##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
  FORM 10-Q  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004 COMMISSION FILE NUMBER: 000-24539 ECLIPSYS CORPORATION  DELAWARE
    
    65-0632092(State of Incorporation)
    
    (IRS Employer Identification Number)
 1750 Clint Moore Road
Boca Raton, Florida
33487
(Address of principal executive offices) 561-322-4321
(Telephone number of registrant) Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing for the past 90 days. Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes þ No o Indicate the number of shares outstanding of each of the issuers classes
of common stock as of the latest practicable date. Class
    
    Shares outstanding as of July 26, 2004Common Stock, $.01 par value
    
    46,710,932
    1




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##### 



ECLIPSYS CORPORATION FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2004 INDEX PagePART I. Financial InformationItem 1. Condensed Consolidated Balance Sheets (unaudited)  As of June 30, 2004 and December 31, 2003
    
    
    3Condensed Consolidated Statements of Operations (unaudited) For the Three and Six Months
    
    
    4ended June 30, 2004 and 2003Condensed Consolidated Statements of Cash Flows (unaudited) For the Three and Six Months
    
    
    5ended June 30, 2004 and 2003Notes 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
    
    
    25Item 4. Controls and Procedures
    
    
    25PART II. Other InformationItem 1. Legal Proceedings
    
    
    26Item 2. Changes in Securities and Use of Proceeds
    
    
    26Item 4. Submission of Matters to a Vote of Security Holders
    
    
    26Item 6. Exhibits and Reports on Form 8-K
    
    
    26Signatures
    
    
    27
  2




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##### 



PART I. 
 ITEM 1. ECLIPSYS CORPORATION
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands) June 30,
    
    December 31,2004
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    84,656
    
    
    $
    151,683Marketable securities
    
    
    40,818
    
    
    
    Accounts receivable, net
    
    
    54,009
    
    
    
    54,903Inventory
    
    
    1,712
    
    
    
    530Prepaid expenses
    
    
    10,759
    
    
    
    13,989Other current assets
    
    
    1,095
    
    
    
    1,004Total current assets
    
    
    193,049
    
    
    
    222,109Property and equipment, net
    
    
    32,932
    
    
    
    32,304Capitalized software development costs, net
    
    
    29,951
    
    
    
    25,260Intangibles assets, net
    
    
    3,030
    
    
    
    Goodwill
    
    
    2,180
    
    
    
    454Other assets
    
    
    16,060
    
    
    
    15,656TOTAL ASSETS
    
    $
    277,202
    
    
    $
    295,783LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Deferred revenue
    
    $
    92,620
    
    
    $
    91,782Accounts payable
    
    
    17,029
    
    
    
    18,415Accrued compensation costs
    
    
    15,681
    
    
    
    17,189Other current liabilities
    
    
    15,554
    
    
    
    15,169Total current liabilities
    
    
    140,884
    
    
    
    142,555Deferred revenue
    
    
    8,821
    
    
    
    9,390Other long-term liabilities
    
    
    147
    
    
    
    684Stockholders Equity:Common stock
    
    
    467
    
    
    
    460Additional paid-in capital
    
    
    418,754
    
    
    
    411,634Unearned stock compensation
    
    
    (683
    )
    
    
    (795
    )Accumulated deficit
    
    
    (290,801
    )
    
    
    (267,778
    )Accumulated other comprehensive income
    
    
    (387
    )
    
    
    (367
    )Total stockholders equity
    
    
    127,350
    
    
    
    143,154TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    277,202
    
    
    $
    295,783
 The accompanying notes are in integral part of these unaudited condensed consolidated financial statements 3




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ECLIPSYS CORPORATION
Condensed Consolidated Statements of Operations (Unaudited)
(In thousands, except per share amounts) THREE MONTHS
    
    SIX MONTHSENDED JUNE 30,
    
    ENDED JUNE 30,2004
    
    2003
    
    2004
    
    2003REVENUESSystems and services
    
    $
    68,597
    
    
    $
    58,381
    
    
    $
    130,404
    
    
    $
    112,078Hardware
    
    
    5,046
    
    
    
    5,005
    
    
    
    11,623
    
    
    
    8,144TOTAL REVENUES
    
    
    73,643
    
    
    
    63,386
    
    
    
    142,027
    
    
    
    120,222COSTS AND EXPENSESCosts of systems and services revenues
    
    
    41,795
    
    
    
    33,900
    
    
    
    81,651
    
    
    
    66,704Costs of hardware revenues
    
    
    4,337
    
    
    
    4,163
    
    
    
    9,971
    
    
    
    6,847Sales and marketing
    
    
    15,458
    
    
    
    17,719
    
    
    
    30,710
    
    
    
    34,274Research and development
    
    
    14,536
    
    
    
    13,535
    
    
    
    29,446
    
    
    
    26,519General and administrative
    
    
    4,407
    
    
    
    3,420
    
    
    
    7,575
    
    
    
    6,784Depreciation and amortization
    
    
    3,295
    
    
    
    2,500
    
    
    
    6,376
    
    
    
    4,869TOTAL COSTS AND EXPENSES
    
    
    83,828
    
    
    
    75,237
    
    
    
    165,729
    
    
    
    145,997LOSS FROM OPERATIONS
    
    
    (10,185
    )
    
    
    (11,851
    )
    
    
    (23,702
    )
    
    
    (25,775
    )Interest income, net
    
    
    225
    
    
    
    831
    
    
    
    679
    
    
    
    1,731LOSS BEFORE INCOME TAXES
    
    
    (9,960
    )
    
    
    (11,020
    )
    
    
    (23,023
    )
    
