##### 



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, 2004 COMMISSION FILE NUMBER: 000-24539 ECLIPSYS CORPORATION  DELAWARE
(State of Incorporation)
    
    65-0632092
(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 [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ] 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, 2004Common Stock, $.01 par value
    
    
    46,658,922
 1




---



##### 



ECLIPSYS CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2004 INDEX PagePART I.
    
    Financial InformationItem 1.
    
    Condensed Consolidated Balance Sheets (unaudited)  As of March
31, 2004 and December 31, 2003
    
    3Condensed Consolidated Statements of Operations (unaudited)
For the Three Months ended March 31, 2004 and 2003
    
    4Condensed Consolidated Statements of Cash Flows (unaudited)
For the Three Months ended March 31, 2004 and 2003
    
    5Notes to Condensed Consolidated Financial Statements (unaudited)
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    10Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    23Item 4.
    
    Controls and Procedures
    
    23PART II.
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    24Item 6.
    
    Exhibits and Reports on Form 8-K
    
    24Signatures
    
    
    
    25
 2




---



##### 



PART I. ITEM 1. ECLIPSYS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS) MARCH 31,
    
    DECEMBER 31,2004
    
    2003ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    93,378
    
    
    $
    151,683Marketable securities
    
    
    40,808
    
    
    
    Accounts receivable, net
    
    
    49,473
    
    
    
    54,903Inventory
    
    
    1,734
    
    
    
    530Prepaid expenses
    
    
    11,937
    
    
    
    13,989Other current assets
    
    
    883
    
    
    
    1,004Total current assets
    
    
    198,213
    
    
    
    222,109Property and equipment, net
    
    
    33,282
    
    
    
    32,304Capitalized software development costs, net
    
    
    27,951
    
    
    
    25,260Goodwill and other intangibles, net
    
    
    5,378
    
    
    
    454Other assets
    
    
    16,651
    
    
    
    15,656TOTAL ASSETS
    
    $
    281,475
    
    
    $
    295,783LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Deferred revenue
    
    
    88,195
    
    
    
    91,782Accounts payable
    
    
    17,946
    
    
    
    18,415Accrued compensation costs
    
    
    13,156
    
    
    
    17,189Other current liabilities
    
    
    15,971
    
    
    
    15,169Total current liabilities
    
    
    135,268
    
    
    
    142,555Deferred revenue
    
    
    10,219
    
    
    
    9,390Other long-term liabilities
    
    
    153
    
    
    
    684Stockholders Equity:Common stock
    
    
    466
    
    
    
    460Additional paid-in capital
    
    
    417,330
    
    
    
    411,634Unearned stock compensation
    
    
    (740
    )
    
    
    (795
    )Accumulated deficit
    
    
    (280,842
    )
    
    
    (267,778
    )Accumulated other comprehensive income
    
    
    (379
    )
    
    
    (367
    )Total stockholders equity
    
    
    135,835
    
    
    
    143,154TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    281,475
    
    
    $
    295,783
 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3




---



##### 



ECLIPSYS CORPORATION 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 THREE MONTHS ENDED MARCH 31,2004
    
    2003REVENUESSystems and services
    
    $
    61,807
    
    
    $
    53,697Hardware
    
    
    6,577
    
    
    
    3,139TOTAL REVENUES
    
    
    68,384
    
    
    
    56,836COSTS AND EXPENSESCosts of systems and services revenues
    
    
    39,857
    
    
    
    32,804Costs of hardware revenues
    
    
    5,634
    
    
    
    2,684Sales and marketing
    
    
    15,252
    
    
    
    16,556Research and development
    
    
    14,911
    
    
    
    12,984General and administrative
    
    
    3,167
    
    
    
    3,364Depreciation and amortization
    
    
    3,080
    
    
    
    2,369TOTAL COSTS AND EXPENSES
    
    
    81,901
    
    
    
    70,761LOSS FROM OPERATIONS
    
    
    (13,517
    )
    
    
    (13,925
    )Interest income, net
    
    
    454
    
    
    
    900LOSS BEFORE INCOME TAXES
    
    
    (13,063
    )
    
    
    (13,025
    )Provision for income taxes
    
    
    
    
    
    
    NET LOSS
    
    $
    (13,063
    )
    
    $
    (13,025
    )BASIC NET LOSS PER COMMON SHARE
    
    $
    (0.28
    )
    
    $
    (0.29
    )DILUTED NET LOSS PER COMMON SHARE
    
    $
    (0.28
    )
    
    $
    (0.29
    )BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
    
    
    46,115
    
    
    
    45,069DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
    
    
    46,115
    
    
    
    45,069
 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4




---



##### 



ECLIPSYS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 (IN THOUSANDS)
 Three Months Ended March 31,2004
    
    2003OPERATING ACTIVITIES:Net loss
    
    $
    (13,063
    )
    
    $
    (13,025
    )Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:Depreciation and amortization
    
    
    6,025
    
    
    
    4,791Provision for bad debts
    
    
    550
    
    
    
    550Stock compensation expense
    
    
    56
    
    
    
    57Changes in operating assets and liabilities:Accounts receivable
    
    
    4,880
    
    
    
    1,580Inventory
    
    
    (1,169
    )
    
    
    (155
    )Other current assets
    
    
    2,173
    
    
    
