIES OPTIONS PRICE APPRECIATION FOR UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(1) OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ------------------------- NAME GRANTED FISCAL YEAR PER SHARE DATE 5% 10% ---- ---------- ------------ ----------- ---------- -- --- Harvey J. Wilson........... -- -- -- -- -- -- James E. Hall.............. 4,000 0.3% $0.20 1/20/07 $ 491 $ 1,243 46,000 3.5 6.50 1/25/07 187,895 976,162 Robert J. Vanaria.......... 99,999 7.6 7.50 2/8/07 471,671 1,195,307 --------------- (1) Amounts reported in these columns represent amounts that may be realized upon exercise of the options immediately prior to the expiration of their term assuming the specified compound rates of appreciation (5% and 10%) on the market value of the Eclipsys Voting Common Stock on the date of option grant over the term of the options. These numbers are calculated based on rules promulgated by the Securities and Exchange Commission and do not reflect Eclipsys' estimate of future stock price growth. Actual gains, if any, on stock option exercises and Eclipsys Voting Common Stock holdings are dependent on the timing of such exercise and the future performance of the Eclipsys Voting Common Stock. There can be no assurance that the rates of appreciation assumed in this table can be achieved or that the amounts reflected will be received by the individuals. Year-End Option Values The following table sets forth certain information concerning the number and value of unexercised options held by each of the Named Executive Officers on December 31, 1997. None of the Named Executive Officers exercised any stock options during the year ended December 31, 1997. FISCAL YEAR END OPTION VALUES [Enlarge/Download Table] NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS FISCAL YEAR END AT FISCAL YEAR END(1) --------------------------- --------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ------------- ----------- ------------- Harvey J. Wilson................................ -- -- -- -- James E. Hall................................... -- 50,000 -- $75,450 Robert J. Vanaria............................... 33,333 66,666 -- -- --------------- (1) Represents the difference between the exercise price and the fair market value of the Eclipsys Voting Common Stock at fiscal year end as determined by the Eclipsys Board. EMPLOYMENT ARRANGEMENTS On May 1, 1996, Harvey J. Wilson entered into an Employment Agreement with Eclipsys. Eclipsys agreed to employ Mr. Wilson as its Chief Executive Officer until May 1, 1999, with an annual salary of $150,000, subject to deferral until Eclipsys has reached certain milestones and subject to adjustment from time to time thereafter. In January 1998, Mr. Wilson's annual salary was increased to $200,000. Upon termination of his employment, unless terminated for cause, Mr. Wilson shall be entitled to payment of his salary and continuation of his benefits for a period of months determined by the Eclipsys Board which is consistent with its practice for senior executives. Mr. Wilson has agreed not to compete with Eclipsys during his term of employment and for three years thereafter. 94
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STOCK PLANS A total of 4,333,333 shares of Eclipsys Voting Common Stock have been reserved for issuance in the aggregate under Eclipsys' three stock plans described below. The Eclipsys 1996 Stock Plan (the "1996 Stock Plan") provided for grants of stock options and awards of restricted and unrestricted Eclipsys Voting Common Stock. As of October 31, 1998, options to purchase 1,822,472 shares of Eclipsys Voting Common Stock were outstanding and 126,666 restricted shares of Eclipsys Voting Common Stock had been granted under the 1996 Stock Plan. The Eclipsys Board has provided that no additional grants or awards will be made under the 1996 Stock Plan. Under the Eclipsys 1998 Stock Incentive Plan (the "Incentive Plan"), a variety of awards, including incentive stock options intended to qualify under Section 422 of the Code, nonstatutory stock options, stock appreciation rights, restricted and unrestricted stock awards and other stock-based awards, may be granted to officers, employees, directors, consultants and advisors of Eclipsys and its subsidiaries. The Eclipsys Board has authorized the Executive Development and Compensation Committee to administer the Incentive Plan. While Eclipsys currently anticipates that most grants under the Incentive Plan will consist of stock options, it may also grant stock appreciation rights, which represent the right to receive any excess in value of the shares of Eclipsys Voting Common Stock over the exercise price; restricted stock awards, which entitle recipients to acquire shares of Eclipsys Voting Common Stock, subject to the right of Eclipsys to repurchase all or part of such shares at their purchase price in the event that the conditions specified in the award are not satisfied; or unrestricted stock awards, which represent grants of shares to participants free of any restrictions under the Incentive Plan. Options or other awards that are granted under the Incentive Plan but expire unexercised are available for future grants. As of October 31, 1998, options to purchase 489,986 shares of Eclipsys Voting Common Stock have been granted under the Incentive Plan, including a nonstatutory option to purchase up to 333,333 shares of Eclipsys Voting Common Stock granted to Harvey J. Wilson on April 8, 1998. Mr. Wilson's option covers (i) 66,666 shares at a purchase price of $15.00 per share, vesting over three years following the grant date, (ii) 66,667 shares at a purchase price of $30.00 per share, vesting over four years, (iii) 100,000 shares at a purchase price of $45.00 per share, vesting over five years, and (iv) 100,000 shares at a purchase price of $60.00, vesting over five years. Vesting under Mr. Wilson's option is subject to acceleration at the discretion of the Eclipsys Board under certain circumstances. Under the Eclipsys 1998 Employee Stock Purchase Plan (the "Eclipsys Purchase Plan"), employees of Eclipsys, including directors who are also employees, are eligible to participate in quarterly plan offerings in which payroll deductions may be used to purchase shares of Eclipsys Voting Common Stock. As of October 31, 1998, 14,152 shares of Eclipsys Voting Common Stock have been purchased pursuant to the Eclipsys Purchase Plan. The purchase price of such shares is the lower of 85% of the fair market value of Eclipsys Voting Common Stock on the day the offering commences and 85% of the fair market value of Eclipsys Voting Common Stock on the day the offering terminates. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Mr. Denning, Mr. DiBona and Mr. Fife served during the year ended December 31, 1997 as members of the Executive Development and Compensation Committee of the Eclipsys Board. Mr. Harvey J. Wilson, an executive officer of Eclipsys, was an ex-officio member of the Executive Development and Compensation Committee and in such capacity participated in certain deliberations of the Committee. Mr. Wilson was a director of MMS during the year ended December 1997. Mr. Fife, one of Eclipsys' directors and a member of the Executive Development and Compensation Committee, is, and was during 1997, the President and Chief Executive Officer of MMS. None of Mr. Denning, Mr. DiBona or Mr. Fife was at any time during the year ended December 31, 1997, or at any other time, an officer or employee of Eclipsys. See "Certain Transactions" for a description of certain relationships and transactions between Eclipsys and affiliates of Mr. Denning and Mr. Wilson. 95
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PRINCIPAL STOCKHOLDERS OF ECLIPSYS The following table sets forth certain information regarding the beneficial ownership of the shares of Eclipsys Voting Common Stock as of October 31, 1998, by (i) each person or entity known to Eclipsys to own beneficially more than 5% of the Eclipsys Voting Common Stock, (ii) each current director of Eclipsys, (iii) Eclipsys' Chief Executive Officer and the other Named Executive Officers and (iv) all current directors and executive officers as a group. Unless otherwise indicated, each person or entity named in the table has sole voting power and investment power (or shares such power with his or her spouse) with respect to all shares of capital stock listed as owned by such person or entity. [Enlarge/Download Table] NUMBER OF SHARES APPROXIMATE NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) PERCENTAGE OWNED ------------------------ --------------------- ---------------- General Atlantic Partners, LLC(2)........................ 6,855,255 35.3% c/o General Atlantic Service Corporation Three Pickwick Plaza Greenwich, CT 06830 Steven A. Denning(2)..................................... 6,855,255 35.3 c/o General Atlantic Service Corporation Three Pickwick Plaza Greenwich, CT 06830 William E. Ford(2)....................................... 6,855,255 35.3 c/o General Atlantic Service Corporation Three Pickwick Plaza Greenwich, CT 06830 Wilfam Ltd.(3)........................................... 2,126,288 10.9 c/o Eclipsys Corporation 777 East Atlantic Avenue, Suite 200 Delray Beach, FL 33483 Alltel Information Services, Inc.(4)..................... 2,077,497 10.7 4001 Rodney Parham Road Little Rock, AR 72212 First Union Corporation(5)............................... 1,199,392 6.2 One First Union Center, Floor 18 Charlotte, NC 28288 Motorola, Inc............................................ 1,000,000 5.1 1303 East Algonquin Road Schaumburg, IL 60190 Partners HealthCare System, Inc.......................... 988,290 5.1 Prudential Tower, Suite 1150 800 Boylston Street Boston, MA 02199 Harvey J. Wilson(6)...................................... 2,626,963 13.5 James E. Hall(7)......................................... 19,166 * Robert J. Vanaria(8)..................................... 49,999 * T. Jack Risenhoover, II(9)............................... 8,809 * G. Fred DiBona........................................... 31,666 * Eugene Fife(10).......................................... 31,666 * Jay B. Pieper(11)........................................ 988,290 5.1 Richard D. Severns(12)................................... 1,000,000 5.1 All executive officers and directors as a group (10 persons)(13)........................................... 11,611,814 59.6 --------------- * Less than 1% (1) The number of shares beneficially owned by each stockholder is determined under rules promulgated by the Securities and Exchange Commission, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which the individual or entity has sole or shared voting power or investment power and any 96
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shares as to which the individual or entity has the right to acquire beneficial ownership within 60 days after June 1, 1998 through the exercise of any stock option, warrant or other right. The inclusion herein of such shares, however, does not constitute an admission that the named stockholder is a direct or indirect beneficial owner of such shares. (2) Consists of 1,052,661 shares held by General Atlantic Partners 28, L.P. ("GAP 28"), 3,768,830 shares held by General Atlantic Partners 38, L.P. ("GAP 38"), 504,674 shares held by General Atlantic Partners 47, L.P. ("GAP 47"), 403,883 shares held by General Atlantic Partners 48, L.P. ("GAP 48") and 1,125,207 shares held by GAP Coinvestment, L.P. ("GAP Coinvestment"). The general partner of GAP 28, GAP 38, GAP 47 and GAP 48 is General Atlantic Partners, LLC, a Delaware limited liability company. The managing members of General Atlantic Partners, LLC are the general partners of GAP Coinvestment. Messrs. Denning and Ford are both managing members of General Atlantic Partners, LLC. Messrs. Denning and Ford disclaim beneficial ownership of shares owned by GAP 28, GAP 38, GAP 47, GAP 48 and GAP Coinvestment. 60,236 shares of Eclipsys Voting Common Stock held by GAP 38 are subject to options granted by GAP 38 to AIS, and 10,463 shares of Eclipsys Voting Common Stock held by GAP Coinvestment are subject to options granted by GAP Coinvestment to AIS. See footnote (4) below. (3) Mr. Harvey J. Wilson is the managing general partner of Wilfam, Ltd. ("Wilfam") and Mr. Gregory L. Wilson, Mr. Harvey Wilson's son, is the investment manager for Wilfam. Mr. Harvey J. Wilson and Mr. Gregory L. Wilson share voting and dispositive control of the shares held by Wilfam. (4) Affiliates of General Atlantic Partners, LLC and Harvey Wilson agreed in January 1997 to grant to AIS options to purchase 103,602 shares of Eclipsys Voting Common Stock (as converted at the time of the initial public offering), at an exercise price of $.01 per share and pursuant to option agreements to be entered into after the closing of the Alltel Acquisition. Specifically, (i) GAP 38 granted to AIS an option to purchase 60,236 shares of Eclipsys Voting Common Stock (as converted at the time of the initial public offering) held by GAP 38, (ii) GAP Coinvestment granted to AIS an option to purchase 10,463 shares of Eclipsys Voting Common Stock (as converted at the time of the initial public offering) held by GAP Coinvestment and (iii) Wilfam granted to AIS an option to purchase 32,904 shares of Eclipsys Voting Common Stock (as converted at the time of the initial public offering) held by Wilfam. AIS may only exercise these options if either of the holders of the Warrants exercises them to purchase shares of Eclipsys Non-Voting Common Stock, in which case AIS may exercise the options to purchase on an aggregate basis one share of Eclipsys Voting Common Stock (as converted at the time of the initial public offering) for each approximately 6.67 shares of Eclipsys Non-Voting Common Stock issued pursuant to the Warrants. To the extent that AIS exercises the options, the option shares will be transferred to AIS by GAP 38, GAP Coinvestment and Wilfam on a pro rata basis. (5) Includes 601,771 shares of Eclipsys Non-Voting Common Stock issuable upon the exercise of a warrant, all of which Eclipsys Non-Voting Common Stock is convertible into Eclipsys Voting Common Stock on a one-for-one basis. (6) Includes 2,126,288 shares held by Wilfam for which Mr. Wilson is the managing general partner. 32,903 shares of Eclipsys Voting Common Stock held by Wilfam are subject to options granted by Wilfam to AIS. (7) Includes 16,666 shares issuable upon exercise of stock options which are exercisable within 60 days of October 31, 1998. (8) Includes 16,666 shares issuable upon exercise of stock options which are exercisable within 60 days of October 31, 1998. (9) Includes 8,109 shares issuable upon the exercise of stock options which are exercisable within 60 days of October 31, 1998. (10) Includes 16,666 shares issuable upon the exercise of stock options which are exercisable within 60 days of October 31, 1998. 97
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(11) These shares are held by Partners. Mr. Pieper is a Vice President of Partners. Mr. Pieper disclaims beneficial ownership of these shares. (12) These shares are held by Motorola. Mr. Severns is a Senior Vice President of Motorola. Mr. Severns disclaims beneficial ownership of these shares. (13) See notes (2) and (6) through (12) above. 98
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CERTAIN TRANSACTIONS RELATING TO ECLIPSYS In May 1996, Eclipsys acquired the Partners License from Partners. In consideration for this license, Eclipsys issued to Partners 988,290 shares of Eclipsys Voting Common Stock and agreed to pay to Partners a royalty in connection with sales of the BICS system until Eclipsys completed an initial public offering of Eclipsys Voting Common Stock with a per share offering price of $10.00 or higher. Under the terms of the Partners License, Eclipsys may further develop, commercialize, distribute and support the original technology and license it, as well as sell related services, to other healthcare providers and hospitals throughout the world (with the exception of the Boston, Massachusetts metropolitan area). No sales of the BICS system have been made and, consequently, no royalties have been paid by Eclipsys pursuant to the Partners License because products based on the licensed technology are still in field trials. Eclipsys is obligated to offer to Partners and certain of its affiliates an internal use license, granted on most favored customer terms, to all new software applications developed by Eclipsys, whether or not derived from the licensed technology, and major architectural changes to the licensed technology. Beginning as of May 3, 1998, Partners and certain of its affiliates are also entitled to receive internal use licenses for any changes to any module or application included in the licensed technology requiring at least one person year of technical effort. Eclipsys has an exclusive right of first offer to commercialize new information technologies developed in connection with Partners. If Eclipsys breaches any material term of the license, or if Mr. Harvey J. Wilson voluntarily terminates his employment with Eclipsys prior to May 1999, the license may become non-exclusive, at Partners' option. If Partners converts the current license to a non-exclusive license, it must return 370,609 shares of Eclipsys Voting Common Stock to Eclipsys. As part of the Partners License, Eclipsys provided certain development services to Partners. Fees for these development services paid by Partners to Eclipsys totaled $2.0 million, $2.5 million and $325,000 for 1996, 1997 and the first three months of 1998, respectively. Mr. Jay Pieper, a director of Eclipsys, is Vice President of Corporate Development and Treasury Affairs for Partners. Partners was not affiliated with Eclipsys' at the time of the negotiation of the Partners License. In January 1998, Eclipsys completed the Emtek Acquisition for aggregate consideration of $11.7 million (net of a $9.6 million receivable from Motorola), consisting of 1,000,000 shares of Eclipsys Voting Common Stock issued to Motorola and the assumption of $12.3 million in liabilities. In connection with the Emtek Acquisition, Eclipsys entered into a software and support agreement with Motorola pursuant to which Eclipsys agreed to provide certain software and support services to Motorola's international customers for a minimum period of one year in exchange for negotiated annual payments. As of October 31, 1998, payments from Motorola totaled $4.6 million on the $9.6 million receivable owed and $500,000 under the software and support agreement. Mr. Richard Severns, a Senior Vice President of Motorola, is a director of Eclipsys. Neither Mr. Severns nor Emtek was affiliated with Eclipsys at the time of the negotiation of the Emtek Acquisition. Mr. Harvey J. Wilson, President, Chief Executive Office and Chairman of the Board of Eclipsys, is the managing general partner of Wilfam, a limited partnership whose limited partners are members of the Mr. Wilson's immediate family. Mr. Gregory L. Wilson, a general partner, is the investment manager for Wilfam. In December 1995, upon the incorporation of Eclipsys, Wilfam purchased 2,022,700 shares of Eclipsys Voting Common Stock and Mr. Harvey Wilson purchase 505,675 shares of Eclipsys Voting Common Stock for a purchase price of $.10 per share. In January 1997, Wilfam purchased 103,588 shares of Series D Convertible Preferred Stock (each of which was converted on a one-for-one basis into Eclipsys Voting Common Stock in the initial public offering) at a purchase price of $12.55 per share. Affiliates of General Atlantic Partners, LLC purchased (i) in May 1996, an aggregate of $5.0 million of Series A Convertible Participating Preferred Stock of Eclipsys, which were subsequently converted into 1,231,747 shares of Series F Convertible Preferred Stock (each of which was converted on a one-for-one basis into Eclipsys Voting Common Stock in the initial public offering), (ii) in January 1997, 4,423,509 shares of Series D Convertible Preferred Stock (each of which was converted on a one-for-one basis into Eclipsys Voting Common Stock in the initial public offering) for an aggregate of $55.5 million, (iii) in February 1998, an aggregate of 900,000 shares of Series G Convertible Preferred Stock (each of which was converted on a two-for-three basis into Eclipsys Voting Common Stock in the initial public offering) 99
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for an aggregate of $9.0 million and (iv) in August 1998, an aggregate of 600,000 shares of Eclipsys Voting Common Stock. Messrs. William Ford and Steven Denning, both of whom are directors of Eclipsys, are Managing Members of General Atlantic Partners, LLC. Wilfam is a limited partner in certain affiliates of General Atlantic Partners, LLC. As such, Wilfam participated in the May 1996 and the February 1998 investments discussed above. The Wilfam indirect investments were approximately $12,600 in shares of Series A Convertible Participating Preferred Stock and $185,000 in Series G Convertible Preferred Stock, both of which were subsequently converted as discussed above. During the year ended December 31, 1997 and the nine months ended September 30, 1998, Eclipsys from time to time chartered an airplane for corporate purposes from an aircraft charter company. Eclipsys paid $336,000 to the charter company during 1997 and $384,580 during the first nine months of 1998. The aircraft provided for use by Eclipsys was leased by the charter company from RMSC of West Palm Beach ("RMSC"), a company that is wholly owned by Mr. Harvey J. Wilson. In connection with these charters, RMSC invoiced the charter company $219,000 in 1997 and $226,042 in the first nine months of 1998. Mr. Wilson has no ownership interest in the charter company. Eclipsys believes that the terms of the charters were at least as favorable to it as those that could have been negotiated with unaffiliated third parties. See "Description of Eclipsys Capital Stock -- Registration Rights" for a description of registration rights granted to certain significant stockholders of Eclipsys. See "Eclipsys Management -- Observer Rights" for a description of certain observer rights granted to a significant stockholder of Eclipsys. See "Eclipsys Management -- Employment Arrangements" for a description of Mr. Harvey J. Wilson's employment agreement with Eclipsys. Eclipsys has adopted a policy that future transactions between Eclipsys and its executive officers, directors and affiliates must (i) be on terms no less favorable to Eclipsys than could be obtained from unaffiliated third parties and (ii) be approved by a majority of the members of the Eclipsys Board and by a majority of the disinterested members of the Eclipsys Board. 100
