ECLIPSYS CORP - FORM 10-Q

Attached files

file	filename
EX-31.1 - CERTIFICATION - ECLIPSYS CORP	dex311.htm
EX-32.2 - SECTION 1350 CERTIFICATION - ECLIPSYS CORP	dex322.htm
EX-31.2 - CERTIFICATION - ECLIPSYS CORP	dex312.htm
EX-32.1 - SECTION 1350 CERTIFICATION - ECLIPSYS CORP	dex321.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2010

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

For the transition period from to

COMMISSION FILE NUMBER: 000-24539

ECLIPSYS CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

65-0632092

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

Three Ravinia Drive

Atlanta, GA

30346

(Address of principal executive offices)

(404) 847-5000

(Registrant’s telephone number, including area code)

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 requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer x	Accelerated filer ¨	Non-accelerated filer ¨	Smaller reporting company ¨
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

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


Class		Shares outstanding as of April 30, 2010
Common Stock, $0.01 par value		57,450,620

ECLIPSYS CORPORATION AND SUBSIDIARIES

FORM 10-Q

For the period ended March 31, 2010

Table of Contents


Part I.	Financial Information	3

Item 1.	Financial Statements - Unaudited	3

	Condensed Consolidated Balance Sheets (unaudited) - As of March 31, 2010 and December 31, 2009	3

	Condensed Consolidated Statements of Operations (unaudited) - For the Three Months Ended March 31, 2010 and March 31, 2009	4

	Condensed Consolidated Statements of Cash Flows (unaudited) - For the Three Months Ended March 31, 2010 and March 31, 2009	5

	Notes to Condensed Consolidated Financial Statements (unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23

Item 4.	Controls and Procedures	24

Part II.	Other Information	25

Item 1.	Legal Proceedings	25

Item 1A.	Risk Factors	25

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37

Item 6.	Exhibits	38

Signatures		39

Certifications

PART I - FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

ECLIPSYS CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(in thousands, except share data)


	As of
	March 31, 2010			December 31, 2009
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	118,668		$	123,160
Accounts receivable, net of allowance for doubtful accounts of $2,855 in 2010 and $2,994 in 2009		113,141			111,712
Prepaid expenses		26,895			26,832
Other current assets		3,484			4,250

Total current assets		262,188			265,954
Long-term investments		81,395			85,988
Property and equipment:
Property and equipment		167,598			160,923
Accumulated depreciation and amortization		(109,036	)		(104,344	)

Property and equipment, net		58,562			56,579
Capitalized software development costs, net		56,123			51,889
Acquired technology, net		27,079			29,557
Intangible assets, net		6,699			7,411
Goodwill		100,008			100,008
Deferred tax assets		82,200			86,639
Other assets		12,105			13,039

Total assets	$	686,359		$	697,064

Liabilities and Stockholders’ Equity
Current liabilities:
Deferred revenue	$	138,790		$	135,185
Accounts payable		14,389			14,752
Accrued compensation costs		24,568			34,034
Deferred tax liabilities		6,033			6,033
Other current liabilities		18,582			20,994

Total current liabilities		202,362			210,998
Deferred revenue		3,892			4,896
Long-term debt and capital leases		15,676			29,727
Other long-term liabilities		15,761			15,616

Total liabilities		237,691			261,237

Stockholders’ Equity:
Preferred stock, $0.01 par value - 5,000,000 shares authorized; no share issued or outstanding		—			—
Common stock, $0.01 par value, 200,000,000 shares authorized; 57,423,573 and 57,162,466 issued and oustanding, respectively		574			572
Additional paid-in capital		605,876			599,111
Accumulated deficit		(156,578	)		(162,004	)
Accumulated other comprehensive loss		(1,204	)		(1,852	)

Total stockholders’ equity		448,668			435,827

Total liabilities and stockholders’ equity	$	686,359		$	697,064

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

ECLIPSYS CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)

(in thousands, except per share amounts)


	For the Three Months Ended March 31,
	2010			2009
Revenues:
Systems and services	$	125,557		$	128,137
Hardware		2,803			2,029

Total revenues		128,360			130,166
Costs and expenses:
Cost of systems and services (excluding depreciation and amortization shown below)		65,199			66,874
Cost of hardware		2,452			1,656
Sales and marketing		19,748			22,751
Research and development		13,461			13,493
General and administrative		8,567			12,021
Restructuring		—			5,434
Depreciation and amortization		8,226			8,034

Total costs and expenses		117,653			130,263
Income (loss) from operations		10,707			(97	)
Gain on sale of assets		—			400
Loss on investments, net		(226	)		(158	)
Interest income		417			847
Interest expense		(344	)		(1,143	)

Income (loss) before income taxes		10,554			(151	)
Provision for income taxes		5,128			714

Net income (loss)	$	5,426		$	(865	)

Basic earnings (loss) per share:
Net income (loss)	$	5,426		$	(865	)
Less: Income allocated to participating securities		31			—

Net income (loss) available to common stockholders	$	5,395		$	(865	)

Basic weighted average common shares outstanding		56,838			55,470

Basic earnings (loss) per common share	$	0.09		$	(0.02	)

Diluted earnings (loss) per share:
Net income (loss)	$	5,426		$	(865	)
Less: Income allocated to participating securities		30			—

Net income (loss) available to common stockholders	$	5,396		$	(865	)

Basic weighted average common shares outstanding		56,838			55,470
Dilutive effect of potential common shares		891			—

Diluted weighted average shares common outstanding		57,729			55,470

Diluted earnings (loss) per common share	$	0.09		$	(0.02	)

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

ECLIPSYS CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)