    1,925Other assets
    
    
    (1,991
    )
    
    
    (412
    )Deferred revenue
    
    
    (2,758
    )
    
    
    5,809Accrued compensation costs
    
    
    (4,033
    )
    
    
    (2,265
    )Other current liabilities
    
    
    333
    
    
    
    2,254Other long-term liabilities
    
    
    (532
    )
    
    
    44Total adjustments
    
    
    3,534
    
    
    
    14,178NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
    
    
    (9,529
    )
    
    
    1,153INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    (4,018
    )
    
    
    (2,633
    )Purchase of marketable securities, net
    
    
    (40,808
    )
    
    
    (52,449
    )Capitalized software development costs
    
    
    (4,638
    )
    
    
    (2,666
    )Cash paid for acquisition
    
    
    (2,500
    )
    
    
    NET CASH USED IN INVESTING ACTIVITIES
    
    
    (51,964
    )
    
    
    (57,748
    )FINANCING ACTIVITIES:Exercise of stock options
    
    
    2,417
    
    
    
    8Employee stock purchase plan
    
    
    782
    
    
    
    591NET CASH PROVIDED BY FINANCING ACTIVITIES
    
    
    3,199
    
    
    
    599EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
    
    
    (11
    )
    
    
    8NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (58,305
    )
    
    
    (55,988
    )CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD
    
    
    151,683
    
    
    
    183,500CASH AND CASH EQUIVALENTS - END OF PERIOD
    
    $
    93,378
    
    
    $
    127,512SUPPLEMENTAL DISCLOSURENon-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




---



##### 



ECLIPSYS CORPORATION 
   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, 2004 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, 2003 that was filed with
the SEC on March 15, 2004. 2. ACQUISITION In March 2004, the Company acquired CPM Resource Center, LTD or CPMRC.
CPMRC provides consulting services and clinical content 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 will be incorporated into future releases of SunriseXA. The Company
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 owners of
CPMRC may earn an additional $12.5 million over the next 5 year period based on
future operating results. The operating results of CPMRC are reflected with
those of the Company for the three months ended March 31, 2004, from the date
of acquisition. The Company did not present unaudited pro forma results of
operations of Eclipsys and CPMRC for the three months ended March 31, 2004 and
2003 because our pro forma results for those periods would not be materially
different from our actual results for those periods. In connection with the acquisition, the Company recorded approximately
$5.0 million in goodwill and other intangible assets. Additionally included in
the statement of operations is an estimate of amortization for the other
intangibles. The Company is in the process of obtaining an evaluation to
finalize the allocation of the purchase price. 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 for awards in 2002 and
2003, 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, 2004 (in thousands, except per share data): 6




---



##### 



Three Months Ended March 31,2004
    
    2003Net loss:As reported
    
    $
    (13,063
    )
    
    $
    (13,025
    )Add: Stock-based employee compensation expense included
in reported net loss, net of related tax effects
    
    
    56
    
    
    
    56Deduct: Total stock-based compensation expense determined
under fair value based method for all awards, net of related tax effects
    
    
    (2,813
    )
    
    
    (5,031
    )Pro forma
    
    
    (15,820
    )
    
    
    (18,000
    )Basic net loss per share:As reported
    
    
    (0.28
    )
    
    
    (0.29
    )Pro forma
    
    
    (0.34
    )
    
    
    (0.40
    )Diluted net loss per share:As reported
    
    
    (0.28
    )
    
    
    (0.29
    )Pro forma
    
    
    (0.34
    )
    
    
    (0.40
    )
 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. 5. ACCOUNTS RECEIVABLE Accounts receivable was comprised of the following (in thousands): March 31,
    
    December 31,2004
    
    2003Accounts Receivable:Billed accounts receivable, net
    
    $
    42,818
    
    
    $
    49,150Unbilled accounts receivable, net
    
    
    6,655
    
    
    
    5,753Total accounts receivable, net
    
    $
    49,473
    
    
    $
    54,903
 The non-current portion of unbilled accounts receivable is included in
other assets and was $1.0 million as of March 31, 2004 and December 31, 2003. 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 a
warranty accrual of $4.4 million at December 31, 2003. During the first
quarter of 2004, the Company recorded an additional $450,000 provision related
to the response time issues. Warranty costs are charged to costs of systems of
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 31,2004
    
    2003Beginning Balance:
    
    $
    4,400
    
    
    $
    Provision for warranty
    
    
    450
    
    
    
    4,400Warranty utilized
    
    
    (959
    )
    
    
    Ending Balance
    
    $
    3,891
    
    
    $
    4,400
 7




---



##### 



7. GOODWILL AND OTHER INTANGIBLE ASSETS The components of goodwill and other intangible assets were as follows (in
thousands): As of March 31, 2004
    
    As of December 31, 2003Gross Carrying
    
    Accumulated
    
    
    
    
    
    Gross Carrying
    
    AccumulatedAmount
    
    Amortization
    
    Net Balance
    
    Amount
    
    Amortization
    
    Net BalanceGoodwill
    
    $
    454
    
    
    
    
    
    
    $
    454
    
    
    $
    454
    
    
    
    
    
    
    $
    454Goodwill and
other intangible assets acquired during the period
    
    

    4,965
    
    
    $
    (41
    )
    
    
    4,924
    
    
    
    
    
    
    
    
    
    
    
