ECLIPSYS CORP - 10-Q Quarterly Report

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

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

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]

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


PART I	Financial Information	Page

Item 1.	Condensed Consolidated Balance Sheets (unaudited) — As of September 30, 2003 and December 31, 2002	3

	Condensed Consolidated Statements of Operations (unaudited) – For the Three and Nine Months ended September 30, 2003 and 2002	4

	Condensed Consolidated Statements of Cash Flows (unaudited) – For the Three and Nine Months ended September 30, 2003 and 2002	5

	Notes to Condensed Consolidated Financial Statements (unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25

Item 4.	Controls and Procedures	25

PART II	Other Information

Item 1.	Legal Proceedings	26

Item 6.	Exhibits and Reports on Form 8-K	26

Signatures		27

ECLIPSYS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS)


		SEPTEMBER 30, 2003			DECEMBER 31, 2002

ASSETS
Current assets:
	Cash and cash equivalents	$	117,361		$	183,500
	Marketable securities		41,444			—
	Accounts receivable, net		48,772			46,822
	Other current assets		13,499			16,921
	Inventory		659			656

Total current assets			221,735			247,899

Property and equipment, net			32,356			26,800
Capitalized software development costs, net			24,882			16,375
Acquired technology, net			19			267
Goodwill			454			454
Other assets			15,150			9,402

TOTAL ASSETS		$	294,596		$	301,197

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Deferred revenue	$	86,055		$	79,235
	Accrued compensation costs		11,957			14,442
	Other current liabilities		26,350			13,854

Total current liabilities			124,362			107,531

Deferred revenue			8,049			843
Other long-term liabilities			675			226

Stockholders’ equity:
	Common stock		457			451
	Unearned stock compensation		(852	)		(1,021	)
	Additional paid-in capital		409,327			405,380
	Accumulated deficit		(246,926	)		(211,814	)
	Accumulated other comprehensive loss		(496	)		(399	)

Total stockholders’ equity			161,510			192,597

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	294,596		$	301,197

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

ECLIPSYS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


		THREE MONTHS						NINE MONTHS
		ENDED SEPTEMBER 30,						ENDED SEPTEMBER 30,

		2003			2002			2003			2002

REVENUES
	Systems and services	$	61,559		$	44,521		$	173,637		$	153,383
	Hardware		6,591			3,028			14,735			11,237

TOTAL REVENUES			68,150			47,549			188,372			164,620
COSTS AND EXPENSES
	Cost of systems and services revenues		35,855			30,924			102,559			87,047
	Cost of hardware revenues		5,551			2,479			12,398			9,292
	Sales and marketing		17,766			14,487			52,040			37,725
	Research and development		14,633			12,129			41,152			33,584
	General and administrative		3,063			3,218			9,847			8,476
	Depreciation and amortization		2,761			2,218			7,630			6,250

TOTAL COSTS AND EXPENSES			79,629			65,455			225,626			182,374

LOSS FROM OPERATIONS			(11,479	)		(17,906	)		(37,254	)		(17,754	)
Interest income, net			412			732			2,143			3,007

LOSS BEFORE INCOME TAXES			(11,067	)		(17,174	)		(35,111	)		(14,747	)
Provision for income taxes			—			—			—			165

NET LOSS		$	(11,067	)	$	(17,174	)	$	(35,111	)	$	(14,912	)

BASIC NET LOSS PER COMMON SHARE		$	(0.24	)	$	(0.38	)	$	(0.78	)	$	(0.33	)

DILUTED NET LOSS PER COMMON SHARE		$	(0.24	)	$	(0.38	)	$	(0.78	)	$	(0.33	)

BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING			45,488			44,774			45,283			44,631

DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING			45,488			44,774			45,283			44,631

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

ECLIPSYS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)


					THREE MONTHS						NINE MONTHS
					ENDED SEPTEMBER 30,						ENDED SEPTEMBER 30,

					2003			2002			2003			2002

OPERATING ACTIVITIES
	Net loss				$	(11,067	)	$	(17,174	)	$	(35,111	)	$	(14,912	)
	Adjustments to reconcile net loss to net cash provided by operating activities:
		Depreciation and amortization				5,760			4,469			15,762			14,624
		Provision for bad debts				975			1,305			2,175			1,805
		Write-down of capitalized software development costs				1,200			—			1,200			—
		Stock compensation expense				56			46			169			78
		Changes in operating assets and liabilities:
			Accounts receivable			(2,195	)		5,453			(4,125	)		12,867
			Inventory			32			(965	)		(3	)		(879	)
			Other current assets			656			(1,542	)		3,422			2,734
			Other assets			(3,917	)		(2,383	)		(7,765	)		(3,939	)
			Deferred revenue			6,787			9,759			14,026			9,209
			Accrued compensation costs			(2,716	)		64			(2,484	)		(2,688	)
			Other current liabilities			5,275			4,845			12,495			6,759
			Other liabilities			(80	)		(47	)		449			(426	)

				Total adjustments to reconcile net loss to net cash provided by operating activities		11,833			21,004			35,321			40,144

				NET CASH PROVIDED BY OPERATING ACTIVITIES		766			3,830			210			25,232

INVESTING ACTIVITIES
	Purchase of property and equipment					(6,534	)		(2,288	)		(13,186	)		(9,693	)
	Sale (purchase) of marketable securities, net					11,332			19,590			(41,572	)		(41,588	)
	Capitalized software development costs					(8,011	)		(2,235	)		(15,574	)		(6,449	)

				NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES		(3,213	)		15,067			(70,332	)		(57,730	)

FINANCING ACTIVITIES
	Exercise of stock options					1,092			19			2,043			1,470
	Employee stock purchase plan					631			602			1,910			1,860

				NET CASH PROVIDED BY FINANCING ACTIVITIES		1,723			621			3,953			3,330

EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS						(12	)		(10	)		30			11

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS						(736	)		19,508			(66,139	)		(29,157	)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD						118,097			120,277			183,500			168,942

CASH AND CASH EQUIVALENTS, END OF PERIOD					$	117,361		$	139,785		$	117,361		$	139,785

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

ECLIPSYS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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. Eclipsys Corporation, or Eclipsys, or the Company, manages its business as one reportable 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/A filed May 23, 2003.

