##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
   FORM 10-Q   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005 COMMISSION FILE NUMBER: 000-24539 ECLIPSYS CORPORATION  DELAWARE
    
    65-0632092(State of Incorporation)
    
    (IRS Employer Identification Number)
 1750 Clint Moore Road
Boca Raton, Florida
33487
(Address of principal executive offices) 561-322-4321
(Telephone number of registrant) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing for the past 90 days. Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes þ No o Indicate the number of shares outstanding of each of the issuers classes of common stock as
of the latest practicable date. Class
    
    Shares outstanding as of May 3, 2005Common Stock, $.01 par value
    
    47,907,885
   1




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ECLIPSYS CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2005 INDEX PagePART I.
    
    Financial InformationItem 1.
    
    Condensed Consolidated Balance
Sheets (unaudited)  As of March 31, 2005 and December 31, 2004
    
    
    3Condensed Consolidated Statements of Operations (unaudited)  For the Three Months ended March 31, 2005 and 2004
    
    
    4Condensed Consolidated Statements of Cash Flows (unaudited)  For the Three Months ended March 31, 2005 and 2004
    
    
    5Notes to Condensed Consolidated Financial Statements (unaudited)
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    27Item 4.
    
    Controls and Procedures
    
    
    27PART II.
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    
    28Item 6.
    
    Exhibits
    
    
    28Signatures
    
    
    
    
    29Certifications
    
    
    
    

    31
 2




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##### 



PART I. ITEM 1. ECLIPSYS CORPORATION
Condensed Consolidated Balance Sheets - (Unaudited)
(In thousands, except share and per share amounts) March 31,
    
    
    December 31,2005
    
    
    2004AssetsCurrent Assets:Cash and cash equivalents
    
    $
    69,344
    
    
    $
    122,031Marketable securities
    
    
    36,860
    
    
    
    Accounts receivable, net of allowance for doubtful accounts of
$4,559 and $4,952 at March 31, 2005 and December 31, 2004, respectively
    
    
    59,064
    
    
    
    64,862Inventory
    
    
    1,564
    
    
    
    1,644Prepaid expenses
    
    
    16,425
    
    
    
    14,495Other current assets
    
    
    2,605
    
    
    
    1,091Total current assets
    
    
    185,862
    
    
    
    204,123Property and equipment, net
    
    
    35,676
    
    
    
    35,002Capitalized software development costs, net
    
    
    32,994
    
    
    
    29,819Goodwill
    
    
    2,863
    
    
    
    2,863Acquired technology and intangible assets, net
    
    
    4,390
    
    
    
    4,690Other assets
    
    
    22,945
    
    
    
    14,923Total assets
    
    $
    284,730
    
    
    $
    291,420Liabilities and Stockholders EquityCurrent liabilities:Deferred revenue
    
    $
    107,234
    
    
    $
    106,804Accounts payable
    
    
    11,235
    
    
    
    21,945Accrued compensation costs
    
    
    14,003
    
    
    
    12,738Other current liabilities
    
    
    15,669
    
    
    
    10,642Total current liabilities
    
    
    148,141
    
    
    
    152,129Deferred revenue
    
    
    17,741
    
    
    
    15,892Other long-term liabilities
    
    
    538
    
    
    
    122Stockholders Equity:Common stock
    
    
    474
    
    
    
    472Additional paid-in capital
    
    
    432,650
    
    
    
    429,001Unearned stock compensation
    
    
    (7,179
    )
    
    
    (5,641
    )Accumulated deficit
    
    
    (307,504
    )
    
    
    (300,343
    )Accumulated other comprehensive income
    
    
    (131
    )
    
    
    (212
    )Total stockholders equity
    
    
    118,310
    
    
    
    123,277Total liabilities and stockholders equity
    
    $
    284,730
    
    
    $
    291,420
 The accompanying notes are an integral part of these unaudited condensed consolidated financial
statements. 3




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##### 



ECLIPSYS CORPORATION Condensed Consolidated Statements of Operations (Unaudited)
 (In thousands, except per share amounts)
 Three
Months Ended March 31,2005
    
    

2004REVENUESSystems and services
    
    $
    83,128
    
    
    $
    61,807Hardware
    
    
    1,307
    
    
    
    6,577TOTAL REVENUES
    
    
    84,435
    
    
    
    68,384COSTS AND EXPENSESCost of systems and services revenues
    
    
    52,265
    
    
    
    39,338Cost of hardware revenues
    
    
    1,101
    
    
    
    5,634Sales and marketing
    
    
    18,176
    
    
    
    15,941Research and development
    
    
    12,576
    
    
    
    14,738General and administrative
    
    
    4,356
    
    
    
    3,169Depreciation and amortization
    
    
    3,683
    
    
    
    3,081TOTAL COSTS AND EXPENSES
    
    
    92,157
    
    
    
    81,901LOSS FROM OPERATIONS
    
    
    (7,722
    )
    
    
    (13,517
    )Interest income, net
    
    
    561
    
    
    
    454LOSS BEFORE INCOME TAXES
    
    
    (7,161
    )
    
    
    (13,063
    )Provision for income taxes
    
    
    
    
    
    
    NET LOSS
    
    $
    (7,161
    )
    
    $
    (13,063
    )BASIC NET LOSS PER COMMON SHARE
    
    $
    (0.15
    )
    
    $
    (0.28
    )DILUTED NET LOSS PER COMMON SHARE
    
    $
    (0.15
    )
    
    $
    (0.28
    )BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
    
    
    47,323
    
    
    
    46,115DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
    
    
    47,323
    
    
    
    46,115
 The accompanying notes are an integral part of these unaudited condensed consolidated financial
statements . 4




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ECLIPSYS CORPORATION Condensed Consolidated Statements of Cash Flows (Unaudited)
 (In thousands)
 Three Months Ended March 31,2005
    
    
    2004Operating activities:Net loss
    
    $
    (7,161
    )
    
    $
    (13,063
    )Adjustments to reconcile net loss to net cash
used in operating activities:Depreciation and amortization
    
    
    7,806
    
    
    
    6,025Provision for bad debts
    
    
    450
    
    
    
    550Stock compensation expense
    
    
    416
    
    
    
    56Changes in operating assets and liabilities:Accounts receivable
    
    
    5,348
    
    
    
    4,880Inventory
    
    
    80
    
    
    
    (1,169
    )Other current assets
    
    
    (3,444
    )
    
    
    2,173Other assets
    
    
    (8,825
    )
    
    
    (1,991
    )Deferred revenue
    
    
    2,279
    
    
    
    (2,758
    )Accrued compensation costs
    
    
    1,265
    
    
    
    (4,033
    )Other current liabilities
    
    
    (5,683
    )
    
    
    333Other long-term liabilities
    
    
    416
    
    
    
    (532
    )Total adjustments
    
    
    108
    
    
    
    3,534Net cash used in operating activities
    
    
    (7,053
    )
    
    
    (9,529
    )Investing activities:Purchases of property and equipment
    
    
    (4,125
    )
    
    
    (4,018
    )Purchases of marketable securities
    
    
    (138,018
    )
    
    
    (84,015
    )Proceeds from sales of marketable securities
    
    
    101,158
    
    
    
    43,207Capitalized software development costs
    
    
    (6,427
    )
    
    
    (4,638
    )Cash paid for acquisition
    
    
    
    
    
    
    (2,500
    )Net cash used in investing activities
    
    
    (47,412
    )
    
    
    (51,964
    )Financing activities:Exercise of stock options
    
    
    1,697
    
    
    
    2,417Employee stock purchase plan
    
    
    
    
    
    
    782Net cash provided by financing activities
    
    
    1,697
    
    
    
    3,199Effect of exchange rates on cash and cash equivalents
    
    
    81
    
    
    
    (11
    )Net decrease in cash and cash equivalents
    
    
    (52,687
    )
    
    
    (58,305
    )Cash and cash equivalents  beginning of period
    
    
    122,031
    
    
    
    151,683Cash and cash equivalents  end of period
    
    $
    69,344
    
    
    $
    93,378Supplemental disclosuresNon-cash investing activities:Issuance of shares for acquisition
    
    
    
    
    
    $
    2,500
 The accompanying notes are an integral part of these unaudited condensed consolidated financial
statements. 5