    Total goodwill and other intangibles
    
    $
    5,419
    
    
    $
    (41
    )
    
    $
    5,378
    
    
    $
    454
    
    
    $
    
    
    
    $
    454
 In March 2004, the Company acquired CPMRC as discussed in Note 2. The
Company preliminarily recorded estimates for goodwill and other intangible
assets and is in the process of obtaining an evaluation to finalize the
allocation of the purchase price. 8. OTHER COMPREHENSIVE INCOME The components of other comprehensive (loss) income were as follows (in
thousands): Three Months Ended March 31,2004
    
    2003Net Loss
    
    $
    (13,063
    )
    
    $
    (13,025
    )Foreign currency translation adjustment
    
    
    (11
    )
    
    
    8Total comprehensive loss
    
    $
    (13,074
    )
    
    $
    (13,017
    )
 8




---



##### 



9. LEGAL ACTION From July through September 2002, the Company and three of its then
current officers (Messrs. Robert J. Colletti, John T. Patton and Harvey J.
Wilson) were named in seven complaints filed by purported shareholders of the
Company in the United States District Court, Southern District of Florida, West
Palm Beach Division, or the District Court. Each complaint sought
certification as a class and monetary damages, and alleged that the Company and
the named officers violated federal securities laws. On February 4, 2003, the District Court issued an order that consolidated
all seven cases into one single case and appointed the City of Philadelphia
Board of Pensions and Retirement, Louis Giannakokas and Norman K. Mielziner to
serve as lead plaintiffs. On April 30, 2003, the plaintiffs filed with the
District Court an amended, consolidated complaint, or the Amended Complaint.
On July 31, 2003, the Company filed a motion to dismiss the Amended Complaint.
On September 16, 2003, the plaintiffs filed opposition papers to the motion to
dismiss, and the Company filed a reply brief on October 16, 2003. On November
4, 2003, the District Court granted the Companys motion to dismiss the Amended
Complaint in its entirety. In so doing, the District Court granted the
plaintiffs fifteen days to file a further amended complaint that conformed to
applicable law as well as the District Courts ruling. The plaintiffs
subsequently obtained an extension of that fifteen day deadline. On December 5, 2003, the plaintiffs filed with the District Court their
second amended complaint, or the Second Amended Complaint. In it, among other
things, the plaintiffs reduced the class period by a total of eight months and
eliminated numerous allegations that had been contained in the Amended
Complaint. On January 5, 2004, the Company filed a motion to dismiss the
Second Amended Complaint. The plaintiffs filed opposition papers to the motion
on February 20, 2004. On March 19, 2004, the Company filed a brief in further
support of its motion. On April 1, 2004, the District Court issued an order
granting the Companys motion and dismissing in its entirety the plaintiffs
Second Amended Complaint. In the order, the District Court granted the
plaintiffs fifteen days to file a further amended complaint that conformed to
applicable law as well as the District Courts ruling. The deadline for the
plaintiffs to file a further amended complaint expired on April 16, 2004. The
plaintiffs did not file a further amended complaint prior to the District
Courts deadline. In addition, on May 10, 2004, the plaintiffs consented to
dismissal of the lawsuit and, in doing, waived all rights to appeal the dismissal. Separately, in October 2003, the Company was contacted by the attorneys
for the lead plaintiffs who sought the Companys consent to the filing of an
amended complaint that would add new counts asserting new claims and a new
class period due to the Companys announced SunriseXA response time issues.
The Company did not formally respond to their request, and have not yet seen any
pleadings filed in which the lead plaintiffs have sought to add or assert claims.
Accordingly, the Company is unable to predict whether new claims may be filed
against it, or what effect any new claims could have on the Company. The Company
is also unable to predict the nature of any new claims or the damages that may be
sought if any new claims are filed. The Company is involved in other 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 operations or
cash flows. 9




---



##### 



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. Executive Overview The
following should be read in conjunction with our unaudited condensed
consolidated financial statements, including the notes thereto, which
are included elsewhere in this document and with the audited consolidated
financial statements and the notes thereto included in the Companys Annual
Report onForm 10-Kfor the year ended December 31, 2003 as filed with the SEC
on March 15, 2004. Eclipsys is a healthcare information technology company. We develop and
license our proprietary software 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 Internet website address is www.eclipsys.com. Our annual reports on
FORM 10-K, quarterly reports on FORM 10-Q, current reports on FORM 8-K and
amendments thereto that have been filed with the Securities and Exchange
Commission, or SEC, are available to you free of charge through a hyperlink on
our website. Background We were founded in December 1995 to commercialize an integrated clinical
and financial information software system for use by hospitals. Historically,
hospitals have operated in a paper environment. This has resulted in patient
safety concerns, including avoidable medical errors, duplicative and
unnecessary procedures, inefficient use of limited resources, and an inability
to track, bill and collect for services rendered. Our software is designed to
address these issues by turning data into information that can be easily used,
accessed by or provided to the right person, at the right time, in the right
place at a hospital. This enables hospital employees to redesign business
processes, deliver higher quality care at lower cost, and receive expedited
payment for services rendered. Our software also helps hospitals to improve
collaboration among physicians, nurses and other healthcare workers across all
venues of care. We initially grew through a series of strategic acquisitions that were
completed in 1999. Our acquisitions were focused on acquiring strong customer
bases and advanced software pertaining to the healthcare industry. In addition, in 1996 we licensed certain intellectual property on an
exclusive basis from Partners HealthCare System, Inc., or Partners. The
intellectual property related to clinical workflows including order management
and clinical decision support. The Partners licensed technology has been
incorporated within our product offerings. In
March 2004, we acquired CPMRC. CPMRC provides consulting
services and clinical content 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 will be
incorporated into future releases of SunriseXA. We expect the integration of the CPMRC
content within the SunriseXA framework to improve clinical, financial and
customer satisfaction by improving the healthcare delivery process. Product Development Since June of 1999, we have primarily focused on taking the intellectual
property that we acquired through acquisitions and re-expressing it on a common
platform to provide integrated software to our customers. In 1999, we
announced the general availability of Sunrise Clinical Manger, or SCM, the
first version of our SunriseTM suite of software products. SCM provides
advanced knowledge-based clinical decision-support capabilities including
physician order entry. 10




