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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 SEPTEMBER 30, 2002

COMMISSION FILE NUMBER: 000-24539

ECLIPSYS CORPORATION

(Exact name of registrant as specified in its charter)

1750 Clint Moore Road
Boca Raton, Florida
33487
(Address of principal executive offices)

561-322-4321
(Telephone number of registrant)

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing for the past 90 days. Yes  [X]     No  [   ]

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

ECLIPSYS CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2002

INDEX

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PART I.

ITEM 1.

ECLIPSYS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(IN THOUSANDS)

     The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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ECLIPSYS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

     The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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ECLIPSYS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(IN THOUSANDS)

     The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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ECLIPSYS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. BASIS OF PRESENTATION

     The condensed consolidated financial statements include all adjustments that, in the opinion of management, are necessary for a fair presentation of the results for the periods presented. All such adjustments are considered of a normal recurring nature. Quarterly results of operations are not necessarily indicative of annual results. Certain prior period amounts have been reclassified to conform to the 2002 presentation (Note 7). The Company manages its business as one reporting segment.

     Certain financial information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K filed March 25, 2002.

2. 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.

3. ACCOUNTS RECEIVABLE

     Accounts receivable was comprised of the following (in thousands):

     The non-current portion of unbilled accounts receivable is included in other assets and was $1.5 million and $1.8 million as of September 30, 2002 and December 31, 2001, respectively.

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4. OTHER COMPREHENSIVE INCOME

     The components of other comprehensive (loss) income were as follows (in thousands):

5. LEGAL ACTION

     From July through September 2002, the Company and three of its officers (Messrs. Colletti, Patton and Wilson) were named in seven complaints filed by purported shareholders of the Company in the United States District Court, Southern District of Florida, West Palm Beach Division (the “District Court”). Each complaint seeks certification as a class and monetary damages and alleges that the Company and the named officers violated federal securities laws. The Company believes that the actions are without merit, and intends to conduct a vigorous defense against these allegations.

6. PUBLIC OFFERING

     During the quarter ended March 31, 2001, the Company completed a follow-on public offering for 5,750,000 shares of its common stock. Net proceeds from the offering were approximately $123.2 million.

7. RECENT ACCOUNTING PRONOUNCEMENTS

     In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 142 “Goodwill and Other Intangible Assets.” Under this new standard, the FASB eliminated amortization of goodwill and created indefinite life intangible assets and established new impairment measurement procedures for goodwill. In accordance with SFAS 142, goodwill is no longer amortized, but instead tested for impairment at least once annually. There was no impairment of goodwill upon adoption of SFAS 142, and amortization ceased as of January 1, 2002, leaving a recorded balance of $454,000 for goodwill as of

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December 31, 2001 and September 30, 2002. The effect of adopting SFAS 142 was to reduce depreciation and amortization expense by $0 and $454,000 for the three and nine months ended September 30, 2002, respectively. Net income and earnings per share for the three and nine months ended September 30, 2001 adjusted to exclude amortization expense is as follows (in thousands, except earnings per share):

     As of September 30, 2002, the Company had the following balances for acquired technology and intangible assets (in thousands):

     Amortization of acquired technology and ongoing customer relationships for the three and nine months ended September 30, 2002 was $295,000 and $2,956,000, respectively. The ongoing customer relationships became fully amortized during the first quarter of 2002. The estimated amortization expense for the next five fiscal years is as follows (in thousands):

     In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which is effective for fiscal years beginning after December 15, 2001. This statement supercedes FASB Statement No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” However, it retains the fundamental provisions of SFAS 121 for the recognition and measurement of the impairment of long-lived assets to be held and used and the measurement of long-lived assets to be disposed of by sale. Impairment of goodwill is not included in the scope of SFAS 144 and will be treated in accordance with the accounting standards established in SFAS 142. According to SFAS 144, long-lived assets are measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing or discontinued operations. The statement applies to all long-lived assets, including discontinued operations, and replaces the provisions of APB Opinion No. 30, “Reporting the Results of Unusual and Infrequently Occurring Events and Transactions,” for the disposal of segments of a business. The adoption of SFAS 144 has had no impact on the Company’s financial position or results of operations.