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ECLIPSYS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)  1.
    BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of Eclipsys
Corporation, or the Company, and the notes thereto have been prepared in accordance with the
instructions for Form 10-Q and Rule 10-01 of Regulation S-X of the Securities and Exchange
Commission, or SEC. These unaudited condensed consolidated financial statements do not include all
of the information and disclosures required by accounting principles generally accepted in the
United States of America. However, such information reflects all adjustments (consisting of normal
recurring adjustments) that are, in the opinion of management, necessary for a fair statement of
results for the interim periods presented. The results of operations for the three months ended March 31, 2005 are not necessarily
indicative of annual results. The Company manages its business as one reportable segment. The unaudited condensed consolidated financial statements included herein should be read in
conjunction with the audited consolidated financial statements and the notes thereto that are
included in the Companys Annual Report on Form 10-K for the year ended December 31, 2004 that was
filed with the SEC on March 16, 2005. Certain prior period amounts have been reclassified to conform to the 2005 presentation.  2.
    ACQUISITIONS In March 2004, we acquired CPM
Resource Center, Ltd., or CPMRC. CPMRC provides consulting
services and clinical content designed principally to improve and enhance the care process
primarily related to the workflow of nurses and interdisciplinary healthcare professionals. CPMRCs
evidence-based content and practice guidelines have been incorporated into our current releases of
SunriseXA software. We paid $2.5 million in cash and issued 184,202 shares of common stock for
CPMRC, for a total consideration of $5.0 million. The prior owner of CPMRC may earn up to an
additional $12.5 million over the next 5-year period based on future operating results, the
consideration will be payable half in cash and half in shares of our common stock. The
number of shares of the common stock to be issued, if any, will be based upon the average of the
last reported sale prices of our common stock on the NASDAQ National Market for the five
consecutive trading days ending on the trading day that is one day prior to the date on which the
earn-out consideration is paid. The operating results of CPMRC have been combined with those of the
Eclipsys since the date of acquisition. We did not present unaudited pro forma results of
operations of Eclipsys and CPMRC for the three months ended March 31, 2004 because our pro forma
results for this period would not be materially different from our actual results. As a result of the CPMRC
acquisition, we recorded approximately $2.4 million in
non-amortizable goodwill and $3.2 million in amortizable intangible assets. Amortizable intangible
assets include customer relationships and intellectual property, and are being amortized over seven-and five-year periods, respectively, which we believe approximates the expected utility of these
assets. The non-amortizable goodwill is not tax deductible. The non-amortizable goodwill reflects
approximately $700,000 of incremental consideration that the prior owner earned in 2004 as part of
the earn-out provisions of the agreement. All consideration paid under the earn-out provisions of
the agreement will be recorded as non-amortizable goodwill. In December of 2004, we acquired eSys Medical Inc. (eSys). eSys develops and markets radiology
information systems (RIS). We paid $2.3 million in cash consideration for the eSys acquisition.
Under the terms of the transaction, the prior owners of eSys may earn up to an additional $2.5
million of future consideration. This consideration may be earned during the next eighteen months
related to certain milestones in connection with future development efforts of the acquired
technology. This future consideration, if earned, will be paid in cash (25%) and our common stock
(75%). Additionally, the agreement contains an earn-out provision in which the prior owners can
earn up to an additional $5.0 million in future consideration based on sales of the acquired
technology over the next five years, payable in shares of our common stock. The number of shares of
our common stock issued as earn-out consideration will be based on the average closing prices of
our common stock on the NASDAQ National Market for the calendar quarter preceding the payment of
the earn-out consideration. As a result of the eSys
acquisition, we recorded approximately $2.0 million in amortizable
intangible assets. These amortizable intangible assets include customer relationships ($1.1 million) and
acquired technology ($914,000), which are being amortized over
five-and three-year periods,
respectively. We believe these amortization periods reflect the estimated expected utility of these
assets. The operating results of eSys have been combined with those of Eclipsys since the date of
acquisition. We did not present unaudited pro forma results of operations of Eclipsys and eSys for
the three months ended March 31, 2004 because our pro forma results for this period would not be
materially different from our actual results. The majority of future consideration, if earned, will be
recorded as non-amortizable goodwill. 6




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With respect to the acquisitions of CPMRC and eSys, we assigned the total purchase price to
the net assets and liabilities of the businesses, with any remaining amount assigned to goodwill.
The value assigned to the identifiable intangible assets was based on an analysis as of the date of
acquisitions.  3.
    STOCK-BASED COMPENSATION The Company accounts for stock-based compensation using the intrinsic value method prescribed
in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and
related Interpretations. Under this method, 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. Accordingly, the Company provides the
additional disclosures required under Statement of Financial Accounting Standards, or SFAS No. 123,
Accounting for Stock-Based Compensation as amended by SFAS No. 148 Accounting for Stock-Based
Compensation  Transition and Disclosure. The Company has adopted the disclosure-only provisions of SFAS 123. Had compensation cost for
the Companys stock option grants described above been determined based on the fair value at the
grant date of the respective awards, consistent with the provisions of SFAS 123, the Companys net
loss and loss per share would have been the pro forma amounts indicated below for the three month
periods ended March 31, (in thousands, except per share data): Three Months Ended March 31,2005
    
    
    2004Net loss:As reported
    
    $
    (7,161
    )
    
    $
    (13,063
    )Add: Stock-based employee compensation expense included
in reported net loss, net of related tax effects
    
    
    416
    
    
    
    56Deduct: Total stock-based compensation expense determined
under fair value based method for all awards
    
    
    (2,416
    )
    
    
    (2,813
    )Pro forma
    
    
    (9,161
    )
    
    
    (15,820
    )Basic net loss per share:As reported
    
    
    (0.15
    )
    
    
    (0.28
    )Pro forma
    
    
    (0.19
    )
    
    
    (0.34
    )Diluted net loss per share:As reported
    
    
    (0.15
    )
    
    
    (0.28
    )Pro forma
    
    
    (0.19
    )
    
    
    (0.34
    )
  4.
    MARKETABLE SECURITIES Marketable securities consist of funds that are highly liquid and are classified as
available-for-sale. Marketable securities are recorded at fair value, and unrealized gains and
losses are recorded as a component of other comprehensive income. March 31,
    
    
    December 31,2005
    
    
    2004Security Type (in thousands)Debt securities issued by the U.S. Treasury and other U.S. government corporations and
agencies
    
    $
    7,100
    
    
    $
    Debt securities issued by states of the United
States and political subdivisions of the states

    
    
    27,150
    
    
    
    Total
    
    $
    34,250
    
    
    $
    
 As of March 31, 2005, all marketable securities except for the auction rate securities have
a maturity of less than 1 year. Action rate securities held of
$2.6 million at March 31, 2005 have an
underlying maturity of greater than ten years, but typically have an interest rate reset feature
of every 30 days where the Company can sell and/or reset the interest rate on the security. At March
31, 2005, the Company believes that these investments are considered a part of the Companys
working capital and are appropriately classified as current assets.  5.
    ACCOUNTS RECEIVABLE Accounts receivable was comprised of the following (in thousands): Accounts receivable was comprised of the following (in thousands): March 31,
    
    
    December 31,2005
    
    
    2004Accounts Receivable:Accounts receivable, net
    
    $
    46,314
    
    
    $
    53,698Unbilled accounts receivable, net
    
    
    12,750
    
    
    
    11,164Total accounts receivable, net
    
    $
    59,064
    
    
    $
    64,862
 The non-current portion of unbilled accounts receivable is included in other assets and was
$1.0 million as of March 31, 2005 and $1.1 million as of December 31, 2004. 7




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6.
    WARRANTY RESERVE The agreements that we use to license our software to our customers includes a limited
warranty. The warranty provides that the product, in its unaltered form, will perform substantially
in accordance with the related documentation. Through September 30, 2003, Eclipsys had not
incurred any material warranty costs related to its products. Due to the response time issues that
we identified during the fourth quarter of 2003, we recorded provisions related to warranty costs
of $4.6 million through March 31, 2005. Warranty costs are charged to cost of systems and services
revenues when they are probable and reasonably estimable. A summary of the activity in our
warranty reserve was as follows (in thousands): March 31,
    
    
    December, 312005
    
    
    2004Beginning Balance
    
    $
    2,057
    
    
    $
    4,400Provision for warranty
    
    
    
    
    
    
    450Provision reduction
    
    
    
    
    
    
    (252
    )Warranty utilized
    
    
    (245
    )
    
    
    (2,541
    )Ending Balance
    
    $
    1,812
    
    
    $
    2,057
  7.
    GOODWILL AND OTHER INTANGILBE ASSETS Acquired technology and intangible assets are amortized over their estimated useful lives
generally on a straight-line basis. The carrying values of acquired technology and intangible
assets are reviewed if the facts and circumstances suggest that they may be impaired and goodwill
is reviewed at least annually. This review indicates whether assets will be recoverable based on
future expected cash flows. We perform our review for impairment of our intangible assets including
goodwill during the fourth quarter of each fiscal year. Such a review was performed in the fourth
quarter of 2004 and no impairment related issues were noted. The gross and net amounts for acquired technology, goodwill, and intangible assets consisted
of the following (in thousands): March 31,
    
    
    December 31,2005
    
    
    2004Amounts subject to amortization:Acquired technology
    
    $
    914
    
    
    $
    914Ongoing customer relationships
    
    
    4,335
    
    
    
    4,335Gross intangibles
    
    $
    5,249
    
    
    $
    5,249Accumulated amortization
    
    
    (859
    )
    
    
    (559
    )Net acquired technology and other intangibles
    
    $
    4,390
    
    
    $
    4,690Amounts not subject to amortization:Goodwill
    
    $
    2,863
    
    
    
    2,863
 8




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8.
    OTHER COMPREHENSIVE LOSS The components of other comprehensive loss were as follows (in thousands): Three Months Ended March 31,2005
    
    
    2004Net Loss
    
    $
    (7,161
    )
    
    $
    (13,063
    )Reclassification adjustment for realized loss
included in net earnings
    
    
    
    
    
    
    Unrealized loss on available-for-sale marketable securities
arising during the period
    
    
    
    
    
    
    Foreign currency translation adjustment
    
    
    81
    
    
    
    (11
    )Other comprehensive loss
    
    $
    (7,080
    )
    