    
    (24,044
    )Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    NET LOSS
    
    $
    (9,960
    )
    
    $
    (11,020
    )
    
    $
    (23,023
    )
    
    $
    (24,044
    )BASIC NET LOSS PER COMMON SHARE
    
    $
    (0.21
    )
    
    $
    (0.24
    )
    
    $
    (0.50
    )
    
    $
    (0.53
    )DILUTED NET LOSS PER COMMON SHARE
    
    $
    (0.21
    )
    
    $
    (0.24
    )
    
    $
    (0.50
    )
    
    $
    (0.53
    )BASIC
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
    
    
    46,573
    
    
    
    45,289
    
    
    
    46,228
    
    
    
    45,179DILUTED WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING
    
    
    46,573
    
    
    
    45,289
    
    
    
    46,228
    
    
    
    45,179
 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements 4




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ECLIPSYS CORPORATION
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands) THREE MONTHS ENDED JUNE 30,
    
    SIX MONTHS ENDED JUNE 30,2004
    
    2003
    
    2004
    
    2003OPERATING ACTIVITIESNet loss
    
    $
    (9,960
    )
    
    $
    (11,020
    )
    
    $
    (23,023
    )
    
    $
    (24,044
    )Adjustments to reconcile net loss to net cash
used in operating activities:Depreciation and amortization
    
    
    6,226
    
    
    
    5,211
    
    
    
    12,251
    
    
    
    10,002Provision for bad debts
    
    
    450
    
    
    
    650
    
    
    
    1,000
    
    
    
    1,200Stock compensation expense
    
    
    105
    
    
    
    56
    
    
    
    161
    
    
    
    112Changes in operating assets and liabilities:Accounts receivable
    
    
    (4,986
    )
    
    
    (3,510
    )
    
    
    (106
    )
    
    
    (1,930
    )Inventory
    
    
    21
    
    
    
    120
    
    
    
    (1,148
    )
    
    
    (35
    )Other current assets
    
    
    966
    
    
    
    841
    
    
    
    3,139
    
    
    
    2,766Other assets
    
    
    (459
    )
    
    
    (3,436
    )
    
    
    (2,450
    )
    
    
    (3,848
    )Deferred revenue
    
    
    3,027
    
    
    
    1,430
    
    
    
    269
    
    
    
    7,238Accrued compensation costs
    
    
    2,525
    
    
    
    2,496
    
    
    
    (1,508
    )
    
    
    232Other current liabilities
    
    
    (1,334
    )
    
    
    4,968
    
    
    
    (1,001
    )
    
    
    7,222Other long-term liabilities
    
    
    (5
    )
    
    
    485
    
    
    
    (537
    )
    
    
    529Total adjustments to reconcile net loss
to net cash used in operating activities
    
    
    6,536
    
    
    
    9,311
    
    
    
    10,070
    
    
    
    23,488NET CASH USED IN OPERATING ACTIVITIES
    
    
    (3,424
    )
    
    
    (1,709
    )
    
    
    (12,953
    )
    
    
    (556
    )INVESTING ACTIVITIESPurchases of property and equipment
    
    
    (2,777
    )
    
    
    (4,019
    )
    
    
    (6,795
    )
    
    
    (6,652
    )Purchases of marketable securities, net
    
    
    (10
    )
    
    
    (455
    )
    
    
    (40,818
    )
    
    
    (52,904
    )Capitalized software development costs
    
    
    (3,881
    )
    
    
    (4,897
    )
    
    
    (8,519
    )
    
    
    (7,563
    )Cash paid for acquisition
    
    
    
    
    
    
    
    
    
    
    (2,500
    )
    
    
    NET CASH USED IN INVESTING ACTIVITIES
    
    
    (6,668
    )
    
    
    (9,371
    )
    
    
    (58,632
    )
    
    
    (67,119
    )FINANCING ACTIVITIESExercise of stock options
    
    
    497
    
    
    
    943
    
    
    
    2,914
    
    
    
    951Proceeds from employee stock purchase plan
    
    
    882
    
    
    
    688
    
    
    
    1,664
    
    
    
    1,279NET CASH PROVIDED BY FINANCING ACTIVITIES
    
    
    1,379
    
    
    
    1,631
    
    
    
    4,578
    
    
    
    2,230EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENT
    
    
    (9
    )
    
    
    34
    
    
    
    (20
    )
    
    
    42NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (8,722
    )
    
    
    (9,415
    )
    
    
    (67,027
    )
    
    
    (65,403
    )CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    93,378
    
    
    
    127,512
    
    
    
    151,683
    
    
    
    183,500CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    
    84,656
    
    
    $
    118,097
    
    
    
    84,656
    
    
    $
    118,097SUPPLEMENTAL 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




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ECLIPSYS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of
Eclipsys Corporation, or the Company, and the notes thereto have been prepared
in accordance with the instructions for Form 10-Q and Rule 10-01 of Regulation
S-X of the Securities and Exchange Commission, or SEC. These unaudited
condensed consolidated financial statements do not include all of the
information and disclosures required by accounting principles generally
accepted in the United States of America. However, such information reflects
all adjustments (consisting of normal recurring adjustments) that are, in the
opinion of management, necessary for a fair statement of results for the
interim periods presented. The results of operations for the three and six months ended June 30, 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 are incorporated in the latest release of our clinical product. The
Company paid $2.5 million in cash and issued 184,202 shares of common stock for
CPMRC, for 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 and six months ended June 30, 2004, from the
date of acquisition. The Company did not present unaudited pro forma results of
operations of Eclipsys and CPMRC for the three and six months ended June 30,
2004 and 2003 because our pro forma results for those periods would not be
materially different from our actual results for those periods. As a result of the acquisition, the Company recorded approximately $1.7
million in non amortizable goodwill and $3.2 million in amortizable intangible
assets. Amortizable intangible assets include customer relationships and
intellectual property and will be amortized over a seven and five year period,
respectively. The non amortizable goodwill is not tax deductible. 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. 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 2003 and
2004, 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 and six month periods ended June 30, 2004 (in thousands, except per share
data): 6