---



##### 



In 2001, we announced our SunriseXATM strategy. This strategy is 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 SunriseXA. In October 2003, we identified and announced certain 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 some complex, high-volume hospital environments. To address this issue, we
implemented a strategy to allow SunriseXA customers to continue their
deployment of SunriseXA which would, at the same time, allow us to continue the
development of our advanced SunriseXA solutions. This strategy replaces the
affected SunriseXA components with certain components from our SCM product.
The response time issue resulted in a product delivery delay for certain of our
advanced SunriseXA functionality. The announcement of these issues also
impacted the implementation schedules for a number of our customers. As
expected, this announcement has had an adverse effect on our first quarter 2004
sales. Additionally, we believe this issue may temporarily continue
to make sales more challenging for the affected SunriseXA
applications. In connection with the response time issue, we recorded a $1.2 million
write-down of capitalized software development costs to net realizable value
for certain SunriseXA components in the third quarter of 2003. The write-down
was included in the costs of systems and services revenue. 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 remediate the problem for our
customers. Accordingly, we established a warranty reserve of $4.4 million in
the fourth quarter of 2003, and recorded an additional $450,000 provision in
the first quarter of 2004, related to estimated incremental costs associated
with this issue. This provision reflects our estimate of warranty-related
costs that includes, among other things, implementation and third-party costs
for affected customers. Through March 31, 2004, we have incurred approximately
$1.0 million in warranty costs related to remediation of the response time
issue. As of March 31, 2004 the warranty reserve balance was $3.9 million.
Actual warranty costs could differ materially from managements estimate.
Professional services revenue and cash flows will be negatively impacted during
the first half of 2004 as we deliver services and incur third-party costs
related to this issue. In February 2004, the Company released SunriseXA 3.3. The general
availability of this release fulfilled a key deliverable expected by our
customers in connection with the SunriseXA response time issue. This release
was consistent with our strategy. SunriseXA 3.3 went live at two customer
sites in April of 2004. Additionally, we are currently in development of a
more extensive release of SunriseXA, Release 3.5, which we expect will contain
enhanced functionality and will utilize the same database engine and user
interface as SunriseXA 3.3. We currently expect SunriseXA 3.5 to be generally
available in June 2004. Operational Initiatives During 2001, 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 the Company 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 with payment terms over time, compared to our historical
licensing model in which software 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 purchase 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 customers now pay us over
time for software and services, our revenue is spread over a longer time
period, 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 impacted from lower upfront
software payments. However, we believe that this new contracting model will
provide for more predictable revenues on a year over years basis. We believe
that over time, our margins will return to historical levels. Based upon the foregoing, we consumed cash in 2003 because the cash
collections under our new contracting method from new contract signings was not
sufficient to offset our higher operating expenses that we incurred. To fund
these initiatives, we used a portion of our cash on hand. During 2004, we
expect to continue to utilize cash in connection with these initiatives. We believe that the most significant issues that we face in 2004 relate to
the delivery of SunriseXA 3.5, which we expect to release in June 2004, as well
as our ability to sign new business. 11




---



##### 



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, software development and our warranty reserve. Please refer
to Note 2 to the audited consolidated financial statements included in the
Companys Annual Report on FORM 10-K for the year ended December 31, 2003 as
filed with the SEC on March 15, 2004, for further discussion of our accounting
policies, which have not changed materially since that 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 7 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 101, Revenue Recognition in
Financial Statements (which has been superseded by SAB 104) and Emerging
Issues Task Force, or EITF 00-21, Revenue Arrangements with Multiple
Deliverables. SOP 97-2 and SAB 101, as amended, require among other matters,
that there be a signed contract evidencing an arrangement exists, delivery has
occurred, the fee is fixed or determinable, and collectibility is probable.
For those license arrangements in which the fee is not considered fixed or
determinable, the license revenue is recognized as payments become due. For
arrangements where vendor specific objective evidence or VSOE, only exists for
all undelivered elements, we account for the delivered elements in accordance
with the residual method prescribed by SOP 98-9. For software license arrangements that are bundled with services and
maintenance where services are considered essential to the functionality of the
software, we recognize revenues using the percentage-of-completion method.
Under these arrangements, software license fees and implementation fees are
recognized over the implementation period, which has typically ranged from 12
to 24 months. Under the percentage-of-completion method, revenues are
recognized based upon the proportion of labor hours incurred in relation to the
total labor hours estimated under the agreement. Determining factors for
percentage-of-completion include the nature of services required and the
provision for payments of software and services upon the achievement of
implementation milestones. Under the percentage-of-completion method, revenue
and profit are recognized throughout the term of the contract, based upon
estimates of the total labor hours to be incurred and revenues to be generated
throughout the term of the contract. 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 could have a material effect on our operating results
in the period of change. We also enter into subscription arrangements that typically include
multiple software products (including the right to future products within the
suites purchased), implementation and consulting services, maintenance and,
where desired by the customer, outsourcing and remote hosting services. The
customer is entitled to these elements throughout the term of the arrangements,
which range from 7 to 10 years. Payments are due annually, quarterly or
monthly over the arrangement term. For these arrangements, revenue is
recognized monthly over the term of the agreement. In these 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. If other judgments or assumptions were used in the evaluation of our
revenue arrangements, the timing and amounts of revenue recognized may have
been significantly different. 12