    $
    (13,074
    )
  9.
    NEW ACCOUNTING PRONOUNCEMENTS On December 16, 2004, the FASB issued SFAS No. 123R, Share-Based Payment, (SFAS 123R) which is
a revision of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123). Statement 123R
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95,
Statement of Cash Flows. Generally, the approach in SFAS 123R is similar to the approach described
in SFAS 123. SFAS 123R requires all share-based payments to employees to be recognized in the
income statement over the corresponding service period based on their grant date fair values and
also requires an estimation of forfeitures when calculating compensation expense. The Company must
adopt SFAS 123R no later than January 1, 2006. SFAS 123R permits public companies to adopt its
requirements using one of three methods: the modified prospective method, the modified
retrospective method, or the modified retrospective method to all prior years for which SFAS 123
was effective. The Company has not yet determined which adoption method it will utilize and has not
yet determined the effect of adopting, SFAS 123R on its results of operations  10.
    LEGAL ACTION We are involved in litigation incidental to our business from time to time. In the opinion of
management, after consultation with legal counsel, the ultimate outcome of such litigation will not
have a material adverse effect on our financial position, results of operations or cash flows.  11.
    SUBSEQUENT EVENTS On April 29, 2005, the Company announced that Eugene V. Fife, the Companys Chairman of the
Board of Directors, had been named interim Chief Executive Officer and President, replacing Paul L.
Ruflin who has left the Company. Mr. Fife will also continue to serve as the Chairman of the
Companys Board of Directors. The Company also announced that it had initiated a search for a new,
long-term Chief Executive Officer. In connection with his appointment as interim Chief Executive Officer, the Company entered
into an employment agreement with Mr. Fife on April 29, 2005. Pursuant to this agreement, the
Company agreed to employ Mr. Fife as interim Chief Executive Officer and President at an initial
annual salary of $750,000. Pursuant to the employment agreement, the Company or Mr. Fife can
terminate Mr. Fifes employment with the Company at any time. Mr. Fife also agreed not to solicit
the Companys employees or customers during his employment and for 12 months after the termination
of his employment. In addition, separate from the employment agreement, Mr. Fife will continue to
receive $150,000 in annual compensation as the Chairman of the Companys Board of Directors. Also on April 29, 2005, the Company entered into a restricted stock agreement (the Restricted
Stock Agreement) with Mr. Fife under the Companys Amended and Restated 2000 Stock Incentive Plan.
Pursuant to the Restricted Stock Agreement, the Company sold Mr. Fife 100,000 shares of the common
stock of the Registrant at a purchase price of $0.01 per share. Under the Restricted Stock
Agreement, the Company maintains the right to repurchase the unvested portion of these shares at
the original purchase price upon the termination of the Business Relationship (as defined in the
Restricted Stock Agreement) between the Company and Mr. Fife. The shares vest over a two-year
period, with 4.166% vesting each month. 9




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##### 



In connection with his separation from the Company, Paul L. Ruflin is entitled to the
following severance benefits under his Amended and Restated Employment Agreement with the Company:
(i) severance pay consisting of 18 months of his current base salary, which is $750,000, 150% of
his target bonus for 2005, which is $250,000, and a pro rata portion of his 2005 target bonus based
on the number of days in 2005 that he was employed by the Company, payable over 18 months beginning
on the first regular pay period after six months from the date of termination, (ii) continued life,
group health and dental insurance benefits until the earlier of 18 months after his termination or
such time as Mr. Ruflin is eligible to receive substantially similar benefits from another
employer, and (iii) the acceleration of the vesting under his stock option and restricted stock
grant so as to provide an additional 12 months of vesting. 10




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##### 



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS This report contains forward-looking statements. For this purpose, any statements contained
herein that are not statements of historical fact may be deemed to be forward-looking statements.
Without limiting the foregoing, the words believes, anticipates, plans, expects, intends,
and similar expressions are intended to identify forward-looking statements. The important factors
discussed under the caption Certain Factors That May Affect Future Operating Results, presented
below, could cause actual results to differ materially from those indicated by forward-looking
statements made herein. We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise. The following should be read in conjunction with our consolidated financial statements,
including the notes thereto, which are included elsewhere in this document. Executive Overview Eclipsys is a healthcare information technology company. We develop and license our
proprietary software and content to hospitals. Our software allows hospitals to automate many of
the key clinical, administrative and financial functions that they require. Our software is
designed to improve patient care and patient satisfaction for our customers, and allow them to
reduce their operating costs and enhance their revenues. Our content provides practice guidelines
for use in hospitals. Our Web site address is www.eclipsys.com. We make available free of charge, on or
through our Web site, our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after
such material is electronically filed with or furnished to the Securities and Exchange Commission. Background We were founded in December 1995, we initially grew through a series of strategic acquisitions
completed through 1999. Our acquisitions were focused on acquiring strong customer bases and
advanced software pertaining to the healthcare industry. In addition to these acquisitions, in 1996 we licensed certain intellectual property on an
exclusive basis from Partners HealthCare System, Inc., or Partners. This intellectual property
related to clinical workflows including order management and clinical decision support. The
Partners technology has been incorporated within our product offerings. In March 2004, we acquired CPM Resource Center, Ltd., or CPMRC. CPMRC provides consulting
services and clinical content designed principally to improve and enhance the care process
primarily related to the workflow of nurses and interdisciplinary healthcare professionals who
provide the majority of hands-on care at the point of service. CPMRCs evidence-based content and
practice guidelines have been incorporated into the current release of our SunriseXA software. We
paid $2.5 million in cash and issued 184,202 shares of common stock for CPMRC, for a total
consideration of $5.0 million. Additionally, the prior owner of CPMRC may earn up to an additional
$12.5 million, payable in our common stock and cash, over the 5 years following the acquisition
based on future operating results. In December of 2004, we acquired eSys Medical Inc. (eSys). eSys develops and markets radiology
information systems, or RIS. We believe eSys RIS will enhance our diagnostic imaging solution and
extend our clinical workflow solutions in radiology. We paid $2.3 million in cash consideration for
the eSys acquisition. Under the terms of the transaction, the prior owners of eSys may earn up to
an additional $2.5 million of future consideration. This consideration may be earned during the
eighteen months following the acquisition, based on the attainment of specified milestones in
connection with future development efforts of the acquired technology. This future consideration,
if earned, will be paid in cash (25%) and our common stock (75%). Additionally, the agreement
contains an earn-out provision in which the prior owners can earn up to an additional $5 million in
future consideration based on sales of the acquired technology over the next five years. 11




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Product Development Since June 1999, we have primarily focused on re-expressing the intellectual property that we
acquired through acquisitions on a common platform to provide integrated software to our customers.
In 1999, we announced the general availability of Sunrise Clinical Manager, or SCM, the first
version of our Sunrisetmsuite of software products. SCM provides advanced
knowledge-based clinical decision-support capabilities including computerized physician order
entry. In 2001, we announced our SunriseXAtmstrategy. This strategy was to migrate our
Sunrise suite of products to an open architecture and platform. SunriseXAs architecture is built
on Microsofts .NET Framework, Microsoft SQL Server and the Microsoft Windows family of operating
systems. In 2002 and 2003, we announced the general availability of certain components of our
SunriseXA product offerings. In October 2003, we identified and announced response time issues within components of
SunriseXA. Although some of our SunriseXA software components had been implemented in and were
working at some customer sites, we determined that the software did not produce acceptable response
times for complex, high-volume hospital environments. To address the issue, we implemented a
strategy that was designed to allow SunriseXA customers to continue their deployment of SunriseXA
which would, at the same time, allow us to continue the development of advanced SunriseXA
solutions. This strategy replaced the affected SunriseXA components with components from our
SCM product, which is our prior generation, core clinical product. The response time issue resulted
in a product delivery delay for some of our advanced SunriseXA functionality. The announcement of
these issues also impacted the implementation schedules for a number of our customers. As
previously disclosed, this announcement had an adverse effect on our sales for 2004. In connection with this issue, we recorded a $1.2 million write-down of capitalized software
development costs to net realizable value for some SunriseXA components in the third quarter of
2003. The write-down was included in the cost of systems and services revenues. Also, we believe
that the correction of the response time issue is covered by the warranties that we provide to our
customers. We intend to continue to remediate the problem for our customers. Accordingly, we have
recorded provisions related to warranty costs of $4.6 million through March 31, 2005. These
provisions reflect our estimate of warranty-related costs that includes, among other things,
implementation and third-party costs for affected customers. Warranty costs are charged to cost of
systems and services revenues when they are probable and reasonably estimable. Through March 31,
2005, we had expended approximately $2.8 million in warranty costs related to remediation of the
response time issue. As of March 31, 2005, the warranty reserve balance was $1.8 million.
Professional services revenues have been, and we believe will continue to be, negatively affected
as we utilize resources to fulfill these obligations. In June 2004, we released Sunrise Clinical Manager 3.5 XA and in March 2005 we released
Sunrise Clinical Manager 4.0 XA. The general availability of these releases fulfilled key
deliverables expected by our customers in connection with the SunriseXA response time issue. These
releases were consistent with our strategy and contained enhanced functionality as planned. Operational Initiatives During 2001, our management made two strategic decisions that significantly impacted our
operating results. First, we substantially increased our gross research and development spending,
which includes research and development expenses and capitalized software development costs. This
decision was made to enable us to bring components of our SunriseXA product line to market more
rapidly. Second, we invested heavily in sales and marketing to enhance market awareness surrounding
Eclipsys and its products and services. We did this to capitalize on perceived market demand for
our products and services. Additionally, in 2002, we moved aggressively to change our contracting
model, offering our customers payment terms which are more evenly distributed over the term of the
contract compared to our historical licensing model, in which software license fees were paid in
advance. We did this to meet the needs of our customers, by matching the timing of their payments
to the value that we deliver to them. We believe that this new contracting model makes purchasing
decisions easier for our customers. The change in our contracting model has had a material affect on our business. Most notably,
our revenues, gross margins, and cash flows have been affected by our adoption of this approach.
Because the payments from our customers for software license fees are more evenly distributed over
the term of the contract, our revenue is recognized over a longer period of time compared to our
historical licensing model, while a significant portion of our operating expenses remain relatively
fixed. For example, in 2003, our gross margins, operating margins, and cash flow from operating
activities were negatively affected by lower upfront software payments. However, we believe that
this contracting model is providing for more predictable revenues on a year-over-year basis. We
believe that over time, this impact of our contracting model on our margins will diminish, and our
margins will trend back towards historical levels. 12