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##### 



Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003Net loss:As reported
    
    $
    (9,960
    )
    
    $
    (11,020
    )
    
    $
    (23,023
    )
    
    $
    (24,044
    )Add: Stock-based employee compensation expense included
in reported net loss, net of related tax effects
    
    
    105
    
    
    
    56
    
    
    
    161
    
    
    
    112Deduct: Total stock-based compensation expense determined
under fair value based method for all awards, net of related tax effects
    
    
    (2,666
    )
    
    
    (4,073
    )
    
    
    (5,479
    )
    
    
    (9,364
    )Pro forma
    
    
    (12,521
    )
    
    
    (15,037
    )
    
    
    (28,341
    )
    
    
    (33,296
    )Basic net loss per share:As reported
    
    
    (0.21
    )
    
    
    (0.24
    )
    
    
    (0.50
    )
    
    
    (0.53
    )Pro forma
    
    
    (0.27
    )
    
    
    (0.33
    )
    
    
    (0.61
    )
    
    
    (0.74
    )Diluted net loss per share:As reported
    
    
    (0.21
    )
    
    
    (0.24
    )
    
    
    (0.50
    )
    
    
    (0.53
    )Pro forma
    
    
    (0.27
    )
    
    
    (0.33
    )
    
    
    (0.61
    )
    
    
    (0.74
    )
 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): June 30,
    
    December 31,2004
    
    2003Accounts Receivable:Billed accounts receivable, net
    
    $
    45,462
    
    
    $
    49,150Unbilled accounts receivable, net
    
    
    8,547
    
    
    
    5,753Total accounts receivable, net
    
    $
    54,009
    
    
    $
    54,903
 The non-current portion of unbilled accounts receivable is included in
other assets and was $1.3 million as of June 30, 2004 and $962,000 as of
December 31, 2003. 6. WARRANTY RESERVE The agreements that we use to license our software to our customers
include 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 SunriseXA 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 three
months 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): 7




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June 30,
    
    March 31,
    
    December 31,2004
    
    2004
    
    2003Beginning Balance:
    
    $
    3,891
    
    
    $
    4,400
    
    
    $
    Provision for warranty
    
    
    
    
    
    
    450
    
    
    
    4,400Warranty utilized
    
    
    (324
    )
    
    
    (959
    )
    
    
    Ending Balance
    
    $
    3,567
    
    
    $
    3,891
    
    
    $
    4,400
 7. GOODWILL AND OTHER INTANGIBLE ASSETS The components of goodwill and other intangible assets were as follows (in
thousands): As of June 30, 2004
    
    As of December 31, 2003Gross
    
    
    
    
    
    
    
    
    
    GrossCarrying
    
    Accumulated
    
    Net
    
    Carrying
    
    Accumulated
    
    NetAmount
    
    Amortization
    
    Balance
    
    Amount
    
    Amortization
    
    BalanceAmortized intangible assets:Customer relationships
    
    $
    287
    
    
    $
    (13
    )
    
    $
    274
    
    
    
    
    
    
    
    
    
    
    
    Intellectual property
    
    
    2,953
    
    
    
    (197
    )
    
    
    2,756
    
    
    
    
    
    
    
    
    
    
    
    3,240
    
    
    
    (210
    )
    
    
    3,030
    
    
    
    
    
    
    
    
    
    
    
    Unamortized intangible assets:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Goodwill
    
    
    454
    
    
    
    
    
    
    
    454
    
    
    $
    454
    
    
    
    
    
    
    $
    454Goodwill acquired during the period
    
    
    1,726
    
    
    
    
    
    
    
    1,726
    
    
    
    
    
    
    
    
    
    
    
    2,180
    
    
    
    
    
    
    
    2,180
    
    
    
    454
    
    
    
    
    
    
    
    454Total goodwill and other intangible assets
    
    $
    5,420
    
    
    $
    (210
    )
    
    $
    5,210
    
    
    $
    454
    
    
    $
    
    
    
    $
    454
 The estimated amortization for the next five fiscal years is as follows (in thousands): For the year ending December 31,2004
    
    $
    5262005
    
    
    6322006
    
    
    6322007
    
    
    6322008
    
    
    632Thereafter
    
    
    186$
    3,240
 8




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##### 



8. OTHER COMPREHENSIVE LOSS The components of other comprehensive loss were as follows (in thousands): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net loss
    
    $
    (9,960
    )
    
    $
    (11,020
    )
    
    $
    (23,023
    )
    
    $
    (24,044
    )Unrealized loss on available-for-sale marketable securities
arising during the period
    
    
    
    
    
    
    (164
    )
    
    
    
    
    
    
    (164
    )Foreign currency translation adjustment
    
    
    (9
    )
    
    
    34
    
    
    
    (20
    )
    
    
    42Total comprehensive loss
    
    $
    (9,969
    )
    
    $
    (11,150
    )
    
    $
    (23,043
    )
    