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BUSINESS OF TSI The information in this section relates to the business of TSI as it is currently conducted, without giving effect to the Merger and the HealthVISION Acquisition. See "-- Recent Developments" at page 107. OVERVIEW TSI provides management information technology to hospitals, integrated delivery networks, physician groups and other healthcare organizations. Using TSI products, these organizations are able to increase efficiency, improve quality of care and lower the cost of care delivery. TSI product lines span the health care organization's information technology needs, providing data integration services, master person identifier solutions, disease management products and a clinical data repository as well as enterprise-wide financial, operational and clinical decision support. INDUSTRY Pressure by employers, health insurers and government payors to control health care costs is driving a movement towards managed care and new forms of reimbursement for health care providers. These new managed care reimbursement models, including capitation, case rates, per diems and other fixed payment arrangements, are shifting the financial risk of providing care from payors to providers. Payors are also demanding that providers differentiate their services by demonstrating quality of care. These and other pressures are leading to industry consolidation and the formation of multi-entity provider networks, including integrated delivery networks. These changes have altered the information needs of health care providers trying to compete in this new environment. Institutions must understand their costs in order to manage the profitability of their clinical processes and their many types of managed care contracts. Institutions also need to be able to compare practice patterns and outcomes of different clinicians or affiliated providers and to monitor utilization and outcomes on a continuous basis. Further, systems must be put in place that help clinicians translate their new understanding of improved care delivery into daily clinical operations. Information tools are required at the point of care that help clinicians improve their overall productivity as well as insure quality and cost effective care. The existing information systems installed in most provider organizations were developed to meet the needs of providers in a fee-for-service environment. These systems are typically transaction-based departmental systems (e.g., laboratory, pharmacy, radiology and nursing) focused on recording billing information for a single department. They are suitable primarily for collecting financial data, rather than for analyzing clinical and operational information. Existing departmental systems generally have been designed to operate as stand-alone systems and typically are limited in their ability to share data. Because these legacy systems do not integrate clinical, operational and financial data across the enterprise, they do not provide the information TSI believes is necessary for managers or clinicians to evaluate the cost of care by patient, clinical specialty or episode of care. Further, these systems were designed mainly to capture charges in a fee-for-service environment, rather than to lower costs, improve utilization and demonstrate quality. PRODUCTS TSI's initial product, Transition I, was introduced in 1985. Since 1985, TSI has developed new products on a regular basis. All TSI products extend the core concepts of management information, accountability and control. These products are based on the foundation of providing information technology tools that enable healthcare organizations to: analyze past clinical, operational and financial practices; model new approaches for the future; transform those models into actionable plans; and measure actual practice against those plans. Recent additions to the TSI product lines have extended these capabilities to include disease-specific tools that focus on improving the day-to-day efficiency and effectiveness of care 101
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providers as well as the real-time measurement of clinical protocols. TSI data sources have also expanded to include clinical data repository technology. The focus of TSI products is to empower the enterprise with information that can be used to change and improve the clinical and financial performance of the organization. More than 1,100 healthcare organizations in the United States and abroad have chosen TSI as their information technology solution to support their ongoing improvement efforts. TSI's current product offerings are as follows: Transition II. At the core of the Transition family of products is Transition II, an integrated decision support system designed to provide the clinical, operational and financial information that is needed to manage and improve the delivery of care. Together, the clinical and financial components of Transition II enable an organization to: (i) delineate responsibility and accountability for managing costs; (ii) control resource utilization and reduce costs; (iii) measure variances from rules-based protocols on a daily basis; (iv) manage a mix of complex reimbursement contracts by case or member; (v) analyze and measure quantifiable improvements in the patient care process; and (vi) develop clinical and departmental budgets and variance analyses that adjust for actual volume and mix. Transition II creates a clinical and financial data repository by integrating data from across the enterprise. The system gathers information from the many departmental information systems within the organization through interfaces that enable concurrent updating of distributed data. Transition II analyzes this data in order to determine the patient-level costs of care and identify areas for improvement. This information allows the organization to evaluate its cost structure, make changes in clinical processes to reduce costs and accurately price reimbursement contracts on a profitable basis. Transition II also analyzes and measures clinical process and outcomes data, identifying the practice patterns that most consistently result in the highest quality at the lowest cost. In addition, the system includes capabilities for case mix, reimbursement and utilization management, cost and profitability analysis, strategic planning, modeling and forecasting. Enterprise Manager Series, formerly known as Transition II for Integrated Delivery Systems, contains several different components that meet the needs of emerging integrated delivery networks. This product incorporates the functionality of Transition II and extends it across multiple entities. It also adds capabilities designed to meet the special needs of integrated delivery networks, such as analyses focusing on groups of patient-members and their associated health care activities. Different types of members can be categorized, for example, by disease type, age, sex, insurance product or employer. Enterprise Manager Series includes tools to: (i) measure and monitor the cost and quality of care longitudinally and determine where in a provider network appropriate care can be provided most cost effectively; (ii) manage the financial risks of capitation; (iii) provide risk pool accounting and management both centrally and to physician groups; (iv) manage physician panels and determine panel sizing; (v) centrally identify and consolidate multiple patient identifiers across an enterprise and resolve them to a common master patient index; (vi) manage populations by identifying detailed characteristics and demographics, risk factors or chronic conditions, patient outcome status, and HEDIS and HEDIS-like indicators; and (vii) link physician and hospital billing information with the ability to view utilization, revenue and profitability by physician only, hospital only, and combined physician and hospital. Enterprise Person Identifier. This product is a vendor-neutral enterprise master person index that uniquely identifies and cross-references patient, person, or member identification numbers to link information stored in disparate systems. This product is increasingly essential for an organization delivering care at multiple sites to produce complete and accurate billing statements by capturing and correctly linking all visits and related charges incurred by patients throughout the network, regardless of the source of the data. This capability is also a necessary foundation for enterprise clinical systems, such as clinical data repositories and electronic patient records. Dictionary Manager. Dictionary Manager enables users to input a change to semi-static data tables or dictionaries just once, and have that change immediately reflected in all designated systems 102
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automatically. Changes to the charge masters, the addition of new physicians to the users staff, and the elimination of an insurance provider are all updated and maintained accurately and automatically by Dictionary Manager. Transition IV. Transition IV, TSI's next generation of decision support solutions, extends the capabilities of Transition II by providing access to real-time clinical information that can be used to enhance the quality of patient care. Transition IV creates a domain of information to improve a healthcare organization's ability to perform care analysis, care planning, care support, and opportunity analysis. Transition IV provides a single desktop that incorporates the HealthVISION real time clinical data repository with the clinical and financial planning and analysis capabilities of Transition II. Transition IV is comprised of five additive levels of packaging to enable initial purchases or upgrades to any level. Among other benefits and features, Transition IV: - Provides detailed clinical information to use for process improvement - Minimizes re-work through real-time alerts - Provides real-time collection of clinical data through live HL7 feeds - Improves patient outcomes through timely intervention - Incorporates financial information in analysis and alerts - Provides Web-enabled physician desktop - Provides ease of access to timely data, such as laboratory test results Transition For Quality. TSI's Transition for Quality product offers tools that complement the analytical power of Transition II's clinical component and provides on-line case management. With Transition for Quality, an organization can define a broad range of quality issues and identify cases for review and follow up based on outcome measures and variance from critical paths. Using this information, the organization can concurrently monitor the progress and outcomes of cases and intervene in response to automatic alerts. In addition, Transition for Quality provides healthcare organizations with compliance tools to comply with the Joint Commission on Accreditation of Healthcare Organizations' Oryx initiative. Transition Perspective and Clinical ABCs. These benchmarking products offered in conjunction with products of Premier Inc. and HCIA, Inc., respectively, enable Transition II customers to use external benchmarking data to further support their process improvement efforts. Vital Oncology. This product, developed by TSI's subsidiary, Vital Software, automates the clinical processes unique to medical oncology while enhancing the quality of care. Vital Oncology significantly increases the productivity of physicians and nurses, reduces the likelihood of error, and improves patient care. SERVICES AND SUPPORT Implementation Assistance. Almost all new sales of products and many sales of add-on products include implementation assistance. Implementation is carried out by a team of specialists overseeing the process on-site. Implementation of Transition II typically takes from six to twelve months. Software Maintenance Contracts. TSI offers software maintenance contracts for all software products. Under these contracts, TSI provides ongoing support, including updates and enhancements to the software modules and telephone access to a Help Desk staffed by an experienced team of support professionals. Consulting Services. TSI also offers post-implementation consulting services intended to assist customers in maximizing the benefits available through the use of the Transition family of products. TSI's staff can assess performance of the customer's system and advise the customer on its growing needs. While these services do not currently constitute a major source of revenue, TSI believes they have the potential to grow in importance. 103
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Integration Services. TSI offers data extraction services to develop the conversion protocols necessary to obtain data feeds from an organization's source systems, so as to enable data from these source systems to be integrated with data from TSI applications. Typical extractions are from general ledger, payroll, admission/discharge/transfer, medical records abstracting, patient billing and various departmental systems. TSI also supports the installation of real time HL7 interfaces. CUSTOMERS TSI's customers include a broad range of hospitals, integrated delivery networks, managed care organizations and physician practices in the United States and around the world. TSI's products are installed at more than 1,100 customer sites. TECHNOLOGY TSI has products deployed on both two-tier client/server and three-tier client/server/server architectures. Each of the products utilizes the architecture strategy best suited for the data access requirements inherent to each product. This enables TSI to provide the power and flexibility of distributed data and processing combined with a wide range of user platforms. For example, each of Transition II, the Enterprise Manager Series and Transition IV comprises a broad range of integrated applications that draw from a central repository of patient-level clinical and financial data. They feature an open, three-tiered client/server/server architecture that includes, at the client level, a Microsoft Windows-compliant point-and-click interface. TSI believes these features differentiate these products from other available decision support products. Multiple Platforms. TSI's products are designed to operate with a variety of hardware platforms, operating systems and database management systems. This strategy enables TSI to provided a practical and affordable solution for small and mid-size group health plans and community hospitals as well as large teaching hospitals and vertically-integrated health care delivery networks. Microsoft Windows (3.1, 95, 98 and NT) is the client standard for all products. Transition II host tier options include IBM 370/390 mainframes running the Model 204 DBMS, IBM AS/400s with DB2/400 and UNIX servers (Hewlett-Packard HP9000 and IBM RS/6000) running the Oracle DBMS. The application tier requires an Intel based processor. The Enterprise Manager Series of products utilizes the Transition II architecture with a SQL Server component for specific population studies. Transition for Quality is offered on both the HP9000 and the RS/6000 running either Oracle or Sybase. Transition IV repository options include UNIX servers (HP9000, RS/6000) running either the Oracle, Sybase or Informix DBMS. The Transition IV application tier is an Intel processor running NT with the SQL Server DBMS. Vital Oncology utilizes an Intel processor running NT with the SQL Server DBMS. Three-Tiered Client/Server/Server Architecture. Transition II and Transition IV, together with the Enterprise Manager Series, employ a three-tiered computing architecture in which workstations (clients) and host-servers share the work of managing and processing information. This client/server environment allows a user to realize greater processing efficiency at a lower cost than traditional terminal/ host or PC-LAN configurations. The Data Server tier pulls data from an organization's disparate transaction system databases and other data sources and batch processes it daily into a value-added data repository. This tier performs the processing necessary to calculate unit costs, reimbursement, quality indicators and critical path variances. The system incorporates a variety of communications protocols, together with data interfaces developed during the system implementation process, to extract data from the disparate databases throughout an organization in which transnational cost, process and outcomes information is stored, allowing the organization to preserve its existing investment in information technology. The Application Server, the middle tier, performs the value-added data integration, storage and access required to support the clinical and financial analysis of the data. This tier runs on Windows NT and requires the SQL Server DBMS. The Application Server relies on direct data feeds from the Data Server 104
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tier and provides SQL-compliant database structures to integrate other data sources and to handle ad-hoc queries among all tiers of the architecture. The Client tier performs on-line clinical and financial analysis through a Microsoft Windows-compliant point-and-click interface. The Transition II, Enterprise Manager Series and Transition IV applications were developed using Microsoft's Visual Basic and Visual C++ development environments and are compatible with Windows 3.1, 3.11, Windows '95, Windows '98, Windows NT and other operating environments supported by the Microsoft Foundation Classes. The architecture has been expanded to incorporate a Visual Basic rapid development strategy exploiting Microsoft's ActiveX, COM/DCOM and Web enabling directions. With Transition II, the Enterprise Manager Series and Transition IV, there is no need to layer a separate executive information system on top of the application. Instead, the product includes a graphical, mouse-driven user interface which allows even inexperienced users to navigate through intuitive screens and windows of information, to select the information to be reviewed at various levels of detail and to transform numerical data into charts and graphs. The system can be customized to set user preferences, display styles and sorting parameters, enabling users to develop their own objects and applications. The system provides tightly coupled interfaces to CCA Model 204, DB2/400, Oracle and Microsoft SQL Server databases. Additionally, each of Transition II, the Enterprise Manager Series and Transition IV system integrates external data through compliance with the ODBC (Open Database Connectivity) and OLE 2.0 (Object Linking and Embedding) protocols. ODBC provides standard SQL connectivity to a variety of SQL-compliant relational and non-relational databases, while the OLE 2.0 protocol provides a display, update and editing environment for Windows programs such as Microsoft Excel, Microsoft Word and PC SAS. As a result, additional data from a customer's legacy systems can be used in its native form without the need for data import. SALES AND MARKETING At September 30, 1998, TSI had a direct sales force of 23, consisting of 19 direct sales persons and four sales management executives organized in two geographic regions covering the United States and Canada. TSI's direct sales and sales management personnel are compensated through salaries plus commissions based on quarterly and annual quotas. TSI also sells through distributors based in New Zealand, Australia and the Netherlands. Distributors provide local support for implementations and ongoing maintenance support. TSI uses periodic newsletters and press releases, participation in trade shows, direct mail and telemarketing to generate and pursue leads. Company employees also speak at health care industry conferences and publish case studies and articles. TSI sponsors annual user group conferences at which customers can learn about TSI's new product offerings and exchange information about their own experiences with TSI's products. TSI's May 1998 user group conference attracted approximately 1,300 attendees. COMPETITION The market for health care information systems and services is intensely competitive and rapidly evolving. TSI competes directly with other vendors of decision support systems to health care providers. Other vendors of health care information systems, including vendors currently targeting decision support systems for payors, may enter the markets in which TSI competes. TSI also faces competition from internal management information systems departments of large hospital networks, many of which have developed or may develop financial and clinical outcomes management systems or other cost control solutions. TSI believes that the principal competitive factors influencing the market for its products include vendor and product reputation, product architecture, functionality and features, ease of use, rapidity of implementation, quality of customer support, product performance and price. Competition may result in significant price reductions, decreased gross margins, loss of market share and lack of acceptance of TSI's products. There can be no assurance that TSI will be able to compete successfully in the future or that 105
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competition will not have a material adverse effect on TSI's business, financial condition and results of operations. RESEARCH AND PRODUCT DEVELOPMENT TSI's products consist primarily of internally-developed software. In addition, TSI has incorporated in its products DBMSs, graphical user interfaces, and other software developed by third-party vendors. TSI believes that the timely development of new products and enhancements to existing products is essential to maintaining its competitive position in the market and positioning itself as an innovator. Since TSI's inception in 1985, TSI has developed and released functionality upgrades as well as new products on a yearly basis. TSI's current research and development efforts include expanding the capabilities of Transition IV and extending the Vital Oncology product to additional disease-specific applications. In addition, enhancements are planned for the Enterprise Person Identifier, Dictionary Manager and Transition for Quality products. TSI's research and development activities are conducted in its Boston office. As of September 30, 1998, its research and development staff consisted of 63 employees. TSI's total research and development expenditures were $4.6 million in fiscal 1997. INTELLECTUAL PROPERTY TSI's ability to compete effectively depends to a significant extent on its ability to protect its proprietary information. TSI relies primarily on trade secret laws, confidentiality procedures and licensing arrangements to protect its intellectual property rights. TSI generally enters into confidentiality agreements with its consultants, key employees and sales representatives and generally controls access to and distribution of its software and other proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use TSI's products or technology without authorization or to develop similar technology independently. Although TSI intends to defend its intellectual property, there can be no assurance that the steps taken by TSI to protect its proprietary information will be adequate to prevent misappropriation of its intellectual property or that TSI's competitors will not independently develop software that is substantially equivalent or superior to TSI's software. TSI is subject to the risk of alleged infringement by it of the intellectual property rights of others. Although TSI is not currently aware of any material infringement claims with respect to TSI's current or future products, there can be no assurance that third parties will not assert such claims or that any such claims will not require TSI to enter into license arrangements or result in protracted and costly litigation, regardless of the merits of such claims. No assurance can be given that any necessary licenses will be available or that, if available, such licenses can be obtained on commercially reasonable terms. Furthermore, litigation may be necessary to enforce TSI's intellectual property rights, to protect TSI's trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement. Such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on TSI's business, financial condition and results of operations. EMPLOYEES As of September 30, 1998, TSI had 216 full-time employees, including 98 in operations, 63 in research and development, 36 in sales and marketing and 19 in general administration and finance. TSI believes its future success will depend in large part upon the continued service of its key technical and senior management personnel and upon TSI's continuing ability to attract and retain highly-qualified technical and managerial personnel. Competition for highly-qualified personnel is intense and there can be no assurance that TSI will be able to retain its key managerial and technical employees or that it will be able to attract and retain additional highly-qualified technical and managerial personnel in 106