The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Under this method, compensation cost for stock options is measured as the excess, if any, of the estimated market price of the Company’s stock at the date of the grant over the amount an employee must pay to acquire the stock. Accordingly, the Company provides the additional disclosures required under Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” as amended by SFAS No. 148 “Accounting for Stock-Based Compensation – Transition and Disclosure.”

The Company has adopted the disclosure-only provisions of SFAS 123. Had compensation cost for the Company’s stock option grants described above been determined based on the fair value at the grant date for awards in 2002 and 2003, consistent with the provisions of SFAS 123, the Company’s net loss and loss per share would have been the pro forma amounts indicated below (in thousands, except per share data):


		Three Months						Nine Months
		Ended September 30,						Ended September 30,

		2003			2002			2003			2002

Net loss:
	As reported	$	(11,067	)	$	(17,174	)	$	(35,111	)	$	(14,912	)
	Add: Stock-based employee compensation expense included in reported net (loss) income, net of related tax effects		56			46			169			78
	Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects		(3,702	)		(6,685	)		(13,067	)		(18,875	)

Pro forma		$	(14,713	)	$	(23,813	)	$	(48,009	)	$	(33,709	)
Basic net loss per share:
	As reported	$	(0.24	)	$	(0.38	)	$	(0.78	)	$	(0.33	)
	Pro forma	$	(0.32	)	$	(0.53	)	$	(1.06	)	$	(0.76	)
Diluted net loss per share:
	As reported	$	(0.24	)	$	(0.38	)	$	(0.78	)	$	(0.33	)
	Pro forma	$	(0.32	)	$	(0.53	)	$	(1.06	)	$	(0.76	)

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.

The non-current portion of unbilled accounts receivable is included in other assets and was $0.9 million and $1.5 million as of September 30, 2003 and December 31, 2002, respectively.

On October 20, 2003, the Company announced that it had identified a response time issue with some components of SunriseXA, the newest version of the Company’s Sunrise family of products. To address the issue, the Company developed a strategy designed to allow SunriseXA customers to continue their deployment of SunriseXA and to enable the Company to continue its development of planned advanced SunriseXA components. The Company's strategy is to replace the affected SunriseXA components with the workflow engine for the Company’s Clinical Manager products. In connection with the strategy, the Company recorded a $1.2 million write-down of capitalized software development costs for certain SunriseXA components to net realizable value. The write-down is included in the cost of systems and services revenues.

The Company had the following balances for acquired technology and goodwill (in thousands):

Amortization of acquired technology for the three and nine months ended September 30, 2003 was $56,000 and $248,000, respectively. The estimated amortization expense for the next five fiscal years is as follows (in thousands):

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


	Three Months						Nine Months
	Ended September 30,						Ended September 30,

	2003			2002			2003			2002

Net loss	$	(11,067	)	$	(17,174	)	$	(35,111	)	$	(14,912	)
Reclassification adjustment for realized loss included in net earnings		167			447			167			447
Unrealized loss on available-for-sale marketable securities arising during the period		(130	)		(169	)		(295	)		(373	)
Foreign currency translation adjustment		(12	)		(10	)		30			11

Total comprehensive loss	$	(11,042	)	$	(16,906	)	$	(35,209	)	$	(14,827	)

From July through September 2002, the Company and three of its then current 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 sought certification as a class and monetary damages, and alleged 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.

On February 4, 2003, the District Court issued an order consolidating all seven cases into one single case and appointing the City of Philadelphia Board of Pensions and Retirement, Louis Giannakokas and Norman K. Mielziner to serve as lead plaintiffs. On April 30, 2003, the plaintiffs filed with the District Court an amended, consolidated complaint. On July 31, 2003, the Company filed a motion to dismiss the amended, consolidated complaint. On September 16, 2003, the plaintiffs filed an opposition to the motion to dismiss, and the Company filed a reply on October 16, 2003. At this time, the motion to dismiss has been fully briefed. The Company does not know when the District Court will decide the motion or what its ruling may be.

Recently, following our announcement of Sunrise XA response time issues and our strategy to address those issues, we were contacted by the attorneys representing the lead plaintiffs in this suit seeking our consent to their filing of an amended complaint that would add new counts asserting new claims and a new class period. We have not formally responded to this request, and have not yet seen any motion to amend the complaint or any amended complaint. We are unable to predict what effect this development will have on the course of currently pending action nor can we predict the nature of the new claims, or the damages claimed, in any additional new counts, if filed.

The Company is involved in other litigation incidental to its business from time to time. In the opinion of management, after consultation with legal counsel, the ultimate outcome of such litigation will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

In November 2002, the Financial Accounting Standards Board, (the “FASB”), reached a consensus on Emerging Issues Task Force, (the “EITF”), Issue 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables,” (the “Issue”). The guidance in the Issue was effective for revenue arrangements entered into by the Company beginning July 1, 2003. The Issue addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. Specifically, the Issue addresses how to determine whether an arrangement involving multiple deliverables contains more than one earnings process and, if it does, how to divide the arrangement into separate units of accounting consistent with the identified earnings processes for revenue recognition purposes. The Issue also addresses how arrangement consideration should be measured and allocated to the separate units of accounting in the arrangement. The adoption of the Issue has not had a material impact on the Company’s financial position, results of operations or cash flows.