    $
    (24,166
    )
 9. LEGAL ACTION As previously disclosed, from July through September 2002, the Company and
three of its then current officers were named in a series of complaints filed
by purported shareholders. Each complaint sought certification as a class and
monetary damages, and alleged that the Company and the named officers violated
federal securities laws. These complaints were ultimately consolidated into a
single case, which was dismissed by the District Court in November 2003 and was
re-filed by the plaintiffs in December 2003 in the form of a Second Amended
Complaint. The Company then moved to dismiss the Second Amended Complaint. On April 1, 2004, the District Court issued an order granting the
Companys motion and dismissing in its entirety the plaintiffs 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
so doing, waived all rights to appeal the dismissal. 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




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##### 



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS This report contains forward-looking statements. For this purpose, any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words believes, anticipates, plans, expects, intends, and similar
expressions are intended to identify forward-looking statements. The important
factors discussed under the caption Certain Factors That May Affect Future
Operating Results, presented below, could cause actual results to differ
materially from those indicated by forward-looking statements made herein. We
undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise. 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 on
Form 10-K for 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 are
incorporated in the latest release of our clinical product. We expect this
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 re-expressing the
intellectual property that we acquired through acquisitions on a common
platform to provide integrated software to our customers. In 1999, we announced
the general availability of Sunrise Clinical 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




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##### 



In 2001, we announced our SunriseXATM strategy. This strategy was to
migrate our Sunrise suite of products to an open architecture and platform.
SunriseXAs architecture is built on Microsofts .NET Framework, Microsoft SQL
Server and the Microsoft Windows family of operating systems. In 2002 and 2003,
we announced the general availability of some components of SunriseXA. In October 2003, we identified and announced some 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 was to replace
the affected SunriseXA components with components from our SCM product, which
is our prior generation, core clinical product. The response time issue
resulted in a product delivery delay for some of our advanced SunriseXA
functionality. The announcement of these issues also impacted the
implementation schedules for a number of our customers. As expected, this
announcement has had an adverse effect on our sales for the first half of 2004. 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 some 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 continue 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 reserve in
the first quarter of 2004, related to estimated incremental costs associated
with this issue. This provision reflected our estimate of warranty-related
costs that includes, among other things, implementation and third-party costs
for affected customers. Through June 30, 2004, we had expended approximately
$1.3 million in warranty costs related to remediation of the response time
issue. As of June 30, 2004 the warranty reserve balance was $3.6 million.
Actual warranty costs could differ materially from managements estimate.
Professional services revenue and cash flows have been and will continue to be
negatively impacted as we fulfill these obligations. In June 2004, the Company released Sunrise Clinical Manager 3.5 XA. 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 and contains enhanced functionality as
planned by the Company. Sunrise Clinical Manager 3.5 XA went live at two
customer sites in July of 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 effect 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
flows 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 year basis. We believe
that over time, our margins will trend back toward 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 issue that we face for the remainder
of 2004 is our ability to sign new business. 11




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##### 



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 104, Revenue Recognition 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 arrangements that typically include multiple software
products (including the right to future products within the suites purchased
and/or platform protection rights that do not qualify as exchange rights),
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 generally range
from 7 to 10 years. Payments are due annually, quarterly or monthly over the
term of the arrangement. 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




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##### 



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 June 30, 2004, we have expended approximately $1.3
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




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##### 



THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003 Eclipsys Corporation
Statement of Operations Data  Unaudited
(in thousands) Three Months Ended June 30,% of Total
    
    
    
    
    
    % of Total2004
    
    Revenues
    
    2003
    
    Revenues
    
    Change $
    
    Change %RevenuesSystems and services
    
    $
    68,597
    
    
    
    93.1
    %
    
    $
    58,381
    
    
    
    92.1
    %
    
    $
    10,216
    
    
    
    17.5
    %Hardware
    
    
    5,046
    
    
    
    6.9
    %
    
    
    5,005
    
    
    
    7.9
    %
    
    
    41
    
    
    
    0.8
    %Total revenues
    
    
    73,643
    
    
    
    100.0
    %
    
    
    63,386
    
    
    
    100.0
    %
    
    
    10,257
    
    
    
    16.2
    %Costs and expensesCosts of systems and services revenues
    
    
    41,795
    
    
    
    56.8
    %
    
    
    33,900
    
    
    
    53.5
    %
    
    
    (7,895
    )
    
    
    -23.3
    %Costs of hardware revenues
    
    
    4,337
    
    
    
    5.9
    %
    
    
    4,163
    
    
    
    6.6
    %
    
    
    (174
    )
    
    
    -4.2
    %Sales and marketing
    
    
    15,458
    
    
    
    21.0
    %
    
    
    17,719
    
    
    
    28.0
    %
    
    
    2,261
    
    
    
    12.8
    %Research and development
    
    
    14,536
    
    
    
    19.7
    %
    
    
    13,535
    
    
    
    21.4
    %
    
    
    (1,001
    )
    
    
    -7.4
    %General and administrative
    
    
    4,407
    
    
    
    6.0
    %
    
    
    3,420
    
    
    
    5.4
    %
    
    
    (987
    )
    
    
    -28.9
    %Depreciation and amortization
    
    
    3,295
    
    
    
    4.5
    %
    
    
    2,500
    
    
    
    3.9
    %
    
    
    (795
    )
    
    
    -31.8
    %Total costs and expenses
    
    
    83,828
    
    
    
    113.8
    %
    
    
    75,237
    
    
    
    118.7
    %
    
    
    (8,591
    )
    
    
    -11.4
    %Loss from operations
    
    
    (10,185
    )
    
    
    -13.8
    %
    
    
    (11,851
    )
    
    
    -18.7
    %
    
    
    1,666
    
    
    
    14.0
    %Interest income, net
    
    
    225
    
    
    
    0.3
    %
    
    
    831
    
    
    
    1.3
    %
    
    
    (606
    )
    
    
    -72.9
    %Loss before income taxes
    
    
    (9,960
    )
    