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     In November 2001, the FASB’s Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue 01-09, “Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Products,” which is a codification of EITF 00-14, 00-22 and 00-25. This issue presumes that consideration from a vendor to a customer or reseller of the vendor’s products is a reduction in the selling prices of the vendor’s product and, therefore, should be characterized as a reduction of revenue when recognized in the vendor’s income statement and could lead to negative revenue under certain circumstances. Revenue reduction is required unless the consideration related to a separate identifiable benefit and the benefit’s fair value can be established. The Company adopted EITF 01-09 effective January 1, 2002, and it had no impact on the Company’s financial position or results of operations.

     In January 2002, the EITF reached a consensus on EITF Issue 01-14, “Income Statement Characterization of Reimbursements Received for “Out-of-Pocket” Expenses Incurred.” This consensus requires that reimbursements received for out-of-pocket expenses incurred be characterized as revenue in the income statement. The Company adopted EITF 01-14 effective January 1, 2002 and has made the appropriate reclassifications as required by EITF 01-14. The effect of adopting EITF 01-14 was to increase both revenues and expenses by the following amounts (in thousands):

     In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS 146 requires that a liability for a cost that is associated with an exit or disposal activity be recognized when the liability is incurred. It nullifies the guidance in EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” Under EITF Issue No. 94-3, an entity recognized a liability for an exit cost on the date that the entity committed itself to an exit plan. In SFAS 146, the Board acknowledges that an entity’s commitment to a plan does not, by itself, create a present obligation to other parties that meets the definition of a liability. SFAS 146 also establishes that fair value is the objective for the initial measurement of the liability. SFAS 146 will be effective for exit or disposal activities that are initiated after December 31, 2002. The Company does not expect the adoption of SFAS 146 to have a significant impact on the Company’s financial position or results of operations.

8. STOCKHOLDERS’ EQUITY

     At the Annual Meeting of Stockholders of the Company held on May 8, 2002, the shareholders voted to approve the amendment and restatement of the Company’s 2000 Stock Incentive Plan, 1999 Stock Incentive Plan, 1998 Stock Incentive Plan and Amended and Restated 1998 Employee Stock Purchase Plan to reflect an increase in the number of shares of common stock authorized for issuance under all of the Company’s stock plans (the 2000 Stock Incentive Plan, the 1999 Stock Incentive Plan, the Amended and Restated Employee Stock Purchase Plan, the 1998 Stock Incentive Plan and the 1996 Stock Plan) from 12,000,000 to 15,000,000.

      On July 15, 2002, Mr. Paul Ruflin joined the Company as its Chief Executive Officer and President. Under his employment arrangement with the Company, Mr. Ruflin received a restricted stock grant effective July 15, 2002 of 150,000 shares of the Company’s common stock subject to a five-year vesting schedule, plus an option to purchase 850,000 shares of the Company’s common stock, with vesting over a five-year period. As of September 30, 2002, the Company had unearned compensation of approximately $1,100,000 recorded in stockholders’ equity related to the restricted stock grant.

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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 “Risk Factors,” 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.

OVERVIEW

     Eclipsys is a healthcare information technology company that provides advanced software solutions and services that assist healthcare organizations in improving their outcomes by augmenting the quality of care and the level of patient satisfaction, reducing costs and enhancing revenues.

     We believe our mission of “better healthcare through knowledge” aligns with our customers’ objectives, and our advanced software solutions and services facilitate their workflow processes and implement best practices in their organizations. To these ends, we design and offer a comprehensive package of software applications and services that together enable providers in a variety of healthcare settings to improve the effectiveness of their operations and the quality of care as measured by clinical outcomes.