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the future. None of the Company's employees is represented by a labor union. TSI has not experienced any work stoppage and considers its relationships with its employees to be good. PROPERTIES TSI's principal offices occupy approximately 27,000 square feet of office space in Boston, Massachusetts under a lease expiring in August 2000. TSI also leases space for offices in Arizona, California, Georgia, Illinois, Pennsylvania and Texas. TSI believes that its existing facilities will be adequate to meet its currently anticipated requirements and that, if additional space is needed, such space will be available on acceptable terms. LEGAL PROCEEDINGS TSI is not a party to any material litigation, and is not aware of any pending or threatened litigation that would have a material adverse effect on TSI or its business. RECENT DEVELOPMENTS On December 3, 1998, TSI completed its acquisition of the approximately 80.5% of the capital stock of HealthVISION not already owned by TSI for cash in the amount of $25.6 million, plus an earn-out of up to $10.8 million if specified financial milestones are met. The acquisition will be accounted for as a purchase, reflecting an estimated aggregate purchase price, including TSI's initial 1997 investment, of $40.7 million, which includes $6.4 million previously paid by TSI and $9.3 million of assumed liabilities, net of cash acquired. HealthVISION is a Santa Rosa, California provider of electronic medical record software. HealthVISION's products include CareVISION, a patient-centered clinical data repository and lifetime patient record system, which is expected to constitute an integral component of TSI's Transition IV product. HealthVISION's total revenues for the year ended December 31, 1997 and for the nine-month period ended September 30, 1998 were approximately $9.2 million and $9.4 million, respectively. HealthVISION incurred net losses of $11.1 million and $5.6 million for such periods, respectively. At September 30, 1998, HealthVISION employed approximately 150 persons in seven offices in the United States, Canada and Australia. 107
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PRINCIPAL STOCKHOLDERS OF TSI The following table sets forth certain information regarding the beneficial ownership of the shares of TSI Voting Common Stock as of November 10, 1998, by (i) each person or entity known to TSI to own beneficially more than 5% of the TSI Voting Common Stock, (ii) each current director of TSI, (iii) TSI's Chief Executive Officer and the four other most highly compensated executive officers of TSI during the fiscal year ended September 30, 1998 and (iv) all current directors and executive officers as a group. Unless otherwise indicated, each person or entity named in the table has sole voting power and investment power (or shares such power with his or her spouse) with respect to all shares of capital stock listed as owned by such person or entity. [Enlarge/Download Table] NUMBER OF SHARES APPROXIMATE NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) PERCENTAGE OWNED ------------------------ ---------------------- ---------------- Warburg, Pincus Ventures, L.P.(2)......................... 6,125,000 34.0% 466 Lexington Avenue New York, New York 10017 Patrick T. Hackett(2)..................................... 6,125,000 34.0 c/o Warburg, Pincus Ventures, L.P. 466 Lexington Avenue New York, New York 10017 NationsBank Corporation(3)................................ 1,114,673 6.2 101 South Tryon Street Charlotte, North Carolina 28255 Amvescap P.L.C.(4)........................................ 936,955 5.2 11 Devonshire Square London EC2M 4YR England Robert F. Raco(5)......................................... 868,766 4.6 Christine Shapleigh(6).................................... 532,429 2.9 Donald C. Cook(7)......................................... 552,400 2.9 Thomas H. Zajac(8)........................................ 290,650 1.6 Peter W. Van Etten(9)..................................... 28,700 * Allen F. Wise(9).......................................... 28,700 * Robert S. Hillas.......................................... -- -- Anthony R. Fonze(10)...................................... 35,000 * All directors and executive officers as a group (10 persons)(11)............................................ 8,534,180 42.1 --------------- * Less than one percent. (1) The number of shares beneficially owned by each stockholder is determined under rules promulgated by the Commission, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which the individual or entity has the right to acquire beneficial ownership within 60 days after the date of this table through the exercise of any stock option, warrant or other right. The inclusion herein of shares, however, does not constitute an admission that the named stockholder is a direct or indirect beneficial owner of such shares. (2) Represents shares held by Warburg, Pincus Ventures, L.P. ("WP Ventures"), of which Mr. Hackett may be deemed to have beneficial ownership. The number of shares beneficially owned by WP Ventures is based on information contained in a Schedule 13G filed with the Commission on February 14, 1997 by WP Ventures, Warburg, Pincus & Co. ("W.P & Co.") E.M. Warburg, Pincus & Co., LLC ("E.M. Warburg"). Each of WP Ventures, WP & Co. and E.M. Warburg has shared voting power and shared dispositive power with respect to 6,125,000 shares of Common Stock. WP & Co., as the sole general partner of WP Ventures, has a 20% interest in the profits of WP Ventures. E.M. Warburg manages WP Ventures. Lionel I. Pincus is the managing partner of WP & Co. and the managing member of E.M. Warburg and may be deemed to control both WP & Co. and E.M. Warburg. Mr. Hackett disclaims beneficial ownership of the shares held by WP Ventures. (3) Includes 356,262 shares of TSI Voting Common Stock issuable upon exchange of outstanding shares of TSI Non-Voting Common Stock and 297,928 shares of TSI Voting Common Stock issuable upon 108
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exchange of 297,928 shares of TSI Non-Voting Common Stock issuable upon exercise of a warrant. The number of shares beneficially owned by NationsBank Corporation ("NationsBank") is based on information contained in Schedule 13G/A filed with the Commission on February 18, 1998 by NationsBank as a parent holding company for NB Holdings Corporation ("NB Holdings"), which is a holding company of its subsidiaries, NationsBank, N.A. ("NB") and NationsBanc Investment Corporation ("NIC"). Each of NationsBank and NB Holdings has reported sole voting power with respect to 1,114,673 shares of TSI Voting Common Stock and sole dispositive power with respect to 1,114,663 shares of TSI Voting Common Stock. NIC has reported sole voting power and sole dispositive power with respect to 1,114,663 shares of TSI Voting Common Stock. NB has reported sole voting power with respect to 10 shares of TSI Voting Common Stock. (4) The number of shares beneficially owned by Amvescap P.L.C. ("Amvescap") is based on a Schedule 13G/A filed with the Commission on February 12, 1998 by Amvescap, AVZ, Inc. ("AVZ"), AIM Management Group, Inc. ("AIM"), Amvescap Group Services ("AGS"), Invesco, Inc. ("Invesco"), Invesco Capital Management, Inc. ("ICM"), Invesco PLC ("IP") and Invesco Realty Advisors, Inc. ("IRA"). Each of Amvescap, AVZ, AIM, AGS, Invesco, ICM, INAH, IFG, IMG, IP and IRA have shared voting power and shared dispositive power with respect to 937,355 shares of TSI Voting Common Stock. (5) Represents shares subject to stock options exercisable within 60 days of the date of this table. Does not include 150,468 shares subject to options not exercisable within 60 days of the date of this table. (6) Includes 2,000 shares held in custody by Dr. Shapleigh for the benefit of her two minor children and 529,429 shares subject to stock options exercisable within 60 days of the date of this table. Does not include 55,777 shares subject to options not exercisable within 60 days of the date of this table. (7) Includes 1,250 shares held in custody by the spouse of Mr. Cook for the benefit of Mr. Cook's two minor children and 467,817 shares subject to stock options exercisable within 60 days of the date of this table. Does not include 116,900 shares subject to options not exercisable within 60 days of the date of this table. (8) Represents 290,650 shares subject to stock options exercisable within 60 days of the date of this table. Does not include 100,000 shares subject to options not exercisable within 60 days of the date of this table. (9) Represents shares subject to stock options exercisable within 60 days of the date of this table. (10) Mr. Fonze tendered his resignation from his office as Vice President and General Manager of TSI's Vital Software subsidiary on October 27, 1998. Represents options Mr. Fonze had the right to exercise through November 30, 1998, the date on which his employment with TSI, and his right to exercise options, ended. (11) See Notes (2) and (5) through (10). Does not include Mr. Fonze. 109
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DESCRIPTION OF ECLIPSYS CAPITAL STOCK Under Eclipsys' Third Amended and Restated Certificate of Incorporation (the "Eclipsys Charter"), Eclipsys is authorized to issue 200,000,000 shares of Eclipsys Voting Common Stock, 5,000,000 shares of Eclipsys Non-Voting Common Stock and 5,000,000 shares of Preferred Stock, $.01 par value per share ("Eclipsys Preferred Stock"). COMMON STOCK AND NON-VOTING COMMON STOCK Holders of Eclipsys Voting Common Stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders and do not have cumulative voting rights. Holders of Eclipsys Non-Voting Common Stock do not have voting rights other than as provided by statute. Accordingly, holders of a majority of the shares of Eclipsys Voting Common Stock entitled to vote in any election of directors may elect all of the directors standing for election. Holders of Eclipsys Voting Common Stock and Eclipsys Non-Voting Common Stock are entitled to receive ratably such dividends, if any, as may be declared by the Eclipsys Board out of funds legally available therefor, subject to any preferential dividend rights of outstanding Eclipsys Preferred Stock. Upon the liquidation, dissolution or winding up of Eclipsys, the holders of Eclipsys Voting Common Stock and Eclipsys Non-Voting Common Stock are entitled to receive ratably the net assets of Eclipsys available after the payment of all debts and other liabilities and subject to the prior rights of any outstanding Eclipsys Preferred Stock. Holders of Eclipsys Voting Common Stock and Eclipsys Non-Voting Common Stock have no preemptive, subscription or redemption rights. The outstanding shares of Eclipsys Voting Common Stock and Eclipsys Non-Voting Common Stock are fully paid and nonassessable. The rights, preferences and privileges of holders of Eclipsys Voting Common Stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of Preferred Stock which Eclipsys may designate and issue in the future. Certain holders of Eclipsys Voting Common Stock and Eclipsys Non-Voting Common Stock have the right to require Eclipsys to effect the registration of their shares of Eclipsys Voting Common Stock, or the Eclipsys Voting Common Stock into which the Eclipsys Non-Voting Common Stock is convertible, as the case may be, in certain circumstances. Shares of Eclipsys Non-Voting Common Stock may be converted, at the holder's option, into shares of Eclipsys Voting Common Stock at the rate of one share of Eclipsys Voting Common Stock for each share of Eclipsys Non-Voting Common Stock surrendered for conversion, subject to certain adjustments. The holder can elect to convert all or any part of its Eclipsys Non-Voting Common Stock at any time, except that, if the holder is subject to certain federal banking regulations, the holder may only convert in connection with specified sales of the Eclipsys Voting Common Stock to be issued upon the conversion. PREFERRED STOCK Under the terms of the Eclipsys Charter, the Eclipsys Board is authorized, subject to any limitations prescribed by law, without stockholder approval, to issue up to 5,000,000 shares of Eclipsys Preferred Stock in one or more series. Each such series of Eclipsys Preferred Stock shall have such rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, as shall be determined by the Eclipsys Board. The purpose of authorizing the Eclipsys Board to issue Eclipsys Preferred Stock and determine its rights and preferences is to eliminate delays associated with a stockholder vote on specific issuances. The issuance of Eclipsys Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of the outstanding voting stock of Eclipsys. Eclipsys has no present plans to issue any shares of Eclipsys Preferred Stock. WARRANTS In January 1997, Eclipsys issued two warrants (the "Eclipsys Warrants"), each exercisable at a purchase price of $.01 per share, to purchase up to 1,124,822 and up to 674,893 shares of Eclipsys Non- 110
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Voting Common Stock, respectively, to First Union Corporation and BT Investment Partners L.P. The number of shares purchasable pursuant to each Eclipsys Warrant was subject to adjustment based on the timing of the redemption of the Series B Redeemable Preferred Stock, which occurred upon the closing of the Eclipsys IPO. Because the Eclipsys IPO closed prior to December 31, 1998, the Eclipsys Warrants are exercisable for an aggregate of 962,833 shares of Eclipsys Non-Voting Common Stock. In lieu of payment of the exercise price, each warrantholder may elect to convert its Eclipsys Warrant, in whole or in part, into shares of Eclipsys Non-Voting Common Stock having a value equal to the value of the shares issuable at the time of the conversion less the aggregate exercise price for such shares under the Eclipsys Warrant. Both Eclipsys Warrants expire on August 6, 2001. REGISTRATION RIGHTS Pursuant to a Second Amended and Restated Registration Rights Agreement (the "Registration Rights Agreement") dated January 28, 1998 among Eclipsys and certain of its stockholders (the "Rightsholders"), such Rightsholders will be entitled, commencing February 6, 1999, to certain rights with respect to the registration under the Securities Act of a total of approximately 17,890,233 shares of Eclipsys Voting Common Stock (the "Registrable Shares"), including shares issuable upon exercise of the Warrants. In general, the Registration Rights Agreement provides that Rightsholders with demand and incidental registration rights beginning no earlier than February 6, 1999, six months after the effective date of the Eclipsys IPO. In connection with the Merger, Eclipsys has agreed to use its reasonable efforts to amend the Registration Rights Agreement to add Warburg as a party to the agreement. In the event that Eclipsys is unable to amend the Registration Rights Agreement, Eclipsys will enter into a separate registration rights agreement with Warburg containing terms that are substantially identical to the Registration Rights Agreement. Certain of the Rightsholders, holding approximately 16,589,691 Registrable Shares, may require Eclipsys to prepare and file a registration statement under the Securities Act with respect to their Registrable Shares if such registration would result in an offering with net proceeds to the requesting Rightsholder or Rightsholders of at least $5.0 million. In addition, one of the Rightsholders may compel registration for a smaller amount if the offering is to include all the shares of Eclipsys stock then owned by such Rightsholder, none of which are then available for sale pursuant to Rule 144 under the Securities Act. Two of the Rightsholders may each require Eclipsys to prepare and file two registration statements. Each of five other Rightsholders are entitled to one such registration request. After the merger, Warburg will be entitled to one registration request, but may not require Eclipsys to prepare and file a registration statement prior to January 1, 2000. Eclipsys is not required to file a demand registration statement for six months after the effective date of its initial public offering or within three months after the effective date of any other registration statement, subject to certain restrictions. If Eclipsys proposes to register any of its securities under the Securities Act, the Rightsholders will be entitled to include Registrable Shares in such offering, subject to the right of the managing underwriter of any underwritten public offering to limit for marketing reasons the number of shares of Registrable Shares included in the offering. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for Eclipsys Voting Common Stock is BankBoston, N.A. 111
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COMPARISON OF STOCKHOLDERS' RIGHTS At the Effective Time, the stockholders of TSI will become stockholders of Eclipsys, a corporation governed by Delaware law and a Certificate of Incorporation and Bylaws adopted thereunder. The following discussion summarizes the material differences between the rights of holders of TSI Voting Common Stock and holders of Eclipsys Voting Common Stock, based on a comparison of the Delaware and Massachusetts corporation laws and differences between the charters and bylaws of TSI and Eclipsys. The Restated Articles of Organization and the Amended and Restated Bylaws of TSI are referred to herein as the "TSI Charter" and the "TSI Bylaws," respectively, and the Third Amended and Restated Certificate of Incorporation and the Amended and Restated Bylaws of Eclipsys are referred to herein as the "Eclipsys Charter" and the "Eclipsys Bylaws," respectively. This summary does not purport to be complete and is qualified in its entirety by reference to the TSI Charter and TSI Bylaws, the Eclipsys Charter and Eclipsys Bylaws and the relevant provisions of the Delaware General Corporation Law (the "Delaware Law") and the Massachusetts Business Corporation Law (the "Massachusetts Law"). MEETINGS OF STOCKHOLDERS The Delaware Law provides that special meetings of stockholders may be called only by the directors or by any other person authorized by a corporation's certificate of incorporation or bylaws. The Eclipsys Charter and the Eclipsys Bylaws provide that a special meeting of stockholders may only be called by the president, the chairman of the board or the Eclipsys Board. The Massachusetts Law provides that special meetings of stockholders of a corporation with a class of voting stock registered under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), may be called by the president or the directors of such corporation, and unless otherwise provided in the corporation's charter or bylaws shall be called by the clerk or other officer upon the written application of the owners of not less than 40% in interest of the corporation's stock entitled to vote at such meeting. The TSI Bylaws authorize the president, the chairman of the board, or the TSI Board to call special meetings of the stockholders and require that the Clerk or any other officer call a special meeting of the stockholders upon written application by the owners of not less than 20% in interest of the corporation's stock entitled to vote at such meeting. INSPECTION RIGHTS Inspection rights under the Delaware Law are more extensive than under the Massachusetts Law. Under the Delaware Law, stockholders demonstrating a proper purpose have the right to inspect a corporation's stock ledger, stockholder list, and other books and records. Under the Massachusetts Law, a corporation's stockholders have the right for a proper purpose to inspect the corporation's articles of organization, bylaws, records of all meetings of incorporators and stockholders, and stock and transfer records, including the stockholder list. In addition, stockholders of a Massachusetts business corporation have a qualified common law right under certain circumstances to inspect other books and records of the corporation. ACTION BY CONSENT OF STOCKHOLDERS Under the Delaware Law, unless otherwise provided in a corporation's certificate of incorporation, any action required or permitted to be taken at an annual or special meeting of stockholders may be taken without such a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action to be taken is signed by the holders of outstanding stock representing the number of shares necessary to take such action at a meeting at which all shares entitled to vote were present. However, the Eclipsys Charter prohibits stockholders from taking any action by written consent in lieu of a meeting. 112