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We consumed cash in 2003, 2004 and the first quarter of 2005, primarily because cash
collections under our new contracting method from new contract signings were not sufficient to
offset our higher operating expenses. To fund these initiatives, we used a portion of our cash on
hand. Operational Environment and Other Challenges for 2005 During the fourth quarter of 2004, we experienced a slow down in sales transactions as a
result of increasing competition within our sector. We expect that competition may continue to
intensify, which could result in delayed sales, pricing pressures, a decrease in profitability on
new contracts or a loss of future business. In the event that we continue to encounter intensified
competition, we may experience a decline in the financial performance of our business. Our success
in 2005 will depend largely upon our execution in closing new sales transactions during the first
half of 2005. Additionally, we have a significant number of customers scheduled to go live on one
or more modules of our software applications throughout 2005. The successful implementation of
these customers will be critical to our success in 2005. We released Sunrise Clinical Manager 4.0
XA in March of 2005 and we are scheduled to release Sunrise Clinical Manager 4.5 XA during the
fourth quarter of 2005. These two new releases contain significant additional functionality. If
we experience a delay in future releases, or they do not achieve market acceptance, our business
may suffer. Critical Accounting Policies We believe there are several accounting policies that are critical to understanding our
historical and future performance, as these policies affect the reported amount of revenue and
other significant areas involving managements judgments and estimates. On an ongoing basis,
management evaluates and adjusts its estimates and judgments, if necessary. These significant
accounting policies relate to revenue recognition, allowance for doubtful accounts, capitalized
software development costs and our warranty reserve. Please refer to Note 2 of the audited
consolidated financial statements included in our Annual Report on Form 10-K for the year ended
December 31, 2004 as filed with the SEC on March 16, 2005, for further discussion of our accounting
policies, which have not changed materially since our filing. Revenue Recognition We generally contract under multiple element arrangements, which include software license
fees, hardware and services including consulting, implementation, and software maintenance, for
periods of 3 to 10 years. We evaluate revenue recognition on a contract-by-contract basis as the
terms of each arrangement vary. The evaluation of our contractual arrangements often requires
judgments and estimates that affect the timing of revenue recognized in our statements of
operations. Specifically, we may be required to make judgments about:  
    whether the fees associated with our products and services are fixed or determinable;
    whether collection of our fees is reasonably assured;
    whether professional services are essential to the functionality of the related software product;
    whether we have the ability to make reasonably dependable estimates in the application of
the percentage-of-completion method; and
    whether we have verifiable objective evidence of fair value for our products and services. We recognize revenues in accordance with the provisions of Statement of Position, or SOP, No.
97-2, Software Revenue Recognition,as amended by SOP No. 98-9, Staff Accounting Bulletin, or SAB,
104, Revenue Recognition and Emerging Issues Task Force, or EITF 00-21, Revenue Arrangements
with Multiple Deliverables. SOP 97-2 and SAB 104, as amended, require, among other things, that
there be a signed contract evidencing that an arrangement exists, delivery has occurred, the fee is
fixed or determinable, and collectibility is probable. Many of our contracts with our customers are multiple element arrangements, which may provide
for multiple software products, including the rights to future products we may offer within the
software suites the customer purchases or rights to software versions that support different
hardware or operating platforms, and that do not qualify as exchange rights. We refer to these
arrangements as 13




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subscription contracts. Additionally, we sometimes enter into multiple element arrangements that do
not include these rights to future products or platform protection rights. We refer to these
arrangements as traditional software contracts. Finally, we offer many of our products and services
on a stand-alone basis. Revenue under each of these arrangements is recognized as follows: Subscription Contracts Our subscription contracts typically include the following deliverables:  
    software license;
    maintenance;
    professional services; and
    third party hardware or remote hosting services. Software license fees are recognized ratably over the term of the contract, commencing upon
the delivery of the software provided that (1) there is evidence of an arrangement, (2) the fee is
fixed or determinable and (3) collection of our fee is considered probable. The value of the
software is determined using the residual method pursuant to Statement of Position 98-9,
Modification of Statement of Position 97-2 With Respect to Certain Transactions, or SOP 98-9.
These contracts contain the rights to unspecified future products within the product suite
purchased and/or unspecified platform transfer rights that do not qualify for exchange accounting.
Accordingly, these arrangements are accounted for pursuant to paragraphs 48 and 49 of Statement of
Position 97-2, Software Revenue Recognition, or SOP 97-2. Under certain arrangements, we
capitalize related direct costs consisting of third party software costs and direct software
implementation costs. These costs are amortized over the term of the arrangement. In the case of maintenance revenues, vendor-specific objective evidence, or VSOE, of fair
value is based on substantive renewal prices, and the revenues are recognized ratably over the
maintenance period. In the case of professional services revenues, VSOE is based on prices from stand-alone sale
transactions, and the revenues are recognized as services are performed pursuant to paragraph 65 of
SOP 97-2. Third party hardware revenues are recognized upon delivery, pursuant to SAB 104. In the case of remote hosting services, where VSOE is based upon consistent pricing charged to customers
based on volumes and performance requirements on a stand-alone basis and substantive renewal terms,
the revenues are recognized ratably over the contract term as the services are performed. Our
remote hosting arrangements generally require us to perform one-time set-up activities and include
a one-time set-up fee. This one-time set-up fee is generally paid by the customer at contract
execution. We have determined that these set-up activities do not constitute a separate unit of
accounting, and accordingly the related set-up fees are recognized ratably over the term of the
contract. We consider the applicability of Emerging Issues Task Force 00-3, or EITF 00-3, Application of
AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored On
Another Entitys Hardware, to our remote hosting services arrangements on a contract-by-contract
basis. If we determine that the customer has the contractual right to take possession of our
software at any time during the hosting period without significant penalty, and can feasibly run
the software on its own hardware or enter into another arrangement with a third party to host the
software, a software element covered by SOP 97-2 exists. When a software element exists in a remote
hosting services arrangement, we recognize the license, professional services and remote hosting
services revenues pursuant to SOP 97-2, whereby the fair value of the remote hosting services is
recognized as revenue ratably over the term of the remote hosting contract. If we determine that a
software element covered by SOP 97-2 is not present in a remote hosting services arrangement; we
recognize revenue for the remote hosting services arrangement ratably over the term of the remote
hosting contract pursuant to SAB 104. 14




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Traditional Software Contracts We enter into traditional multiple-element arrangements that include the following elements:  
    software license;
    maintenance;
    professional services; and
    third party hardware or remote hosting services. Revenue for each of the elements is recognized as follows: Software license fees are recognized upon delivery of the software provided that (1) there is
evidence of an arrangement, (2) the fee is fixed or determinable and (3) collection of our fee is
considered probable. For those arrangements in which the fee is not considered fixed or
determinable, the software license revenue is recognized as the payments become due. For
arrangements where VSOE only exists for the undelivered elements, we account for the delivered
elements (software license revenue) using the residual method in accordance with SOP 98-9. In addition to the software license fees, these contracts may also contain maintenance,
professional services and hardware or remote hosting services. VSOE and revenue recognition for
these elements is determined using the same methodology as noted above for subscription contracts. Software Contracts Requiring Contract Accounting We enter into multiple element arrangements containing milestone provisions in which the
professional services are considered essential to the functionality of the software. Under these
arrangements, software license fees and professional service revenues are recognized using the
percentage-of-completion method over the implementation period, which generally ranges from 12 to
24 months. Under the percentage-of-completion method, revenue and profit are recognized throughout
the term of the implementation based upon estimates of total labor hours incurred and revenues to
be generated over the term of the implementation. Changes in estimates of total labor hours and the
related effect on the timing of revenues and profits are recognized in the period in which they are
determinable. Accordingly, changes in these estimates could occur and have a material effect on our
operating results in the period of change. Stand-Alone Products and Services We also market products and services on a stand-alone basis. These products and services
include the following:  
    software license;
    maintenance;
    professional services;
    hardware;
    network services;
    remote hosting services;
    outsourcing. 15