     Our products perform the core information technology functions required by healthcare organizations and other healthcare providers throughout the healthcare enterprise. Our software applications are available to our customers for implementation in-house or through our remote hosting service, and are designed to work in a variety of healthcare settings. In addition, our products are designed to work both through wireless devices within a healthcare facility and over the Internet. Our software and services provide comprehensive functionality to help healthcare organizations solve the clinical problems and business issues they face and achieve balanced outcomes through an appropriate and sustainable combination of clinical quality, resource utilization and patient satisfaction.

     During 2002, we have continued our development of SunriseXA, which is our next generation product and service offering. SunriseXA release 2 reached general availability in September 2002. SunriseXA is a Web-based solution that builds upon the knowledge-driven, work-flow enhancing components of our Sunrise suites. SunriseXA’s extended architecture is built on Microsoft Corporation’s Web-based infrastructure, .NET. We believe the open, modular nature of our software architecture reduces the overall cost of ownership and reduces the time to productive use because our solutions do not require the initial investment and disruption associated with a complete replacement of a customer’s existing systems. To facilitate rapid adoption by our customers, we have engineered our solutions to take advantage of Web-based technologies.

     In addition, we provide a wide range of complementary services to our customers, including implementation, integration, support, maintenance and training. We also provide outsourcing, remote hosting, network services and business solutions consulting to assist customers in meeting their healthcare information technology requirements. Through this comprehensive service offering and our integrated software components, we provide our customers with solutions for their clinical, financial and administrative information needs.

     As we continue our product transition to SunriseXA, a key component of our strategy is to invest heavily in the areas of research and development, sales, sales support and marketing. Also, we have begun to offer additional contracting options to our prospects and customers. We believe these new contracting options will be attractive to prospects and customers. Additionally, certain aspects of these options may contribute to a more predictable revenue stream in the future.

     We maintain decentralized sales and customer support teams in each of our six North American regions to provide direct, sustained customer contact. We market our solutions primarily to large healthcare organizations, particularly academic medical centers. We have one or more of our products installed or being installed in over 1,500 facilities worldwide.

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CRITICAL ACCOUNTING POLICIES

     We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. Our significant accounting policies are discussed in detail in Note 2 to the consolidated financial statements contained in our Form 10-K, filed on March 25, 2002. Some of these accounting policies as discussed below require management to make estimates and assumptions about future events that could materially affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities.

     For contracts under which we recognize revenue using 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. The percentage-of-completion method is used when management determines that services are essential to the functionality of the software sold. 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.

     In evaluating the collectibility of our accounts receivable, we assess a number of factors including a specific customer’s ability to meet its financial obligations to us, as well as general factors, such as the length of time the receivables are past due and historical collection experience. Based on these assessments, we record 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 worsen 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.

     At each balance sheet date, we perform a detailed assessment of our capitalized software development costs to be marketed 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.

RESULTS OF OPERATIONS

     Total revenues decreased nearly $15.6 million, or 24.6%, to $47.5 million for the quarter ended September 30, 2002, compared with $63.1 million for the third quarter of 2001. For the nine months ended September 30, 2002, total revenues decreased $13.8 million, or 7.7%, to $164.6 million, compared to $178.4 million for the same period in 2001. Systems and services revenues decreased $15.4 million, or 25.7%, to $44.5 million for the quarter ended September 30, 2002, compared with $60.0 million for the third quarter of 2001. For the nine months ended September 30, 2002, systems and services revenues decreased $15.0 million, or 8.9%, to $153.4 million, compared to $168.4 million for the same period in 2001. The decrease for the quarter and nine months ended September 30, 2002 was primarily as a result of the continuing impact of the bookings shortfall in the second quarter of 2002 and the limited amount of software license fees in the third quarter of 2002. Furthermore, we experienced a decline in networking services revenues of approximately $3.1 million for the third quarter of 2002, compared to the same period in 2001 as a result of the bookings shortfall. We have begun to offer alternative contracting options that, among other things, provide for payments to be spread more evenly over the term of the arrangement, as compared to our historical contracting methods. During the transition to these new contracts, we expect our operating results to reflect lower revenues and cash flows. However, we believe that these new contracting options will provide for more predictable revenues over the term of the arrangement.