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Under the Massachusetts Law and the TSI Bylaws, any action required or permitted to be taken at any meeting of stockholders may be taken without a meeting if all stockholders entitled to vote consent to the action in writing. CUMULATIVE VOTING Under the Delaware Law, a corporation may provide in its certificate of incorporation for cumulative voting by stockholders in elections of directors (i.e., each stockholder casts as many votes for directors as he has shares of stock multiplied by the number of directors to be elected). The Eclipsys Charter does not provide for cumulative voting rights. The Massachusetts Law does not authorize or provide for cumulative voting rights. Neither the TSI Charter nor the TSI Bylaws provide for cumulative voting. ISSUANCE OF STOCK; PREFERRED STOCK Shares of Eclipsys Voting Common Stock may be issued from time to time, in such amounts and for such consideration, as may be determined by the Eclipsys Board. No holder of Eclipsys Voting or Non-Voting Common Stock has any preemptive or preferential rights to purchase or to subscribe for any shares of capital stock or other securities that may be issued by Eclipsys. Eclipsys has 5,000,000 authorized shares of Eclipsys Preferred Stock. None of such shares is outstanding. The Eclipsys Preferred Stock is issuable in one or more series. The Eclipsys Board is empowered to authorize without stockholder approval the issuance of each series of Eclipsys Preferred Stock and is empowered to fix the voting rights, if any (in addition to those prescribed by law), dividend rights, liquidation preferences, redemption provisions, if any, conversion rights, if any, and other rights of each such series, any of which rights could adversely affect the voting and other rights of the holders of Eclipsys Voting Common Stock. Shares of TSI Voting Common Stock may be issued by TSI from time to time as approved by the TSI Board without stockholder approval. Holders of the capital stock of TSI are not entitled to preemptive or preferential rights to purchase or to subscribe for any shares of capital stock or other securities that may be issued by TSI. TSI has 1,000,000 authorized shares of Preferred Stock, par value $.01 per share (the "TSI Preferred Stock"). None of such shares is outstanding. The TSI Preferred Stock is issuable in one or more series. The TSI Board can authorize, without stockholder approval, the issuance of each series of TSI Preferred Stock and can fix the voting rights, if any, dividend rights, liquidation preferences, redemption provisions, if any, conversion rights, if any, and other rights of each such series, any of which rights could adversely affect the voting and other rights of the holders of TSI Voting Common Stock. DIVIDENDS AND REPURCHASES OF STOCK Under the Delaware Law, a corporation generally is permitted to declare and pay dividends out of surplus or out of net profits for the current and/or preceding fiscal year, provided that such dividends will not reduce capital below the amount of capital represented by all classes of stock having a preference upon the distribution of assets. Also under the Delaware Law, a corporation may generally redeem or repurchase shares of its stock if such redemption or repurchase will not impair the capital of the corporation. The directors of a Delaware corporation may be jointly and severally liable to the corporation for a willful or negligent violation of such provisions of Delaware law. The Eclipsys Charter provides that the declaration and payment of any dividend is within the discretion of the Eclipsys Board and subject to the rights of the holders of any Eclipsys Preferred Stock. Under the Massachusetts Law, the payment of dividends and the repurchase of the corporation's stock are generally permissible if such actions are not taken when the corporation is insolvent, do not render the corporation insolvent, and do not violate the corporation's articles of organization. The directors of a Massachusetts corporation may be jointly and severally liable to the corporation to the extent that a dividend authorized by the directors exceeds such permissible amounts and is not repaid to the 113
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corporation. The TSI Charter provides that the declaration and payment of any dividend is within the discretion of the TSI Board and subject to the rights of the holders of any TSI preferred stock. CLASSIFICATION OF THE BOARD OF DIRECTORS The Delaware Law permits (but does not require) classification of a corporation's board of directors into one, two or three classes. The Eclipsys Charter provides that the Eclipsys Board is divided into three classes with no one class having more than one director more than any other class, elected for staggered three year terms. The Massachusetts Law generally requires that publicly held Massachusetts corporations have a classified board of directors consisting of three classes as nearly equal in size as possible, unless those corporations elect to opt out of the statute's coverage. The TSI Bylaws divide the TSI Board into three classes, with no one class having more than one director more than any other class, for staggered three year terms. REMOVAL OF DIRECTORS Under the Delaware Law, stockholders may remove directors with or without cause by a majority vote unless otherwise provided in the certificate of incorporation. The Eclipsys Charter provides that directors may be removed only for cause by the holders of at least 75% of the then issued and outstanding shares of capital of the corporation. Unlike Massachusetts law, Delaware law does not permit directors to remove other directors. Under the Massachusetts Law, except as otherwise provided in the corporation's charter or bylaws, directors of a public company subject to that section may be removed from office with or without cause by the holders of a majority of the shares outstanding and entitled to vote in the election of directors or with cause by a majority of the directors then in office, provided that the directors elected by a particular class of stockholders may be removed only by the vote of the holders of a majority of the shares of the particular class entitled to vote for the election of such directors. The TSI Bylaws provide that any director may be removed with or without cause by the vote of the holders of a majority of the shares issued, then outstanding and entitled to vote in the election of directors, or with cause by the majority of the Board of Directors. VACANCIES ON THE BOARD OF DIRECTORS Under the Delaware Law, unless otherwise provided in the charter or bylaws, vacancies on the board of directors and newly created directorships resulting from any increase in the authorized number of directors may be filled by the remaining directors. The Eclipsys Charter and Bylaws provide that only a vote of the majority of the directors in office, even if less than a quorum, shall fill any vacancy on the Eclipsys Board. Under the Massachusetts Law, unless otherwise provided in a corporation's articles of organization, any vacancy in the board of directors may be filled in the manner prescribed in the bylaws or in the absence of such a bylaw, by the directors. The TSI Charter does not address the manner in which vacancies on the board of directors may be filled. The TSI Bylaws provide that any vacancy may be filled by a vote of the majority of the directors in office (even if less than a quorum) or, in the absence of such election by the directors, by the stockholders. LIMITATION ON DIRECTORS' LIABILITY; INDEMNIFICATION OF OFFICERS AND DIRECTORS The Delaware Law allows a corporation to include in its certificate of incorporation a provision that limits or eliminates the personal liability of directors to the corporation and its shareholders for monetary damages for breach of fiduciary duty as a director. The Delaware Law does not, however, permit a 114
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corporation to limit or eliminate the personal liability of a director for (i) any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) intentional or negligent payment of unlawful dividends or stock purchase or redemption, or (iv) any transaction from which the director derived an improper personal benefit. The Eclipsys Charter provides for limitations on directors' liability as permitted by this statute. The Delaware Law also provides that a corporation may indemnify any of its officers and directors party to any action, suit or proceeding by reason of the fact that he or she was a director, officer, employee or agent of the corporation by, among other things, a majority vote consisting of directors who were not parties to such action, suit or proceeding, provided that such officer or director acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation. The Eclipsys Charter and the Eclipsys Bylaws provide for indemnification of officers and directors of Eclipsys to the fullest extent permitted by this statute. The Massachusetts Law allows a corporation to include in its charter a provision that limits or eliminates the personal liability of directors to the corporation and its shareholders for monetary damages for breach of fiduciary duty as a director. The Massachusetts Law does not, however, permit a corporation to limit or eliminate the personal liability of a director for (i) any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) payment of dividends or stock purchase or redemption, except a distribution of stock of the corporation, in violation of the corporation's charter, or (iv) any loans to any officer or director of the corporation. The TSI Charter provides for limitations on directors' liability as permitted by this statute. The Massachusetts Law provides that indemnification of directors, officers, employees and other agents of a corporation, and persons who serve at its request as directors, officers, employees and other agents of another organization, may be provided by it to whatever extent specified in or authorized by (i) the charter, (ii) a bylaw adopted by the stockholders, or (iii) a vote adopted by the holders of a majority of the shares of stock entitled to vote on the election of directors. The TSI Bylaws provide that TSI will indemnify its directors or officers (including persons who serve at its request as directors, officers or trustees of any organization in which TSI has an interest as a stockholder, creditor or otherwise), to the fullest extent permitted by the Massachusetts Law, against liabilities and expenses arising out of legal proceedings brought or threatened against them by reason of their status as directors or officers. Under this provision each director and officer is entitled to indemnification even if not successful on the merits, if such director or officer acted in good faith in the reasonable belief that his or her action was in the best interest of TSI. INTERESTED DIRECTOR TRANSACTIONS The Delaware Law and each of the Eclipsys and TSI Bylaws provide that no transaction between a corporation and one or more of its directors or officers or an entity in which one or more of its directors or officers are directors or officers or have a financial interest, shall be void or voidable solely for that reason. In addition, no such transaction shall be void or voidable solely because the director or officer is present at, participates in, or votes at the meeting of the board of directors, or committee thereof, which authorizes the transaction. In order that such a transaction not be found void or voidable, it must, after disclosure of material facts, be approved by a majority of the disinterested directors, a committee of disinterested directors, or the stockholders, or the transaction must be fair as to the corporation. The Massachusetts Law has no comparable provision. SALE, LEASE OR EXCHANGE OF ASSETS AND MERGERS The Delaware Law requires the approval of the directors and the vote of the holders of a majority of the outstanding stock entitled to vote thereon for the sale, lease, or exchange of all or substantially all of a 115
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corporation's property and assets or a merger or consolidation of the corporation into any other corporation, although the certificate of incorporation may require a higher stockholder vote. The Massachusetts Law provides that a vote of two-thirds of the shares of each class of stock outstanding and entitled to vote thereon is required to authorize the sale, lease, or exchange of all or substantially all of a corporation's property and assets or a merger or consolidation of the corporation into any other corporation, except that the articles of organization may provide that the vote of a greater or lesser proportion, but not less than a majority of the outstanding shares of each class, is required. Neither the Eclipsys Charter or Bylaws nor the TSI Charter or Bylaws address this issue. AMENDMENTS TO CHARTER Under the Delaware Law, charter amendments require the approval of the directors and the vote of the holders of a majority of the outstanding stock and a majority of each class of stock outstanding and entitled to vote thereon as a class, unless the certificate of incorporation requires a greater proportion. The Eclipsys Charter does not require a greater proportion except with respect to amendment, repeal or modification of the following provisions, which require a vote of at least 75% of the issued and outstanding shares entitled to vote thereon: the provisions regarding indemnification and exculpation of directors; the provisions regarding classification, number, election, nomination and removal of directors; the provisions prohibiting actions by the unanimous written consent of stockholders in lieu of a meeting; and the provisions regarding the calling of special stockholders meetings. In addition, Delaware law requires a class vote when, among other things, an amendment will adversely affect the powers, preferences or special rights of a class of stock. Under the Massachusetts Law, amendments to a corporation's articles of organization relating to certain changes in capital or in the corporate name require the vote of at least a majority of each class of stock outstanding and entitled to vote thereon. Amendments relating to other matters require a vote of at least two-thirds of each class outstanding and entitled to vote thereon or, if the articles of organization so provide, a greater or lesser proportion but not less than a majority of the outstanding shares of each class. Under Massachusetts law, the articles of organization or bylaws may provide that all outstanding classes of stock vote as a single class, but a separate vote of any class of stock adversely affected by the amendment also is required. The TSI Charter does not address this issue. APPRAISAL RIGHTS Dissenting stockholders have the right to obtain the fair value of their shares ("appraisal rights") in more circumstances under the Massachusetts Law than under the Delaware Law. Under the Delaware Law, a stockholder is entitled to appraisal rights in the event of certain mergers or consolidations, but not in the event of the sale, lease, or exchange of all or substantially all of a corporation's assets or the adoption of an amendment to its certificate of incorporation, unless such rights are granted in the corporation's certificate of incorporation. The Eclipsys Charter does not grant such rights. The Delaware and Massachusetts Laws further provide that a dissenting stockholder must not vote in favor of the proposal in order to preserve his or her appraisal rights. In order to perfect his or her appraisal rights, both jurisdictions require a dissenting stockholder to notify the company in writing, prior to the vote on the proposal, of his or her intention to demand payment for his or her shares if the action is taken. The Delaware Law does not grant appraisal rights to a holder of securities listed on a national securities exchange or designated as national market system securities if the stockholder receives such securities in exchange. Under the Massachusetts Law, a properly dissenting stockholder is entitled to receive the appraised value of his shares when the corporation votes (i) to sell, lease, or exchange all or substantially all of its property and assets, (ii) to adopt an amendment to its articles of organization which adversely affects the rights of the stockholder or (iii) to merge or consolidate with another corporation. The TSI Charter does not address this issue. 116
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ANTI-TAKEOVER PROVISIONS The Charters and Bylaws of both Eclipsys and TSI contain provisions that could discourage potential takeover attempts and prevent stockholders from changing the company's management, including provisions authorizing the Eclipsys Board to issue shares of preferred stock in series and restrictions on the ability of stockholders to call a special meeting of stockholders. The Delaware Law is substantially similar to the Massachusetts Law. However, while the Delaware Law provides that, if a person acquires 15% or more of the stock of a Delaware corporation without the approval of its board of directors (an "interested stockholder"), such person may not engage in certain transactions with the corporation for a period of three years, the Massachusetts Law lowers the 15% threshold to 5% (except in the case of certain stockholders eligible to file Schedule 13G under the Exchange Act). Both the Delaware Law and the Massachusetts Law include certain exceptions to this prohibition; for example, if the board of directors approves the acquisition of stock or the transaction prior to the time that the person became an interested stockholder, or if the interested stockholder acquires 85% (in the Delaware Law) or 90% (in the Massachusetts Law) of the voting stock of the corporation (excluding voting stock owned by directors who are also officers and certain employee stock plans) in one transaction, or if the transaction is approved by the board of directors and by the affirmative vote of two-thirds of the outstanding voting stock which is not owned by the interested stockholder, the prohibition does not apply. The Eclipsys Board has approved the Merger pursuant to the Delaware Law, and TSI is currently subject to the Massachusetts Law. 117
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LEGAL MATTERS The validity of the shares of Eclipsys Voting Common Stock offered hereby will be passed upon for Eclipsys by Hale and Dorr LLP. Certain legal matters in connection with the Merger will be passed upon for TSI by Foley, Hoag & Eliot LLP. EXPERTS The financial statements of Eclipsys Corporation as of December 31, 1997 and 1996 and for each of the two years in the period ended December 31, 1997 included in this Joint Proxy Statement/Prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. The financial statements of Transition Systems, Inc. as of September 30, 1998 and 1997 and for each of the three years in the period ended September 30, 1998 included in this Joint Proxy Statement/ Prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. The consolidated balance sheets of HealthVISION, Inc. as of December 31, 1996 and 1997 and the consolidated statements of operations, stockholders' equity and cash flows for the years then ended appearing in this Joint Proxy Statement/Prospectus have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing. The financial statements of ALLTEL Healthcare Information Services, Inc. as of January 23, 1997, December 31, 1996 and 1995 and for the period from January 1, 1997 through January 23, 1997 and each of the two years in the period ended December 31, 1996 included in this Joint Proxy Statement/ Prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. The financial statements of SDK Healthcare Information Systems as of April 30, 1997 and 1996 and for each of the years in the two-year period ended April 30, 1997 included in this Joint Proxy Statement/ Prospectus have been examined by KPMG Peat Marwick LLP, independent certified public accountants. Such financial statements have been included in the registration statement in reliance upon the reports with respect thereto of KPMG Peat Marwick LLP, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. FUTURE STOCKHOLDER PROPOSALS Stockholder proposals intended for inclusion in the proxy statement for the next Eclipsys annual stockholders' meeting should be sent to the Secretary of Eclipsys at 777 East Atlantic Ave., Suite 200, Delray Beach, Florida 33483. Under the Eclipsys Bylaws, notice of any stockholder proposal to be made at an annual meeting of stockholders of Eclipsys must be received no less than 60 days nor more than 90 days prior to the date of the annual meeting of stockholders of Eclipsys. If public notice of the annual meeting of stockholders of Eclipsys is not given at least 70 days before the meeting date, any stockholder proposal must be received by Eclipsys within 10 days after such public notice. A copy of the current Bylaws may be obtained from the Secretary of Eclipsys. The provisions in the Bylaws relevant to the foregoing will be continued unchanged after the Merger. TSI expects to consummate the Merger prior to its annual meeting in 1999 and, accordingly, does not currently intend to call the 1999 annual meeting. If the Merger is not completed and TSI calls the 1999 annual meeting to be held on or before March 12, 1999, stockholders of TSI will not be entitled to include any proposals in TSI's proxy statement for that meeting. All such proposals were required to have been submitted to the Clerk of TSI on or before September 8, 1998. If TSI calls the 1999 annual meeting to be held after March 12, 1999, TSI stockholders must submit any proposals to be included in TSI's proxy statement to the Clerk of TSI a reasonable time before TSI begins to print its proxy materials. 118
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In addition, the TSI Bylaws provide that a TSI stockholder must give written notice to TSI not less than sixty days prior to the scheduled annual meeting describing any proposal to be brought before such meeting, even if the item is not to be included in TSI's proxy statement relating to such meeting. Such procedural requirements are fully set forth in Article III of the TSI Bylaws. To bring an item of business before the 1999 annual meeting, a stockholder must deliver the requisite notice of such item to the Clerk of TSI no later than Friday, December 11, 1998. WHERE YOU CAN FIND MORE INFORMATION Eclipsys filed a Registration Statement on Form S-4 to register with the Commission the Eclipsys Voting Common Stock to be issued to TSI stockholders in the Merger. This Joint Proxy Statement/ Prospectus is a part of that Registration Statement and constitutes a prospectus of Eclipsys in addition to a proxy statement of Eclipsys and TSI for their respective Special Stockholders' Meetings. As allowed by Commission rules, this Joint Proxy Statement/Prospectus does not contain all the information you can find in the Registration Statement or the exhibits to the Registration Statement. Eclipsys and TSI file annual, quarterly and special reports, proxy statements and other information with the Commission. You may read and copy any reports, statements or other information we file at the Commission's public reference rooms in Washington, D.C., New York, New York and Chicago, Illinois. Please call the Commission at 1-800-SEC-0330 for further information on the public reference rooms. Our Commission filings are also available to the public from commercial document retrieval services and at the web site maintained by the Commission at http://www.sec.gov. FORWARD-LOOKING STATEMENTS This Joint Proxy Statement/Prospectus includes various statements concerning possible future events or circumstances for Eclipsys, TSI or the combined company that are subject to risks and uncertainties that could cause actual results or events to differ significantly from the results or events stated in this Joint Proxy Statement/Prospectus, such as those set forth under the caption "Risk Factors". These forward-looking statements include information and projections concerning future results of, operations of Eclipsys, TSI and the combined company, and statements elsewhere in this document using words such as "believes," "expects," "anticipates," "plans," "intends" or similar expressions. 119