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Revenue related to these products and services is recognized as follows: Software license fees and maintenance are marketed on a stand-alone basis and may be licensed
either under traditional contracts or under subscription arrangements. Software license fees under
traditional contracts are recognized pursuant to SOP 97-2 if, when the software has been delivered,
persuasive evidence of an arrangement exists, the fee is fixed or determinable and collectibility
is probable. Under subscription agreements for stand-alone products, software license fees are
recognized ratably over the term of the contract. With respect to maintenance, VSOE is determined
based on substantive renewal prices contained in the contracts. Maintenance is recognized ratably
over the term of the contract. Professional services represent incremental services marketed to customers including
implementation and consulting services. Professional services revenues, where VSOE is based on
prices from stand-alone transactions, are recognized as services are performed. Hardware is recognized upon delivery pursuant to SAB 104. Network services arrangements include the assessment, assembly and delivery of a wireless
network, which may include wireless carts or other wireless equipment to the customer. Our network
services arrangements are sold to a customer for a fixed fee. All services are performed prior to
the delivery of the equipment. These contracts are typically 60 to 90 days in length and are
recognized pursuant to SAB 104, upon the delivery of the network to the customer. Remote hosting contracts that are sold on a stand-alone basis are recognized ratably over the
contract term pursuant to SAB 104. Our remote hosting arrangements generally require us to perform
one-time set-up activities and include a one-time set-up fee. This one-time set-up fee is generally
paid by the customer at contract execution. We have determined that these set-up activities do not
constitute a separate unit of accounting, and accordingly we recognize the related set-up fees
ratably over the term of the contract. We provide outsourcing services to our customers. Under these arrangements we assume all
responsibilities for a healthcare organizations information technology operations using our
employees. Our outsourcing services include facilities management, network outsourcing and
transition management. These arrangements typically range from five to ten years in duration.
Revenues from these arrangements are recognized when services are performed. If other judgments or assumptions had been used in the evaluation of our revenue arrangements,
the timing and amounts of revenue recognized might have been significantly different. Allowance for Doubtful Accounts In evaluating the collectibility of our accounts receivable, we assess a number of factors,
including a specific customers ability to meet its financial obligations to us, as well as general
factors such as the length of time the receivables are past due and historical collection
experience. Based on these assessments, we record a reserve for specific account balances as well
as a reserve based on our historical experience for bad debt to reduce the related receivables to
the amount we ultimately expect to collect from customers. If circumstances related to specific
customers change, or economic conditions deteriorate such that our past collection experience is no
longer relevant, our estimate of the recoverability of our accounts receivable could be further
reduced from the levels provided for in our consolidated financial statements. Capitalized Software Development Costs We capitalize software development costs in accordance with FASB Statement No. 86, Accounting
for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed. We capitalize
software development costs incurred subsequent to establishing technological feasibility of the
software being developed. These costs include salaries, benefits, consulting and other directly
related costs incurred in connection with coding and testing software products. Capitalization
ceases when the products are generally released for sale to customers, at which time amortization
of the capitalized costs begins. This amortization is reflected in the cost of systems and
services revenues. At each balance sheet date, we perform a detailed assessment of our capitalized
software development costs, which includes a review of, among other factors, projected revenues,
customer demand requirements, product lifecycle, changes in software and hardware technologies, and
product development plans. Based on this analysis we record adjustments, when appropriate, to
reflect the net realizable value of our capitalized software development costs. The estimates of
expected future revenues generated by the software, the remaining economic life of the software, or
both, could change, materially affecting the carrying value of capitalized software development
costs, as well as our consolidated operating results in the period of change. 16




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On October 20, 2003, we announced response time issues with some components of SunriseXA, the
newest version of our Sunrise suite of products. To address the issue, we announced a strategy to allow our SunriseXA customers to
continue their deployment of SunriseXA, while enabling us to continue the development of our
advanced SunriseXA components. Our strategy was to replace the affected SunriseXA components with
certain components from our SCM product. As a result, in 2003 we recorded a $1.2 million write-down
of capitalized software development costs for certain SunriseXA components to net realizable value.
The write-down is included in the cost of systems and services revenues. Warranty Reserve The agreements that we use to license our software include a limited warranty. The warranty
provides that our software, in its unaltered form, will perform substantially in accordance with
the related documentation. Through September 30, 2003, we did not incur any material warranty costs
related to our products. Due to the response time issues that we identified in October 2003, we
recorded provisions related to warranty costs of $4.6 million through March 31, 2005. Warranty
costs are charged to costs of systems and services revenues when they are probable and reasonably
estimable. In determining this warranty reserve, we used significant judgments and estimates for
the additional professional service hours and third party costs that will be necessary to remedy
this issue on a customer-by-customer basis. The timing and amount of our warranty reserve could
have been different if we had used other judgments or assumptions in our evaluation. 17




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THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THREE MONTHS ENDED MARCH 31, 2004 Eclipsys Corporation
Statements of Operations Data- Unaudited
(in thousands, except per share data) Three Months Ended
    
    Three Months EndedMarch 31,
    
    March 31,% of Total
    
    
    
    
    
    
    % of Total2005
    
    
    Revenues
    
    
    2004
    
    
    Revenues
    
    
    Change $
    
    
    Change %RevenuesSystems and services
    
    $
    83,128
    
    
    
    98.5
    %
    
    $
    61,807
    
    
    
    90.4
    %
    
    $
    21,321
    
    
    
    34.5
    %Hardware
    
    
    1,307
    
    
    
    1.5
    %
    
    
    6,577
    
    
    
    9.6
    %
    
    
    (5,270
    )
    
    
    -80.1
    %Total revenues
    
    
    84,435
    
    
    
    100.0
    %
    
    
    68,384
    
    
    
    100.0
    %
    
    
    16,051
    
    
    
    23.5
    %Costs and expensesCost of systems and services revenues
    
    
    52,265
    
    
    
    61.9
    %
    
    
    39,338
    
    
    
    57.5
    %
    
    
    12,927
    
    
    
    32.9
    %Cost of hardware revenues
    
    
    1,101
    
    
    
    1.3
    %
    
    
    5,634
    
    
    
    8.2
    %
    
    
    (4,533
    )
    
    
    -80.5
    %Sales and marketing
    
    
    18,176
    
    
    
    21.5
    %
    
    
    15,941
    
    
    
    23.3
    %
    
    
    2,235
    
    
    
    14.0
    %Research and development
    
    
    12,576
    
    
    
    14.9
    %
    
    
    14,738
    
    
    
    21.6
    %
    
    
    (2,162
    )
    
    
    -14.7
    %General and administrative
    
    
    4,356
    
    
    
    5.2
    %
    
    
    3,169
    
    
    
    4.6
    %
    
    
    1,187
    
    
    
    37.5
    %Depreciation and amortization
    
    
    3,683
    
    
    
    4.4
    %
    
    
    3,081
    
    
    
    4.5
    %
    
    
    602
    
    
    
    19.5
    %Total costs and expenses
    
    $
    92,157
    
    
    
    109.1
    %
    
    $
    81,901
    
    
    
    119.8
    %
    
    $
    10,256
    
    
    
    12.5
    %Loss from operations
    
    
    (7,722
    )
    
    
    -9.1
    %
    
    
    (13,517
    )
    
    
    -19.8
    %
    
    
    5,795Interest income, net
    
    
    561
    
    
    
    0.7
    %
    
    
    454
    
    
    
    0.7
    %
    
    
    107
    
    
    
    23.6
    %Loss before income taxes
    
    
    (7,161
    )
    
    
    -8.5
    %
    
    
    (13,063
    )
    
    
    -19.1
    %
    
    
    5,902Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    $
    (7,161
    )
    
    
    -8.5
    %
    
    $
    (13,063
    )
    
    
    -19.1
    %
    
    $
    5,902Basic loss per share
    
    $
    (0.15
    )
    
    
    
    
    
    $
    (0.28
    )
    
    
    
    
    
    $
    0.13Diluted loss per share
    
    $
    (0.15
    )
    
    
    
    
    
    $
    (0.28
    )
    
    
    
    
    
    $
    0.13
 RESULTS OF OPERATIONS Total revenues increased $16.1 million, or 23.5%, to $84.4 million for the quarter ended March
31, 2005, compared with $68.4 million for the first quarter of 2004. Systems and services revenues increased $21.3 million, or 34.5%, to $83.1 million for the
quarter ended March 31, 2005, compared with $61.8 million for the first quarter of 2004. The
increase in systems and services revenues was primarily a result of an increase in revenues
associated with monthly generated revenues including software, maintenance, outsourcing and remote
hosting. These revenues increased $12.6 million or 26.8% over the prior year. Additionally,
professional services revenues, which include implementation and consulting related services, were
$16.2 million, an increase of $4.4 million or 36.9% over the prior year. Also, revenues related to
software and networking services were $7.3 million, an increase
of $4.4 million, 147.5% over the prior
year. The increase in monthly generated revenues including software, maintenance, outsourcing,
remote hosting and professional services was primarily related to higher sales volumes in 2003 and
2004. The higher sales volumes were primarily associated with successful sales of our advanced
clinical systems as well as outsourcing and remote hosting related services. The sales of our
advanced clinical systems were related to ongoing industry wide initiatives related to the adoption
of such systems. The increase in professional services was related to heightened activity in our
implementation and consulting areas associated with customer implementations of our software
solutions. These activities are expected to remain at higher levels in 2005 as numerous customers
are in the process of upgrading their software applications. The increase in software and
networking services was primarily related to a higher volume of
networking services revenues. This increase in revenues was associated with an expansion of our
service offerings in this area, which was initiated in 2004. 18