     Hardware revenues decreased $0.1 million, or 3.6%, to $3.0 million for the quarter ended September 30, 2002, compared with $3.1 million for the third quarter of 2001. For the nine months ended September 30, 2002, hardware revenues increased $1.2 million, or 12.1%, to $11.2 million, compared to $10.0 million for the same period in 2001. The increase in hardware revenues for the nine months ended September 30, 2002, compared to the same period in 2001, was due to increased shipments during the first quarter, primarily related to contracts entered into during the prior year.

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     Cost of systems and services revenues decreased $1.0 million, or 3.1%, to $30.9 million for the quarter ended September 30, 2002, compared to $31.9 million for the third quarter of 2001. However, as a percentage of systems and services revenues, cost of systems and services revenues increased to 69.5%, compared to 53.2%. For the nine months ended September 30, 2002, cost of systems and services revenues decreased approximately $7.7 million, or 8.1%, to $87.0 million, or 56.8% of systems and services revenues, compared to $94.7 million, or 56.2% of systems and services revenues, for the same period in 2001. The decrease during the quarter ended September 30, 2002, was primarily related to lower amortization of acquired technology and network service intangible asset that amounted to $0.2 million for the quarter ended September 30, 2002, compared to $4.2 million for the same period in 2001 as a result of certain assets becoming fully amortized. Additionally, variable costs related to networking services were lower by $2.5 million from the third quarter of 2001 in association with lower networking services revenues. These lower costs were partially offset by incremental costs of $1.6 million related to additional obligations arising from contracts assumed in prior acquisitions as well as higher costs in other areas. Costs related to remote hosting services increased as a result of a higher volume of remote hosting customers. Also, software royalties were higher due to a change in the mix of revenues. Additionally, amortization of capitalized software development costs increased due to the Company releasing certain clinical products of its new SunriseXAtm product line during the first quarter of 2002. The decrease for the nine months ended September 30, 2002, was primarily from lower amortization of acquired technology and network service intangible asset that amounted to $2.6 million for the nine months ended September 30, 2002, compared to $13.2 million for the same period in 2001. The lower amortization was partially offset by the increased costs identified above.

     Cost of hardware revenues decreased $0.2 million, or 8.2%, to $2.5 million for the quarter ended September 30, 2002, compared to $2.7 million for the same period in 2001. For the nine months ended September 30, 2002, cost of hardware revenues increased $1.0 million, or 12.0%, to $9.3 million, or 82.7% of hardware revenues, compared to $8.3 million, or 82.7% of hardware revenues, for the same period in 2001. The fluctuations in the cost of hardware revenues for the quarter and nine months ended September 30, 2002, as compared to the same periods in 2001, were attributable to the fluctuations in hardware revenues.

     Sales and marketing expenses increased 34.8%, or nearly $3.8 million, to $14.5 million, or 30.5% of total revenues, for the quarter ended September 30, 2002, from $10.7 million, or 17.0% of total revenues, for the same period in 2001. For the nine months ended September 30, 2002, sales and marketing expenses increased $5.8 million, or 18.3%, to $37.7 million, or 22.9% of total revenues, compared to $31.9 million, or 17.9% of total revenues, for the same period in 2001. The increase in sales and marketing expenses was primarily due to a program we initiated, during the fourth quarter of 2001, to significantly expand the size of our sales and marketing organization. The program was implemented to increase the sales presence of our sales organization and enhance the market awareness of our company and its products and services. This program is expected to continue to result in higher expenses. Additionally, there were an increased number of marketing events held in the first quarter of 2002, as compared to the same period in 2001.