---



##### 



Allowance for Doubtful Accounts In evaluating the collectability 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 both specific and general reserves 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 the 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.
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. 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 is 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 was included in the cost of systems and services
revenues. Warranty Reserve The agreements that we use to license our software to our customers
includes 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 a warranty reserve of $4.4 million
at December 31, 2003, and recorded an additional $450,000 provision during the
first quarter of 2004, related to the estimated incremental costs associated
with this issue. Through March 31, 2004, we have incurred approximately $1.0
million in warranty costs related to remediation of the response time issue.
Warranty costs are charged to cost of 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. 13




---



##### 



THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE MONTHS ENDED MARCH 31, 2003 Eclipsys Corporation
Statements of Operations Data- Unaudited
(in thousands, except per share data) Three Months Ended March 31,% of Total
    
    
    
    
    
    % of Total2004
    
    Revenues
    
    2003
    
    Revenues
    
    Change $
    
    Change %RevenuesSystems and services
    
    $
    61,807
    
    
    
    90.4
    %
    
    $
    53,697
    
    
    
    94.5
    %
    
    $
    8,110
    
    
    
    15.1
    %Hardware
    
    
    6,577
    
    
    
    9.6
    %
    
    
    3,139
    
    
    
    5.5
    %
    
    
    3,438
    
    
    
    109.5
    %Total revenues
    
    
    68,384
    
    
    
    100.0
    %
    
    
    56,836
    
    
    
    100.0
    %
    
    
    11,548
    
    
    
    20.3
    %Costs and expensesCosts of systems and services revenues
    
    
    39,857
    
    
    
    58.3
    %
    
    
    32,804
    
    
    
    57.7
    %
    
    
    7,053
    
    
    
    21.5
    %Costs of hardware revenues
    
    
    5,634
    
    
    
    8.2
    %
    
    
    2,684
    
    
    
    4.7
    %
    
    
    2,950
    
    
    
    109.9
    %Sales and marketing
    
    
    15,252
    
    
    
    22.3
    %
    
    
    16,556
    
    
    
    29.1
    %
    
    
    (1,304
    )
    
    
    -7.9
    %Research and development
    
    
    14,911
    
    
    
    21.8
    %
    
    
    12,984
    
    
    
    22.8
    %
    
    
    1,927
    
    
    
    14.8
    %General and administrative
    
    
    3,167
    
    
    
    4.6
    %
    
    
    3,364
    
    
    
    5.9
    %
    
    
    (197
    )
    
    
    -5.9
    %Depreciation and amortization
    
    
    3,080
    
    
    
    4.5
    %
    
    
    2,369
    
    
    
    4.2
    %
    
    
    711
    
    
    
    30.0
    %Total costs and expenses
    
    $
    81,901
    
    
    
    119.8
    %
    
    $
    70,761
    
    
    
    124.5
    %
    
    $
    11,140
    
    
    
    15.7
    %Loss from operations
    
    
    (13,517
    )
    
    
    -19.8
    %
    
    
    (13,925
    )
    
    
    -24.5
    %
    
    
    408Interest income, net
    
    
    454
    
    
    
    0.7
    %
    
    
    900
    
    
    
    1.6
    %
    
    
    (446
    )
    
    
    -49.6
    %Loss before income taxes
    
    
    (13,063
    )
    
    
    -19.1
    %
    
    
    (13,025
    )
    
    
    -22.9
    %
    
    
    (38
    )Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    $
    (13,063
    )
    
    
    -19.1
    %
    
    $
    (13,025
    )
    
    
    -22.9
    %
    
    $
    (38
    )Basic loss per share
    
    $
    (0.28
    )
    
    
    
    
    
    $
    (0.29
    )
    
    
    
    
    
    $
    0.01Diluted loss per share
    
    $
    (0.28
    )
    
    
    
    
    
    $
    (0.29
    )
    
    
    
    
    