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others.” This interpretation clarifies the requirements of SFAS No. 5, “Accounting for Contingencies,” relating to guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees. This interpretation is intended to improve the comparability of financial reporting by requiring identical accounting for guarantees issued with a separately identified premium and guarantees issued without a separately identified premium. The interpretation’s provisions for initial recognition and measurement are required on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of both interim and annual periods that ended after December 15, 2002. The Company’s standard license agreements contain indemnification clauses in the ordinary course of business. Pursuant to these clauses, the Company indemnifies, holds harmless, and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party. The Company believes the estimated fair value of these indemnification clauses is minimal. Accordingly, there are no liabilities recorded for these agreements as of September 30, 2003. The Company accounts for warranty liabilities in accordance with the provisions of SFAS No. 5, “Accounting for Contingencies.” To date, the warranty liabilities recorded by the Company have been insignificant.

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities.” This interpretation of Accounting Research Bulletin 51, “Consolidated Financial Statements,” addresses consolidation by business enterprises of variable interest entities that possess certain characteristics. The interpretation requires that if a business enterprise has a controlling financial interest in a variable interest entity, the assets, liabilities, and results of the activities of the variable interest entity must be included in the consolidated financial statements with those of the business enterprise. This interpretation applies immediately to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. The Company will adopt the provisions of Interpretation No. 46 in the fourth quarter of 2003 and has not consolidated any additional entities.

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.

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.

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 U.S. Securities and Exchange Commission are available to you free of charge through a hyperlink on our website.

Our newest product offerings are known as SunriseXA. SunriseXA’s extended architecture is built on Microsoft Corporation’s Web-based infrastructure, .Net and is focused on re-engineering and migrating our Sunrise suite of solutions to the Microsoft .Net Framework. SunriseXA enables the knowledge-driven, workflow-enhancing components of the Sunrise suite to operate as web-based workflow components.

On October 20, 2003, we announced that we had identified a response time issue with some components of SunriseXA. To address the issue, we developed a strategy designed to allow SunriseXA customers to continue their deployment of SunriseXA and to enable us to continue our development of planned advanced SunriseXA functionality. The strategy is to replace the affected SunriseXA components with the workflow engine from our Sunrise Clinical Manager product.

We will continue to develop planned advanced SunriseXA functionality, including Clinical Documentation, Ambulatory, Emergency Department, Secure Health Messaging, Access and Medication Management. In addition, we intend to continue to pursue the development of SunriseXA Objects Plus, designed to meet customer demand for customization of SunriseXA, and SunriseXA Portal, designed to allow remote web-based access to the SunriseXA database.

In connection with our strategy discussed above, we recorded a $1.2 million write-down of capitalized software development costs for certain SunriseXA components to net realizable value. The write-down is included in the cost of systems and services revenues. While we have determined the overall direction of our technical strategy for addressing these issues, the details of that strategy are still being worked out. Our investigation into the causes of the response time issues is ongoing, and it is possible that further analysis may reveal additional problems with our software. Furthermore, we cannot predict how prospects or customers who are currently implementing SunriseXA will respond to our strategy. These and other factors may negatively impact our future operating results, cash flows and financial position.

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 our comprehensive services offering and integrated software components, we provide our customers with solutions for their clinical, financial and administrative information needs.

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/A, filed on May 23, 2003. 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. These significant accounting policies relate to revenue recognition, allowance for doubtful accounts and capitalized software development costs.

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 and clarified by Staff Accounting Bulletin, or SAB 101, “Revenue Recognition in Financial Statements” and the AICPA Software Revenue Recognition Task Force Technical Practice Aid 5100.54. SOP No. 97-2, as amended, generally requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair values of those elements.

Our contractual arrangements are evaluated on a contract-by-contract basis and often require 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 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 generally contract under multiple element arrangements, which include software license fees, hardware and services, including implementation, consulting, software maintenance and, where desired by the customer, outsourcing and remote hosting services. We recognize revenue from these multiple element arrangements based upon contract terms.

Under multiple element arrangements, where vendor-specific objective evidence of fair value exists for all undelivered elements, we account for the delivered elements in accordance with the “residual method.” Under the residual method, we allocate revenue to each element in a multiple element arrangement based on vendor-specific objective evidence of the element’s respective fair value, with the fair value determined by the price charged when that element is sold separately. For arrangements in which vendor-specific objective evidence of fair value does not exist for each element, including specified upgrades, revenue is deferred and not recognized until delivery has occurred of all of the elements that lack vendor-specific objective evidence.

Multiple element arrangements where we provide our customer with a comprehensive technology solution over a 7 to 10 year period may include multiple software products, including the right to future unspecified products within the suites purchased. These contracts generally provide for monthly or annual payments over the term of the contracts and may contain perpetual or term licensing provisions. We generally recognize revenues under these arrangements on a monthly basis evenly over the term of the contract.

For multiple element arrangements bundled with services and maintenance where such services are considered essential to the functionality of the software and provide for payments upon the achievement of implementation milestones, we recognize revenues using the percentage-of-completion method, following the guidance in the AICPA Statement of Position No. 81-1, or SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. 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.

Remote hosting and outsourcing services are marketed under long-term arrangements generally over periods of five to ten years. Revenues from these arrangements are recognized evenly over the period during which the services are performed.

Software support and maintenance fees are marketed under annual and multi-year arrangements and are recognized as revenue ratably over the contracted maintenance term. Hardware sales are generally recognized upon delivery to the customer.