     Research and development expenses increased $2.9 million, or 31.2%, to $12.1 million, or 25.5% of total revenues, for the quarter ended September 30, 2002, compared to $9.2 million, or 14.7% of total revenues, for the same period in 2001. For the nine months ended September 30, 2002, research and development expenses increased $5.8 million, or 20.7%, to $33.6 million, or 20.4% of total revenues, compared to $27.8 million, or 15.6% of total revenues, for the same period in 2001. The increase in research and development expenses was due primarily to a program we implemented in the fourth quarter of 2001. This program accelerates the development of our products with respect to our SunriseXAtm initiative, which, among other things, will migrate our products onto the Microsoft.NET platform. This initiative is expected to result in continued heightened research and development expenses. The percentage of research and development expenditures capitalized for the quarter ended September 30, 2002 was 15.6%, compared to 15.5% for the same period in 2001. Research and development expenses that were capitalized amounted to $2.2 million and $1.7 million for the quarters ended September 30, 2002 and 2001, respectively. The percentage of research and development expenditures capitalized for the nine months ended September 30, 2002 was 16.1%, compared to 15.4% for the same period in 2001. Research and development expenses that were capitalized amounted to $6.4 million and $5.1 million for the nine months ended September 30, 2002 and 2001, respectively. Amortization of capitalized software development costs, which is included as a component of cost of systems and systems revenues, were $1.5 and $1.1 million for the quarters ended September 30, 2002 and 2001, respectively. This amortization amounted to $4.3 and $3.3 million for the nine months ended September 30, 2002 and 2001, respectively.

     General and administrative expenses increased approximately $0.7 million, or 30.5%, to $3.2 million, or 6.8% of total revenues, for the quarter ended September 30, 2002, compared to $2.5 million, or 3.9% of total revenues, for the same period in 2001. For the nine months ended September 30, 2002, general and administrative expenses increased $0.6 million, or 7.8%, to $8.5 million, or 5.1% of total revenues, compared to $7.9 million, or 4.4% of total revenues, for the same period in 2001. The increase was primarily due to higher insurance premiums and legal and professional fees, partially offset by a bad debt provision recorded in 2001.

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     Depreciation and amortization decreased nearly $1.5 million, or 39.6%, to $2.2 million, or 4.7% of total revenues, for the quarter ended September 30, 2002, from $3.7 million, or 5.8% of total revenues, for the same period in 2001. For the nine months ended September 30, 2002, depreciation and amortization expenses decreased approximately $4.4 million, or 41.7%, to $6.3 million, or 3.8% of total revenues, compared to $10.7 million, or 6.0% of total revenues, for the same period in 2001. The decrease was primarily the result of the complete amortization of certain intangibles, which became fully amortized during the fourth quarter of 2001, as well as the adoption of SFAS 142, which eliminated the amortization of goodwill, partially offset by higher depreciation of fixed assets purchased during 2001.

     Transaction costs for the nine months ended September 30, 2001 were ($0.5) million as the result of the completion of certain activities related to prior pooling of interest transactions which were completed for less than original estimates.

     Interest income decreased $0.9 million, or 54.2%, to $0.7 million for the quarter ended September 30, 2002, from $1.6 million for the same period in 2001. For the nine months ended September 30, 2002, interest income decreased $1.7 million, or 35.7%, to $3.0 million, compared to $4.7 million for the same period in 2001. This decrease was due to a significant decline in yields on our cash and marketable securities from the same period in the prior year, partially offset by higher cash and marketable securities balances. Also, during the quarter ended September 30, 2002, certain marketable securities were sold resulting in a realized loss of approximately $0.4 million.

     During the first quarter of 2002, a provision for income taxes was recorded for $165,000. Based upon current estimates, no additional provision for income taxes was recorded during the third quarter of 2002.

     As a result of these factors, we had a net loss of $17.2 million for the quarter ended September 30, 2002, compared to net income of $4.0 million for the same period in 2001. For the nine months ended September 30, 2002, the net loss was $14.9 million, compared to a net income of $2.3 million for the same period in 2001.

LIQUIDITY AND CAPITAL RESOURCES

     During the quarter ended September 30, 2002, operations provided $3.8 million of cash. Investing activities provided $15.1 million of cash due to $19.6 million from the sale of marketable securities, net of purchases, partially offset by $2.3 million used for the purchase of fixed assets and $2.2 million used for the funding of development costs. Financing activities provided $0.6 million of cash, as a result of the exercise of stock options and the purchase of common stock under our employee stock purchase plan.