	Three Months Ended March 31,
	2010			2009
Operating activities:
Net income (loss)	$	5,426		$	(865	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		12,336			12,035
Provision for bad debts		450			1,046
Stock compensation expense		3,681			4,408
Unrealized loss on investments, net		226			158
Gain on sale of assets		—			(400	)
Deferred provision for income taxes		4,545			452
Changes in operating assets and liabilities:
Accounts receivable		(1,470	)		3,695
Prepaid expenses and other current assets		659			(1,454	)
Other assets		704			(237	)
Deferred revenue		2,531			(807	)
Accrued compensation		(9,437	)		7,465
Accounts payable and other current liabilities		(3,809	)		(6,596	)
Other long-term liabilities		27			751
Other		8			85

Total adjustments		10,451			20,601

Net cash provided by operating activities		15,877			19,736

Investing activities:
Purchases of property and equipment		(6,661	)		(7,273	)
Proceeds from sales and redemptions of investments		4,575			150
Capitalized software development costs		(8,091	)		(7,216	)
Earnout on disposition		—			842
Cash paid for acquisitions, net of cash acquired		—			(2,763	)

Net cash used in investing activities		(10,177	)		(16,260	)

Financing activities:
Proceeds from stock options exercised		3,431			74
Proceeds from employee stock purchase plan		201			242
Repayment of secured financings		(14,000	)		—
Other		(48	)		—

Net cash provided by (used in) financing activities		(10,416	)		316

Effect of exchange rates on cash and cash equivalents		224			(214	)

Net change in cash and cash equivalents		(4,492	)		3,578
Cash and cash equivalents — beginning of period		123,160			108,304

Cash and cash equivalents — end of period	$	118,668		$	111,882

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

ECLIPSYS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE A – PREPARATION OF INTERIM FINANCIAL STATEMENTS

In these notes, Eclipsys Corporation and its subsidiaries are referred to as “the Company” or “Eclipsys.”

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared based upon U.S. Securities and Exchange Commission (“SEC”) rules that permit reduced disclosure for interim periods. In the Company’s opinion, these statements include all adjustments necessary for a fair presentation of the results of the interim periods presented. All adjustments are of a normal recurring nature. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by United States generally accepted accounting principles (“GAAP”).

Revenues, expenses, assets, and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be indicative of annual results. For a more complete discussion of the Company’s significant accounting policies and other information, this report should be read in conjunction with the Consolidated Financial Statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2009 that was filed with the SEC on February 25, 2010.

The Company manages its business as one reportable segment.

NOTE B – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In October 2009, the Financial Accounting Standards Board (“FASB”) issued updated guidance that amends existing revenue recognition accounting pronouncements that have multiple element arrangements. This updated guidance provides accounting principles and application guidance on whether multiple deliverables exist, how the arrangement should be separated, and the consideration allocated. This new approach is effective for fiscal years beginning after June 15, 2010 and may be applied retrospectively or prospectively for new or materially modified arrangements. In addition, early adoption is permitted. The adoption of this guidance during the first quarter of 2010 did not have an impact on the Company’s Condensed Consolidated Financial Statements.

In October 2009, the FASB issued updated guidance related to certain arrangements that contain software elements, which amends revenue recognition to exclude tangible products that include software and non-software components that function together to deliver the product’s essential functionality. This updated guidance will be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Earlier application is permitted as of the beginning of a company’s fiscal year provided the company has not previously issued financial statements for any period within that year. An entity shall not elect early application of this update unless it also elects early application of the update related to multiple element arrangements. The adoption of this guidance during the first quarter of 2010 did not have an impact on the Company’s Condensed Consolidated Financial Statements.

NOTE C – EARNINGS (LOSS) PER SHARE

For all periods presented, basic and diluted earnings (loss) per common share (“EPS”) is presented using the two-class method, which requires that basic earnings (loss) per common share be calculated by dividing net income (loss) available to common stockholders by the weighted average number of shares of common stock outstanding during the period.

Non-vested restricted stock granted prior to April 1, 2009 carries non-forfeitable dividend rights and is therefore a participating security. Non-vested restricted stock granted subsequent to March 31, 2009 carries forfeitable dividend rights and is, therefore, not considered a participating security. The two-class method of computing earnings per share is required for companies with participating shares. Under this method, net income is allocated to common stock and participating securities to the extent that each security may share in earnings, as if all of the earnings for the period had been distributed. The Company has accounted for non-vested restricted stock granted prior to April 1, 2009 as a participating security and has used the two class method of computing earnings per share. Because the Company does not pay dividends, earnings allocated to each participating security and share of common stock are equal. For the three months ended March 31, 2009, the Company was in a net loss position and therefore did not allocate any loss to participating securities.

Diluted earnings per common share reflect the potential dilution from assumed conversion of all dilutive securities using the treasury stock method. When the effect of the outstanding equity securities is anti-dilutive, they are not included in the calculation of diluted earnings per common share.

ECLIPSYS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The computation of basic and diluted earnings (loss) per common share is as follows (in thousands, except per share data):


	Three Months Ended March 31,
	2010		2009
Basic earnings (loss) per common share:
Net income (loss)	$	5,426	$	(865	)
Less: Income allocated to participating securities		31		—

Net income (loss) available to common stockholders	$	5,395	$	(865	)

Basic weighted average shares outstanding		57,161		55,470
Less: Participating securities		323		—

Basic weighted average common shares outstanding		56,838		55,470

Basic earnings (loss) per common share	$	0.09	$	(0.02	)
Diluted earnings (loss) per common share:
Net income (loss)	$	5,426	$	(865	)
Less: Income allocated to participating securities		30		—

Net income (loss) available to common stockholders	$	5,396	$	(865	)

Basic weighted average common shares outstanding		56,838		55,470
Dilutive portion of potential common shares		891		—