Since revenue recognition and contractual billing terms may not precisely coincide, the differences between timing of revenue recognition and the issuance of invoices results in either unbilled accounts receivable or deferred revenue. Unbilled accounts receivable represent revenue recognized in accordance with our revenue recognition policies for which customers have not yet been invoiced. Conversely, deferred revenue consists of payments received for which the revenue has not yet been recognized in accordance with our revenue recognition policies.

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.

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 computer 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.

As discussed above, our results of operations for the quarter ended September 30, 2003 reflect a $1.2 million write-down of previously capitalized Sunrise XA software development costs.


			Three Months Ended September 30,

						% of Total						% of Total
			2002			Revenues			2003			Revenues			Change $			Change %

Revenues Systems and services			$	44,521			93.6	%	$	61,559			90.3	%	$	17,038			38.3	%
	Hardware			3,028			6.4	%		6,591			9.7	%		3,563			117.7	%

		Total revenues		47,549			100.0	%		68,150			100.0	%		20,601			43.3	%

Costs and expenses Cost of systems and services revenues				30,924			65.0	%		35,855			52.6	%		4,931			15.9	%
	Cost of hardware revenues			2,479			5.2	%		5,551			8.1	%		3,072			123.9	%
	Sales and marketing			14,487			30.5	%		17,766			26.1	%		3,279			22.6	%
	Research and development			12,129			25.5	%		14,633			21.5	%		2,504			20.6	%
	General and administrative			3,218			6.8	%		3,063			4.5	%		(155	)		-4.8	%
	Depreciation and amortization			2,218			4.7	%		2,761			4.1	%		543			24.5	%

		Total costs and expenses		65,455			137.7	%		79,629			116.8	%		14,174			21.7	%

Loss from operations				(17,906	)		-37.7	%		(11,479	)		-16.8	%		6,427
Interest income, net				732			1.5	%		412			0.6	%		(320	)		-43.7	%

Loss before income taxes				(17,174	)		-36.1	%		(11,067	)		-16.2	%		6,107
Provision for income taxes				—			0.0	%		—			0.0	%		—			0.0	%

Net loss			$	(17,174	)		-36.1	%	$	(11,067	)		-16.2	%	$	6,107

Basic loss per share			$	(0.38	)				$	(0.24	)				$	0.14

Diluted loss per share			$	(0.38	)				$	(0.24	)				$	0.14

Total revenues increased $20.6 million for the quarter ended September 30, 2003 compared to the same period in 2002.

Systems and services revenues increased $17.0 million for the quarter ended September 30, 2003, compared to the same period in 2002. The increase consisted primarily of increases in revenues generated from comprehensive technology solutions that generally provide for revenue recognition on a monthly basis. These revenues, which include license fees, remote hosting services, professional services, software maintenance fees, outsourcing services and third party revenues, increased approximately $14.0 million during the third quarter of 2003, compared to the same period in 2002. Other revenues, including revenues generated from network services, license fees and third party revenues, increased approximately $3.0 million during the three months ended September 30, 2003, compared to the same period in 2002. The increase in the revenue is a result of higher volumes of new contracts. The new contracts consisted of a significantly higher proportion of contracts executed for which revenue is recognized on a monthly basis, which, to a large extent, correspond with customer payment terms. We expect these contracts will continue to represent a significant 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.

Hardware revenues increased $3.6 million for the quarter ended September 30, 2003 compared to the quarter ended September 30, 2002. The increase in hardware revenues is attributable to increased shipments during the quarter as a result of new contracted business during the current and previous quarters. We expect hardware revenues to continue to fluctuate in future periods.

Total costs and expenses increased $14.2 million for the quarter ended September 30, 2003, compared to the same period in 2002.

Cost of systems and services revenues increased $4.9 million for the quarter ended September 30, 2003 compared to the quarter ended September 30, 2002. Gross margins on systems and services revenues were 41.8% for the quarter ended September 30, 2003, compared to 30.5% for the same period in 2002. The increase in cost of systems and services was related to several factors, including an increase in third party costs, including royalties and consulting costs, which were billable to our customers, higher costs associated with providing networking, outsourcing and remote hosting services, higher payroll and related costs associated with providing our implementation and integration services and higher amortization of deferred costs related to long-term contracts. These higher costs were reflective of higher revenues in each of these areas. Additionally, as explained in the overview above, we recorded a $1.2 million write-down of capitalized software development costs related to the discontinuation of development efforts on certain SunriseXA components. Furthermore, amortization of capitalized software development costs increased $0.6 million due to increased capitalized software development costs related to the release of clinical products in the SunriseXA product line. These increases were partially offset by lower amortization of acquired technology, due to some assets becoming fully amortized during the first quarter of 2003.

Cost of hardware revenues increased $3.1 million for the quarter ended September 30, 2003, compared to the quarter ended September 30, 2002. The increase was primarily attributable to the increase in hardware revenues. Gross margins on hardware revenues decreased to 15.8% for the quarter ended September 30, 2003, compared to 18.1% for the same period in 2002 due to industry pricing pressures. We expect margins on hardware will continue to fluctuate as a result of pricing pressures within the hardware sector.

Sales and marketing expenses increased $3.3 million for the quarter ended September 30, 2003, compared to the quarter ended September 30, 2002. The increase in sales and marketing expenses was related to increased payroll and related costs due to our initiative to significantly expand the size of our sales and marketing organization, including approximately $0.5 million higher commissions, resulting from increased sales volume. We expect that sales and marketing will continue at these higher expense levels in the future.