     During the nine months ended September 30, 2002, operations provided $25.2 million of cash. Investing activities used $57.7 million of cash, of which $41.6 million was for the net purchase of marketable securities, $9.7 million was for the purchase of fixed assets and $6.4 million was for the funding of development costs. Financing activities provided $3.3 million of cash, as a result of the exercise of stock options and the purchase of common stock under our employee stock purchase plan.

     As of September 30, 2002, our principal source of liquidity is our combined cash and marketable securities balance of $181.4 million. Although our cash flows have been positive year-to-date through September 30, 2002, it is likely that we may have negative cash flows from operations over the next 12 months, or beyond, due to our sales and marketing and research and development initiatives, as well as changes in contracting, whereby less fees are collected upon new contract signing. Our future capital requirements will depend upon a number of factors, including our sales volumes and the timing and level of research and development activities. As of September 30, 2002, we did not have any material commitments for capital expenditures. We believe that our current cash and marketable securities balances will be sufficient to meet our operating requirements for at least the next 12 months.

RISK FACTORS

     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.

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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 healthcare organizations. Furthermore, the solutions we provide typically require significant capital expenditures by the customer. The sales cycle for our systems has ranged 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 cycle and the implementation cycle, we will expend substantial time, effort and financial resources preparing contract proposals, negotiating the contract and implementing the solution. 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, which could harm our future operating results. Additionally, any decision by our customers to delay 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 has faced, and will likely continue to face, 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 reimbursements to healthcare organizations. Our solutions often involve a significant financial commitment by our customers, and, as a result, 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 $14.9 million during the first nine months of 2002, and, prior to 2001, we incurred net losses in each year since our inception, including net losses of $126.3 million in 1997, $35.3 million in 1998, $9.4 million in 1999 and $34.0 million in 2000. Although we had net income in 2001, 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 quarterly operating results may continue to fluctuate due to a number of factors, including:

	–		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 systems and services and from hardware;
	–		changes in our operating expenses;
	–		the timing and size of future acquisitions;
	–		personnel changes;
	–		the performance of our products; and
	–		fluctuations in general economic and financial market conditions, including interest rates.

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     It is difficult to predict the timing of revenues from product sales because the sales cycle can vary depending upon several factors. These factors include the size of the transaction, the changing business plans of the customer, the effectiveness of the customer’s management and general economic conditions. In addition, depending upon the extent to which our customers elect to license our products under comprehensive bundled arrangements, the timing of revenue recognition could vary considerably. Under comprehensive bundled arrangements, revenues are recognized under the terms of the contract consistent with the timing of performance of all services offered under the arrangement. 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, under which revenue is recognized on a percentage-of-completion basis. For these contracts, the revenue recognition will depend upon a variety of factors including the availability of implementation personnel, the implementation schedule and the complexity of the implementation process. 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. You should not rely on these comparisons as indicators of future performance.

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 Corp., McKessonHBOC, Inc., Quadramed, IDX Systems Corp. and Siemens. We also face competition from providers of practice management systems, general decision support and database systems and other segment-specific applications, as well as from healthcare technology consultants. A number of existing and potential competitors are more established 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 healthcare providers have consolidated to create larger healthcare delivery 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 federal Food, Drug and Cosmetic, or 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 the product is substantially equivalent to a device already legally marketed, or to obtain FDA approval of a pre-market approval application establishing the safety and effectiveness of the product;
	–		requiring us to comply with rigorous regulations governing the pre-clinical and clinical testing, manufacture, distribution, labeling and promotion of medical devices; and
	–		requiring us to comply with the FDC Act’s general controls, including establishment registration, device listing, compliance with good manufacturing practices, reporting of specified device malfunctions and adverse device events.

     If we fail to comply with applicable requirements, the FDA could respond by imposing fines, injunctions or civil penalties, requiring recalls or product corrections, suspending production, refusing to grant pre-market clearance or approval of products, withdrawing clearances and approvals, and initiating criminal prosecution. Any final FDA policy governing computer products, once issued, may increase the cost and time to market of new or existing products or may prevent us from marketing our products.