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WHERE TO FIND CERTAIN DEFINED TERMS [Download Table] TERM PAGE ---- ---- AIS......................................................... 22 AIS Settlement.............................................. 60 Alltel...................................................... 17 Alltel Acquisition.......................................... 18 Alltel Renegotiation........................................ 30 Antitrust Division.......................................... 58 Brigham..................................................... 11 BT Alex. Brown.............................................. 43 Code........................................................ 57 Commission.................................................. 39 Delaware Law................................................ 112 EBIT........................................................ 53 EBITDA...................................................... 18 EPS......................................................... 54 Eclipsys.................................................... 1 Eclipsys Acquisitions....................................... 22 Eclipsys Board.............................................. 39 Eclipsys Bylaws............................................. 112 Eclipsys Charter............................................ 110 Eclipsys Covenant Condition................................. 76 Eclipsys IPO................................................ 30 Eclipsys Non-Voting Common Stock............................ 7 Eclipsys Preferred Stock.................................... 110 Eclipsys Purchase Plan...................................... 96 Eclipsys Representation Bringdown Condition................. 76 Eclipsys Termination Fee.................................... 78 Eclipsys Voting Common Stock................................ 7 Eclipsys Voting Proposal.................................... 39 Eclipsys Warrants........................................... 110 Effective Time.............................................. 71 Emtek....................................................... 18 Emtek Acquisition........................................... 18 Exchange Act................................................ 112 Exchange Agent.............................................. 71 Exchange Ratio.............................................. 7 FDA......................................................... 12 FDC Act..................................................... 12 Foley Hoag.................................................. 44 FTC......................................................... 58 GAAP........................................................ 18 GAP 28...................................................... 97 GAP 38...................................................... 97 GAP 47...................................................... 97 GAP 48...................................................... 97 GAP Coinvestment............................................ 97 General Atlantic............................................ 43 Hale and Dorr............................................... 43 HealthVISION................................................ 1 HealthVISION Acquisition.................................... 45 HIPAA....................................................... 13 HSR Act..................................................... 58 Incentive Plan.............................................. 96 120
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[Download Table] TERM PAGE ---- ---- IRS......................................................... 57 Massachusetts Law........................................... 112 Material Adverse Change..................................... 76 Merger...................................................... 7 Merger Agreement............................................ 7 MGH......................................................... 11 Morgan Stanley.............................................. 44 Morgan Stanley Opinion...................................... 48 Motorola.................................................... 22 MSA......................................................... 18 MSA Buyout.................................................. 18 1996 Stock Plan............................................. 95 1998 Preferred Stock Issuance............................... 60 Named Executive Officers.................................... 93 Outside Date................................................ 77 Partners.................................................... 11 Partners License............................................ 22 Record Date................................................. 39 Registrable Shares.......................................... 111 Registration Rights Agreement............................... 111 Registration Statement...................................... 65 Reorganization.............................................. 57 Revolver.................................................... 30 Rightsholder................................................ 111 Securities Act.............................................. 59 SDK......................................................... 18 SDK Acquisition............................................. 18 SDK Notes................................................... 22 SDK Partial Repayment....................................... 60 Simione..................................................... 23 Simione Investment.......................................... 23 SMS......................................................... 11 Stockholders Agreement...................................... 93 Sub......................................................... 7 Surviving Corporation....................................... 7 Tax Opinions................................................ 58 Term Loan................................................... 30 TSI......................................................... 1 TSI Board................................................... 41 TSI Bylaws.................................................. 112 TSI Charter................................................. 112 TSI Covenant Condition...................................... 76 TSI Non-Voting Common Stock................................. 7 TSI Preferred Stock......................................... 113 TSI Representation Bringdown Condition...................... 76 TSI Stock Option............................................ 74 TSI Stock Purchase Plan..................................... 75 TSI Termination Fee......................................... 78 TSI Voting Common Stock..................................... 7 TSI Warrant................................................. 74 U.S. GAAP................................................... 18 Warburg..................................................... 43 Wilfam...................................................... 97 121
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INDEX TO FINANCIAL STATEMENTS [Download Table] PAGE ---- Eclipsys Corporation........................................ F-2 Report of Independent Accountants......................... F-2 Consolidated Balance Sheets as of December 31, 1996 and 1997, and September 30, 1998 (unaudited)............... F-3 Consolidated Statements of Operations for the years ended December 31, 1996 and 1997 and the nine months ended September 30, 1997 and 1998 (unaudited)................ F-4 Consolidated Statements of Shareholders' Equity (Deficit) for the years ended December 31, 1996 and 1997 and the nine months ended September 30, 1998 (unaudited)....... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1996 and 1997 and the nine months ended September 30, 1997 and 1998 (unaudited)................ F-6 Notes to Consolidated Financial Statements................ F-7 ALLTEL Healthcare Information Services, Inc................. F-25 Report of Independent Accountants......................... F-25 Consolidated Balance Sheets as of December 31, 1995 and 1996................................................... F-26 Consolidated Statements of Operations for the years ended December 31, 1995 and 1996 and for the period from January 1, 1997 through January 23, 1997............... F-27 Consolidated Statements of Shareholder's Deficit for the years ended December 31, 1995 and 1996 and for the period from January 1, 1997 through January 23, 1997... F-28 Consolidated Statements of Cash Flows for the years ended December 31, 1995 and 1996 and for the period from January 1, 1997 through January 23, 1997............... F-29 Notes to Consolidated Financial Statements................ F-30 SDK Healthcare Information Systems.......................... F-37 Independent Auditors' Report.............................. F-37 Balance Sheets as of April 30, 1997 and 1996.............. F-38 Statements of Operations and Retained Earnings for the years ended April 30, 1997 and 1996.................... F-39 Statements of Cash Flows for the years ended April 30, 1997 and 1996.......................................... F-40 Notes to Financial Statements............................. F-41 Transition Systems, Inc..................................... F-47 Report of Independent Accountants......................... F-47 Consolidated Balance Sheets as of September 30, 1997 and 1998, and June 30, 1998 (unaudited).................... F-48 Consolidated Statements of Operations for the years ended September 30, 1996, 1997 and 1998 and the nine months ended June 30, 1997 and 1998 (unaudited)............... F-49 Consolidated Statements of Cash Flows for the years ended September 30, 1996, 1997 and 1998 and the nine months ended June 30, 1997 and 1998 (unaudited)............... F-50 Consolidated Statements of Stockholders' Equity for the years ended September 30, 1996, 1997 and 1998.......... F-51 Notes to Consolidated Financial Statements................ F-52 HealthVISION, Inc. ......................................... F-63 Report of Independent Auditors............................ F-63 Consolidated Balance Sheets as of December 31, 1996 and 1997................................................... F-64 Consolidated Statements of Operations for the years ended December 31, 1996 and 1997............................. F-65 Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the years ended December 31, 1996 and 1997................................................... F-66 Consolidated Statement of Cash Flows for the years ended December 31, 1996 and 1997............................. F-67 Notes to Consolidated Financial Statements................ F-68 Condensed Consolidated Balance Sheet as of September 30, 1998 (unaudited)....................................... F-77 Condensed Consolidated Statements of Operations for the nine months ended September 30, 1997 and 1998 (unaudited)............................................ F-78 Condensed Consolidated Statement of Changes in Stockholders' Equity (Deficit) for the nine months ended September 30, 1998 (unaudited)................... F-79 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 1997 and 1998 (unaudited)............................................ F-80 Notes to the Condensed Consolidated Financial Statements............................................. F-81 F-1
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REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Eclipsys Corporation In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of changes in shareholders' equity (deficit) and of cash flows present fairly, in all material respects, the financial position of Eclipsys Corporation and its subsidiaries at December 31, 1996 and 1997, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP Atlanta, Georgia April 20, 1998, except as to Note 13, which is as of June 9, 1998 F-2
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ECLIPSYS CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) [Enlarge/Download Table] DECEMBER 31, ------------------- SEPTEMBER 30, 1996 1997 1998 ------- --------- -------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 4,589 $ 4,786 $ 12,309 Accounts receivable, net of allowance for doubtful accounts of $0, $1,739, $2,088.......................... 190 30,969 40,443 Inventory................................................. -- 866 539 Other current assets...................................... 59 1,114 9,757 ------- --------- --------- Total current assets.................................... 4,838 37,735 63,048 Property and equipment, net................................. 322 9,517 10,530 Capitalized software development costs...................... -- 1,591 4,277 Acquired technology, net.................................... -- 25,802 18,798 Intangible assets, net...................................... -- 28,288 15,559 Other assets................................................ 580 3,832 9,479 ------- --------- --------- Total assets............................................ $ 5,740 $ 106,765 $ 121,691 ======= ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Current maturities of long-term debt...................... $ -- $ 12,794 -- Deferred revenue.......................................... -- 25,295 $ 39,211 Other current liabilities................................. 882 31,150 32,411 ------- --------- --------- Total current liabilities............................... 882 69,239 71,622 Deferred revenue............................................ 6,966 7,789 Other long-term liabilities................................. 57 9,480 3,713 Long-term debt.............................................. -- 3,794 -- ------- --------- --------- Total liabilities....................................... 939 89,479 83,124 ------- --------- --------- Mandatorily redeemable preferred stock (Note 5)............. -- 35,607 -- ------- --------- --------- Commitments and contingencies (Note 11) Shareholders' equity (deficit) Preferred stock:.......................................... Series A, $.01 par value, 1,000,000 shares authorized, issued and outstanding 1,000,000, $6 per share liquidation preference, 1996; no shares authorized, issued or outstanding, 1997 and 1998................... 10 -- -- Series D, $.01 par value, 7,200,000 shares authorized, issued and outstanding 7,058,786, $12.55 per share liquidation preference, 1997; no shares authorized, issued or outstanding, 1996 and 1998................... -- 71 -- Series E, $.01 par value, 920,000 shares authorized, issued and outstanding 896,431, $12.55 per share liquidation preference, 1997; no shares authorized, issued or outstanding, 1996 and 1998................... -- 9 -- Series F, $.01 par value, 1,530,000 shares authorized, issued and outstanding 1,478,097, $6 per share liquidation preference, 1997; no shares authorized, issued or outstanding, 1996 and 1998................... -- 15 -- Common stock: Voting, $.01 par value, 30,000,000 and 50,000,000 authorized; issued and outstanding 3,626,662, 4,198,730 and 19,418,685......................................... 36 42 193 Non-Voting, $.01 par value, 3,000,000 shares authorized; issued and outstanding 0, 0 and 896,431................ -- -- 9 Additional paid-in capital................................ 7,974 115,777 189,341 Unearned compensation..................................... (266) (250) (196) Accumulated deficit....................................... (2,953) (134,013) (150,841) Accumulated other comprehensive income.................... -- 28 61 ------- --------- --------- Total shareholders' equity (deficit).................... 4,801 (18,321) 38,567 ------- --------- --------- Total liabilities and shareholders' equity (deficit).... $ 5,740 $ 106,765 $ 121,691 ======= ========= ========= The accompanying notes are an integral part of these consolidated financial statements. F-3
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ECLIPSYS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE DATA) [Enlarge/Download Table] YEAR ENDED NINE MONTHS ENDED DECEMBER 31, SEPTEMBER 30, ---------------------- ---------------------- 1996 1997 1997 1998 --------- ---------- ---------- --------- (UNAUDITED) Revenues: Systems and services.......................... $ -- $ 89,722 $ 64,470 $ 88,541 Hardware...................................... -- 4,355 3,009 9,202 --------- ---------- ---------- --------- Total revenues............................. -- 94,077 67,479 97,743 --------- ---------- ---------- --------- Costs and expenses: Cost of systems and services revenues......... -- 77,083 56,168 53,196 Cost of hardware revenues..................... -- 2,953 2,055 7,825 Marketing and sales........................... 770 13,662 9,881 13,945 Research and development...................... 1,704 15,714 11,991 19,267 General and administrative.................... 603 5,672 4,143 4,580 Depreciation and amortization................. 32 9,710 7,292 7,937 Write-off of in-process research and development (Note 6)....................... -- 99,189 99,189 -- Write-off of MSA.............................. -- -- -- 7,193 --------- ---------- ---------- --------- Total costs and expenses................... 3,109 223,983 190,719 113,943 --------- ---------- ---------- --------- Loss from operations............................ (3,109) (129,906) (123,240) (16,200) Interest (income) expense, net.................. (156) 1,154 727 628 --------- ---------- ---------- --------- Net loss........................................ (2,953) (131,060) (123,967) (16,828) Dividends and accretion on mandatorily redeemable preferred stock.................... -- (5,850) (4,199) (10,928) Preferred stock conversion...................... -- (3,105) (3,105) -- --------- ---------- ---------- --------- Net loss available to common shareholders....... $ (2,953) $ (140,015) $ (131,271) $ (27,756) ========= ========== ========== ========= Basic and diluted net loss per common share..... $ (.98) $ (39.73) $ (38.28) $ (3.41) ========= ========== ========== ========= Weighted average common shares outstanding...... 3,022,660 3,524,313 3,429,385 8,133,275 ========= ========== ========== ========= The accompanying notes are an integral part of these consolidated financial statements. F-4
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ECLIPSYS CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS, EXCEPT SHARE DATA) [Enlarge/Download Table] PREFERRED STOCK --------------------------------------------------------------- COMMON STOCK SERIES A SERIES D SERIES E ------------------- --------------------- ------------------- ----------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ---------- ------ ---------- -------- ---------- ------ -------- ------ Capital contribution at December 22, 1995 (inception date)...................... 520,000 $ 5 ---------- ---- ---------- -------- ---------- ---- -------- --- Balance at December 31, 1995............. 520,000 5 Capital contribution.................... 2,008,373 20 Stock grants............................ 109,999 1 Issuance of Series A Preferred stock.... 1,000,000 $ 10 Issuance of common stock................ 988,290 10 Issuance of stock options............... Compensation expense recognized......... Net loss................................ ---------- ---- ---------- -------- ---------- ---- -------- --- Balance at December 31, 1996............. 3,626,662 36 1,000,000 10 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 Issuance of common stock warrants....... Exchange of Series A for Series F....... (1,000,000) (10) Acquisition of SDK...................... 499,997 5 Stock option exercises.................. 57,071 1 Stock grants............................ 15,000 Dividends and accretion on mandatorily redeemable preferred stock............ 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............. 4,198,730 42 -- -- 7,058,786 71 896,431 9 ---------- ---- ---------- -------- ---------- ---- -------- --- EMTEK Acquisition....................... 1,000,000 10 Sale of common stock.................... 4,830,000 48 Conversion of preferred stock........... 10,033,313 100 (7,058,786) (71) (896,431) (9) Issuance of Series G Preferred Stock.... Stock option exercises.................. 253,073 2 Dividends, accretion and redemption related to mandatorily redeemable preferred stock ...................... Compensation expense recognized......... Comprehensive income: Net loss................................ Foreign currency translation adjustment............................ Other comprehensive income.............. Comprehensive income.................... ---------- ---- ---------- -------- ---------- ---- -------- --- BALANCE AT SEPTEMBER 30, 1998 (UNAUDITED)............................. 20,315,116 $202 -- $ -- -- $ -- -- $-- ========== ==== ========== ======== ========== ==== ======== === PREFERRED STOCK --------------------------------------- SERIES F SERIES G ADDITIONAL ------------------- ----------------- PAID-IN UNEARNED ACCUMULATED SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT ---------- ------ -------- ------ ---------- ------------ ----------- Capital contribution at December 22, 1995 (inception date)...................... $ 45 ---------- ---- -------- --- -------- ----- --------- Balance at December 31, 1995............. 45 Capital contribution.................... 178 Stock grants............................ Issuance of Series A Preferred stock.... 5,991 Issuance of common stock................ 1,472 Issuance of stock options............... 288 $(288) Compensation expense recognized......... 22 Net loss................................ $ (2,953) ---------- ---- -------- --- -------- ----- --------- Balance at December 31, 1996............. 7,974 (266) (2,953) Issuance of Series D Preferred stock.... 62,464 Acquisition of Alltel................... 26,051 Issuance of Series E Preferred stock.... 11,241 Issuance of common stock warrants....... 10,501 Exchange of Series A for Series F....... 1,478,097 $ 15 (5) Acquisition of SDK...................... 3,243 Stock option exercises.................. 6 Stock grants............................ 97 Dividends and accretion on mandatorily redeemable preferred stock............ (5,850) Issuance of stock options............... 55 (55) Compensation expense recognized......... 71 Comprehensive income: Net loss.............................. (131,060) Foreign currency translation adjustment........................... Other comprehensive income............ Comprehensive income.................... ---------- ---- -------- --- -------- ----- --------- Balance at December 31, 1997............. 1,478,097 15 115,777 (250) (134,013) ---------- ---- -------- --- -------- ----- --------- EMTEK Acquisition....................... 9,050 Sale of common stock.................... 65,897 Conversion of preferred stock........... (1,478,097) (15) (900,000) $(9) 4 Issuance of Series G Preferred Stock.... 900,000 9 8,991 Stock option exercises.................. 550 Dividends, accretion and redemption related to mandatorily redeemable preferred stock ...................... (10,928) Compensation expense recognized......... 54 Comprehensive income: Net loss................................ (16,828) Foreign currency translation adjustment............................ Other comprehensive income.............. Comprehensive income.................... ---------- ---- -------- --- -------- ----- --------- BALANCE AT SEPTEMBER 30, 1998 (UNAUDITED)............................. -- $ -- -- $-- $189,341 (196) $(150,841) ========== ==== ======== === ======== ===== ========= ACCUMULATED OTHER COMPREHENSIVE COMPREHENSIVE INCOME INCOME TOTAL ------------- ------------- --------- Capital contribution at December 22, 1995 (inception date)...................... $ 50 --- --------- Balance at December 31, 1995............. 50 Capital contribution.................... 198 Stock grants............................ 1 Issuance of Series A Preferred stock.... 6,001 Issuance of common stock................ 1,482 Issuance of stock options............... -- Compensation expense recognized......... 22 Net loss................................ (2,953) --- --------- Balance at December 31, 1996............. 4,801 Issuance of Series D Preferred stock.... 62,514 Acquisition of Alltel................... 26,072 Issuance of Series E Preferred stock.... 11,250 Issuance of common stock warrants....... 10,501 Exchange of Series A for Series F....... -- Acquisition of SDK...................... 3,248 Stock option exercises.................. 7 Stock grants............................ 97 Dividends and accretion on mandatorily redeemable preferred stock............ (5,850) Issuance of stock options............... -- Compensation expense recognized......... 71 Comprehensive income: Net loss.............................. $(131,060) (131,060) Foreign currency translation adjustment........................... 28 $28 28 --------- Other comprehensive income............ 28 --------- Comprehensive income.................... (131,032) --------- --- --------- Balance at December 31, 1997............. 28 (18,321) --- --------- EMTEK Acquisition....................... 9,060 Sale of common stock.................... 65,945 Conversion of preferred stock........... -- Issuance of Series G Preferred Stock.... 9,000 Stock option exercises.................. 552 Dividends, accretion and redemption related to mandatorily redeemable preferred stock ...................... (10,928) Compensation expense recognized......... 54 Comprehensive income: Net loss................................ (16,828) (16,828) Foreign currency translation adjustment............................ 33 33 33 --------- Other comprehensive income.............. 33 --------- Comprehensive income.................... (16,795) --------- --- --------- BALANCE AT SEPTEMBER 30, 1998 (UNAUDITED)............................. $ -- $61 $ 38,567 ========= === ========= The accompanying notes are an integral part of these consolidated financial statements. F-5