Diluted weighted average shares common outstanding		57,729		55,470

Diluted earnings (loss) per common share	$	0.09	$	(0.02	)
Anti-dilutive share excluded from the calculation of diluted earnings per common share		3,196		5,367

NOTE D – ACCOUNTS RECEIVABLE

Accounts receivable, net of an allowance for doubtful accounts, consists of the following (in thousands):


	As of
	March 31, 2010		December 31, 2009
Accounts Receivable:
Billed accounts receivable, net	$	81,266	$	82,110
Unbilled accounts receivable, net		31,875		29,602

Total accounts receivable, net	$	113,141	$	111,712

NOTE E – LONG-TERM INVESTMENTS

The fair value of investment securities were as follows (in thousands):


	As of
	March 31, 2010		December 31, 2009
Available for sales securities:
Goldman Sachs purchased auction rate securities (“ARS”)	$	50,147	$	49,939
Trading securities:
UBS Financial Services purchased ARS		29,039		33,403
ARS put option		2,209		2,646

Total trading securities		31,248		36,049

Total long-term investments	$	81,395	$	85,988

ECLIPSYS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The changes in market value of available for sale securities are recorded in the accumulated other comprehensive loss caption in the stockholders’ equity section of the Condensed Consolidated Balance Sheets, until the Company disposes of them. Once these securities are disposed of, either by sale or maturity, any realized loss is reported in loss on investments, net. The Condensed Consolidated Statements of Cash Flows reflects gross proceeds from sales or redemptions of available for sale securities as investing activities.

Changes in the market value of trading securities are recorded in loss on investments, net, on the Condensed Consolidated Statements of Operations as they occur. The Condensed Consolidated Statements of Cash Flows reflects gross proceeds from sales or redemptions of trading securities as investing cash flows since the securities are illiquid with no established market and are not used for operating activities.

The par values of investments in ARS were as follows (in thousands):


	As of
	March 31, 2010		December 31, 2009
UBS:
AAA rated pool of student loans	$	28,025	$	32,275
A3 rated pool of student loans		3,150		3,475

UBS		31,175		35,750

Goldman Sachs:
AAA rated pool of student loans		40,050		40,050
Baa2 rated pool of student loans		15,400		15,400

Goldman Sachs UBS		55,450		55,450

Total par value of ARS	$	86,625	$	91,200

These investments have long-term nominal maturities for which the interest rates are supposed to be reset through a Dutch auction each month. Prior to February 2008, monthly auctions provided a liquid market for these securities. However, in February 2008, the broker-dealers managing the Company’s ARS portfolio experienced failed auctions in which the amount of ARS submitted for sale exceeded the amount of purchase orders. The Company’s ARS continued to fail to settle at auctions through the first quarter of 2010. The Company continues to earn interest on these investments at the contractual rate.

On November 12, 2008, the Company entered into a settlement agreement with UBS pursuant to which the Company (1) received the right (the “put option”) to sell the ARS, originally purchased through UBS, at par value, to UBS between June 30, 2010 and July 2, 2012 and (2) gave UBS the right to purchase the ARS, originally purchased through UBS, from the Company any time after the acceptance date of the settlement agreement as long as the Company receives the par value of the securities.

The Company has accounted for the put option as a freestanding financial instrument and elected to record the value under the fair value option. The Company has classified the related UBS purchased ARS as trading securities. Although the underlying credit quality of UBS will impact the future value of the put option and could cause the put option to decrease in fair value and not offset the change in fair value of the UBS purchased ARS, the Company expects that the future changes in the fair value of the put option will over time generally offset the fair value movements in the related UBS purchased ARS.

The put option becomes exercisable on June 30, 2010. Although the Company currently anticipates that it will exercise the put option on the date it becomes exercisable, the Company is not required to do so. In addition, there is no guarantee that the Company will be able to recover the entire investment because the individual securities are illiquid and the Company is still subject to the credit risk that UBS may not be able to perform under the terms of the put option. Accordingly, the Company has classified the UBS portfolio as a non-current asset on its balance sheet as a component of long-term investments.

As of March 31, 2010, the Company has recorded these investments, including the put option, at their estimated fair value. All of the ARS were at an unrealized loss position as of March 31, 2010. See Note I – Fair Value Measurement for further information regarding the valuation of the ARS.

In evaluating its ARS purchased from Goldman Sachs for other than temporary impairment, as of March 31, 2010, the Company considered a number of qualitative factors such as: the loans are sufficiently collateralized; all of the underlying student loans in the Goldman Sachs’ portfolio are guaranteed by the Federal Family Education Loan Program (“FFELP”);

ECLIPSYS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

there have been principal repayments of some of the securities to investors; the Company continues to earn interest on the securities at market rates; and there was continued evidence of improvement in the secondary market for ARS during the first quarter of 2010. Management believes these investments continue to be of high credit quality and expects to recover the securities’ entire amortized cost basis. In addition, the Company does not currently intend to sell the securities, unless it receives an unsolicited offer, which the Company considers favorable at that time. More likely than not, the Company will not be required to sell the securities before recovering its cost. Accordingly, the Company has classified these securities as long-term investments in its Condensed Consolidated Balance Sheets. The Company has concluded that no other-than-temporary impairment losses, including any credit loss, occurred for the three months ended March 31, 2010. The Company will continue to analyze its ARS purchased from Goldman Sachs each reporting period for impairment, and it may be required to record an impairment charge in the Condensed Consolidated Statements of Operations if the fair value of the Goldman Sachs purchased ARS declines, and the decline is determined to be other-than-temporary.