    
    -13.5
    %
    
    
    (11,020
    )
    
    
    -17.4
    %
    
    
    1,060
    
    
    
    9.6
    %Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    $
    (9,960
    )
    
    
    -13.5
    %
    
    $
    (11,020
    )
    
    
    -17.4
    %
    
    $
    1,060
    
    
    
    9.6
    %Basic net loss per share
    
    $
    (0.21
    )
    
    
    
    
    
    $
    (0.24
    )
    
    
    
    
    
    $
    0.03Diluted net loss per share
    
    $
    (0.21
    )
    
    
    
    
    
    $
    (0.24
    )
    
    
    
    
    
    $
    0.03
 RESULTS OF OPERATIONS Total revenues increased $10.3 million, or 16.2%, to $73.6 million for the
quarter ended June 30, 2004 compared to $63.4 million for the same period in
2003. Systems and services revenues increased $10.2 million, or 17.5%, to $68.6
million for the quarter ended June 30, 2004 compared to $58.4 million for the
same period in 2003. The improvement is primarily due to an increase of $7.6
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 second quarter of 2004. We expect these types of 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. In addition, the professional services portion of systems and services
revenues increased $2.3 million as customers moved forward with implementation
activities including several activations during the period. We expect
professional services to continue to fluctuate in future periods based on
several factors, including the timing of future releases, available customer
resources and other customer decisions. Finally, network services increased $2.4 million as a result of increased
activities at numerous customer sites. These increases were partially offset
by a reduction of $2.1 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. 14




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##### 



Hardware revenues for the quarter ended June 30, 2004 remained
substantially unchanged compared to the same period in 2003. We expect hardware
revenues to continue to fluctuate in future periods. Costs of systems and services revenues increased $7.9 million, or 23.3%,
to $41.8 million, for the quarter ended June 30, 2004 compared to $33.9 million
for the same period in 2003. Gross margins on systems and services revenues
were 39.1% for the quarter ended June 30, 2004 compared to 41.9% for the same
period in 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 as revenues increased in these areas and to higher
third party costs including royalties. Costs of hardware revenues were substantially flat at $4.3 million for the
quarter ended June 30, 2004 compared to $4.2 million for the same period in
2003. Gross margins on hardware revenues decreased to 14.0% for the quarter
ended June 30, 2004 compared to 16.8% for the same period in 2003. Sales and marketing expenses decreased $2.3 million, or 12.8%, to $15.5
million for the quarter ended June 30, 2004 compared to $17.7 million for the
same period in 2003. The decrease in sales and marketing expenses was primarily
related to a decrease in payroll related costs, including the realignment of
sales and marketing functions during the first quarter of 2004. Sales and
marketing is expected to increase during the second half of 2004 due to the
timing of contract signings and the timing of key marketing events. Research and development expenses increased $1.0 million or 7.4% to $14.5
million for the quarter ended June 30, 2004 compared to $13.5 million for the
same period in 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 decreased
$1.0 million or 20.8% to $3.9 million for the quarter ended June 30, 2004
compared to $4.9 million for the same period in 2003. The decrease in
capitalized software development costs was due to decreased costs associated
with coding, testing and other related activities for Sunrise Clinical Manager
3.5 XA. Amortization of capitalized software development costs, which is
included as a component of costs of systems and systems revenues, was flat at
$1.9 million for the quarter ended June 30, 2004 and for the same period in
2003. Amortization expense is expected to increase starting in the third
quarter of 2004 due to the release of Sunrise Clinical Manager 3.5 XA. General and administrative expenses increased approximately $1.0 million
primarily due to increased legal costs. Legal costs increased due to
litigation incurred in the ordinary course of business. We expect legal fees
to be lower for the remainder of 2004. Depreciation and amortization increased $0.8 million, or 31.8%, to $3.3
million, for the quarter ended June 30, 2004 compared to $2.5 million for the
same period in 2003. The increase was primarily the result of higher
depreciation related to fixed assets purchased in our continued effort to
expand capacity at our Technology Solutions Center. Interest income decreased $0.6 million or 72.9% to $0.2 million for the
quarter ended June 30, 2004 compared to $0.8 million for the same period in
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 $10.0 million for the
quarter ended June 30, 2004 compared to a net loss of $11.0 million for the
same period in 2003. 15




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##### 



SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003 Eclipsys Corporation
Statement of Operations Data  Unaudited
(in thousands) Six Months Ended June 30,% of Total
    
    
    
    
    
    % of Total2004
    
    Revenues
    
    2003
    
    Revenues
    
    Change $
    
    Change %RevenuesSystems and services
    
    $
    130,404
    
    
    
    91.8
    %
    
    $
    112,078
    
    
    
    93.2
    %
    
    $
    18,326
    
    
    
    16.4
    %Hardware
    
    
    11,623
    
    
    
    8.2
    %
    
    
    8,144
    
    
    
    6.8
    %
    
    
    3,479
    
    
    
    42.7
    %Total revenues
    
    
    142,027
    
    
    
    100.0
    %
    
    
    120,222
    
    
    
    100.0
    %
    
    
    21,805
    
    
    
    18.1
    %Costs and expensesCosts of systems and services revenues
    
    
    81,651
    
    
    
    57.5
    %
    
    
    66,704
    
    
    
    55.5
    %
    
    
    (14,947
    )
    
    
    -22.4
    %Costs of hardware revenues
    
    
    9,971
    
    
    
    7.0
    %
    
    
    6,847
    
    
    
    5.7
    %
    
    
    (3,124
    )
    
    
    -45.6
    %Sales and marketing
    
    
    30,710
    
    
    