Research and development expenses increased $2.5 million for the quarter ended September 30, 2003, compared to the quarter ended September 30, 2002. Gross spending on research and development increased $8.3 million primarily due to our initiative to accelerate the migration of our products onto the Microsoft .NET platform. Under this initiative, we have increased the number of employees in our product delivery organization, which includes research and development, and spent approximately $5.4 million for outside consultants while we actively recruit qualified research and development personnel. The percentage of research and development costs capitalized for the quarter ended September 30, 2003 was 35.4%, or $8.0 million, compared to 15.6%, or $2.2 million, for the same period in 2002. The percentage of research and development costs capitalized increased as a result of the incremental expenses incurred for coding and testing of two releases of SunriseXA products that were technologically feasible, one of which was generally released during the current quarter. As discussed above, amortization of capitalized software development costs, which is included in cost of systems and services revenues, increased by approximately $0.6 million, to $2.1 million for the quarter ended September 30, 2003, compared to $1.5 million for third quarter of 2002.

General and administrative expenses decreased approximately $0.2 million for the quarter ended September 30, 2003, compared to the quarter ended September 30, 2002, primarily related to lower personnel related costs partially offset by higher director and officer insurance premiums.

Depreciation and amortization increased $0.5 million for the quarter ended September 30, 2003, compared to the quarter ended September 30, 2002. The increase was primarily a result of investments in computer hardware and software to expand our research and development infrastructure and to enhance the infrastructure and increase capacity at our Technology Solutions Center related to a higher volume of remote hosting customers. As a result of continuing investments, we expect depreciation and amortization to continue to increase in the future.

Interest income decreased $0.3 million for the quarter ended September 30, 2003, compared to the quarter ended September 30, 2002. This decrease in interest income was primarily due to a decline in yields, related to changes in general economic conditions and

a lower average combined balance in cash and cash equivalents and marketable securities. The Company’s marketable securities continue to consist of funds that are highly liquid.

As a result of these factors, we had a net loss of $11.1 million for the quarter ended September 30, 2003, compared to a net loss of $17.2 million for the quarter ended September 30, 2002.


			Nine Months Ended September 30,

						% of Total						% of Total
			2002			Revenues			2003			Revenues			Change $			Change %

Revenues Systems and services			$	153,383			93.2	%	$	173,637			92.2	%	$	20,254			13.2	%
	Hardware			11,237			6.8	%		14,735			7.8	%		3,498			31.1	%

Total revenues				164,620			100.0	%		188,372			100.0	%		23,752			14.4	%

Costs and expenses Cost of systems and services revenues				87,047			52.9	%		102,559			54.4	%		15,512			17.8	%
	Cost of hardware revenues			9,292			5.6	%		12,398			6.6	%		3,106			33.4	%
	Sales and marketing			37,725			22.9	%		52,040			27.6	%		14,315			37.9	%
	Research and development			33,584			20.4	%		41,152			21.8	%		7,568			22.5	%
	General and administrative			8,476			5.1	%		9,847			5.2	%		1,371			16.2	%
	Depreciation and amortization			6,250			3.8	%		7,630			4.1	%		1,380			22.1	%

		Total costs and expenses		182,374			110.8	%		225,626			119.8	%		43,252			23.7	%

Loss from operations				(17,754	)		-10.8	%		(37,254	)		-19.8	%		(19,500	)
Interest income, net				3,007			1.8	%		2,143			1.1	%		(864	)		-28.7	%

Loss before income taxes				(14,747	)		-9.0	%		(35,111	)		-18.6	%		(20,364	)
Provision for income taxes				165			0.1	%		—			0.0	%		(165	)		-100.0	%

Net loss			$	(14,912	)		-9.1	%	$	(35,111	)		-18.6	%	$	(20,199	)

Basic loss per share			$	(0.33	)				$	(0.78	)				$	(0.45	)

Diluted loss per share			$	(0.33	)				$	(0.78	)				$	(0.45	)

Total revenues increased $23.8 million for the nine months ended September 30, 2003, compared to the same period in 2002.

Systems and services revenues increased $20.3 million for the nine months ended September 30, 2003, compared to the same period in 2002. The increase consisted primarily of increases in revenues generated from comprehensive technology solutions that generally provide for revenue recognition on a monthly basis. These revenues increased approximately $27.0 million during the first nine months of 2003, compared to the same period in 2002. Additionally, revenues from networking services and third party license fees were higher by approximately $2.7 million. However these increases were offset by a decrease in revenues from license fees recognized under traditional contracting methods of approximately $9.4 million for the nine months ended September 30, 2003, compared to the same period in 2002. The increase in the revenue is a result of higher volumes of new contracts. The new contracts consisted of a significantly higher proportion of contracts executed that generally provide for revenue recognition on a monthly basis, which, to a large extent, correspond with customer payment terms. As previously discussed, the new contracting model is expected to negatively impact cash flows in the near future as these contracts result in lower cash flows during the early periods of the contracts compared to traditional licensing methods.

Hardware revenues increased $3.5 million for the nine months ended September 30, 2003, compared to the same period in 2002. The increase in hardware revenues was primarily attributable to increased shipments during the third quarter of 2003 related to business contracted during the current and previous quarters. We expect hardware revenues to continue to fluctuate in future periods.

Total costs and expenses increased $43.3 million for the nine months ended September 30, 2003, compared to the same period in 2002.

Cost of systems and services revenues increased $15.5 million for the nine months ended September 30, 2003, compared to the same period in 2002. Gross margins on systems and services revenues were 40.9% for the nine months ended September 30, 2003, compared to 43.2% for the same period in 2002. The increase in cost of systems and services revenues was related to several factors, including higher third party costs, including royalties and consulting costs, which were billable to our customers, higher costs associated with providing our outsourcing, remote hosting and networking services, higher payroll and related costs associated with providing our implementation and integration services and higher amortization of deferred costs related to long-term contracts. These higher costs were reflective of higher revenues in each of these areas. Additionally, amortization of capitalized software development costs increased $1.5 million due to increased capitalized software development costs relating to the release of clinical products in our new SunriseXA product line. Furthermore, as explained in the overview above, we recorded a $1.2 million write-down of capitalized software development costs related to the discontinuation of development efforts on certain SunriseXA components. These increases were partially offset by lower amortization of acquired technology, due to some assets becoming fully amortized during 2002 and the first quarter of 2003.