    $
    0.01
 RESULTS OF OPERATIONS Total revenues increased $11.5 million, or 20.3%, to $68.4 million for the
quarter ended March 31, 2004, compared with $56.8 million for the first quarter
of 2003. Systems and services revenues increased $8.1 million, or 15.1%, to $61.8
million for the quarter ended March 31, 2004, compared with $53.7 million for
the first quarter of 2003. The increase is primarily due to an increase of
$9.4 million of revenues generated from arrangements which generally provide
for revenue recognition on a monthly basis. These revenues included license
fees, remote hosting services, software and hardware maintenance fees, and
outsourcing services. This increase is primarily the result of new contracts
signed prior to the first quarter of 2004. The new contracts consisted of a
high proportion of contracts executed for which revenues are recognized on a
monthly basis. We expect these contracts will continue to represent a
significant, and potentially growing, proportion of our new contracts.
However, because these contracts are characterized by payments being spread
over a longer period of time compared to traditional licensing arrangements, we
expect cash flows will continue to be negatively impacted in the near future.
Additionally, professional services increased $1.8 million as a result of new
contracts signed in 2003. These increases were partially offset by a reduction
of $0.9 million of networking services and $2.2 million of license fees. We
expect both networking services and license fees (other than those recognized
on a monthly basis) to continue to fluctuate in future periods. Hardware revenues increased $3.4 million, or 109.5%, to $6.6 million for
the quarter ended March 31, 2004, compared with $3.1 million for the first
quarter of 2003. The increase in hardware revenues was due to increased
shipments during the quarter. We expect hardware revenue to continue to
fluctuate in future periods. Costs of systems and services revenues increased $7.0 million, or 21.5%,
to $39.8 million, for the quarter ended March 31, 2004, compared to $32.8
million for the first quarter of 2003. Gross margins on systems and services
revenue were 35.5% for the quarter ended 14




---



##### 



March 31, 2004 compared to 38.9% for
the first quarter of 2003. The increase in costs of systems and services
revenues were primarily related to higher costs associated with providing our
remote hosting and outsourcing services and higher third party costs including
royalties. Costs of hardware revenues increased $2.9 million, or 109.9%, to $5.6
million for the quarter ended March 31, 2004, compared to $2.7 million for the
first quarter of 2003. Gross margins on hardware revenue were substantially
flat at 14.3% in the first quarter of 2004 and 14.5% in first quarter 2003.
The increase in the cost of hardware revenues was primarily attributable to the
increase in hardware revenues discussed above. Sales and marketing expenses decreased $1.3 million, or 7.9%, to $15.3
million for the quarter ended March 31, 2004, compared to $16.6 million for the
first quarter of 2003. The decrease in sales and marketing expenses was
primarily related to decreases in commissions and realignment of sales and
marketing functions during the first quarter of 2004. Research and development expenses increased $1.9 million, or 14.8%, to
$14.9 million, for the quarter ended March 31, 2004, compared to $13.0 million,
for the first quarter of 2003. The increase in research and development
expenses was due primarily to an increase in the number of development employees.
The increase in headcount in this area is consistent with our product
development initiative implemented throughout 2003. Capitalized software
development costs increased $1.9 million, or 74.0%, to $4.6 million for the
quarter ended March 31, 2004, compared to $2.7 million for the same period in
2003. The increase in capitalized software development costs was due to
increased costs associated with coding, testing and other related activities
for SunriseXA 3.5. Amortization of capitalized software development costs,
which is included as a component of costs of systems and systems revenues,
increased by approximately $0.2 million, to $1.9 million for the three months
ended March 31, 2004, compared to $1.7 million for first quarter of 2003. Depreciation and amortization increased $0.7 million, or 30.0%, to $3.0
million, for the quarter ended March 31, 2004, compared to $2.3 million, for
the first quarter of 2003. 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 decreased $0.4 million, or 49.6%, to $0.5 million for the
quarter ended March 31, 2004, compared to $0.9 million for the first quarter of
2003. This decrease was due to a decline in yields and lower cash and
marketable security balances from the same period last year. As a result of these factors, we had a net loss of $13.1 million for the
quarter ended March 31, 2004, compared to net loss of $13.0 million for the
first quarter in 2003. LIQUIDITY AND CAPITAL RESOURCES During the quarter ended March 31, 2004, operations used $9.5 million of
cash, primarily related to the payment of year-end bonuses and commissions, an
incremental payroll and the impact of our contracting model that spreads
payments over a longer period of time. Investing activities used $51.9 million
of cash, consisting of a $40.8 million purchase of marketable securities, $4.6
million for the funding of capitalized software development costs, $4.0 million
for the purchase of property and equipment and $2.5 million for the acquisition of
CPMRC in March 2004. The purchase of property plant and equipment is 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 $3.2 million of cash, from the exercise of stock options
and the employee stock purchase plan. As of March 31, 2004, our principal source of liquidity is our combined
cash and marketable securities balance of $134.2 million. It is likely that we
will continue to have negative cash flows in the near future as we continue the
development of our SunriseXA products. Additionally, our contracting method
will result in lower cash flows during the early stages of a customer contract.
We expect this will continue to impact our short term cash position.
Furthermore, we expect that capital expenditures will continue at levels
similar to the first quarter of 2004 as we continue to invest in our Technology
Solutions Center. 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 related to SunriseXA, the success and
market acceptance of our future product releases, and other related items. As
of March 31, 2004 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 2004. 15




---



##### 



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 a number of risks relating to our recently announced strategy to
address SunriseXA response time issues 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 announced and are pursuing a strategy that we believe will address
these issues. Our strategy is 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 we have made significant
progress in implementing that strategy and proving the technical feasibility of
our SunriseXA products, 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 that the availability of SunriseXA Release 3.5, or the
releases of 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.
    