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Hardware revenues decreased $5.3 million, or 80.1%, to $1.3 million for the quarter ended
March 31, 2005, compared with $6.6 million for the first quarter of 2004. The decrease in
hardware revenues was related to a change in sales mix in recent quarters, which resulted in lower
hardware sales as more customers are procuring remote hosting services in connection with their
software transactions. Additionally, hardware revenues were high in the second half of 2004 as a
significant number of customers made progress on their respective implementation and procured the
required hardware in connection with these activities. We expect that hardware revenues will be
lower in 2005 compared to 2004. Cost of systems and services revenues increased $12.9 million, or 32.9%, to $52.3 million, for
the quarter ended March 31, 2005, compared to $39.3 million for the first quarter of 2004. Gross
margins on systems and services revenue were 37.1% for the quarter
ended March 31, 2005, compared to
36.4% for the first quarter of 2004. The increase in cost of systems and services revenues was
largely associated with increased revenues related to outsourcing, remote hosting and professional
services resources in connection with contracts entered into 2003 and 2004. Additionally, costs
in the quarter were negatively impacted as we used a significant level of third party consulting
resources to supplement our employees in connection with our implementation and consulting engagements. Cost of hardware revenues decreased $4.5 million, or 80.5%, to $1.1 million for the quarter
ended March 31, 2005, compared to $5.6 million for the first quarter of 2004. Gross margins on
hardware revenue were 15.8% in the first quarter of 2005 and 14.3% in first quarter 2004. The
decrease in the cost of hardware revenues was attributable to the decrease in hardware revenues
discussed above. Sales and marketing expenses increased $2.2 million, or 14.0%, to $18.2 million for the
quarter ended March 31, 2005, compared to $15.9 million for the first quarter of 2004. The
increase in sales and marketing expenses was primarily related to increases in payroll related
costs including commissions and higher costs associated with marketing related events in the
quarter. Research and development expenses decreased $2.2 million, or 14.7%, to $12.6 million, for the
quarter ended March 31, 2005, compared to $14.7 million for the first quarter of 2004. The
decrease in research and development expense was primarily related to an increase in capitalized
software development costs. Capitalized software development costs increased $1.8 million, to $6.4
million for the quarter ended March 31, 2005, compared to $4.6 million for the same period in 2004.
The increase in capitalized software was due to increased costs associated with coding, testing
and other activities associated with the release of SunriseXA 4.0, which was made generally
available in March 2005. Amortization of capitalized software development costs, which is included
as a component of cost of systems and services revenues, increased by approximately $1.2 million,
to $3.3 million for the three months ended March 31, 2005, compared to $1.9 million for first
quarter of 2004. General and administrative expenses increased $1.2 million, or 37.5%, to $4.4 million for the
quarter ended March 31, 2005, compared to $3.2 million for the first quarter of 2004. The increase
in expenses was primarily related to higher professional service fees, including legal and
accounting fees. Depreciation and amortization increased $602,000, or 19.5%, to $3.7 million, for the quarter
ended March 31, 2005, compared to $3.1 million, for the first quarter of 2004. The increase was
primarily the result of higher depreciation related to fixed assets purchased in our continued
effort to expand our research and development infrastructure and to increase capacity at our
Technology Solutions Center. Interest income increased $107,000, or 23.6%, to $561,000 for the quarter ended March 31,
2005, compared to $454,000 for the first quarter of 2004. The increase was due to an improvement
in yields resulting from higher interest rates in the quarter. As a result of these factors, we had a net loss of $7.2 million for the quarter ended March
31, 2005, compared to a net loss of $13.1 million for the first quarter in 2004. LIQUIDITY AND CAPITAL RESOURCES During the quarter ended March 31, 2005, operations used $7.1 million of cash, primarily
related to the payment of year-end bonuses and commissions, incremental payroll costs and the
impact of our contracting model that spreads payments over a longer period of time. Investing
activities used $47.4 million of cash, consisting of a net $36.9 million of purchases of marketable
securities, $6.4 million for the funding of capitalized software development costs and $4.1 million
for the purchases of property and equipment. The purchases of property and equipment was primarily
related to our continued investment in the infrastructure of our Technology Solutions Center for
the expansion of our remote hosting services. Financing activities provided $1.7 million of cash
from the exercise of stock options. 19




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As of March 31, 2005, our principal source of liquidity is our combined cash and marketable
securities balance of $106.2 million. Our future liquidity requirements will depend on a number of
factors including, among other things, the timing and level of our new sales volumes, the cost of
our development efforts, the success and market acceptance of our future
product releases, and other related items. As of March 31, 2005, we did not have any material
commitments for capital expenditures. We believe that our current cash and marketable securities
balances, combined with our anticipated cash collections from customers will be adequate to meet
our liquidity requirements through 2005. Certain Factors That May Affect Future Operating Results There are a number of important factors that could affect our business and future operating
results, including without limitation, the factors set forth below. The information contained in
this report should be read in light of such factors. Any of the following factors could harm our
business and future operating results. We face risks relating to our product strategy In October 2003, we announced the existence of certain response time issues within some
components of SunriseXA, the newest version of our Sunrise family of products. We concluded that
the root cause of the issue was in the technical design of SunriseXA, which did not adequately
support the throughput required in the highly interactive patient care environment. After
substantial analysis, we pursued and continue to pursue a strategy that we believe addresses these
issues. Our strategy was to replace the affected SunriseXA components with certain components from
our SCM product, which is our prior generation, core clinical product. Although we believe that the
releases of Sunrise Clinical Manager 3.5 XA in June 2004 and Sunrise Clinical Manager 4.0 XA in
March 2005 were significant milestones in the implementation of our product strategy, we continue
to face a variety of risks and uncertainties in this regard including among others, the following:  
    We may encounter technical obstacles and delays in implementing this
approach. As we continue to implement our strategy, it is possible that we
could discover additional problems with our software.
    It is possible future releases of SunriseXA, with anticipated
additional features for our products, may be delayed. This could result in
delayed or lost sales.
    Customers who are currently implementing SunriseXA have faced delays in
their implementations. As a result, existing SunriseXA customers could attempt
to cancel their contracts with us or seek financial or other concessions from
us.
    As a result of the changes we will make to our SunriseXA product
offering, potential customers may find such products less appealing, which
could decrease demand for our products.
    2003 operating results reflect a $1.2 million write-down of capitalized
software development costs for certain SunriseXA components. Additionally, to
date we have recorded warranty related costs of $4.6 million related to the
anticipated costs associated with the SunriseXA response time issue. These issues could harm our relationships with customers generally and our reputation in the
marketplace. This announcement adversely effected our 2004 sales. Additionally, it is possible that
this issue may continue to make sales more challenging for the affected SunriseXA applications. Recent changes in our senior management could distract management and cause uncertainty that could
result in delayed or lost sales. On April 29, 2005, we announced that our Chairman, Eugene V. Fife, replaced Paul L.
Ruflin as our President and Chief Executive Officer on an interim basis. At the same time, our
board of directors announced that it had initiated a search for a
new, long-term Chief Executive
Officer. There can be no assurance that we will be able to find an appropriate candidate to become
our long-term Chief Executive Officer in a timely manner. Any transition of this type could divert
our managements time and attention from the operation of our business and if we do not manage this
process effectively, it could cause some level of uncertainty among our customers and potential
customers that could lead to delays in closing new business or ultimately in lost sales. 20




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Our product strategy is dependent on the continued development and support by
Microsoft of its .Net Framework and other technologies Our product strategy is substantially dependent upon Microsofts .Net Framework and other Microsoft
technologies. The .Net Framework, in particular, is a relatively new and evolving technology. If
Microsoft were to cease actively supporting .Net or other technologies, fail to update and enhance
them to keep pace with changing industry standards, encounter technical difficulties in the
continuing development of these technologies or make them unavailable to us, we could be required
to invest significant resources in re-engineering our products. This could lead to lost or delayed
sales, unanticipated development expenses and harm to our reputation, and would cause our financial
results and business to suffer. Given the length of our sales and implementation cycles, if a significant
number of our customers delay implementation, our future operating results may
suffer We have experienced long sales and implementation cycles. How and when to implement, replace,
expand or substantially modify an information system, or modify or add business processes, are
major decisions for hospitals, our target customer market. Furthermore, our software is expensive
and generally requires significant capital expenditures by our customers. The sales cycle for our
software ranges from 6 to 18 months or more from initial contact to contract execution.
Historically, our implementation cycle has ranged from 6 to 36 months from contract execution to
completion of implementation. During the sales and implementation cycles, we will expend
substantial time, effort and financial resources preparing contract proposals, negotiating the
contract and implementing the software. We may not realize any revenues to offset these
expenditures and, if we do, accounting principles may not allow us to recognize the revenues during
corresponding periods. This could harm our future operating results. Additionally, any decision by
our customers to delay purchasing or implementing our products may adversely affect our revenues. The healthcare industry faces financial constraints that could adversely affect the demand for our products and services The healthcare industry faces significant financial constraints. For example, the shift to
managed healthcare in the 1990s put pressure on healthcare organizations to reduce costs, and the
Balanced Budget Act of 1997 dramatically reduced Medicare reimbursement to healthcare
organizations. Our software often involves a significant financial commitment by our customers. Our
ability to grow our business is largely dependent on our customers information technology budgets.
To the extent healthcare information technology spending declines or increases more slowly than we
anticipate, demand for our products would be adversely affected. We have a history of operating losses and we cannot predict future profitability We had a net loss of $(32.6) million for the year ended December 31, 2004. We also had net
losses of $(56.0) million in 2003, $(29.8) million in 2002, $(34.0) million in 2000, $(9.4) million
in 1999, and $(35.3) million in 1998. In 2001, we had net income of $4.4 million, although we had a
loss from operations of $(1.6) million. We may continue to incur net losses and cannot predict
when, or if, we will be profitable in the future. Our operating results may fluctuate significantly and may cause our stock price to decline We have experienced significant variations in revenues and operating results from quarter to
quarter. Our operating results may continue to fluctuate due to a number of factors, including:  
    our progress in implementing our strategy to address our SunriseXA response time issues and the
level of costs associated with that effort;
    the timing, size and complexity of our product sales and implementations;
    overall demand for healthcare information technology;
    the financial condition of our customers and potential customers; 21