NOTE F – ACQUIRED TECHNOLOGY AND INTANGIBLE ASSETS, INCLUDING GOODWILL

The gross and net amounts for intangible assets and goodwill consist of the following (in thousands):


	As of March 31, 2010							As of December 31, 2009
	Gross Carrying Amount		Accumulated Amortization			Net Book Value		Gross Carrying Amount		Accumulated Amortization			Net Book Value		Estimated Life
Intangibles subject to amortization
Acquired technology	$	43,060	$	(15,981	)	$	27,079	$	43,060	$	(13,503	)	$	29,557	3-5 years
Ongoing customer relationships		9,409		(3,543	)		5,866		9,409		(3,110	)		6,299	5-6 years
Non-compete agreements		2,640		(1,867	)		773		2,640		(1,588	)		1,052	2-3 years

Total	$	55,109	$	(21,391	)	$	33,718	$	55,109	$	(18,201	)	$	36,908

Intangibles not subject to amortization:
Trade names						$	60						$	60
Goodwill							100,008							100,008

Total						$	100,068						$	100,068

Goodwill has been recorded in U.S dollars only and is not amortized. Eclipsys has only one reporting unit for which all goodwill is assigned. Impairment tests for goodwill include comparing Eclipsys’ fair value to the comparable carrying value, including goodwill. No impairment has been identified or recorded for the three months ended March 31, 2010 or March 31, 2009.

NOTE G – TOTAL COMPREHENSIVE INCOME (LOSS)

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


	For the Three Months Ended March 31,
	2010		2009
Net income (loss)	$	5,426	$	(865	)
Foreign currency translation adjustments		478		(358	)
Net change in unrealized holding loss, net of tax		170		(1,104	)

Total comprehensive income (loss)	$	6,074	$	(2,327	)

NOTE H – RESTRUCTURING

During the first quarter of 2009, the Company executed a workforce reduction which included terminating the employment of approximately 175 employees, including staff in its services and client solutions organizations to better align with current and projected business volumes, and other workforce reductions across various businesses and back office divisions. These reductions, together with severance costs resulting from the departure of an executive officer of approximately $0.6 million, resulted in a total charge of $5.4 million for severance related costs to the Company’s Condensed Consolidated Statements of Operations. As of March 31, 2010, $5.3 million of these costs have been paid by the Company and the remaining accrued liability is $0.1 million.

ECLIPSYS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE I – FAIR VALUE MEASUREMENT

Investments

The Company measures its financial assets at fair value in accordance with the fair value framework, which requires the categorization of assets into three levels based upon the assumptions (inputs) used to determine the estimated fair value of the assets. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment. The three levels are defined as follows:

•

Level 1: Unadjusted quoted prices in active markets for identical assets.

•

Level 2: Observable inputs other than those included in Level 1. For example, quoted prices for similar assets in active markets or quoted prices for identical assets in inactive markets.

•

Level 3: Unobservable inputs reflecting management’s own assumptions about the inputs used in estimating the value of the asset.

The following table summarizes the Company’s financial assets measured at fair value on a recurring basis as of March 31, 2010 (in thousands):


	Balance as of March 31, 2010		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Unobservable Inputs (Level 3)
Cash equivalents:
Money market funds	$	69,768	$	69,768	$	—	$	—
Long-term investments
Auction rate securities		79,186		—		—		79,186
Put option		2,209		—		—		2,209

	$	151,163	$	69,768	$	—	$	81,395

The following table summarizes the Company’s financial assets measured at fair value on a recurring basis as of December 31, 2009 (in thousands):


	Balance as of December 31, 2009		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Unobservable Inputs (Level 3)
Cash equivalents:
Money market funds	$	80,585	$	80,585	$	—	$	—
Long-term investments
Auction rate securities		83,342		—		—		83,342
Put option		2,646		—		—		2,646

	$	166,573	$	80,585	$	—	$	85,988

The Company has recorded the investments categorized as Level 1 at their estimated fair value. These investments consist of money market funds which are valued daily by the fund companies. The valuation is based on the publicly reported net asset value of each fund.

ECLIPSYS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Company has recorded the investments categorized as Level 3 at their estimated fair value. Due to events in the credit markets, quoted prices in active markets are not readily available for the ARS and put option. The Company estimated the fair value of these ARS based on various factors using a trinomial discount model. The model considers possible cash flows and probabilities which are forecasted under a number of potential scenarios. Each scenario’s cash flow is multiplied by the probability of that scenario occurring. The major inputs are as follows: forecasted maximum interest rates, probability of passing auction or early redemption, probability of failing auction, probability of default at auction, severity of default, and the discount rate. The Company also considered the credit quality and duration of the securities. The Company accounted for illiquidity by using a discount rate within the valuation, with an additional spread representing the additional rates of return investors would require for certain securities to hold those securities in an illiquid environment. The UBS put option was valued using a valuation approach for forward contracts in which one party agrees to sell a financial instrument to another party at a particular time for a particular price. In this approach, the present value of all expected future cash flows are subtracted from the current fair value of the security. The resulting value is calculated as a future value at an interest rate reflective of counterparty risk. There have not been any changes in the Company’s valuation model for ARS and the put option from December 31, 2009.

The assumptions that were used to determine the fair value estimates of the ARS and put option were highly subjective and therefore considered Level 3 unobservable inputs in the fair value hierarchy. The fair value of these assets represents $81.4 million or 53.8% of total assets measured at fair value. The estimate of the fair value of the ARS the Company holds could change significantly based on future market conditions.