Cost of hardware revenues increased $3.1 million for the nine months ended September 30, 2003, compared to the same period in 2002. The increase in the cost of hardware revenues was primarily attributable to the increase in hardware revenues. Gross margins on hardware revenues decreased to 15.9% for the nine months ended September 30, 2003, compared to 17.3% for the same period in 2002 due to industry pricing. We expect margins on hardware will continue to fluctuate as a result of pricing pressures within the hardware sector.

Sales and marketing expenses increased $14.3 million for the nine months ended September 30, 2003, compared to the same period in 2002. The increase in sales and marketing expenses was related to increased payroll and related costs due to our initiative to significantly expand the size of our sales and marketing organization, including approximately $3.1 million higher commissions, resulting from increased sales volume. We expect sales and marketing expenses to continue at these higher levels in the future.

Research and development expenses increased $7.6 million for the nine months ended September 30, 2003, compared to the same period in 2002. Gross spending on research and development increased approximately $16.8 million primarily due to our initiative to accelerate the migration of our products onto the Microsoft ..NET platform. Under this initiative, we have increased the number of employees in our product delivery organization, which includes research and development, and have spent approximately $8.8 million on outside consultants while we actively recruit qualified research and development personnel. The percentage of research and development costs capitalized for the nine months ended September 30, 2003, was 27.5%, or $15.6 million, compared to 16.1%, or $6.4 million, for the same period in 2002. The percentage of research and development costs capitalized increased as a result of the incremental expenses incurred during the second and third quarters of 2003 for coding and testing of two releases of SunriseXA products that were technologically feasible, one of which was generally released during the current quarter. As discussed above, amortization of capitalized software development costs, which is included in cost of systems and services revenues, increased by approximately $1.5 million, to $5.9 million for the nine months ended September 30, 2003, compared to $4.3 million for the same period in 2002.

General and administrative expenses increased $1.4 million compared to the same period in 2002. The increase was primarily due to higher director and officer insurance premiums, legal fees and recruitment costs related to our workforce expansion.

Depreciation and amortization increased $1.4 million for the nine months ended September 30, 2003, compared to the same period in 2002. The increase was primarily a result of investments in computer hardware and software to expand our research and development infrastructure and to increase capacity at our Technology Solutions Center to address the higher volume of remote hosting services. As a result of continuing investments, we expect depreciation and amortization to continue to increase in the future. We also had significant purchases of personal computers for new and existing employees. This increase was partially offset by a $0.2 million decrease in amortization of intangible assets that became fully amortized during the first quarter of 2002.

Interest income decreased $0.9 million for the nine months ended September 30, 2003, compared to the same period in 2002. This decrease in interest income was primarily due to a decline in yields, related to changes in general economic conditions. A decline in the average combined balance in cash and cash equivalents and marketable securities during the third quarter of 2003 also contributed to the decrease in interest income.

As a result of these factors, we had a net loss of $35.1 million for the nine months ended September 30, 2003, compared to a net loss of $14.9 million for the same period in 2002.

During the quarter ended September 30, 2003, operations provided $0.8 million of cash; investing activities used $3.2 million of cash, consisting of $8.0 million for the funding of capitalized software development costs and $6.5 million for the purchase of property and equipment, partially offset by $11.3 million of cash received from the sale of marketable securities; and financing activities provided $1.7 million of cash from stock option exercises and the issuance of common stock under our employee stock purchase plan. For the nine months ended September 30, 2003, operations provided $0.2 million of cash; investing activities used $70.3 million of cash, consisting of approximately $41.5 million for the purchase of marketable securities, $15.6 million for the funding of capitalized software development costs and $13.2 million for the purchase of property and equipment; and financing activities provided $4.0 million of cash from stock option exercises and the issuance of common stock under our employee stock purchase plan.

As of September 30, 2003, our principal source of liquidity is our combined cash and marketable securities balance of $158.8 million. It is likely that we will continue to have negative cash flows over the remainder of 2003 due to our sales and marketing and research and development initiatives, as well as the continuing trend toward our new contract arrangements, which provide for payments to be spread more evenly over the term of our customer contracts. Additionally, the new contracting method may negatively impact cash flows in 2004 as these arrangements result in a proportionately smaller amount of fees being collected during the early stages of the contracts compared to traditional licensing methods. Our future liquidity 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, 2003, we did not have material commitments for capital expenditures. We believe that our current cash and marketable securities balances combined with anticipated cash collections will be sufficient to meet our operating requirements for at least the next 12 months.

There are a number of important factors that could affect our business and future operating results, including without limitation, the factors set forth below. The information contained in this report should be read in light of such factors. Any of the following factors could harm our business and future operating results.

We face a number of risks relating to our recently announced strategy to address SunriseXA response time issues

We recently announced that we have identified response time issues with some components of SunriseXA, the newest version of our Sunrise family of products. We have concluded that the root cause of the issue lies in the technical design of the underlying SunriseXA workflow engine, which does not adequately support the throughput required in the highly interactive patient

care environment. At the same time, we also announced that we have developed a strategy designed to address these issues. This strategy is to replace the affected SunriseXA components with the workflow engine from our Sunrise Clinical Manager, or SCM, product, which is our previous generation core clinical product. We face a variety of risks and uncertainties in connection with these developments, including the following:


–	Our investigation into the causes of the response time issues is ongoing, and it is possible that further analysis will reveal additional problems with our software.