    21.6
    %
    
    
    34,274
    
    
    
    28.5
    %
    
    
    3,564
    
    
    
    10.4
    %Research and development
    
    
    29,446
    
    
    
    20.7
    %
    
    
    26,519
    
    
    
    22.1
    %
    
    
    (2,927
    )
    
    
    -11.0
    %General and administrative
    
    
    7,575
    
    
    
    5.3
    %
    
    
    6,784
    
    
    
    5.6
    %
    
    
    (791
    )
    
    
    -11.7
    %Depreciation and amortization
    
    
    6,376
    
    
    
    4.5
    %
    
    
    4,869
    
    
    
    4.1
    %
    
    
    (1,507
    )
    
    
    -31.0
    %Total costs and expenses
    
    
    165,729
    
    
    
    116.7
    %
    
    
    145,997
    
    
    
    121.4
    %
    
    
    (19,732
    )
    
    
    -13.5
    %Loss from operations
    
    
    (23,702
    )
    
    
    -16.7
    %
    
    
    (25,775
    )
    
    
    -21.4
    %
    
    
    2,073
    
    
    
    8.0
    %Interest income, net
    
    
    679
    
    
    
    0.5
    %
    
    
    1,731
    
    
    
    1.4
    %
    
    
    (1,052
    )
    
    
    -60.8
    %Loss before income taxes
    
    
    (23,023
    )
    
    
    -16.2
    %
    
    
    (24,044
    )
    
    
    -20.0
    %
    
    
    1,021
    
    
    
    4.2
    %Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    $
    (23,023
    )
    
    
    -16.2
    %
    
    $
    (24,044
    )
    
    
    -20.0
    %
    
    $
    1,021
    
    
    
    4.2
    %Basic net loss per share
    
    $
    (0.50
    )
    
    
    
    
    
    $
    (0.53
    )
    
    
    
    
    
    $
    0.03Diluted net loss per share
    
    $
    (0.50
    )
    
    
    
    
    
    $
    (0.53
    )
    
    
    
    
    
    $
    0.03
 RESULTS OF OPERATIONS Total revenues increased $21.8 million, or 18.1%, to $142.0 million for
the six months ended June 30, 2004 compared to $120.2 million for the same
period in 2003. Systems and services revenues increased $18.3 million, or 16.4%, to $130.4
million for the six months ended June 30, 2004 compared to $112.1 million for
the same period in 2003. The improvement is primarily due to an increase of
$16.9 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 second quarter of 2004. We expect these types of 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, the professional services portion of systems and services
revenues increased $4.1 million primarily due to increased activities including
several customer activations. We expect professional services to continue to
fluctuate in future periods based on several factors, including the timing of
future releases, available customer resources and other customer decisions. Finally, network services increased $1.6 million as a result of increased
activities at numerous customer sites. These increases were partially offset
by a reduction of $4.4 million of license fees as less of the new contracts
signed were recognized on a traditional basis. 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 $3.5 million, or 42.7%, to $11.6 million for
the six months ended June 30, 2004 compared to $8.1 million for the same period
in 2003. We expect hardware revenues to continue to fluctuate in future
periods. 16




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Costs of systems and services revenues increased $14.9 million, or 22.4%,
to $81.7 million for the six months ended June 30, 2004 compared to $66.7
million for the same period in 2003. Gross margins on systems and services
revenues were 37.4% for the six months ended June 30, 2004 compared to 40.5%
for the same period in 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 as revenues increased in these areas
and higher third party costs including royalties. Costs of hardware revenues increased $3.1 million, or 45.6%, to $10.0
million for the six months ended June 30, 2004 compared to $6.8 million for the
same period in 2003. Gross margins on hardware revenues decreased to 14.2% for
the six months ended June 30, 2004 compared to 15.9% for the same period in
2003. Sales and marketing expenses decreased $3.6 million, or 10.4%, to $30.7
million for the six months ended June 30, 2004 compared to $34.3 million for
the same period in 2003. The decrease in sales and marketing expenses was
primarily related to decreases in payroll related costs, including the
realignment of sales and marketing functions which was completed during the
first quarter of 2004. Research and development expenses increased $2.9 million, or 11.0%, to
$29.4 million for the six months ended June 30, 2004 compared to $26.5 million
for the same period in 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
were $8.5 million for the six months ended June 30, 2004 and $7.6 million for
the same period in 2003. Amortization of capitalized software development
costs, which is included as a component of costs of systems and services
revenues increased $0.1 million or 2.9% to $3.8 million for the six months
ended June 30, 2004 compared to $3.7 million for the same period in 2003.
Amortization expense is expected to increase starting in the third quarter of
2004 due to the release of Sunrise Clinical Manager 3.5 XA. General and administrative expenses increased approximately $800,000
primarily due to legal costs. Legal costs increased due to litigation incurred
in the ordinary course of business. We expect legal fees to be lower the
remainder of 2004. Depreciation and amortization increased $1.5 million, or 31.0%, to $6.4
million for the six months ended June 30, 2004 compared to $4.9 million for the
same period in 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 $1.1 million, or 60.8%, to $0.7 million for the
six months ended June 30, 2004 compared to $1.7 million for the same period in
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 $23.0 million for the
six months ended June 30, 2004 compared to a net loss of $24.0 million for the
same period in 2003. LIQUIDITY AND CAPITAL RESOURCES During the quarter ended June 30, 2004, operations used $3.4 million of
cash, primarily related to higher research and development costs and the impact
of our change in contracting method that spreads payments over a longer period
of time. Investing activities used $6.7 million of cash, consisting of $3.9
million for the funding of capitalized software development costs and $2.8
million for the purchase of property and equipment. Financing activities
provided $1.4 million of cash, from the exercise of stock options and proceeds
from the employee stock purchase plan. For the six months ended June 30, 2004
operations used $13.0 million of cash, primarily related to the payment of year
end 2003 and current year bonuses, incremental payrolls, and the impact of our
contracting model that spreads payments over a longer period of time.
Investing activities used $58.6 million of cash, consisting of $40.8 million
purchase of marketable securities, $8.5 million for the funding of capitalized
software development costs, $6.8 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; and financing activities provided
$4.6 million from the exercise of stock options and proceeds from the employee
stock purchase plan. As of June 30, 2004, our principal source of liquidity is our combined
cash and marketable securities balance of $125.5 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 customer contracts.
We expect this will continue to impact our short term cash position.
Furthermore, we expect that capital expenditures will increase in the second
half of 2004 as we continue to invest in our Technology Solutions Center. 17