The following table presents the Company’s activity for assets measured at fair value on a recurring basis using significant unobservable inputs - Level 3 (in thousands):


	Auction Rate Securities			Auction Rate Securities Put Options			Total
Balance at December 31, 2009	$	83,342		$	2,646		$	85,988
Total gains/(losses):
Included in loss on investments, net (realized)		—			—			—
Included in loss on investments, net (unrealized)		211			(437	)		(226	)
Included in accumulated other comprehensive loss		208			—			208
Purchases, sales, issuances, and settlements		(4,575	)		—			(4,575	)
Transfers out of Level 3		—			—			—

Balance at March 31, 2010	$	79,186		$	2,209		$	81,395

Unrealized gains and losses included in loss on investments, net, on the Company’s Condensed Consolidated Statements of Operations are related to the changes in ARS purchased through UBS that are classified as trading securities and are still held as of March 31, 2010. Gains and losses included in accumulated other comprehensive loss on the Company’s Condensed Consolidated Balance Sheets are related to the changes in ARS purchased through Goldman Sachs that are classified as available for sale and are still held as of March 31, 2010.

Debt

The fair value of the Company’s bank debt approximates the carrying value of $15.0 million due to the nature of its revolving line of credit financing arrangement with a variable interest rate and a maturity date of August 26, 2011. During the first quarter of 2010, the Company repaid $14.0 million of revolving long-term debt outstanding under the Company’s credit facility.

ECLIPSYS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE J – INCOME TAXES

Income tax provisions for interim periods are based on estimated annual income for the year at the statutory income tax rates in effect at the time, adjusted to reflect the effects of any significant infrequent or unusual items which are required to be discretely recognized within the current interim period. The Company’s intention is to permanently reinvest its foreign earnings outside of the United States. As a result, the effective tax rates in the periods presented are largely based upon the forecasted pretax earnings mix and allocation of certain expenses in various taxing jurisdictions where the Company conducts its business that utilizes a broad range of statutory income tax rates.

The effective tax rate was 48.6% for the three months ended March 31, 2010 and was negative for the three months ended March 31, 2009. The tax rates for these periods were based on the forecasted pretax earnings mix by jurisdiction of Eclipsys and its subsidiaries after considering any discrete items in the interim periods. The negative effective tax rate for the three months ended March 31, 2009 was impacted by the pre-tax loss for the quarter and the respective shortfall for share-based compensation awards to the extent that the cumulative recognized book stock compensation expense for that award exceeded the associated tax deductions. The 48.6% effective rate for the three months ended March 31, 2010 was higher than statutory rates primarily due to the tax effect of share-based compensation shortfalls and deemed dividend distributions from foreign subsidiaries.

NOTE K – CONTINGENCIES

The Company and its subsidiaries are from time to time parties to legal proceedings, lawsuits and other claims incident to their business activities. Such matters may include, among other things, assertions of contract breach or intellectual property infringement, claims for indemnity arising in the course of the Company’s business and claims by persons whose employment with us has been terminated. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. Consequently, management is unable to ascertain the ultimate aggregate amount of monetary liability, amounts which may be covered by insurance or recoverable from third parties, or the financial impact with respect to these other matters as of March 31, 2010. However, based on management’s knowledge, management believes that the final resolution of such other matters pending at the time of this report, individually and in the aggregate, will not have a material adverse effect upon the Company’s condensed consolidated financial position, results of operations or cash flows.

NOTE L – SUBSEQUENT EVENTS

During April 2010, the Company repaid $15.0 million of revolving long-term debt outstanding under the Company’s secured credit facility.

In April 2010, as a result of unsolicited offers, the Company sold $15.4 million of available for sale ARS for $13.9 million. The realized loss of $1.5 million will be recorded in the second quarter of 2010.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report contains forward-looking statements that are based on our current expectations, assumptions, estimates and projections about our company and our industry. These statements are not guarantees of future performance and actual outcomes may differ materially from what is expressed or forecasted. When used in this report, the words “may,” “will,” “should,” “predict,” “continue,” “plans,” “expects,” “anticipates,” “estimates,” “intends,” “believe,” “could,” and similar expressions are intended to identify forward-looking statements. These statements may include, but are not limited to, statements concerning our anticipated performance, including revenue, margin, cash flow, balance sheet and profit expectations; development and implementation of our software; duration, size, scope and revenue expectations associated with client contracts; business mix; sales and growth in our client base; market opportunities; industry conditions; performance of our acquisitions; and our accounting, including its effects and potential changes in accounting.

Actual results might differ materially from the results projected or implied by the forward-looking statements due to a number of risks and uncertainties, including those described in this report under the heading “Risk Factors” and in other filings we make from time to time with the U.S. Securities and Exchange Commission (“SEC”). Except as required by law, we assume no obligation to publicly update or revise these forward-looking statements for any reason, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

Throughout this report we refer to Eclipsys Corporation and its consolidated subsidiaries as “Eclipsys,” “the Company,” “we,” “us,” and “our.”

This discussion and analysis should be read in conjunction with our Condensed Consolidated Financial Statements, including the notes thereto, which are included elsewhere in this report.

EXECUTIVE OVERVIEW

About the Company

Eclipsys is a provider of advanced integrated clinical, revenue cycle and performance management software and related professional services that help healthcare organizations and physicians improve clinical, financial, and operational outcomes. We develop and license proprietary software and content that is designed for use in connection with many of the key clinical, financial and operational functions that healthcare organizations require. Among other things, our software:

•

Enables physicians, nurses and other clinicians to coordinate care through shared electronic medical records, place orders and access and share information about patients;

•

Provides information for use by physicians, nurses and other clinicians through clinical content, which is integrated with our software;

•

Helps our clients optimize the healthcare revenue cycle, including patient admissions, scheduling, invoicing, inventory control and cost accounting; and

•

Supports clinical and financial planning and analysis.

We also provide professional services related to our software. These services include software implementation and maintenance, outsourcing of information technology operations, remote hosting of our software and third-party healthcare information technology applications, technical and user training, and consulting.