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
    market acceptance of new services, products and product enhancements by us and our competitors;
    customer decisions regarding renewal of their respective
contracts;
    product and price competition;
    the relative proportions of revenues we derive from software, services and hardware;
    changes in our operating expenses;
    the timing and size of future acquisitions;
    personnel changes;
    the performance of our products;
    significant judgments and estimates made by management in the application of generally accepted
accounting principles; and
    fluctuations in general economic and financial market conditions, including interest rates. It is difficult to predict the timing of revenues that we receive from product sales, because
the sales cycle can vary depending upon several factors. These include the size and terms of the
transaction, the changing business plans of the customer, the effectiveness of the customers
management, general economic conditions and the regulatory environment. In addition, the timing of
our revenue recognition could vary considerably depending upon the extent to which our customers
elect to license our products under arrangements where revenues are recognized monthly. Generally,
less revenue is recognized under these arrangements during the first 12 to 24 months compared to
our more traditional licensing arrangements. We also continue to offer contracts using our more
traditional licensing arrangements. Because a significant percentage of our expenses are relatively
fixed, a variation in the timing of sales and implementations could cause significant variations in
operating results from quarter to quarter. We believe that period-to-period comparisons of our
historical results of operations are not necessarily meaningful. Stockholders should not rely on
these comparisons as indicators of future performance. Because in many cases we recognize revenues for our software monthly over the
term of a customer contract, downturns or upturns in sales will not be fully
reflected in our operating results until future periods We recognize a significant portion of our revenues from customers monthly over the terms of
their agreements, which are typically 7 years and can be up to 10 years. As a result, much of the
revenues that we report each quarter are attributable to agreements executed during prior quarters.
Consequently, a decline in sales, client renewals, or market acceptance of our products in one
quarter will not necessarily be reflected in lower revenues in that quarter, and may negatively
affect our revenues and profitability in future quarters. In addition, we may be unable to adjust
our cost structure to reflect these reduced revenues. This monthly revenue recognition also makes
it difficult for us to rapidly increase our revenues through additional sales in any period, as
revenues from new customers must be recognized over the applicable agreement term. We operate in an intensely competitive market that includes companies that have
greater financial, technical and marketing resources than we do We operate in a market that is intensely competitive. Our principal competitors include Cerner
Corporation, Epic Systems Corporation, GE Medical Systems, IDX Systems Corporation, McKesson
Corporation, QuadraMed and Siemens AG. We also face competition from providers of practice
management systems, general decision support, database systems and other segment-specific
applications, as well as from healthcare IT consultants. A number of existing and potential
competitors are more established than we are, and have greater name recognition and financial,
technical and marketing resources than we do. We expect that competition will continue to increase,
which could harm our business. 22




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If the healthcare industry continues to undergo consolidation, this could
impose pressure on our products prices, reduce our potential customer base and
reduce demand for our products Many hospitals have consolidated to create larger healthcare enterprises with greater market
power. If this consolidation continues, it could erode our customer base and reduce the size of our
target market. In addition, the resulting enterprises could have greater bargaining power, which
may lead to erosion of the prices for our products. Potential regulation by the U.S. Food and Drug Administration of our products
as medical devices could impose increased costs, delay the introduction of new
products and hurt our business The U.S. Food and Drug Administration, or FDA, is likely to become increasingly active in
regulating computer software or content intended for use in the healthcare setting. The FDA has
increasingly focused on the regulation of computer products and computer-assisted products as
medical devices under the Food, Drug, and Cosmetic Act, or the FDC Act. If the FDA chooses to
regulate any of our products, or third party products that we resell, as medical devices, it could
impose extensive requirements upon us, including the following:  
    requiring us to seek FDA clearance of a pre-market notification
submission demonstrating that a product is substantially equivalent to a device
already legally marketed, or to obtain FDA approval of a pre-market approval
application establishing the safety and effectiveness of the product;
    requiring us to comply with rigorous regulations governing the
pre-clinical and clinical testing, manufacture, distribution, labeling and
promotion of medical devices; and
    requiring us to comply with the FDC Act regarding general controls
including establishment registration, device listing, compliance with good
manufacturing practices, reporting of specified device malfunctions and adverse
device events. If we fail 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 pre-market clearance or approval of products, withdrawing clearances and
approvals, and initiating criminal prosecution. Any final FDA policy governing computer products or
content, once issued, may increase the cost and time to market of new or existing products or may
prevent us from marketing our products. Changes in federal and state regulations relating to patient data could depress
the demand for our products and impose significant product redesign costs on us The demand for health care information systems is affected by state and federal laws and
regulations that govern the collection, use, transmission and other disclosures of electronic
health information. These laws and regulations may change rapidly and may be unclear or difficult
to apply. Federal regulations under the Health Insurance Portability and Accountability Act of 1996, or
HIPAA imposes national health data standards on (i) healthcare providers that conduct electronic
health transactions; (ii) healthcare clearinghouses that convert health data between
HIPAA-compliant and non-compliant formats; and (iii) health plans. Collectively, these groups are
known as covered entities. The HIPAA standards prescribe transaction formats and code sets for
electronic health transactions; protect individual privacy by limiting the uses and disclosures of
individually identifiable health information; and require covered entities to implement
administrative, physical and technological safeguards to ensure the confidentiality, integrity,
availability and security of individually identifiable health information in electronic form.
Though we are not a covered entity, most of our customers are and require that our software and
services adhere to HIPAA standards. There are several HIPAA compliance deadlines for covered entities. The final compliance
deadline for the transaction and code set standards was October 16, 2003. The compliance deadline
for the privacy standards was April 14, 2003 for most covered entities. The compliance deadline for
the security standards for most covered entities was April 20, 2005. Any failure or perception of
failure of our products or services to meet HIPAA standards could adversely affect demand for our
products and services and force us to expend significant capital, research and development and
other resources to modify our products or services to address the privacy and security requirements
of our customers. 23




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States may adopt privacy standards that are more stringent than the federal HIPAA privacy
standards. This may lead to different restrictions for handling individually identifiable health
information. As a result, our customers may demand information technology solutions and services
that are adaptable to reflect different and changing regulatory requirements. In the future,
federal or state governmental authorities may impose new data
security standards or additional restrictions on the collection,
use, transmission and other disclosures of health information. We cannot predict the potential
impact that these future rules, as finally approved, may have on our business. However, the demand
for our products and services may decrease if we are not able to develop and offer products and
services that can address the regulatory challenges and compliance obligations facing our
customers. Our products and content are used to assist clinical decision-making and
provide information about patient medical histories and treatment plans; If our
products fail to provide accurate and timely information or the treatment
methodologies suggested by our content are faulty, our customers could assert
claims against us that could result in substantial cost to us, harm our
reputation in the industry and cause demand for our products to decline We provide products and embedded content that, assist in clinical decision-making, suggest
treatment methodologies, provide access to patient medical histories and assist in creating patient
treatment plans. If our software fails to provide accurate and timely information, or if treatment
methodologies utilizing our content or practice guidelines is determined to be faulty, customers
could assert liability claims against us. Litigation with respect to liability claims, regardless
of its outcome, could result in substantial cost to us, divert managements attention from
operations and decrease market acceptance of our products. We attempt to limit by contract our
liability for damages arising from negligence, errors or mistakes. In addition, we require that our
customers approve all system rules and protocols. Despite these precautions, the limitations of
liability set forth in our contracts may not be enforceable or may not otherwise protect us from
liability for damages. We maintain general liability insurance coverage, including coverage for
errors or omissions. However, this 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 against us. In
addition, the insurer might disclaim coverage as to any future claim. One or more large claims
could exceed our available insurance coverage. Highly complex software products such as ours often contain undetected errors or failures when
first introduced or as updates and new versions are released. It is particularly challenging for us
to test our products because it is difficult to simulate the wide variety of computing environments
or treatment methodologies that our customers may deploy or rely upon. Despite testing, from time
to time we have discovered defects or errors in our products. Defects, errors or difficulties could
cause delays in product introductions and shipments, result in increased costs and diversion of
development resources, require design modifications or decrease market acceptance or customer
satisfaction with our products. In addition, despite testing by us and by current and potential
customers, errors may be found after commencement of commercial shipments, resulting in loss of or
delay in market acceptance. If we undertake additional acquisitions, they may be disruptive to our business
and could have an adverse effect on our future operations and the market price
of our common stock An important element of our business strategy has been expansion through acquisitions. Since
1997, we have completed eleven acquisitions. Any future acquisitions would involve a number of risks, including the following:  
    The anticipated benefits from any acquisition may not be achieved. The
integration of acquired businesses requires substantial attention from
management. The diversion of managements attention and any difficulties
encountered in the transition process could hurt our business.
    In future acquisitions, we could issue additional shares of our capital
stock, incur additional indebtedness or pay consideration in excess of book
value, which could have a dilutive effect on future net income, if any, per
share.
    New business acquisitions must be accounted for under the purchase
method of accounting. These acquisitions may generate significant intangible
assets and result in substantial related amortization charges to us. 24