    Operating results for the year ended December 31, 2003 reflect a $1.2
million write-down of capitalized software development costs related
to certain SunriseXA components and a warranty reserve of $4.4 million
related to the anticipated costs associated with the SunriseXA
response time issue. In the first quarter of 2004, an additional
$450,000 provision was recorded for estimated incremental costs.
Although we believe that these reserves are adequate to cover any
potential losses, it is possible that we will discover additional
facts that lead us to conclude that additional write-offs or reserves
may be required. These issues could harm our relationships with customers generally and our
reputation in the marketplace. This announcement has had an adverse
effect on our first quarter 2004 sales. Additionally, we believe this
issue may temporarily continue to make sales more challenging for the
affected SunriseXA applications. 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 16




---



##### 



corresponding periods. This could harm our future operating results.
Additionally, any decision by our customers to delay a purchase or
implementation 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 1990s 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 $56.0 million for the year ended December 31, 2003.
We also had net losses of $29.8 million in 2002, $34.0 million in 2000, $9.4
million in 1999, $35.3 million in 1998, and $126.3 million in 1997. 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;
    
    market acceptance of new services, products and product enhancements by us and our competitors;
    
    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 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 will also continue to offer contracts
using our more traditional licensing 17




---



##### 



arrangements. Because a significant percentage of our expenses will be
relatively fixed, a variation in the timing of sales and implementations could
cause significant variations in operating results from quarter to quarter. 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 as 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 for outsourcing arrangements. As a result, much of the revenue
that we report each quarter is attributable to agreements executed during prior
quarters. Consequently, a decline in sales, client renewals, or market
acceptance of our products in one quarter, does not necessarily reflect
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 HIT 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. Increased competition could
harm our business. 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 could 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 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 as medical devices, it can 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 FDA 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, once
issued, may increase the cost and time to market of new or existing products or
may prevent us from marketing our products. 18




---



##### 



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. HIPPA imposes national health data standards on (i) health care providers
that conduct electronic health transactions; (ii) health care 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 be HIPAA compliant. 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. Any failure or perception of failure of our
products or services to comply with 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. 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 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 are used to assist clinical decision-making and provide
information about patient medical histories and treatment plans, and if
these products fail to provide accurate and timely information, 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 that among other things, assist in clinical
decision-making, provide access to patient medical histories and assist in
creating patient treatment plans. If our software fails to provide accurate
and timely information, 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 in which
our customers may deploy them. 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 ten acquisitions. 19




---



##### 



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. 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 HIT 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. Although our license agreements with these customers
attempt to prevent misuse of the source code, the possession of our source code
by third parties increases the ease and likelihood of potential
misappropriation of such software. Furthermore, others could 20




---



##### 



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. We face litigation that could force us to pay significant damages and
could distract our management team From July through September 2002, the Company and three of its then
current officers (Messrs. Robert J. Colletti, John T. Patton and Harvey J.
Wilson) were named in seven complaints filed by purported shareholders of the
Company in the United States District Court, Southern District of Florida, West
Palm Beach Division, or the District Court. Each complaint sought
certification as a class and monetary damages, and alleged that we and the
named officers violated federal securities laws. On February 4, 2003, the District Court issued an order that consolidated
all seven cases into one single case and appointed the City of Philadelphia
Board of Pensions and Retirement, Louis Giannakokas and Norman K. Mielziner to
serve as lead plaintiffs. On April 30, 2003, the plaintiffs filed with the
District Court an amended, consolidated complaint, or the Amended Complaint.
On July 31, 2003, the Company filed a motion to dismiss the Amended Complaint.
On September 16, 2003, the plaintiffs filed opposition papers to the motion to
dismiss, and the Company filed a brief on October 16, 2003. On November 4,
2003, the District Court granted the Companys motion to dismiss the Amended
Complaint in its entirety. In so doing, the District Court granted the
plaintiffs fifteen days to file a further amended complaint that conformed to
applicable law as well as the District Courts ruling. The plaintiffs
subsequently obtained an extension of that fifteen day deadline. On December 5, 2003, the plaintiffs filed with the District Court their
second amended complaint, or the Second Amended Complaint. In it, among other
things, the plaintiffs reduced the class period by a total of eight months and
eliminated numerous allegations that had been contained in the Amended
Complaint. On January 5, 2004, the Company filed a motion to dismiss the
Second Amended Complaint. The plaintiffs filed opposition papers to the motion
on February 20, 2004. On March 19, 2004, the Company filed a brief in further
support of its motion. On April 1, 2004, the District Court issued an order
granting the Companys motion and dismissing in its entirety the plaintiffs
Second Amended Complaint. In the order, the District Court granted the
plaintiffs fifteen days to file a further amended complaint that conformed to
applicable law as well as the District Courts ruling. The deadline for the
plaintiffs to file a further amended complaint expired on April 16, 2004. The
plaintiffs did not file a further amended complaint prior to the District
Courts deadline. In addition, on May 10, 2004, the plaintiffs consented to
dismissal of the lawsuit and, in doing, waived all rights to appeal the dismissal. Separately, in October 2003, the Company was contacted by the attorneys
for the lead plaintiffs who sought the Companys consent to their filing of an
amended complaint that would add new counts asserting new claims and a new
class period due to the Companys announced SunriseXA response time issues.
The Company did not formally respond to their request, and have not yet seen
any pleadings filed in which the lead plaintiffs have sought to add or assert
claims. Accordingly, the Company is unable to predict whether new claims may

be filed against it, or what effect any new claims could have on the Company.
The Company is also unable to predict the nature of any new claims or the
damages that may be sought if any new claims are filed. The Company is involved in other 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. 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. 21