With the exception of hardware revenues, we classify our revenues in one caption (systems and services) in our Condensed Consolidated Statements of Operations because the amount of license revenues related to traditional software contracts is less than 10% of total revenues. The remaining revenue types included in this caption relate to bundled subscription arrangements and other services arrangements that have similar attribution patterns for revenue recognition. The revenue items included on our Condensed Consolidated Statements of Operations are as follows:

•

Systems and services revenues include revenues derived from a variety of sources, including software licenses, software maintenance, and professional services, which include implementation, training and consulting services, as well as outsourcing and remote hosting of our software. Our systems and services revenues include both recurring software license revenues and software maintenance revenues (both of which are recognized ratably over the contractual term) and license revenues related to “traditional” software contracts (which are generally recognized upon delivery of the software or during the course of implementation and represent less than 10% of total revenues). For some clients, we host the software applications licensed from us remotely on our own servers, which saves these clients the cost of procuring and maintaining hardware and related facilities. For other clients, we offer an outsourced solution in which we assume partial to total responsibility for a healthcare organization’s information technology operations using our employees. Margins on our software license and maintenance revenues are generally significantly higher than margins on our professional services, outsourcing, and remote hosting revenues.

•

Hardware revenues result from the sale of computer hardware to our clients in connection with their implementation of our software. We purchase this hardware from suppliers and resell it to our clients. As clients elect more remote-hosted solutions, clients’ need for hardware is reduced and future hardware revenues may continue to be negatively impacted. The amount of hardware revenues can vary significantly from period to period. Margins on our hardware revenues are generally significantly lower than margins on our systems and services revenues.

We market our software to healthcare providers of many different sizes and specialties, including community hospitals, large multi-entity healthcare systems, academic medical centers, outpatient clinics and physician practices. A number of the top-ranked U.S. hospitals named in U.S. News & World Report’s Honor Roll use one or more of our solutions.

We continue to focus on expanding sales of our solutions outside of North America, such as the Asia-Pacific region and the Middle East. As of March 31, 2010, our India operations have expanded to include two offices and approximately 780 employees. We believe that India provides access to educated professionals to work on software research, development and support, as well as other functions, at an economical cost.

Business Environment

Our industry, healthcare information technology, or HIT, is highly competitive and subject to numerous government regulations and industry standards. Sales of Eclipsys’ solutions can be affected significantly by many competitive factors, including the features and cost of our solutions as compared to the offerings of our competitors, our marketing effectiveness, and the success of our research and development efforts to create new and enhanced solutions. We anticipate that the HIT industry will continue to grow and be seen as a way to address growing healthcare costs while also improving the quality of healthcare.

Economic conditions have adversely affected the availability of capital for some of our clients and potential clients, with commensurate effects on their decisions about HIT spending. In addition, current economic conditions has and may continue to increasingly motivate some clients and potential clients to prefer software subscription contracting to traditional licensing arrangements as a means to lower the amount of the upfront investment to purchase and implement HIT solutions. Given that periodic revenues from traditional license arrangements carry higher margins and contribute significantly to overall profitability in the transaction period, this client contracting preference has and may continue to affect our profitability in the near term. In addition, the pricing environment for certain market segments is becoming increasingly difficult. Some competitors are becoming more aggressive on pricing as a way to gain or avoid losing market share. We believe this emerging market dynamic of more aggressive pricing is the result of competition to capture market share of the increasing number of hospitals with older, less robust clinical systems beginning to evaluate replacement in light of the incentives being offered through the Health Information Technology for Economic and Clinical Health Act, or HITECH Act, which is part of the American Reinvestment and Recovery Act of 2009 (“ARRA”), among other factors.

Economic factors have contributed to a difficult operating environment, and we have responded with various initiatives to reduce and control our expenses, including headcount reductions to better align with currently anticipated business conditions. However, the difficult economy, client financial challenges, and significant development requirements, combined with the positive effects of the HITECH Act and other factors motivating healthcare providers to expand use of information technology systems (discussed below) have resulted in an unusual business environment that makes planning and forecasting challenging.

Initiatives and Challenges for 2010

Respond to clients’ needs through ARRA certification and our “Speed-to-Value” implementation methodology

We believe helping our clients achieve ARRA “meaningful use” is critical to our future success and failure to do so in a timely manner could put us at a severe competitive disadvantage.

The HITECH Act, which is part of the ARRA, provides financial incentives for hospitals and doctors that are “meaningful users” of electronic health records, or EHRs, which includes use of HIT systems that are “certified” according to technical standards developed under the supervision of the Secretary of Health and Human Services. Qualifying hospitals and physicians can receive significant aggregate payments over a period of approximately four or five years beginning in 2011. The HITECH Act also provides for financial penalties in the form of reduced Medicare reimbursement payments for hospitals and doctors that have not become “meaningful users” of EHRs by 2015. As a result of these incentives and future penalties, we have noticed increased interest in our offerings. In order to take advantage of this opportunity and preserve our competitiveness, we are committing to clients that we will timely meet the HITECH Act certification standards. This has required us to invest in our applicable clinical software to conform to HITECH Act standards, and will require significant additional development investments as certification standards evolve.

Eligible professionals and hospitals who seek to qualify for incentive payments under the Medicare and Medicaid EHR Incentive Programs are required to use certified EHR technicians. While the details are still being finalized, we believe that failure to have certified products and to demonstrate compliance plans for products that are not certified could put us at a competitive disadvantage. Accordingly, we are devoting significant resources to conforming our software to current and anticipated certification criteria and believe both are critical to our future growth and success.

Some of our software is complex and highly configurable and many clients value our ability to adapt the software to their specific needs. However, this high degree of configurability can result in significant implementation costs, which can make our offering too expensive for some potential purchasers. Our ability to reach our goals for expansion into smaller clients and in the international market, and to sell to clients with budgetary constraints, depends upon our ability to develop less costly ways of implementing our complex software. To address this issue, we introduced a new “speed to value” implementation methodology and we are continuing our efforts to refine this approach and expand its use.