–	While we have determined the overall direction of our technical strategy for addressing these issues, the details of that strategy are still being worked out. Accordingly, we cannot assure you that the technical approach we are currently pursuing will provide a satisfactory solution to the issues we are addressing, and we could encounter technical obstacles in implementing this approach.

–	At this time, we cannot predict how long it will take us, or how much it will cost us, to complete the work necessary to allow the SCM workflow engine to replace the affected SunriseXA components. In addition, because the primary focus of our recent research and development activities has been on our latest generation SunriseXA products, we may now need to commit additional resources to update the prior generation SCM workflow engine to accommodate the performance and functionality demanded by our customers

–	It is likely that releases of anticipated additional features for our products will be delayed, which could result in delayed or lost sales.

–	Customers who are currently implementing SunriseXA may face delays in that implementation. As a result, existing SunriseXA customers could attempt to cancel their contracts with us or could 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 these products less appealing, which could decrease demand for our products. In addition, these issues could harm our relationships with customers generally and our reputation in the marketplace.

–	Operating results for the quarter ended September 30, 2003 reflect a $1.2 million write-down of capitalized software development costs related to certain SunriseXA components. Approximately $21.4 million of capitalized SunriseXA software development costs remain on our balance sheet at September 30, 2003. As we continue to study these issues and work on implementing our strategy for addressing them, it is possible that we will discover facts leading us to conclude that additional write-offs would be required.

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, our target customer market. Furthermore, the solutions we provide typically require significant capital expenditures by our customers. 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 and implementation cycles, 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 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 has faced, and will likely continue to face, significant financial constraints. For example, the shift to managed healthcare in the 1990’s put pressure on healthcare organizations to reduce costs, and the Balanced Budget Act of 1997 dramatically reduced Medicare reimbursement to healthcare organizations. Our 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 $35.1 million in the nine months ended September 30, 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:


–	the risks detailed above relating to our recently announced strategy to address SunriseXA response time issues;

–	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;

–	significant estimates made by management in the application of generally accepted accounting principles; and

–	fluctuations in general economic and financial market conditions, including interest rates.

It is difficult to predict the timing of revenues from product sales because the sales cycle can vary depending upon several factors. These factors 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, depending upon the extent to which our customers elect to license our products under comprehensive bundled arrangements, including subscription pricing, 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. 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., GE Medical Systems, IDX Systems Corp., Epic Systems Corporation 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 the 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 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 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.

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 issued in accordance with the Health Insurance Portability and Accountability Act of 1996, or HIPAA, impose national health data standards on health care providers that conduct electronic health transactions, health care clearinghouses that convert health data between HIPAA-compliant and non-compliant formats and health plans. Collectively, these groups are known as covered entities. These 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.

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 data security standards is April 20, 2005 for most covered entities. Although we are not a covered entity, many of our customers are. These customers may demand products that are designed to help them to comply with their HIPAA obligations, and they may, in the future, request us to agree contractually to comply with specific HIPAA standards if it is necessary for us to handle individually identifiable health records. Any failure or perception of failure of our products or services to comply with HIPAA standards could adversely affect demand for our products and services, and force us to expend significant capital, research and development and other resources to modify our products or services to address the privacy and security requirements of our customers.

States may adopt privacy standards that are more stringent than the federal HIPAA privacy standards. This may lead to different restrictions for handling individually identifiable health information. As a result, our customers may demand information technology solutions and services that are adaptable to reflect different and changing regulatory requirements. In the future, federal or state governmental authorities may impose additional restrictions on the collection, use, transmission and other disclosures of health information. We cannot predict the potential impact that these future rules, as finally approved, may have on our business. However, the demand for our products and services may decrease if we are not able to develop and offer products and services that can address the regulatory challenges and compliance obligations facing our customers.

Our products are used to assist clinical decision-making and provide information about patient medical histories and treatment plans, and if these products fail to provide accurate and timely information, our customers could assert claims against us that could result in substantial cost to us, harm our reputation in the industry and cause demand for our products to decline

We provide products that 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 or mistakes. In addition, we require that our customers approve all system rules and protocols. Despite these precautions, the limitations of liability set forth in our contracts may not be enforceable or may not otherwise protect us from liability for damages. We maintain general liability insurance coverage, including coverage for errors or omissions. However, this coverage may not continue to be available on acceptable terms or may not be available in sufficient amounts to cover one or more large claims against us. In addition, the insurer might disclaim coverage as to any future claim. One or more large claims could exceed our available insurance coverage.

Highly complex software products such as ours often contain undetected errors or failures when first introduced or as updates and new versions are released. It is particularly challenging for us to test our products because it is difficult to simulate the wide variety of computing environments in which our customers may deploy them. Despite testing, from time to time we have discovered defects or errors in our products. Defects, errors or difficulties could cause delays in product introductions and shipments, result in increased costs and diversion of development resources, require design modifications or decrease market acceptance or customer satisfaction with our products. In addition, despite testing by us and by current and potential customers, errors may be found after commencement of commercial shipments, resulting in loss of or delay in market acceptance.

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

An important element of our business strategy has been expansion through acquisitions. Since 1997, we have completed 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, particularly our ability to continue to release our products onto the .NET Framework under the SunriseXA initiative, and to develop and introduce new products and services to meet changing customer requirements. The process of developing products and services such as those we offer is extremely complex and is expected to become increasingly complex and expensive in the future as new technologies are introduced. If we are unable to enhance our existing products or develop new products to meet changing customer requirements, demand for our products could suffer.