---



##### 



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. 22




---



##### 



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. Annualized interest income based upon hypothetical values for cash and
marketable securities combined balances and interest rates:* HypotheticalInterest Rate
    
    Combined cash and cash
equivalents andmarketable 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, 2004, foreign currency fluctuations have not had a material
impact on our financial position or results of operations. ITEM 4. CONTROLS AND PROCEDURES Our management, with the participation of our chief executive officer and
chief financial officer, evaluated the effectiveness of our disclosure controls
and procedures (as defined in Rules 13a  15 (e) and 15d  15 (e) under the
Exchange Act) as of March 31, 2004. Based on this evaluation, Eclipsys chief
executive officer and chief financial officer concluded that, as of March 31,
2004, our disclosure controls and procedures were (1) designed to ensure that
material information relating to us, including our consolidated subsidiaries,
is made known to our chief executive officer and chief financial officer by
others within those entities, particularly during the period in which this
report was being prepared (2) effective, in that they provide reasonable
assurance that information required to be disclosed by us in the reports that
we file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time period specified in the SECs rules and forms. 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, 2004 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting. 23




---



##### 



PART II. ITEM 1. LEGAL PROCEEDINGS From July through September 2002, the Company and three of its then
current officers (Messrs. Robert J. Colletti, John T. Patton and Harvey J.
Wilson) were named in seven complaints filed by purported shareholders of the
Company in the United States District Court, Southern District of Florida, West
Palm Beach Division, or the District Court. Each complaint sought
certification as a class and monetary damages, and alleged that the Company and
the named officers violated federal securities laws. On February 4, 2003, the District Court issued an order that consolidated
all seven cases into one single case and appointed the City of Philadelphia
Board of Pensions and Retirement, Louis Giannakokas and Norman K. Mielziner to
serve as lead plaintiffs. On April 30, 2003, the plaintiffs filed with the
District Court an amended, consolidated complaint, or the Amended Complaint.
On July 31, 2003, the Company filed a motion to dismiss the Amended Complaint.
On September 16, 2003, the plaintiffs filed opposition papers to the motion to
dismiss, and the Company filed a brief on October 16, 2003. On November 4,
2003, the District Court granted the Companys motion to dismiss the Amended
Complaint in its entirety. In so doing, the District Court granted the
plaintiffs fifteen days to file a further amended complaint that conformed to
applicable law as well as the District Courts ruling. The plaintiffs
subsequently obtained an extension of that fifteen day deadline. On December 5, 2003, the plaintiffs filed with the District Court their
second amended complaint, or the Second Amended Complaint. In it, among other
things, the plaintiffs reduced the class period by a total of eight months and
eliminated numerous allegations that had been contained in the Amended
Complaint. On January 5, 2004, the Company filed a motion to dismiss the
Second Amended Complaint. The plaintiffs filed opposition papers to the motion
on February 20, 2004. On March 19, 2004, the Company filed a brief in further
support of its motion. On April 1, 2004, the District Court issued an order
granting the Companys motion and dismissing in its entirety the plaintiffs
Second Amended Complaint. In the order, the District Court granted the
plaintiffs fifteen days to file a further amended complaint that conformed to
applicable law as well as the District Courts ruling. The deadline for the
plaintiffs to file a further amended complaint expired on April 16, 2004. The
plaintiffs did not file a further amended complaint prior to the District
Courts deadline. In addition, on May 10, 2004, the plaintiffs consented to
dismissal of the lawsuit and, in doing, waived all rights to appeal the dismissal. Separately, in October 2003, the Company was contacted by the attorneys
for the lead plaintiffs who sought the Companys consent to their filing of an
amended complaint that would add new counts asserting new claims and a new
class period due to the Companys announced SunriseXA response time issues.
The Company did not formally respond to their request, and have not yet seen
any pleadings filed in which the lead plaintiffs have sought to add or assert
claims. Accordingly, the Company is unable to predict whether new claims may
be filed against it, or what effect any new claims could have on the Company.
The Company is also unable to predict the nature of any new claims or the
damages that may be sought if any new claims are filed. The Company is involved in other 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 AND REPORTS ON FORM 8-K (a) Exhibits: See Index to exhibits. (b) Reports on Form 8-K: (1) On April 27, 2004, Eclipsys filed a report on Form 8-K relating to
its financial results for the fiscal quarter ended March 31, 2004, as presented
in a press release on April 27, 2004. 24




---



##### 



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, 2004
    
    /s/ Robert J. CollettiRobert J. CollettiSenior Vice President andChief Financial Officer(Principal financial officerand duly authorized officer)
 25




---



##### 



ECLIPSYS CORPORATION
EXHIBIT INDEX EXHIBITNO.
    
    DESCRIPTION31.1
    
    Certification of Paul L. Ruflin31.2
    
    Certification of Robert J. Colletti32
    
    Certification Pursuant to 18 U.S.C. Section 1350
 26