Deploy Community Strategy

Our community strategy is focused on helping our hospital clients better connect with affiliated physicians and other constituents in their communities. Hospitals are actively looking for solutions they can provide for physicians to establish stronger relationships through electronic sharing of patient information. To help them achieve this, we market Sunrise Ambulatory Care^TM and PeakPractice^TM solutions that our hospital clients can use to extend the inpatient Eclipsys EHR to the community for both employed and affiliated physicians.

We also have introduced Eclipsys HealthXchange™, a vendor-neutral health information exchange solution that enables access, exchange and sharing of health information among disparate systems within and across acute care, ambulatory and community settings.

Given the growing desire of our current and potential client base to enhance their electronic sharing of patient information within their “community”, we believe it is critical we continue to improve, market, and sell these solutions in 2010.

Improve Operating Margins

In the second quarter of 2009, we launched an initiative designed to more effectively align and engage our employees, implement best practice processes across all our major businesses, and improve our operating margins. To support this initiative, we engaged an outside consultant to assists us with a thorough evaluation of our business.

As a result of this project, we developed together an operational plan that targeted very specific, achievable goals with accountability for milestones and cost savings targets at both the executive management and departmental level. We established a governance structure to manage the change process and results measurement tracking and also contracted with the consultant through the second quarter of 2010 to assist in the implementation of the initiative. In the third quarter of 2009, we launched phase one of this initiative. We estimate the annualized benefits of the initiative to approximate $12 to 13 million, and we expect to reach this run rate beginning in the third quarter of 2010.

Pursue International Growth

We continue efforts to expand sales of our solutions in the Asia-Pacific region and the Middle East. We achieved some initial success with our sale of Sunrise Clinical Manager to SingHealth, the largest healthcare provider in Singapore. Our performance at SingHealth is being closely monitored in the region, and could prove to be a catalyst to help us drive business in new international markets. In April 2010, we expanded our Asia-Pacific footprint by contracting with a hospital in Malaysia. These international initiatives are important to our ability to grow our business and require that we oversee development and client support capabilities in a high quality and cost-effective manner. We also may face challenges building brand-name recognition and adapting our software solutions to new international markets.

Execute on Development Initiatives

In addition to requirements to help bring our clients to ARRA “meaningful use” we continue to develop other solutions to meet our client’s needs. We continue to emphasize development and marketing of our performance management suite of solutions, consisting of Sunrise EPSi™, Sunrise Patient Flow™ and Sunrise Clinical Analytics™. These solutions help healthcare organizations streamline and automate manual processes required to gather, analyze and display enterprise-wide information. They also enable hospital senior and department level management to more easily identify areas requiring intervention and to improve clinical quality, regulatory compliance, cost-efficiency, resource utilization and patient satisfaction. We think an integrated performance management offering can be a competitive differentiator for us, but it requires additional investment to develop these independent applications into an integrated solution.

Another important research and development initiative includes continued work on making our Sunrise Enterprise^TM platform more extensible to better interoperate with solutions from third party vendors. Sunrise Enterprise 5.5, which was made generally available in April 2010, is an important step towards providing this capability. Our goal is to make future versions of our platform even more extensible.

During the first quarter of 2010, we introduced Helios by Eclipsys^TM, which is our unique open platform strategy to deliver vendor choice and flexibility. We plan to use our open platform to enable and encourage third parties to write applications that work with our software. We are enabling clients and certified third-parties to natively integrate their applications with our enterprise solutions so our clients can utilize best-of-breed systems without the additional cost and complexity of customized interfaces to a closed proprietary architecture. This approach is expected to result in improved clinician workflows, an enhanced organizational ability to embrace and extend current technology investments and more freedom to adopt the latest technology innovations by removing the constraints caused by waiting for a single vendor's development timeline. We view having an open platform as an important competitive differentiator and our continued development of this platform is an important part of our plans for future success.

In the first quarter of 2010, we also introduced our integrated suite of mobility applications designed for the Apple iPhone and Apple iPod touch. Specific to physicians, Eclipsys’ Apple iPhone application enables rapid access to patient information and order entry capabilities, going one step beyond typical mobile devices which merely provide physicians with views of patient data. For nurses, graphical task lists and patient management features support improved workflows and enhanced ability to respond to patient needs.

Another major initiative is the migration of our patient accounting solutions, Sunrise Patient Financials^TM, to the same XA^TM platform as Sunrise Clinical Manager^TM and other Sunrise Enterprise^TM solutions, such as Sunrise Enterprise Registration^TM and Sunrise Enterprise Scheduling^TM. Once Sunrise Patient Financials is on the same platform we can bring to market a completely integrated clinical and revenue cycle management solution, which some potential clients view as an important factor in their selection of an enterprise vendor. This solution is expected to be generally available in the second half of 2011. With so many hospitals running on extremely antiquated patient accounting systems, we anticipate a growing demand for more modern solutions.

Recent Performance and Outlook

Our first quarter 2010 performance reflects our initiatives to control costs and drive improvements in our operating margins. Total revenues of $128.4 million in the first quarter 2010 were 1.4% lower than the first quarter of 2009, despite an increase in ratable revenues from software, maintenance, outsourcing and remote hosting. The overall decline in revenue reflected continued softness in our professional services business, resulting from fewer large enterprise activations impacted by lower enterprise sales in 2009, reflecting economic pressures on our clients, and some delays in capital investments pending further definition of ARRA requirements. The HITECH Act appears to be starting to drive increased demand for enterprise solutions. We expect bookings activity from ARRA to continue to build through the rest of 2010 and beyond, as clients and prospects start accelerating purchasing decisions required to achieve ‘meaningful use’ requirements. Our professional services business should improve in the latter half of 2010 compared to recent activity due to recent positive bookings activity and expectations for continued improvements in 2010.