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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

     State and federal laws and regulations control the use and disclosure of patient records and may require the users of such information to implement specified privacy, security, or other measures. Laws and regulations governing health data transmissions may change rapidly and may be unclear or difficult to apply.

     On August 22, 1996, former President Clinton signed the Health Insurance Portability and Accountability Act of 1996, or HIPAA. This legislation, among other things, required the Department of Health and Human Services, or HHS, to adopt national standards for some types of electronic health information transactions and the data elements used in those transactions, to adopt standards to ensure the privacy and security of health information.

     In August 2000, HHS issued final rules requiring health plans, health care clearinghouses, and health care providers that conduct electronic transactions to adopt mandatory code sets and electronic health transaction standards. The compliance deadlines for these rules was October 16, 2002, or October 16, 2003, for entities that obtained an extension by submitting a written compliance plan to HHS by October 15, 2002.

     In December 2000, HHS issued final rules requiring health plans, health care clearinghouses, and health care providers that conduct electronic transactions to adopt policies and procedures for protecting the privacy of personally identifiable health information. Among other things, these rules will (i) restrict the use and disclosure of personally identifiable health information without the prior written permission of the patient; (ii) guarantee a patient’s right to be informed regarding how his or her personally identifiable information is used; (iii) provide patients with rights to access and amend or obtain an accounting of disclosures concerning their personally identifiable information; and (iv) impose conditions on the disclosure of personally identifiable information to business associates of entities that maintain such information. The compliance deadline for these rules is April 14, 2003. In August 2002, HHS amended the final privacy rules, but did not extend the April 2003 compliance date.

     In August 1998, HHS issued proposed rules that would require health plans, health care clearinghouses, and health care providers that conduct electronic transactions to implement standards for protecting the security and integrity of electronic health information. These rules have not yet been finalized, and the compliance deadline will be two years after the final rules are issued. The final security rules may differ from the proposed rules.

     These rules could restrict the ability of our customers to obtain, use or disseminate patient information. Our customers may consider a product’s compatibility with these rules when selecting information technology solutions. This could adversely affect demand for our products and force us to re-design our products in order to meet the requirements of regulations affecting our customers. We have included features in our products that are intended to protect the privacy, security, and integrity of patient data. Despite the existence of these features, these products may be vulnerable to break-ins and similar disruptive problems that could jeopardize the security of information stored in and transmitted through the computer systems of our customers. We may need to expend significant capital, research and development and other resources to modify our products to address evolving data security and privacy issues.

     HHS or other federal or state authorities may impose additional laws or regulations affecting the use and disclosure of health-related information. These future rules may be more stringent than the rules issued under HIPAA. We cannot predict the potential impact that these future rules, as finally approved, may have on our business.

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 assist clinical decision-making and relate to patient medical histories and treatment plans. If these products fail 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

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or mistakes. Despite this precaution, 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 extensive testing, from time to time we have discovered defects or errors in our products. Defects, errors or difficulties could cause delays in product introductions and shipments, result in increased costs and diversion of development resources, require design modifications or decrease market acceptance or customer satisfaction with our products. In addition, despite testing by us and by current and potential customers, errors may be found after commencement of commercial shipments, resulting in loss of or delay in market acceptance.

If we undertake additional acquisitions, they may be disruptive to our business and could have an adverse effect on our future operations and the market price of our common stock

     An important element of our business strategy has been expansion through acquisitions. Since 1997, we have completed eight 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 the attention of management 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 healthcare information technology market could erode rapidly due to unforeseen changes in the features and functions of competing products, as well as the pricing models for such products. Our future success will depend in part upon our ability to enhance our existing products and services 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.

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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. We also have licenses from Premier, Inc. for comparative database systems and other software components and clinical benchmarking data. Most of these licenses expire within one to four years, can be renewed only by mutual consent and may be terminated if 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, we may not be able to modify or adapt our own products.