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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 June 30, 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. 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 continue to face some risks relating to our SunriseXA strategy In October 2003, we announced the existence of certain response time
issues within some components of SunriseXA, the newest version of our Sunrise
family of products. We concluded that the root cause of the issue was in the
technical design of SunriseXA, which did not adequately support the throughput
required in the highly interactive patient care environment. After substantial
analysis, we 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 the release of Sunrise Clinical
Manager 3.5 XA in June 2004 was a significant milestone in the implementation
of our Sunrise XA strategy, we continue to face a variety of risks and
uncertainties in this regard including among others, the following:  
    
    We may encounter technical obstacles and delays in implementing this
approach. As we continue to implement our strategy, it is possible that
we could discover additional problems with our software.
    
    It is possible future releases of SunriseXA, with anticipated
additional features for our products, may be delayed. This could result
in delayed or lost sales.
    
    Customers who are currently implementing SunriseXA have faced delays
in their implementations. As a result, existing SunriseXA customers
could attempt to cancel their contracts with us or seek financial or
other concessions from us.
    
    As a result of the changes we will make to our SunriseXA product
offering, potential customers may find such products less appealing,
which could decrease demand for our products.
    
    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 2004 sales. Additionally, it is possible that this issue may continue to
temporarily 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. 18




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Given the length of our sales and implementation cycles, if a significant
number of our customers delay implementation, our future operating results may
suffer We have experienced long sales and implementation cycles. How and when to
implement, replace, expand or substantially modify an information system, or
modify or add business processes, are major decisions for hospitals, our target
customer market. Furthermore, our software is expensive and generally requires
significant capital expenditures by our customers. The sales cycle for our
software ranges from 6 to 18 months or more from initial contact to contract
execution. Historically, our implementation cycle has ranged from 6 to 36
months from contract execution to completion of implementation. During the
sales and implementation cycles, we will expend substantial time, effort and
financial resources preparing contract proposals, negotiating the contract and
implementing the software. We may not realize any revenues to offset these
expenditures, and, if we do, accounting principles may not allow us to
recognize the revenues during corresponding periods. This could harm our future
operating results. Additionally, any decision by our customers to delay 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 19




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
    
    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 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 a significant portion of our revenues from customers monthly
over the terms of their agreements, which are typically 7 years and can be up
to 10 years 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 healthcare IT consultants. A number of existing
and potential competitors are more established than we are, and have greater
name recognition and financial, technical and marketing resources than we do.
We expect that competition will continue to increase. 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. 20




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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. Changes in federal and state regulations relating to patient data could depress
the demand for our products and impose significant product redesign costs on us The demand for health care information systems is affected by state and
federal laws and regulations that govern the collection, use, transmission and
other disclosures of electronic health information. These laws and regulations
may change rapidly and may be unclear or difficult to apply. Federal regulations under the Health Insurance Portability and
Accountability Act of 1996, or 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 adhere to HIPAA standards. There are several HIPAA compliance deadlines for Covered Entities. The
final compliance deadline for the transaction and code set standards was
October 16, 2003. The compliance deadline for the privacy standards was April
14, 2003 for most Covered Entities. The compliance deadline for the security
standards for most Covered Entities is April 20, 2005. Any failure or
perception of failure of our products or services to meet HIPAA standards could
adversely affect demand for our products and services and force us to expend
significant capital, research and development and other resources to modify our
products or services to address the privacy and security requirements of our
customers. 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. 21




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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. 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. 22




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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 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. 23




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Provisions of our charter documents and Delaware law may inhibit potential
acquisition bids that a stockholder may believe is desirable, and the market
price of our common stock may be lower as a result Our board of directors has the authority to issue up to 4,900,000 shares
of preferred stock. The board of directors can fix the price, rights,
preferences, privileges and restrictions of the preferred stock without any
further vote or action by our stockholders. The issuance of shares of preferred
stock may discourage, delay or prevent a merger or acquisition of our company.
The issuance of preferred stock may result in the loss of voting control to
other stockholders. We have no current plans to issue any shares of preferred
stock. In August 2000, our board of directors adopted a shareholder rights plan
under which we issued preferred stock purchase rights that would adversely
affect the economic and voting interests of a person or group that seeks to
acquire us or a 15% or more interest in our common stock without negotiations
with our board of directors. Our charter documents contain additional anti-takeover devices including:  
    
    only one of the three classes of directors is elected each year;
    
    the ability of our stockholders to remove directors, without cause, is limited;
    
    the right of stockholders to act by written consent has been eliminated;
    
    the right of stockholders to call a special meeting of stockholders has been eliminated; and
    