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ECLIPSYS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) [Enlarge/Download Table] YEAR ENDED NINE MONTHS ENDED DECEMBER 31, SEPTEMBER 30, ------------------- -------------------- 1996 1997 1997 1998 ------- --------- --------- -------- (UNAUDITED) Operating activities: Net loss......................................... $(2,953) $(131,060) $(123,967) $(16,828) ------- --------- --------- -------- Adjustments to reconcile net loss to net cash provided (used) by operating activities: Depreciation and amortization................. 32 31,622 23,156 20,155 Provision for bad debts....................... -- 600 450 750 Loss on disposal of property and equipment.... -- 557 570 8 Write off of in-process research and development................................. -- 99,189 99,189 -- Write-off of MSA intangible asset............. -- -- -- 7,193 Write-off of contributed technology........... 1,482 -- -- -- Stock compensation expense.................... 22 168 151 54 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable......................... (190) (816) (505) (5,295) Inventory................................... -- 655 137 327 Other current assets........................ (59) (276) (475) 1,025 Other assets................................ (34) (71) 681 (81) Deferred revenue............................ -- (2,044) (1,772) 9,689 Other current liabilities................... 882 2,196 3,986 (1,756) Other long-term liabilities................. 57 348 1,691 (65) ------- --------- --------- -------- Total adjustments........................ 2,192 132,128 127,259 32,004 ------- --------- --------- -------- Net cash provided (used) by operating activities.................................. (761) 1,068 3,292 15,176 ------- --------- --------- -------- Investing activities: Purchase of property and equipment, net of acquisitions.................................. (354) (3,096) (2,097) (3,573) Capitalized software development costs........... -- (1,591) (698) (2,686) Acquisitions, net of cash acquired............... -- (108,983) (108,983) -- Changes in other assets.......................... (546) -- -- (21,565) ------- --------- --------- -------- Net cash used in investing activities......... (900) (113,670) (111,778) (27,824) ------- --------- --------- -------- Financing activities: Borrowings....................................... -- 10,000 10,000 18,500 Payments on borrowings........................... -- (1,000) -- (35,088) Exercise of stock options........................ 199 7 -- 453 Sale of common stock............................. -- -- -- 66,044 Sale of convertible preferred stock.............. 6,001 73,764 73,764 9,000 Sale/(redemption) of mandatorily redeemable preferred stock............................... -- 30,000 30,000 (38,771) ------- --------- --------- -------- Net cash provided by financing activities..... 6,200 112,771 113,764 20,138 ------- --------- --------- -------- Effect of exchange rate changes on cash and cash equivalents...................................... -- 28 21 33 ------- --------- --------- -------- Net increase in cash and cash equivalents..... 4,539 197 5,299 7,523 Cash and cash equivalents, beginning of year....... 50 4,589 4,589 4,786 ------- --------- --------- -------- Cash and cash equivalents, end of year............. $ 4,589 $ 4,786 $ 9,888 $ 12,309 ======= ========= ========= ======== Cash paid for interest............................. $ -- $ 978 $ 493 $ 1,275 ======= ========= ========= ======== Cash paid for income taxes......................... $ -- $ -- $ -- $ -- ======= ========= ========= ======== The accompanying notes are an integral part of these consolidated financial statements. F-6
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ECLIPSYS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1997 AND SEPTEMBER 30, 1998 (UNAUDITED) 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 patient care and financial software solutions to healthcare organizations. Additionally, Eclipsys provides other information technology solutions including outsourcing, remote processing, networking technologies and other related services. Subsequent to December 31, 1996, the Company made the following acquisitions (Note 6): Effective January 24, 1997, ALLTEL Healthcare Information Services, Inc. ("Alltel"), a wholly-owned subsidiary of ALLTEL Information Services, Inc. ("AIS") Effective June 26, 1997, SDK Healthcare Information Systems ("SDK") Effective January 30, 1998, the Company acquired the net assets of the North American operations of the Emtek Healthcare Division of Motorola, Inc. ("Emtek"). These acquisitions have been accounted for as purchases and accordingly the accompanying financial statements reflect the results of operations of these businesses from the date acquired. 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 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. CASH AND CASH EQUIVALENTS For purposes of the consolidated statement of cash flows, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. REVENUE RECOGNITION The Company's products are sold to customers based on long-term contractual agreements. Revenues are derived from the licensing of computer software, software and hardware maintenance, remote processing and outsourcing, training, implementation assistance, consulting, and the sale of computer hardware. SYSTEMS AND SERVICES For contracts in which the Company is required to make significant production, modification, or customization changes, revenues from software license fees are recognized using the percentage-of- F-7
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ECLIPSYS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1997 AND SEPTEMBER 30, 1998 (UNAUDITED) -- (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) completion method over the implementation period of the contracts based on implementation hours incurred. Other software license fees are generally recognized on a straight-line basis over the term of the licensing and maintenance agreements, which range from five to seven years. Remote processing and outsourcing services are marketed under long-term agreements generally over periods from five to seven years and revenues are recognized monthly as the work is performed. Software maintenance fees are marketed under annual and multi-year agreements and are recognized ratably over the term of the agreements. Implementation revenues are recognized as the services are performed or on a percentage-of-completion basis for fixed fee arrangements. Hardware maintenance revenues are billed and recognized monthly over the term of agreements. Revenues related to other support services, such as training, consulting, and implementation, are recognized when the services are performed. The Company warrants its products will perform in accordance with specifications as outlined in the respective customer contracts. The Company records a reserve for warranty costs at the time it recognizes revenue. Historically, warranty costs have been minimal. The Company accrues for product returns at the time it recognizes revenue, based on actual experience. Historically, product return costs have been minimal. HARDWARE SALES Hardware sales are recognized upon shipment of the product to the customer. UNBILLED ACCOUNTS RECEIVABLE Unbilled accounts receivable represent amounts owed to the Company under noncancelable agreements for software license fees with extended payment terms and computer hardware purchases which have been financed over extended payment terms. The current portion of unbilled accounts receivable of $3.9 million as of December 31, 1997 is included in accounts receivable in the accompanying financial statements. The non-current portion of unbilled accounts receivable of $1.8 million as of December 31, 1997 is included in other assets in the accompanying financial statements. The non-current portion of unbilled accounts receivable provides for payment terms that generally range from three to five years and carry annual interest rates ranging from 7% to 10%. The Company recognizes revenue in advance of billings under certain of its non-cancelable long-term contracts that contain extended payment terms. The Company does not have any obligation to refund any portion of its fees and has a history of enforcement and collection of amounts due under such arrangements. Payments owed under contracts with extended payment terms are due in accordance with the terms of the respective contract. Historically, the Company has had minimal write-offs of amounts due under such arrangements. Additionally, included in unbilled accounts receivable are costs and earnings in excess of billings related to certain software license fee arrangements which are being recognized on a percentage-of-completion basis. These amounts totaled approximately $1.0 million as of December 31, 1997. 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 F-8
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ECLIPSYS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1997 AND SEPTEMBER 30, 1998 (UNAUDITED) -- (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. Salaries, benefits, and other directly related costs incurred in connection with programming and testing software products are capitalized subsequent to establishing technological feasibility. 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. 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. Capitalized costs related to software development were approximately $1.6 million for the year ended December 31, 1997. ACQUIRED TECHNOLOGY AND INTANGIBLE ASSETS The intangible assets arose from the Company's acquisitions (Note 6) and consist of the following as of December 31, 1997 (in thousands): [Enlarge/Download Table] ACCUMULATED NET BOOK USEFUL GROSS AMORTIZATION VALUE LIFE ------- ------------ -------- ------------ Acquired Technology........................ $45,517 $19,715 $25,802 3 - 5 Years Ongoing customer relationships............. 10,846 1,988 8,858 5 Years Management and services agreement.......... 9,543 2,197 7,346 4 Years Goodwill................................... 13,550 1,466 12,084 5 - 12 Years ------- ------- ------- $79,456 $25,366 $54,090 ======= ======= ======= The carrying value of the excess of cost over fair value of net assets acquired is reviewed if the facts and circumstances suggest that it may be impaired. This review indicates if the assets will not be recoverable as determined based on future expected cash flows. Based on its review, the Company does not believe that an impairment of its excess of cost over fair value of net assets acquired has occurred. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of the Company's financial instruments, including cash and cash equivalents, accounts receivable, and other current liabilities, approximate fair value. The 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. F-9
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ECLIPSYS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1997 AND SEPTEMBER 30, 1998 (UNAUDITED) -- (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. BASIC AND DILUTED NET LOSS PER SHARE For all periods presented, basic net loss per common share is presented in accordance with FAS 128, "Earnings per Share", which provides for new accounting principles used in the calculation of earnings per share and was effective for financial statements for both interim and annual periods ended after December 15, 1997. Basic net loss per common share is based on the weighted average number of shares of common stock outstanding during the period. Stock options to acquire 657,500 and 1,831,652 shares of common stock in 1996 and 1997, respectively, warrants to acquire up to 1,799,715 shares of common stock in 1997, and convertible preferred stock (convertible into 1,000,000 and 9,433,314 shares of common stock in 1996 and 1997, respectively) were the only securities issued which would have been included in the diluted earnings per share calculation had they not 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 (Notes 4 and 5). 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. 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 shareholders' equity (deficit). The Company has not entered into any hedging contracts during the two year period ended December 31, 1997. 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 which do not affect the accumulated deficit, be reported. Accordingly, those amounts which are comprised solely of foreign currency translation adjustments, are included in other comprehensive income in the consolidated statement of shareholders' equity (deficit). F-10
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ECLIPSYS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1997 AND SEPTEMBER 30, 1998 (UNAUDITED) -- (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) UNAUDITED INFORMATION The interim financial information as of September 30, 1998 and for the nine months ended September 30, 1997 and 1998 is unaudited. However, in the opinion of management, such information has been prepared on the same basis as the audited financial statements and includes all adjustments, consisting solely of normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations for the periods presented. The interim results, however, are not necessarily indicative of results for any future period. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board 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". All these statements are effective for fiscal years beginning after December 15, 1997, and are not expected to have a material impact on the Company's financial statements. Effective January 1, 1998, the Company adopted SOP 97-2. 3. PROPERTY AND EQUIPMENT Property and equipment are summarized as follows (in thousands): [Download Table] DECEMBER 31, -------------- 1996 1997 ---- ------- Computer equipment.......................................... $107 $ 8,467 Office equipment and other.................................. 199 1,834 Purchased software.......................................... -- 3,382 Leasehold improvements...................................... 48 2,122 ---- ------- 354 15,805 Less: Accumulated depreciation and amortization............. (32) (6,288) ---- ------- $322 $ 9,517 ==== ======= Depreciation of property and equipment totaled approximately $32,000 and $6.3 million in 1996 and 1997, 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. In 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 completes 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 or 1997. 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 F-11
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ECLIPSYS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1997 AND SEPTEMBER 30, 1998 (UNAUDITED) -- (CONTINUED) 4. LICENSING ARRANGEMENT (CONTINUED) 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, President 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. The Company has the option to purchase the technology it licenses from Partners upon the completion of an IPO. 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. It is expected that the Company will release 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, and $2.5 million for the years ended December 31, 1996 and 1997, respectively, and are included as a reduction in research and development expenses in the accompanying consolidated statements of operations. 5. SHAREHOLDERS' EQUITY AND MANDATORILY REDEEMABLE PREFERRED STOCK STOCK SPLIT In May 1997, the Company declared a three-for-two split for all Common Stock and Non-Voting Common Stock issued and outstanding. In addition, the shareholders approved an increase in the number of authorized shares of 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 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 inception of the Company. MANDATORILY REDEEMABLE PREFERRED STOCK In connection with its acquisition of Alltel (Note 6), 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 is subject to adjustment in the event the Company redeems all or a portion of the Series B prior to its mandatory redemption date. The Series B is non-voting and is 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%. In the event that dividends are not paid when due for quarters ending after December 31, 1999, the dividend rate will increase to 12.5%. The Series B is 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, equals the F-12
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ECLIPSYS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1997 AND SEPTEMBER 30, 1998 (UNAUDITED) -- (CONTINUED) 5. SHAREHOLDERS' EQUITY AND MANDATORILY REDEEMABLE PREFERRED STOCK (CONTINUED) liquidation preference amount plus all accrued and unpaid dividends. With respect to liquidation preferences, the Series B ranks equal to the Series C 8.5% Cumulative Redeemable Preferred Stock ("Series C") and senior to all other equity instruments. In the event that certain shareholders cease to continue to own a specified percentage of common or convertible preferred stock of the Company, the holders of the Series B may elect to put the securities back to the Company at their redemption price, as defined. Additionally, the Series B may be put back to the Company at their redemption value in the event of a change of control, as defined. In January 1997, 20,000 shares of the Series C were issued to AIS as part of the consideration paid for Alltel (Note 6). The Series C contains 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 does not have these preferential rights. The Series C redemption price is determined the same as Series B. The Series C must be redeemed on or before December 31, 2001. The Series C may be put back to the Company at their redemption value in the event of a change in control, as defined. The Company has accounted for the Series B and C as mandatorily redeemable preferred stock. Accordingly, the Company is accruing dividends and amortizing 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 and December 31, 1997. 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 6)), which included a discount from its face amount of $5.2 million. The amount charged to APIC related to the Series B and C for the year ended December 31, 1997 was $4.1 million and $1.8 million, respectively. The Series B and Series C consist of the following (in thousands): [Enlarge/Download Table] DATE OF ISSUE DECEMBER 31, 1997 -------------------------------------- -------------------------------------- FACE VALUE DISCOUNT CARRYING VALUE FACE VALUE DISCOUNT CARRYING VALUE ---------- -------- -------------- ---------- -------- -------------- Series B.................... $30,000 $10,501 $19,499 $30,000 $6,476 $23,524 Series C.................... 15,500 5,242 10,258 15,500 3,417 12,083 ------- ------- ------- ------- ------ ------- $45,500 $15,743 $29,757 $45,500 $9,893 $35,607 ======= ======= ======= ======= ====== ======= 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 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. F-13
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ECLIPSYS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1997 AND SEPTEMBER 30, 1998 (UNAUDITED) -- (CONTINUED) 5. SHAREHOLDERS' EQUITY AND MANDATORILY REDEEMABLE PREFERRED STOCK (CONTINUED) 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 is convertible into one share of Common Stock. The Series D contains voting rights as if it were converted into Common Stock and has a liquidation preference of $12.55 per share plus any declared but unpaid dividends. The Series D is equivalent to Series E Convertible Preferred Stock ("Series E") with respect to liquidation preference and rank. Both the Series D and E rank junior to the Series B and C and senior to Series F. To date, the Company has not declared or paid any dividends on the Series D. SERIES E CONVERTIBLE PREFERRED STOCK In January 1997, the Company sold 896,431 shares of Series E for $11.3 million. The Series E is non-voting and is identical to the Series D with respect to liquidation preference and rank. Each share of Series E is convertible into one share of Non-Voting Common Stock. To date, the Company has not declared or paid any dividends on the Series E. 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 contains a liquidation preference of $6 per share. The Series F ranks junior to the Company's other classes of preferred stock with respect to liquidation preferences. Each share of Series F is convertible into one share of Common Stock. To date, the Company has not declared or paid any dividends on the Series F. COMMON STOCK 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. UNDESIGNATED PREFERRED STOCK The Company has available for issuance, 1,000,000 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 at the time of issuance. Currently, there are no outstanding shares. 6. 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. F-14
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ECLIPSYS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1997 AND SEPTEMBER 30, 1998 (UNAUDITED) -- (CONTINUED) 6. ACQUISITIONS (CONTINUED) 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): [Download Table] 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 March 1998, the Company negotiated an agreement with AIS, which settled these issues related to any adjustments that could be made pursuant to the provisions in the acquisition agreement (Note 13). After accounting for this adjustment, 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. Effective June 26, 1997, the Company acquired all of the common stock of 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. F-15