Our products rely on our intellectual property, and any failure by us to protect our intellectual property, or any misappropriation of it, could enable our competitors to market products with similar features, which could reduce demand for our products

     We are dependent upon our proprietary information and technology. Our means of protecting our proprietary rights may not be adequate to prevent misappropriation. The laws of some foreign countries may not protect our proprietary rights as fully as do the laws of the United States. Also, despite the steps we have taken to protect our proprietary rights, it may be possible for unauthorized third parties to copy aspects of our products, reverse engineer our products or otherwise obtain and use information that we regard as proprietary. In some limited instances, customers can access source-code versions of our software, subject to contractual limitations on the permitted use of the source code. Although our license agreements with these customers attempt to prevent misuse of the source code, the possession of our source code by third parties increases the ease and likelihood of potential misappropriation of such software. Furthermore, others could independently develop technologies similar or superior to our technology or design around our proprietary rights. In addition, infringement or invalidity claims or claims for indemnification resulting from infringement claims could be asserted or prosecuted against us. Regardless of the validity of any claims, defending against these claims could result in significant costs and diversion of our resources. The assertion of infringement claims could also result in injunctions preventing us from distributing products. If any claims or actions are asserted against us, we might be required to obtain a license to the disputed intellectual property rights, which might not be available on reasonable terms or at all.

We face litigation that could force us to pay significant damages and could distract our management team

     Our Company and three of our officers were named in seven complaints filed by purported shareholders of the Company. Each complaint seeks certification as a class and monetary damages and alleges that the Company and the named officers violated federal securities laws. Although we believe that these actions are without merit, we cannot assure you that they will not, if successful, require that we pay substantial damages. Regardless of the outcome of these matters, we might incur substantial defense costs, and defending the actions may cause a diversion of management time and attention.

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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.

     Annualized interest income based upon hypothetical values for cash and marketable securities combined balances and interest rates:*

     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 September 30, 2002, foreign currency fluctuations have not had a material impact on our financial position or results of operations.

ITEM 4. CONTROLS AND PROCEDURES

     Evaluation of disclosure controls and procedures. Based on their evaluation of the Company’s disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) as of a date within 90 days of the filing date of this Quarterly Report on Form 10-Q, the Company’s chief executive officer and chief financial officer have concluded that the Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and are operating in an effective manner.

     Changes in internal controls. There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their most recent evaluation.

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PART II.

ITEM 1. LEGAL PROCEEDINGS

     From July through September 2002, the Company and three of its officers (Messrs. Colletti, Patton and Wilson) were named in seven complaints filed by purported shareholders of the Company in the United States District Court, Southern District of Florida, West Palm Beach Division (the “District Court”). Each complaint seeks certification as a class and monetary damages and alleges that the Company and the named officers violated federal securities laws. The Company believes that the actions are without merit, and intends to conduct a vigorous defense against these allegations.

     In September 2002, the City of Philadelphia Board of Pensions and Retirement, Louis Giannakokas, and Norman K. Mielziner collectively filed a motion to be appointed as lead plaintiffs and to consolidate all of the shareholder suits described above. The court has not yet ruled on this motion; however, the Company does not intend to oppose it and it is likely to be granted. Once the court rules, lead plaintiffs would then have 45 days to file a consolidated amended complaint, and the Company would have 45 days from service thereof to file an answer or a motion to dismiss.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

     (a)  Exhibits: See Index to exhibits.

     (b)  Reports on Form 8-K:

	(1) No reports on Form 8-K were filed with the Securities and Exchange Commission during the quarter ended September 30, 2002.

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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.

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CERTIFICATIONS

I, Paul L. Ruflin, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Eclipsys Corporation;

2.     Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.     Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.     The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.     The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.     The registrant’s other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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CERTIFICATIONS

I, Robert J. Colletti, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Eclipsys Corporation;

2.     Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.     Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.     The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.     The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.     The registrant’s other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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ECLIPSYS CORPORATION
EXHIBIT INDEX

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