    advance notice must be given to nominate directors or submit proposals for consideration at stockholder meetings. Section 203 of the Delaware corporate statute may inhibit potential bids
to acquire our company. We are subject to the anti-takeover provisions of the
Delaware corporate statute, which regulate corporate acquisitions. Delaware law
will prevent us from engaging, under specified circumstances, in a business
combination with any interested stockholder for three years following the date
that the interested stockholder became an interested stockholder, unless our
board of directors or a supermajority of our uninterested stockholders agree.
For purposes of Delaware law, a business combination includes a merger or
consolidation involving us and the interested stockholder, and the sale of more
than 10% of our assets. In general, Delaware law defines an interested
stockholder as any holder beneficially owning 15% or more of the outstanding
voting stock of a corporation and any entity or person affiliated with or
controlling or controlled by the holder. These provisions could discourage potential acquisition proposals and
could delay or prevent a change in control transaction. They could also have
the effect of discouraging others from making tender offers for our common
stock. As a result, these provisions may prevent the market price of our common
stock from increasing substantially in response to actual or rumored takeover
attempts. These provisions may also prevent changes in our management. 24




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We do not currently use derivative financial instruments. We generally buy
investments that are highly liquid. Based upon the nature of our investments,
we do not expect any material loss from our investments. Investments in both fixed-rate and floating-rate interest-earning
instruments carry a degree of interest rate risk. Fixed-rate securities may
have their fair market value adversely impacted due to a rise in interest
rates, while floating-rate securities may produce less income than expected if
interest rates fall. Due in part to these factors, our future investment income
may fall short of expectations due to changes in interest rates, or we may
suffer losses in principal if forced to sell securities that have seen a
decline in market value due to changes in interest rates. The following table
illustrates potential fluctuation in annualized interest income based upon
hypothetical values for blended interest rates and cash and marketable
securities account balances. Hypothetical
    
    Combined cash and cash equivalents andInterest Rate
    
    marketable securities balances (in thousands)$
    100,000
    
    
    $
    120,000
    
    
    $
    150,0001.5%
    
    $
    1,500
    
    
    $
    1,800
    
    
    $
    2,2502.0%
    
    
    2,000
    
    
    
    2,400
    
    
    
    3,0002.5%
    
    
    2,500
    
    
    
    3,000
    
    
    
    3,7503.0%
    
    
    3,000
    
    
    
    3,600
    
    
    
    4,5003.5%
    
    
    3,500
    
    
    
    4,200
    
    
    
    5,2504.0%
    
    
    4,000
    
    
    
    4,800
    
    
    
    6,000
 * (This sensitivity analysis is not a forecast of future interest income.) We account for cash equivalents and marketable securities in accordance
with SFAS No. 115. Accounting for Certain Investments in Debt and Equity
Securities. Cash equivalents are short-term highly liquid investments with
original maturity dates of three months or less. Cash equivalents are carried
at cost, which approximates fair market value. Marketable securities consist of
funds that are highly liquid and are classified as available-for-sale.
Marketable securities are recorded at fair value, and unrealized gains and
losses are recorded as a component of other comprehensive income. We do not currently enter into foreign currency hedge transactions.
Through June 30, 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 June 30, 2004. Based on this evaluation, Eclipsys chief
executive officer and chief financial officer concluded that, as of June 30,
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 June 30, 2004 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting. 25




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PART II. 
 ITEM 1. LEGAL PROCEEDINGS As previously disclosed, from July through September 2002, the Company and
three of its then current officers were named in a series of complaints filed
by purported shareholders. Each complaint sought certification as a class and
monetary damages, and alleged that the Company and the named officers violated
federal securities laws. These complaints were ultimately consolidated into a
single case, which was dismissed by the District Court in November 2003 and was
re-filed by the plaintiffs in December 2003 in the form of a Second Amended
Complaint. The Company then moved to dismiss the Second Amended Complaint. On April 1, 2004, the District Court issued an order granting the
Companys motion and dismissing in its entirety the plaintiffs 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
so doing, waived all rights to appeal the dismissal. 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. 
 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (c.) In March 2004, the Company issued 184,202 shares of its common stock,
valued at $2.5 million, to the stockholders of CPM Resource Center, LTD, or
CPMRC, in connection with the Companys acquisition of CPMRC. This issuance
was made pursuant to the exemption from registration provided under Rule 506 of
Regulation D and Section 4(2) of the Securities Act of 1933, as amended. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Annual Meeting of Stockholders held on June 1, 2004, the
stockholders voted upon two proposals: (i) the election of two Class III
directors for a three-year term, or Proposal One, and (ii) the ratification of
the selection of PricewaterhouseCoopers LLP by the board of directors as the
Companys independent auditors for the current fiscal year, or Proposal Two. The outcome of the voting on Proposal One was as follows: Name
    
    For
    
    WithheldDanny L. Crippen
    
    
    43,962,701
    
    
    
    265,207Edward A. Kangas
    
    
    42,844,987
    
    
    
    1,382,921
 The outcome of the voting on Proposal Two was as follows: For
    
    
    43,970,513Against
    
    
    236,303Abstain
    
    
    21,092
 Our Proxy Statement filed pursuant to Section 14 of the Securities
Exchange Act contains a detailed discussion of the proposals that the
stockholders were asked to vote upon. 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K  (a)
    
    Exhibits: See Index to exhibits.(b)
    
    Reports on Form 8-K: (1) On July 28, 2004, Eclipsys filed a report on Form 8-K relating to its
financial results for the fiscal quarter ended June 30, 2004, as presented in a
press release on July 28, 2004. 26




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. ECLIPSYS CORPORATIONDate: August 9, 2004
    /s/ Robert J. CollettiRobert J. Colletti Senior Vice President and Chief Financial Officer(Principal financial officer and duly authorized officer) 27




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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
 28