We depend on licenses from third parties for rights to the technology used in several of our products, and if we are unable to continue these relationships and maintain our rights to this technology, our business could suffer

We depend upon licenses for some of the technology used in our products from a number of third-party vendors, including Computer Corporation of America, Computer Associates, Oracle Corporation and Microsoft. Most of these licenses expire within one to five years, can be renewed only by mutual consent and may be terminated if we breach the terms of the license and fail to cure the breach within a specified period of time. We may not be able to continue using the technology made available to us under these licenses on commercially reasonable terms or at all. As a result, we may have to discontinue, delay or reduce product shipments until we obtain equivalent technology, which could hurt our business. Most of our third-party licenses are non-exclusive. Our competitors may obtain the right to use any of the technology covered by these licenses and use the technology to compete directly with us. In addition, if our vendors choose to discontinue support of the licensed technology in the future or are unsuccessful in their continued research and development efforts, particularly with regard to Microsoft, we may not be able to modify or adapt our own products.

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

We are dependent upon our proprietary information and technology. Our means of protecting our proprietary rights may not be adequate to prevent misappropriation. The laws of some foreign countries may not protect our proprietary rights as fully as do the laws of the United States. Also, despite the steps we have taken to protect our proprietary rights, it may be possible for unauthorized third parties to copy aspects of our products, reverse engineer our products or otherwise obtain and use information that we regard as proprietary. In some limited instances, customers can access source-code versions of our software, subject to contractual limitations on the permitted use of the source code. Although our license agreements with these customers attempt to prevent misuse of the source code, the possession of our source code by third parties increases the ease and likelihood of potential misappropriation of such software. Furthermore, others could 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 then current officers were named in seven complaints filed in the United States District Court for the Southern District of Florida, West Palm Beach Division, or the District Court, by purported shareholders of the Company over the months of July through September 2002. Each complaint individually sought class certification and monetary damages for alleged violations of the federal securities laws. On February 4, 2003, the District Court issued an order consolidating all seven cases into one single case and appointing two persons and one entity to serve as lead plaintiffs. On April 30, 2003, the plaintiffs filed with the District Court an amended, consolidated complaint. On July 31, 2003, we filed a motion to dismiss the amended, consolidated complaint. On September 16, 2003, the plaintiffs filed an opposition to the motion to dismiss, and the Company filed a reply on October 16, 2003. At this time, the motion to dismiss has been fully briefed. The Company does not know when the District Court will decide the motion or what its ruling may be.

Recently, following our announcement of SunriseXA response time issues and our strategy to address those issues, we were contacted by the attorneys representing the lead plaintiffs in this suit seeking our consent to their filing of an amended complaint that would add new counts asserting new claims and a new class period. We have not formally responded to this request, and have not yet seen any motion to amend the complaint or any amended complaint. We are unable to predict what effect this development will have on the course of currently pending action nor can we predict the nature of the new claims, or the damages claimed, in any additional new counts, if filed.

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 in excess of existing insurance coverage. 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.

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.

Section 203 of the Delaware corporate statute may inhibit potential acquisition bids for 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.

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, 2003, foreign currency fluctuations have not had a material impact on our financial position or results of operations.

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 September 30, 2003. Based on this evaluation, the Company’s chief executive officer and chief financial officer concluded that, as of September 30, 2003, 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 and (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 periods 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 September 30, 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

From July through September 2002, our company and three of its then current 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, or the District Court. Each complaint sought certification as a class and monetary damages, and alleged that the Company and the named officers violated federal securities laws. The Company believes that the actions are without merit, and intends to conduct a vigorous defense against these allegations.

Recently, following our announcement of SunriseXA response time issues and our strategy to address those issues, we were contacted by the attorneys representing the lead plaintiffs in this suit seeking our consent to their filing of an amended complaint that would add new counts asserting new claims and a new class period. We have not formally responded to this request, and have not yet seen any motion to amend the complaint or any amended complaint. We are unable to predict what effect this development will have on the course of currently pending action nor can we predict the nature of the new claims, or the damages claimed, in any additional new counts, if filed.

(1) On July 21, 2003, Eclipsys filed a report on Form 8-K relating to its financial results for the fiscal quarter ended June 30, 2003, as presented in a press release on July 21, 2003.

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.


DELAWARE		65-0632092
(State of Incorporation)		(IRS Employer Identification Number)


Class		Shares outstanding as of October 29, 2003

Common Stock, $.01 par value		45,855,900


		September 30,		December 31,
		2003		2002

Accounts Receivable:
	Billed accounts receivable, net	$	43,163	$	42,280
	Unbilled accounts receivable, net		5,609		4,542

	Total accounts receivable, net	$	48,772	$	46,822


		As of September 30, 2003						As of December 31, 2002

		Gross Carrying		Accumulated				Gross Carrying		Accumulated
		Amount		Amortization		Net Balance		Amount		Amortization		Net Balance

Amortized intangible assets:
	Acquired technology	$	95,795	$	95,776	$	19	$	95,795	$	95,528	$	267
Unamortized intangible assets:
	Goodwill					$	454					$	454


	Combined cash and cash equivalents and
	marketable securities balances (in thousands)
Hypothetical
Interest Rate	$	150,000	$	170,000	$	190,000

1.0%	$	1,500	$	1,700	$	1,900
1.5%		2,250		2,550		2,850
2.0%		3,000		3,400		3,800
2.5%		3,750		4,250		4,750
3.0%		4,500		5,100		5,700
3.5%		5,250		5,950		6,650


–	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;


		ECLIPSYS CORPORATION

Date:	November 6, 2003	/s/ Robert J. Colletti Robert J. Colletti Senior Vice President and Chief Financial Officer (Principal financial officer and duly authorized officer)


EXHIBIT
NO.		DESCRIPTION



31.1		Certification of Paul L. Ruflin
31.2		Certification of Robert J. Colletti
32		Certification Pursuant to 18 U.S.C. Section 1350