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ECLIPSYS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1997 AND SEPTEMBER 30, 1998 (UNAUDITED) -- (CONTINUED) 6. ACQUISITIONS (CONTINUED) The purchase price is composed of and allocated as follows (in thousands): [Download Table] 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 Sunrise product suite over the next several years. The Company anticipates that certain products will be generally released during 1998, with additional product releases in subsequent periods 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 charges 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. Unaudited pro forma results of operations for the years ended December 31, 1996 and 1997, as if the aforementioned acquisitions had occurred on January 1, 1996 is as follows (in thousands, except per share data): [Download Table] YEAR ENDED DECEMBER 31, -------------------- 1996 1997 -------- --------- Revenues.................................................... $115,606 $ 103,786 Net loss.................................................... (5,696) (132,159) Basic and diluted loss per share............................ $ (1.62) $ (37.39) Effective January 30, 1998, the Company acquired the net assets of 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. F-16
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ECLIPSYS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1997 AND SEPTEMBER 30, 1998 (UNAUDITED) -- (CONTINUED) 6. ACQUISITIONS (CONTINUED) The purchase price is composed of and allocated as follows: [Download Table] 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 ======= 7. LONG-TERM DEBT Long-term debt consists of the following as of December 31, 1997 (in thousands): [Download Table] Term Loan................................................... $ 9,000 SDK acquisition debt, interest payable quarterly at 9.5%, principal due in two annual installments of $3,794, commencing April 1998..................................... 7,588 -------- 16,588 Less current portion........................................ (12,794) -------- Long-term debt.............................................. $ 3,794 ======== In connection with the Alltel acquisition, the Company entered into a $30 million credit facility (the "Facility"). The Facility included a $10 million term loan (the "Term Loan") and a $20 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 13, 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 is classified as current in the accompanying financial statements. 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, 1997, 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, 1997. As of December 31, 1997, the Company has $20 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, 1997, unused Letters of Credit totaling approximately $5.0 million were outstanding against F-17
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ECLIPSYS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1997 AND SEPTEMBER 30, 1998 (UNAUDITED) -- (CONTINUED) 7. LONG-TERM DEBT (CONTINUED) the Revolver. As discussed in Note 13, in May 1998 the Company increased its borrowings under the Revolver. 8. OTHER CURRENT LIABILITIES Other current liabilities consist of the following (in thousands): [Download Table] DECEMBER 31, -------------- 1996 1997 ---- ------- Accounts payable............................................ $120 $ 4,606 Accrued compensation and incentive.......................... 237 7,847 Customer deposits........................................... -- 7,959 Payment due AIS under MSA................................... -- 2,000 Accrued acquisition costs................................... 501 -- Accrued interest............................................ -- 672 Other....................................................... 24 8,066 ---- ------- $882 $31,150 ==== ======= 9. INCOME TAXES The Company has no current or deferred income tax provision due to the net losses reported by the Company. A reconciliation of the federal statutory rate and the effective income tax rate follows (in thousands): [Download Table] YEARS ENDED DECEMBER 31, ------------------- 1996 1997 -------- -------- Statutory federal income tax rate (34%)..................... $(500) $(45,481) SDK in-process research and development..................... -- 2,376 Meals and entertainment..................................... 8 460 State income taxes.......................................... (58) (5,163) Non-deductible amortization................................. -- 747 Valuation allowance......................................... 550 46,976 Other....................................................... -- 85 ----- -------- Income tax benefit (provision).............................. $ -- $ -- ===== ======== F-18
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ECLIPSYS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1997 AND SEPTEMBER 30, 1998 (UNAUDITED) -- (CONTINUED) 9. INCOME TAXES (CONTINUED) The significant components of the Company's net deferred tax asset were as follows (in thousands): [Download Table] DECEMBER 31, ------------------- 1996 1997 -------- -------- Deferred tax assets: Alltel in-process research and development.................. $ -- $ 34,969 Intangible assets........................................... -- 5,353 Deferred revenue............................................ -- 3,990 Allowance for doubtful accounts............................. -- 660 Compensation related accrued liabilities.................... 58 249 Accrued expenses............................................ -- 3,569 Depreciation and amortization............................... -- 1,257 Net operating loss carryforwards............................ 504 5,220 ----- -------- 562 55,267 ----- -------- Deferred tax liabilities: Capitalization of software development costs.............. -- 604 Depreciation and amortization............................. 12 -- Other..................................................... -- -- ----- -------- Net deferred tax asset...................................... 550 54,663 ----- -------- Valuation allowance......................................... (550) (54,663) ----- -------- $ -- $ -- ===== ======== At December 31, 1997, the Company had net operating loss carryforwards for federal income tax purposes of approximately $20.1 million. The carryforwards expire in varying amounts through 2012. In addition, 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. As a result of the ownership change, net operating loss carryforwards of approximately $1.5 million, which were incurred prior to the date of change, are subject to annual limitation on their future use. As of December 31, 1997, a valuation allowance has been established against the deferred tax assets which 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. 10. EMPLOYEE BENEFIT PLANS 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 F-19
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ECLIPSYS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1997 AND SEPTEMBER 30, 1998 (UNAUDITED) -- (CONTINUED) 10. EMPLOYEE BENEFIT PLANS (CONTINUED) 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. The following table summarizes activity under the Plan: [Enlarge/Download Table] 1996 1997 ------------------------- --------------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE ------- --------------- --------- --------------- Outstanding at beginning of year......... -- $ -- 657,500 $ .11 Granted................................ 657,500 .11 1,309,889 6.52 Exercised.............................. -- (57,071) .11 Forfeited.............................. -- (78,666) 4.81 ------- ---- --------- ----- Outstanding at end of year............... 657,500 .11 1,831,652 4.49 ------- ---- --------- ----- Options exercisable at end of year....... -- 197,978 ------- --------- Weighted average fair value of options granted during the year................ $.45 $1.75 ==== ===== [Enlarge/Download Table] 1996 1997 ------------------------------ ------------------------------ WEIGHTED WEIGHTED WEIGHTED WEIGHTED AVERAGE EXERCISE FAIR MARKET AVERAGE EXERCISE FAIR MARKET OPTIONS GRANTED DURING THE YEAR PRICE VALUE PRICE VALUE ------------------------------------ ---------------- ----------- ---------------- ----------- Option price > fair market value $.10 $ -- $6.73 $1.76 Option price = fair market value -- -- -- -- Option price < fair market value .15 1.39 .20 1.35 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 nonemployees for services. Compensation expense of approximately $1,000 and $97,000 was recorded in 1996 and 1997, respectively, related to these transactions. In addition, during 1996 and 1997, the Company recorded compensation expense of $22,000 and $71,000, respectively, related the granting of certain stock options to employees with exercise prices below the estimated fair market value of the Common Stock at the date of grant. 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 and 1997 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): [Download Table] YEARS ENDED DECEMBER 31, -------------------- 1996 1997 -------- --------- Net loss: As reported............................................... $(2,953) $(131,060) Pro forma................................................. (2,954) (131,324) Basic and diluted net loss per share: As reported............................................... $ (.98) $ (39.73) Pro forma................................................. (.98) (39.80) F-20
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ECLIPSYS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1997 AND SEPTEMBER 30, 1998 (UNAUDITED) -- (CONTINUED) 10. EMPLOYEE BENEFIT PLANS (CONTINUED) 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 and 1997, respectively: dividend yield of 0% for all years, risk-free interest rate of 5.90% and 6.06% and expected life of 5.0 years and 5.2 years. As a nonpublic entity, the Company used the minimum value method which does not incorporate a volatility assumption. The following table summarizes information about stock options outstanding at December 31, 1997: [Enlarge/Download Table] OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------ ------------------------ WEIGHTED AVERAGE WEIGHTED WEIGHTED NUMBER REMAINING AVERAGE NUMBER AVERAGE RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE EXERCISE PRICE AT 12/31/97 LIFE PRICE 12/31/97 PRICE --------------------------------- ----------- ----------- -------- ----------- ---------- $0.10 to $0.20................... 621,929 8.36 $ .12 160,789 $ .11 $6.50 to $7.50................... 1,209,723 9.54 $6.74 37,189 $7.52 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, the Board authorized matching contributions totaling $780,000. 11. 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 $70,000 and $6.2 million for the years ended December 31, 1996 and 1997, respectively. Future minimum rental payments for noncancelable operating leases as of December 31, 1997 are as follows (in thousands): [Download Table] YEAR ENDING DECEMBER 31, ------------ 1998........................................................ $ 5,801 1999........................................................ 4,930 2000........................................................ 2,616 2001........................................................ 1,877 2002........................................................ 1,632 Thereafter.................................................. 4,575 ------- $21,431 ======= 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. F-21
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ECLIPSYS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1997 AND SEPTEMBER 30, 1998 (UNAUDITED) -- (CONTINUED) 12. 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 the Company paid $178,000 under this lease. The lease is noncancelable and expires in 2009. In 1997, the Company paid $336,000 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, President and Chief Executive Officer of the Company (the "Chairman"). The Chairman's company received $219,000 for these transactions. The Chairman has no interest in the charter company. In the opinion of management, the Company believes that the terms of charters were comparable to rates that would be charged by unaffiliated parties. 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, $66,000 was paid under the agreement. Effective January 1, 1998, the Chairman's annual salary was increased to $200,000. 13. SUBSEQUENT EVENTS SHAREHOLDERS' EQUITY (DEFICIT) In January 1998, the Company amended its Certificate of Incorporation (the "Certificate"). Under the amended Certificate, the Company increased the number of authorized shares of Undesignated Preferred to 1,100,000 and created Series G Convertible Preferred Stock ("Series G"). There are 900,000 authorized shares of Series G. The Series G is convertible on a two-for-three basis to shares of Common Stock. The conversion rate is subject to adjustment in certain circumstances. The Series G has a liquidation preference of $10 per share. In the event of an involuntary liquidation of the Company, the Series G will participate on a pro rata basis with the Series D and E. In February 1998, the Company sold 900,000 shares of Series G to outside investors for total consideration of $9 million. The proceeds were utilized to repay the outstanding Term Loan balance. In addition, the Company amended the terms of (i) all of its convertible preferred stock to require that it automatically be converted into Common Stock or Non-Voting Common Stock, as applicable, upon a qualifying IPO and (ii) all of its Mandatorily Redeemable Preferred Stock to require that it be mandatorily redeemed upon a qualifying IPO. In June 1998, the Company effected a two-for-three reverse stock split of all Common Stock and Non-Voting Common Stock outstanding. CREDIT FACILITY In March 1998, the Company borrowed $9.0 million under the Revolver to pay a portion of the AIS settlement, described herein. On May 29, 1998, the Company entered into an agreement to increase the available borrowings under the Revolver (Note 7) from $20.0 million to $50.0 million (unaudited). F-22
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ECLIPSYS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1997 AND SEPTEMBER 30, 1998 (UNAUDITED) -- (CONTINUED) 13. SUBSEQUENT EVENTS (CONTINUED) 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. 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. The first offering period under the Purchase Plan will not commence until after the completion of the Eclipsys IPO. ALLTEL SETTLEMENT 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. The Company will use a portion of the net proceeds of the IPO to redeem the remaining Series C held by AIS. 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. SIMIONE INVESTMENT In April 1998, the Company made a strategic investment in Simione Central Holdings, Inc. ("Simione"), a publicly traded company, purchasing 420,000 shares of restricted common stock from certain stockholders of Simione 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. 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. 14. EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE REPORT OF INDEPENDENT ACCOUNTANTS INITIAL PUBLIC OFFERING Effective August 6, 1998, the Company completed an initial public offering. Net proceeds from the offering were $66.0 million, including proceeds from the exercise of the underwriters' overallotment option. F-23
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ECLIPSYS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1997 AND SEPTEMBER 30, 1998 (UNAUDITED) -- (CONTINUED) 14. EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE REPORT OF INDEPENDENT ACCOUNTANTS (CONTINUED) 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 Revolver. 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. TSI MERGER AGREEMENT On October 29, 1998, the Company entered into a merger agreement to acquire Transition Systems, Inc. ("TSI") for approximately $270.0 million in stock. Under the terms of the agreement, each share of TSI stock will be converted using a fixed exchange rate of .525 shares of the Company's stock, with no collar. The transaction, which is subject to regulatory as well as stockholder approval, is intended to be accounted for as a pooling of interests and is anticipated to close by the end of December 1998. F-24
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REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Eclipsys Corporation In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of changes in shareholder's deficit and of cash flows present fairly, in all material respects, the financial position of ALLTEL Healthcare Information Services, Inc. (the Company) (a Delaware corporation, wholly-owned by ALLTEL Information Services, Inc., an Arkansas corporation) and its subsidiaries at December 31, 1995 and 1996, and the results of their operations and their cash flows for the years then ended and for the period from January 1, 1997 through January 23, 1997 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 10, effective January 24, 1997, the Company was acquired by Eclipsys Corporation. PRICEWATERHOUSECOOPERS LLP Atlanta, Georgia June 27, 1997 F-25
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ALLTEL HEALTHCARE INFORMATION SERVICES, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) [Download Table] DECEMBER 31, ------------------- 1995 1996 -------- -------- ASSETS Current assets: Cash and cash equivalents................................. $ 2,599 $ 2,022 Accounts receivable, net of allowance for doubtful accounts of $749 and $1,274 at December 31, 1995 and 1996, respectively..................................... 29,435 29,713 Inventory................................................. 2,081 1,576 Deferred tax asset........................................ 3,676 3,682 Other current assets...................................... 678 634 -------- -------- Total current assets................................... 38,469 37,627 Property and equipment, net................................. 10,168 10,739 Purchased software, net of accumulated amortization of $2,985 and $4,453 at December 31, 1995 and 1996, respectively.............................................. 4,098 2,882 Capitalized software development costs, net of accumulated amortization of $4,671 and $11,880 at December 31, 1995 and 1996, respectively.................................... 27,632 35,306 Intangible assets, net of accumulated amortization of $1,129 and $2,101 at December 31, 1995 and 1996, respectively.... 5,670 4,698 Other assets................................................ 2,344 9,191 -------- -------- Total assets........................................... $ 88,381 $100,443 ======== ======== LIABILITIES AND SHAREHOLDER'S DEFICIT Current liabilities: Deferred revenue.......................................... $ 24,724 $ 26,807 Other current liabilities................................. 17,668 20,378 -------- -------- Total current liabilities.............................. 42,392 47,185 Deferred revenue............................................ 15,913 10,148 Other long-term liabilities................................. 1,250 Deferred income taxes....................................... 7,002 9,294 Intercompany payable to parent.............................. 46,085 57,953 -------- -------- Total liabilities...................................... 111,392 125,830 Shareholder's deficit: Common stock, $.01 par value, 1,000 shares authorized, issued and outstanding................................. 1 1 Additional paid-in capital................................ 15,678 15,678 Accumulated deficit....................................... (38,236) (40,432) Cumulative foreign currency translation adjustment........ (454) (634) -------- -------- Total shareholder's deficit............................ (23,011) (25,387) -------- -------- Total liabilities and shareholder's deficit....... $ 88,381 $100,443 ======== ======== The accompanying notes are an integral part of these financial statements. F-26
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ALLTEL HEALTHCARE INFORMATION SERVICES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS) [Enlarge/Download Table] YEAR ENDED PERIOD FROM DECEMBER 31, JANUARY 1, 1997 ------------------- THROUGH 1995 1996 JANUARY 23, 1997 -------- -------- ---------------- Revenues: Service and systems..................................... $ 90,737 $ 99,213 $ 6,064 Hardware................................................ 9,377 9,587 122 -------- -------- ------- Total revenues....................................... 100,114 108,800 6,186 -------- -------- ------- Costs and expenses: Cost of service and systems revenues.................... 53,385 63,572 4,277 Cost of hardware revenues............................... 7,950 7,911 104 Marketing and sales..................................... 11,128 11,091 660 Research and development................................ 8,522 10,271 794 General and administrative.............................. 8,168 7,101 621 Depreciation and amortization........................... 6,735 8,135 568 -------- -------- ------- Total costs and expenses............................. 95,888 108,081 7,024 -------- -------- ------- Income (loss) from operations............................. 4,226 719 (838) Interest expense, net..................................... (2,733) (3,758) (379) -------- -------- ------- Income (loss) before income taxes......................... 1,493 (3,039) (1,217) Income tax benefit (provision)............................ (887) 843 437 -------- -------- ------- Net income (loss)......................................... $ 606 $ (2,196) $ (780) ======== ======== ======= The accompanying notes are an integral part of these financial statements. F-27
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ALLTEL HEALTHCARE INFORMATION SERVICES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDER'S DEFICIT (IN THOUSANDS EXCEPT SHARE DATA) [Enlarge/Download Table] EQUITY ADJUSTMENT FROM COMMON STOCK ADDITIONAL FOREIGN --------------- PAID-IN ACCUMULATED CURRENCY SHARES AMOUNT CAPITAL DEFICIT TRANSLATION TOTAL ------ ------ ---------- ----------- ----------- -------- Balance at December 31, 1994........ 1,000 $1 $15,678 $(38,842) $(470) $(23,633) Net income.......................... 606 606 Foreign translation adjustment...... 16 16 ----- -- ------- -------- ----- -------- Balance at December 31, 1995........ 1,000 1 15,678 (38,236) (454) (23,011) Net loss............................ (2,196) (2,196) Foreign translation adjustment...... (180) (180) ----- -- ------- -------- ----- -------- Balance at December 31, 1996........ 1,000 1 15,678 (40,432) (634) (25,387) Net loss............................ (780) (780) Foreign translation adjustment...... 3 3 ----- -- ------- -------- ----- -------- Balance at January 23, 1997......... 1,000 $1 $15,678 $(41,212) $(631) $(26,164) ===== == ======= ======== ===== ======== The accompanying notes are an integral part of these financial statements. F-28