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If we fail to attract, motivate and retain highly qualified technical,
marketing, sales and management personnel, our ability to execute our business
strategy could be impaired Our success depends, in significant part, upon the continued services of our key technical,
marketing, sales and management personnel, and on our ability to continue to attract, motivate and
retain highly qualified employees. Competition for these employees is intense. In addition, the
process of recruiting personnel with the combination of skills and attributes required to execute
our business strategy can be difficult, time-consuming and expensive. We believe that our ability
to implement our strategic goals depends to a considerable degree on our senior management team.
The loss of any member of that team could hurt our business. Changing customer requirements could decrease the demand for our products,
which could harm our business and decrease our revenues The market for our products and services is characterized by rapidly changing technologies,
evolving industry standards and new product introductions and enhancements that may render existing
products obsolete or less competitive. As a result, our position in the healthcare information
technology market could erode rapidly due to unforeseen changes in the features and functions of
competing products, as well as the pricing models for such products. Our future success will depend
in part upon our ability to enhance our existing products and services, particularly our ability to
continue to release our products onto the .NET Framework under the SunriseXA initiative, and to
develop and introduce new products and services to meet changing customer requirements. The process
of developing products and services such as those we offer is extremely complex and is expected to
become increasingly complex and expensive in the future as new technologies are introduced. If we
are unable to enhance our existing products or develop new products to meet changing customer
requirements, demand for our products could suffer. We depend on licenses from third parties for rights to the technology used in
several of our products, and if we are unable to continue these relationships
and maintain our rights to this technology, our business could suffer We depend upon licenses for some of the technology used in our products from a number of
third-party vendors, including Computer Corporation of America, Computer Associates, Oracle
Corporation and Microsoft. Most of these licenses expire within one to five years, can be renewed
only by mutual consent and may be terminated if we breach the terms of the license and fail to cure
the breach within a specified period of time. We may not be able to continue using the technology
made available to us under these licenses on commercially reasonable terms or at all. As a result,
we may have to discontinue, delay or reduce product shipments until we obtain equivalent
technology, which could hurt our business. Most of our third-party licenses are non-exclusive. Our
competitors may obtain the right to use any of the technology covered by these licenses and use the
technology to compete directly with us. In addition, if our vendors choose to discontinue support
of the licensed technology in the future or are unsuccessful in their continued research and
development efforts, particularly with regard to Microsoft, we may not be able to modify or adapt
our own products. Our products rely on our intellectual property, and any failure by us to
protect our intellectual property, or any misappropriation of it, could enable
our competitors to market products with similar features, which could reduce
demand for our products We are dependent upon our proprietary information and technology. Our means of protecting our
proprietary rights may not be adequate to prevent misappropriation. The laws of some foreign
countries may not protect our proprietary rights as fully as do the laws of the United States.
Also, despite the steps we have taken to protect our proprietary rights, it may be possible for
unauthorized third parties to copy aspects of our products, reverse engineer our products or
otherwise obtain and use information that we regard as proprietary. In some limited instances,
customers can access source-code versions of our software, subject to contractual limitations on
the permitted use of the source code. Furthermore, it may be possible for our competitors to copy
or gain access to our content. Although our license agreements with these customers attempt to
prevent misuse of the source code or trade secrets, the possession of our source code or trade
secrets by third parties increases the ease and likelihood of potential misappropriation of our
products. Furthermore, others could independently develop technologies similar or superior to our
technology or design around our proprietary rights. In addition, infringement or invalidity claims
or claims for indemnification resulting from infringement claims could be asserted or prosecuted
against us. Regardless of the validity of any claims, defending against these claims could result
in significant costs and diversion of our resources. The assertion of infringement claims could
also result in injunctions preventing us from distributing products. If any claims or actions are
asserted against us, we might be required to obtain a license to the disputed intellectual property
rights, which might not be available on reasonable terms or at all. 25




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Provisions of our charter documents and Delaware law may inhibit potential
acquisition bids that a stockholder may believe is desirable, and the market
price of our common stock may be lower as a result Our board of directors has the authority to issue up to 4,900,000 shares of preferred stock.
The board of directors can fix the price, rights, preferences, privileges and restrictions of the
preferred stock without any further vote or action by our stockholders. The issuance of shares of
preferred stock may discourage, delay or prevent a merger or acquisition of our company. The
issuance of preferred stock may result in the loss of voting control to other stockholders. We have
no current plans to issue any shares of preferred stock. In August 2000, our board of directors
adopted a shareholder rights plan under which we issued preferred stock purchase rights that would
adversely affect the economic and voting interests of a person or group that seeks to acquire us or
a 15% or more interest in our common stock without negotiations with our board of directors. Our charter documents contain additional anti-takeover devices including:  
    only one of the three classes of directors is elected each year;
    the ability of our stockholders to remove directors without cause is limited;
    the right of stockholders to act by written consent has been eliminated;
    the right of stockholders to call a special meeting of stockholders has been eliminated; and
    advance notice must be given to nominate directors or submit proposals for consideration at stockholder meetings. Section 203 of the Delaware corporate statute may inhibit potential bids to acquire our company. We
are subject to the anti-takeover provisions of the Delaware corporate statute, which regulate
corporate acquisitions. Delaware law will prevent us from engaging, under specified circumstances,
in a business combination with any interested stockholder for three years following the date that
the interested stockholder became an interested stockholder, unless our board of directors or a
supermajority of our uninterested stockholders agree. For purposes of Delaware law, a business
combination includes a merger or consolidation involving us and the interested stockholder, and the
sale of more than 10% of our assets. In general, Delaware law defines an interested stockholder as
any holder beneficially owning 15% or more of the outstanding voting stock of a corporation and any
entity or person affiliated with or controlling or controlled by the holder.
These provisions could discourage potential acquisition proposals and could delay or prevent a
change in control transaction. They could also have the effect of discouraging others from making
tender offers for our common stock. As a result, these provisions may prevent the market price of
our common stock from increasing substantially in response to actual or rumored takeover attempts.
These provisions may also prevent changes in our management. 26




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We do not currently use derivative financial instruments. We generally buy investments that
are highly liquid. Based upon the nature of our investments, we do not expect any material loss
from our investments. Investments in both fixed-rate and floating-rate interest-earning instruments carry a degree
of interest rate risk. Fixed-rate securities may have their fair market value adversely impacted
due to a rise in interest rates, while floating-rate securities may produce less income than
expected if interest rates fall. Due in part to these factors, our future investment income may
fall short of expectations due to changes in interest rates, or we may suffer losses in principal
if forced to sell securities that have seen a decline in market value due to changes in interest
rates. The following table illustrates potential fluctuation in annualized interest income based
upon hypothetical values for blended interest rates and cash and marketable securities account
balances. Combined cash and cash equivalents andHypothetical Interest Rate
    
    marketable securities balances (in thousands)$
    100,000
    
    
    $
    120,000
    
    
    $
    150,0001.5%
    
    
    1,500
    
    
    
    1,800
    
    
    
    2,2502.0%
    
    
    2,000
    
    
    
    2,400
    
    
    
    3,0002.5%
    
    
    2,500
    
    
    
    3,000
    
    
    
    3,7503.0%
    
    
    3,000
    
    
    
    3,600
    
    
    
    4,5003.5%
    
    
    3,500
    
    
    
    4,200
    
    
    
    5,2504.0%
    
    
    4,000
    
    
    
    4,800
    
    
    
    6,000
   *
    
    This sensitivity analysis is not a forecast of future interest income. We account for cash equivalents and marketable securities in accordance with SFAS No. 115.
Accounting for Certain Investments in Debt and Equity Securities. Cash equivalents are
short-term highly liquid investments with original maturity dates of three months or less. Cash
equivalents are carried at cost, which approximates fair market value. Marketable securities
consist of funds that are highly liquid and are classified as available-for-sale. Marketable
securities are recorded at fair value, and unrealized gains and losses are recorded as a component
of other comprehensive income. We do not currently enter into foreign currency hedge transactions. Through March 31, 2005,
foreign currency fluctuations have not had a material impact on our financial position or results
of operations. ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure and Controls and Procedures in Internal Control Over Financial
Reporting Our management, with the participation of our chief executive officer and chief financial
officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31,
2005. The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act, means controls and other procedures of a company that are designed to
ensure that information required to be disclosed by a company in the reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the SECs rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required to be disclosed by
a company in the reports that it files or submits under the Exchange Act is accumulated and
communicated to the companys management, including its principal executive and principal financial
officers, as appropriate to allow timely decisions regarding required disclosure. Management
recognizes that any disclosure controls and procedures, no matter how well designed and operated,
can provide only reasonable assurance of achieving their objectives, and management necessarily
applies its judgment in evaluating the cost-benefit relationship of disclosure controls and
procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2005,
our chief executive officer and chief financial officer concluded that, as of such date, our
disclosure controls and procedures were effective at the reasonable assurance level. No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended March 31, 2005 that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting. 27




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PART II. ITEM 1. LEGAL PROCEEDINGS The Company is involved in litigation from time to time that is 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 our financial position,
results of operation or cash flows. ITEM 6. EXHIBITS Exhibits: See Index to exhibits. 28




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized. ECLIPSYS CORPORATIONDate:
May 10, 2005
    
    /s/ Robert J. CollettiRobert J. CollettiSenior Vice President and Chief Financial Officer(Principal financial officer and duly authorized officer)
 29




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ECLIPSYS CORPORATION EXHIBIT INDEX
 EXHIBITNO.
    
    DESCRIPTION10.1
    
    Amended and Restated 2000 Stock Incentive Plan10.2
    
    Employment Agreement with Eugene V. Fife, dated April 29, 200510.3
    
    Restricted Stock Agreement with Eugene V. Fife, dated April 29, 200531.1
    
    Certification of Eugene V. Fife31.2
    
    Certification of Robert J. Colletti32.1
    
    Certification Pursuant to 18 U.S.C. Section 135032.2
    
    Certification Pursuant to 18 U.S.C. Section 1350
 30