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ALLTEL HEALTHCARE INFORMATION SERVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) [Enlarge/Download Table] YEAR ENDED PERIOD FROM DECEMBER 31, JANUARY 1, 1997 ------------------- THROUGH 1995 1996 JANUARY 23, 1997 -------- -------- ---------------- Operating activities: Net income (loss)....................................... $ 606 $ (2,196) $ (780) -------- -------- ------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization........................ 13,205 15,344 945 Deferred income taxes................................ 6,040 2,286 (52) Changes in assets and liabilities Accounts receivable................................ (6,574) (278) 325 Inventory.......................................... 566 505 55 Other current assets............................... (74) 44 10 Deferred revenue................................... 1,090 (3,682) 1,951 Other current liabilities.......................... 906 2,710 2,351 Other long term liabilities........................ -- 1,250 (1,250) Other assets....................................... 162 (43) (81) -------- -------- ------- Total adjustments............................... 15,321 18,136 4,254 -------- -------- ------- Net cash provided by operating activities..... 15,927 15,940 3,474 -------- -------- ------- Investing activities: Purchase of property, equipment and software............ (7,716) (9,231) (323) Capitalized software development costs.................. (12,905) (12,170) (661) Changes in other assets................................. 96 (6,804) 27 -------- -------- ------- Net cash used in investing activities................ (20,525) (28,205) (957) -------- -------- ------- Financing activities: Net change in intercompany payable to parent............ 5,509 11,868 (1,855) -------- -------- ------- Effect of exchange rate changes on cash and cash equivalents............................................. 16 (180) 3 -------- -------- ------- Net (decrease) increase in cash and cash equivalents...... 927 (577) 665 Cash and cash equivalents, beginning of year.............. 1,672 2,599 2,022 -------- -------- ------- Cash and cash equivalents, end of year.................... $ 2,599 $ 2,022 $ 2,687 ======== ======== ======= The accompanying notes are an integral part of these financial statements. F-29
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ALLTEL HEALTHCARE INFORMATION SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 1. ORGANIZATION AND DESCRIPTION OF BUSINESS Alltel Healthcare Information Services, Inc. ("AHIS") and its subsidiaries (collectively, the "Company") are engaged in one business segment primarily providing enterprise-wide clinical, patient care and financial software solutions, as well as outsourcing, remote processing, networking technologies and other services to healthcare organizations throughout the United States and Western Europe. The Company is a wholly owned subsidiary of Alltel Information Services, Inc. ("AIS") which is a wholly owned subsidiary of Alltel Corporation ("Alltel"). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The financial statements include the accounts of AHIS and its wholly owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation. FINANCIAL STATEMENT PRESENTATION The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. The estimates and assumptions used in the accompanying consolidated financial statements are based upon management's evaluation of the relevant facts and circumstances as of the date of the financial statements. Actual results could differ from those estimates. The consolidated statements of operations include all revenues and costs directly attributable to the operations of AHIS, including the costs of facilities, administration, and other various costs. As more fully described in Notes 8 and 11, certain costs related to interest, benefits, and other costs were allocated to AHIS based on usage and other defined criteria. All of the allocations utilized in the consolidated financial statements are based on assumptions that AHIS management believes are reasonable under the circumstances. However, these allocations are not necessarily indicative of the costs which would have resulted had AHIS been a separate entity. CASH AND CASH EQUIVALENTS For purposes of the consolidated statement of cash flows, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. REVENUE RECOGNITION The Company's products are sold to customers based on contractual agreements. Revenues are derived from the licensing of computer software, the sale of computer hardware, hardware and software maintenance, remote processing and outsourcing, training, implementation assistance, custom development, and consulting. SERVICE AND SYSTEMS Revenues from software license fees are recognized using the percentage-of-completion method for contracts in which the Company is required to make significant production, modification, or customization changes over the implementation period of the contracts based on implementation hours incurred. Other software license fees are generally recognized on a monthly basis over the term of the licensing and maintenance agreements which are generally five years. Remote processing and outsourcing services are F-30
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ALLTEL HEALTHCARE INFORMATION SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 -- (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) marketed under long-term agreements generally over periods from five to seven years and revenues are recognized monthly as the work is performed. Software maintenance fees are marketed under annual and multiyear agreements and are recognized ratably over the term of the agreements. Implementation revenues are recognized as the services are performed or on a percentage-of-completion basis for fixed fee arrangements. Hardware maintenance revenues are billed and recognized monthly over the term of the agreements. Revenues related to other support services, such as training, consulting, and custom development, are recognized when the services are performed. The Company warrants its products will perform in accordance with specifications as outlined in the respective customer contracts. The Company records a reserve for warranty costs at the time it recognizes revenue. Historically, warranty costs have been minimal. The Company accrues for product returns at the time it recognizes revenue, based on actual experience. Historically, product return costs have been minimal. HARDWARE SALES Hardware sales are recognized upon shipment of the product to the customer. UNBILLED ACCOUNTS RECEIVABLE Unbilled accounts receivable represent amounts owed to the Company under noncancelable agreements for software license fees with extended payment terms and computer hardware purchases which have been financed over extended payment terms. The current portion of unbilled accounts receivable of $4,883,000 and $3,245,000 as of December 31, 1995 and 1996, respectively, is included in accounts receivable in the accompanying financial statements. The non-current portion of unbilled accounts receivable of $2,109,000 and $2,151,000 as of December 31, 1995 and 1996, respectively, is included in other assets in the accompanying financial statements. The non-current portion of unbilled accounts receivable provides for payment terms that generally range from three to five years and carry annual interest rates ranging from 7% to 10%. The Company recognizes revenue in advance of billings under certain of its non-cancelable long-term contracts that contain extended payment terms. The Company does not have any obligation to refund any portion of its fees and has a history of enforcement and collection of amounts due under such arrangements. Payments owed under contracts with extended payment terms are due in accordance with the terms of the respective contract. Historically, the Company has had minimal write-offs of amounts due under such arrangements. Additionally, included in unbilled accounts receivable are costs and earnings in excess of billings related to certain software license fee arrangements which are being recognized on a percentage-of-completion basis. These amounts totaled approximately $1,572,000 and $1,240,000 as of December 31, 1995 and 1996, respectively. INVENTORY Inventory consists of computer parts and peripherals and is stated at the lower of cost or market. Cost is determined using the first-in, first-out method. FOREIGN CURRENCY TRANSLATION The financial position and results of operations of foreign subsidiaries are measured using the currency of the respective countries as the functional currency. Assets and liabilities are translated at the foreign exchange rate in effect at the balance sheet date, while revenues and expenses for the year are translated at the average exchange rate in effect during the year. Translation gains and losses are not included in F-31
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ALLTEL HEALTHCARE INFORMATION SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 -- (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) determining net income or loss but are accumulated and reported as a separate component of shareholder's deficit. The Company has not entered into any hedging contracts during the two year period ended December 31, 1996. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. For financial reporting purposes, depreciation and amortization are provided using the straight-line method over the estimated useful lives, which range from two to ten years. Computer equipment is depreciated over useful lives which range from two to five years. Office furniture and equipment is depreciated over two to ten years. Leasehold improvements are amortized over the shorter of the useful lives of the assets or the remaining term of the lease. When assets are retired or otherwise disposed of, the related costs and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in income. Expenditures for repairs and maintenance not considered to substantially lengthen the property lives are charged to expense as incurred. CAPITALIZED SOFTWARE DEVELOPMENT COSTS The Company capitalizes a portion of the internal computer software development costs incurred. Salaries, overhead, and other related costs incurred in connection with programming and testing software products are capitalized subsequent to establishing technological feasibility. Management monitors the net realizable value of all capitalized software development costs to ensure that the investment will be recovered through margins from future sales. These costs are amortized utilizing the straight-line method over periods of 36-60 months. Capitalized costs related to software development were approximately $12,905,000 and $12,170,000, for the years ended December 31, 1995 and 1996, respectively and $750,000 for the period from January 1, 1997 through January 23, 1997. Amortization of capitalized software development costs amounted to approximately $6,470,000 and $7,209,000 for the years ended December 31, 1995 and 1996, respectively, and $377,000 for the period from January 1, 1997 through January 23, 1997 and is included in operating expenses in the accompanying statements of operations. INTANGIBLE ASSETS The intangible assets arose from the acquisition of Medical Data Technology, Inc. (see Note 5), are stated at cost less accumulated amortization, and consist of contracts and the excess of cost over fair value of net assets acquired. The intangible assets are being amortized using the straight-line method over seven years. The carrying value of the excess of cost over fair value of net assets acquired is reviewed if the facts and circumstances suggest that it may be impaired. This review indicates if the asset will not be recoverable as determined based on future expected cash flows. Based on its review, the Company does not believe that an impairment of its excess of cost over fair value of net assets acquired has occurred. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of the Company's financial instruments, including cash and cash equivalents, accounts receivable, and other current liabilities approximate fair value. The carrying amount of the intercompany payable to parent balance approximates fair value based on current rates of interest available to Alltel, and accordingly, the Company, for loans of similar maturities. F-32
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ALLTEL HEALTHCARE INFORMATION SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 -- (CONTINUED) 3. PROPERTY AND EQUIPMENT Property and equipment consists of the following at December 31, 1995 and 1996 (in thousands): [Download Table] 1995 1996 -------- -------- Computer equipment.......................................... $ 21,106 $ 25,093 Office furniture and equipment.............................. 2,815 4,198 Leasehold improvements and other............................ 2,407 3,461 -------- -------- 26,328 32,752 Less: Accumulated depreciation and amortization............. (16,160) (22,013) -------- -------- $ 10,168 $ 10,739 ======== ======== 4. OTHER ASSETS During 1996, the Company entered into a marketing agreement with Integrated Medical Networks, Inc. ("IMN") for the marketing rights of certain software which will provide financial and managed care applications for entities within the healthcare industry. Under the terms of the agreement, IMN will perform significant enhancements to existing technology over a three year period. AHIS will retain worldwide, perpetual marketing rights, as defined, for the resulting technology. For the year ended December 31, 1996, AHIS made payments totaling approximately $5,811,000 under this agreement and is included in other assets in the accompanying financial statements. As discussed in Note 12, this agreement and related asset was transferred to Alltel in conjunction with the sale of the Company. 5. OTHER CURRENT LIABILITIES Included in other current liabilities were the following as of December 31, 1995 and 1996 (in thousands): [Download Table] 1995 1996 ------- ------- Accrued compensation and incentives......................... $ 6,434 $ 6,603 Accrued hardware costs...................................... 3,700 3,326 Accrued royalty costs....................................... 1,045 648 Current portion of long-term debt........................... 260 86 Other....................................................... 6,229 9,715 ------- ------- $17,668 $20,378 ======= ======= 6. INCOME TAXES The Company files its income tax return with AIS which files as part of the consolidated Alltel group. Income tax expense and related balances shown in the accompanying financial statements have been determined as if the Company filed its tax return on a separate company basis. F-33
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ALLTEL HEALTHCARE INFORMATION SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 -- (CONTINUED) 6. INCOME TAXES (CONTINUED) The income tax benefit (provision) consists of the following (in thousands): [Enlarge/Download Table] PERIOD ENDED 1995 1996 JANUARY 23, 1997 ------- ------- ---------------- Current Federal........................................ $ 4,123 $ 2,503 $ -- State and other................................ 1,030 626 -- ------- ------- ---- Deferred......................................... 5,153 3,129 -- ------- ------- ---- Federal........................................ (4,833) (1,829) 377 State and other................................ (1,207) (457) 69 ------- ------- ---- (6,040) (2,286) 446 ------- ------- ---- $ (887) $ 843 $446 ======= ======= ==== A reconciliation of the federal statutory rate and the effective income tax rate follows (in thousands): [Download Table] PERIOD ENDED 1995 1996 JANUARY 23, 1997 ----- ------ ---------------- Statutory federal income tax rate (34%)......... $(508) $1,033 $413 Meals and entertainment....................... (128) (164) (14) State income taxes............................ (141) 76 46 Non-deductible amortization................... (91) (101) (8) Other......................................... (19) (1) -- ----- ------ ---- Income tax benefit (provision)................ $(887) $ 843 $437 ===== ====== ==== The significant components of the Company's net deferred tax liability were as follows (in thousands): [Download Table] 1995 1996 -------- -------- Deferred tax assets Deferred revenue.......................................... $ 4,009 $ 3,596 Inventory and accounts receivable allowances.............. 710 846 Compensation related accrued expenses..................... 584 806 Accrued expenses.......................................... 1,627 1,624 Deferred rent............................................. 660 484 Other..................................................... 1,949 844 -------- -------- 9,539 8,200 -------- -------- Deferred tax liabilities Capitalization of software development costs.............. (10,298) (11,475) Depreciation.............................................. (1,039) (856) Other..................................................... (1,528) (1,481) -------- -------- (12,865) (13,812) -------- -------- Net deferred tax liability.................................. $ (3,326) $ (5,612) ======== ======== F-34
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ALLTEL HEALTHCARE INFORMATION SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 -- (CONTINUED) 7. EMPLOYEE BENEFIT PLANS Effective January 1, 1995, through Alltel, employees of the Company may participate in a noncontributory, trusteed profit-sharing plan which covers substantially all employees who meet certain length-of-service requirements. Company contributions are determined annually by the Board of Directors of Alltel. Contributions to the plan approximated $1,516,000 and $1,781,000 for the years ended December 31, 1995 and 1996, respectively. During 1994, the Company maintained a defined contribution profit-sharing plan. This plan was merged into the Alltel trusteed thrift plan, discussed below during 1995. Also, effective January 1, 1995, through Alltel, substantially all employees of the Company may participate in the Alltel trusteed thrift plan. Employees may contribute up to 10% of the employee's salary and the employer's matching contribution is the lesser of 25% of the employee's contribution or 1.5% of the employee's salary. The trusteed thrift plan is intended to meet all requirements of qualifications under Section 401(k) of the Internal Revenue Code. Company contributions to the trusteed thrift plan were approximately $412,000 and $452,000 for the years ended December 31, 1995 and 1996, respectively. During 1995, employees of the Company became eligible to participate in the AIS Employee Stock Purchase Plan (the "ESPP") which has reserved for issuance 1,000,000 shares of Alltel common stock. The ESPP provides for the purchase of shares of common stock by employees through payroll deductions which may not exceed five percent of employee compensation, as defined. The employee contributes 85% of the prevailing market price of the shares, which are purchased on the open market. The remaining 15% is expensed by the Company in the period the contribution is made. Company contributions to the ESPP were approximately $104,000 and $48,000 for the years ended December 31, 1995 and 1996, respectively. On June 30, 1996, the ESPP was terminated. During 1995, the employees of the Company became eligible to participate in various benefit plans which were administered by Alltel. In addition to the trusteed profit-sharing plan and trusteed thrift plan, employees were also eligible to participate in certain benefit plans including group medical, dental and other various plans. Total expenses related to these plans were approximately $2,196,000 and $2,328,000 for the years ended December 31, 1995 and 1996, respectively and $194,000 for the period from January 1, 1997 through January 23, 1997. 8. COMMITMENTS AND CONTINGENCIES NONCANCELABLE OPERATING LEASES The Company leases offices and certain equipment under noncancelable operating leases. Rental expense under operating leases was approximately $7,014,000 and $5,531,000 for the years ended December 31, 1995 and 1996, respectively, and $461,000 for the period from January 1, 1997 through January 23, 1997. Future minimum rental payments for noncancelable operating leases as of December 31, 1996 are as follows (in thousands): [Download Table] YEAR ENDING DECEMBER 31, ------------------------ 1997................................................... $ 4,877 1998................................................... 4,818 1999................................................... 3,625 2000................................................... 1,535 2001................................................... 1,414 Thereafter............................................. 1,798 ------- $18,067 ======= F-35
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ALLTEL HEALTHCARE INFORMATION SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 -- (CONTINUED) 8. COMMITMENTS AND CONTINGENCIES (CONTINUED) LITIGATION The Company is involved in litigation incidental to its business. In the opinion of management, after consultation with legal counsel, the ultimate outcome of such litigation will not have a material adverse effect on the Company's financial position or results of operations or cash flows. 9. RELATED PARTY TRANSACTIONS The intercompany payable to parent balance represents amounts owed to Alltel related to cash disbursements and receipts activity and certain other transactions. All vendor related invoices are charged to this account at the time an invoice is processed and, consequently, the accompanying financial statements do not reflect an accounts payable balance. The intercompany balance is reduced upon the posting of cash receipts. Intercompany interest of approximately $2,833,000 and $3,858,000 for the years ended December 31, 1995 and 1996, respectively, and $379,000 for the period from January 1, 1997 through January 23, 1997 was charged to this account at interest rates which ranged from 3.5% to 8.0% which represented the incremental borrowing rates of Alltel. As more fully discussed in Note 12, the intercompany payable balance was converted to equity on January 24, 1997 in connection with the sale of the Company. For the years ended December 31, 1995 and 1996, Alltel charged the Company approximately $2,277,000 and $2,100,000, respectively, and $175,000 for the period January 1, 1997 through January 24, 1997 for costs related to providing certain data center charges in conjunction with an outsourcing contract between the Company and one of its customers. During 1995 and 1996, legal services and external fees were provided and paid by Alltel. These costs were approximately $1,869,000 and $964,000 for the years ended December 31, 1995 and 1996, respectively, and are reflected in general and administrative expenses in the accompanying financial statements. During 1996 certain administrative services were performed by AIS, the cost of which was estimated to be approximately $585,000 and is reflected in general and administrative expenses in the accompanying financial statements. Prior to 1996, these functions were performed directly by employees of the Company and, accordingly, the related costs are reflected in the accompanying financial statements. 10. SUBSEQUENT EVENT On January 24, 1997, the Company was purchased by Eclipsys Corporation (formerly Integrated Healthcare Solutions, Inc.) for cash and other co