The overall revenue decline in the first quarter 2010 compared to the first quarter 2009 included a reduction of $4.7 million, or 37.8%, in periodic revenues to $7.8 million. Periodic revenues can fluctuate dramatically depending on whether we are able to record license revenues at contract signing, which is dependent on each individual client’s contract terms. Therefore, it is difficult to project periodic license revenues in future quarters, and declines in periodic license revenues can have a significant adverse effect on our earnings for the period.

Although overall revenues declined, our earnings improved due to our cost reduction efforts, which contributed to a 9.7% reduction in total expenses for the first quarter 2010 compared to the first quarter 2009. The first quarter of 2009 included $5.4 million of restructuring charges. Expense reductions reflect ongoing initiatives implemented during 2009.

Pre-tax income for the first quarter of 2010 was $10.6 million compared to a pre-tax loss of $0.2 million in the first quarter of 2009. Results by quarter can vary due to many factors including the effects on demand created by factors like the HITECH Act and other emerging changes in the market and regulatory environment for our clients; increasing price competition in certain market segments, as certain competitors attempt to retain market share; timing of license revenues; restructuring activity; and capitalized software labor deferrals, which also can fluctuate based on project activity.

Operating cash flows of $15.9 million for the first three months in 2010 decreased $3.8 million compared to operating cash flows of $19.7 million in the first three months of 2009 due to $12.5 million in incentive compensation payments made during 2010 under the 2009 incentive plan, offsetting strong income generated by operations. We did not pay bonuses in 2009 under the 2008 incentive plan. We utilized these operating cash flows and $4.6 million of proceeds from ARS sales and redemptions to repay $14.0 million of long-term debt during the first quarter of 2010. We also paid the remaining $15.0 million of outstanding long-term debt under our secured credit facility in April 2010.

Consolidated Results of Operations (unaudited)

Key financial and operating data for Eclipsys Corporation and its subsidiaries are as follows (in thousands, except per share amounts):


	For The Three Months Ended March 31,						Change ($)			Change (%)
	2010			2009			Change ($)			Change (%)
Revenues:
Systems and services	$	125,557		$	128,137		$	(2,580	)	-2.0	%
Hardware		2,803			2,029			774		38.1	%

Total revenues		128,360			130,166			(1,806	)	-1.4	%

Costs and expenses:
Cost of systems and services (excluding depreciation and amortization shown below)		65,199			66,874			(1,675	)	-2.5	%
Cost of hardware		2,452			1,656			796		48.1	%
Sales and marketing		19,748			22,751			(3,003	)	-13.2	%
Research and development		13,461			13,493			(32	)	-0.2	%
General and administrative		8,567			12,021			(3,454	)	-28.7	%
Restructuring		—			5,434			(5,434	)	-100.0	%
Depreciation and amortization		8,226			8,034			192		2.4	%

Total costs and expenses		117,653			130,263			(12,610	)	-9.7	%

Income (loss) from operations		10,707			(97	)		10,804		*
Gain on sale of assets		—			400			(400	)	-100.0	%
Loss on investments, net		(226	)		(158	)		(68	)	43.0	%
Interest income		417			847			(430	)	-50.8	%
Interest expense		(344	)		(1,143	)		799		-69.9	%

Income (loss) before taxes		10,554			(151	)		10,705		*
Provision for income taxes		5,128			714			4,414		*

Net income (loss)	$	5,426		$	(865	)	$	6,291		-727.3	%

Basic earnings (loss) per common share	$	0.09		$	(0.02	)	$	0.11

Diluted earnings (loss) per common share	$	0.09		$	(0.02	)	$	0.11

*	Not meaningful

Revenues

Total revenues decreased by $1.8 million, or 1.4%, for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009.

Systems and Services Revenues

Systems and services revenues consisted of the following (in thousands):


	For the Three Months Ended March 31,				Change ($)			Change (%)
	2010		2009		Change ($)			Change (%)
Revenues recognized ratably	$	94,309	$	88,101	$	6,208		7.0	%
Professional services		22,747		27,346		(4,599	)	-16.8	%
Periodic revenues:
Eclipsys software related fees		7,330		10,216		(2,886	)	-28.2	%
Third party software related fees		1,171		2,474		(1,303	)	-52.7	%

Total periodic revenues		8,501		12,690		(4,189	)	-33.0	%

Total systems and services revenues	$	125,557	$	128,137	$	(2,580	)	-2.0	%

Revenues Recognized Ratably—Revenues recognized ratably from software, maintenance, outsourcing and remote hosting were $94.3 million for the three months ended March 31, 2010, a 7.0 % increase from the first quarter of 2009. The increase was due to previous period sales of our software solutions, remote hosting related services, and outsourcing, resulting in growth in our recurring revenue base.

Professional Services Revenues - Professional services revenues, which include implementation, training and consulting related services, were $22.7 million for the three months ended March 31, 2010, a decrease of $4.6 million or 16.8% from the first quarter 2009. The decrease primarily resulted from a reduction in professional service hours worked on large enterprise deals, due to lower enterprise deal sales in 2009. Professional services also decreased due to lower client spending on training. Recent improvement in the economy should result in increased enterprise sales and training activity. Prior year percentage of completion revenues of $0.2 million have been reclassified from professional services revenues to periodic revenues to conform to current year presentation.

Periodic Revenues - Periodic revenues, which consist of Eclipsys software related fees and third party software related fees, were $8.5 million for the three months ended March 31, 2010. The decline from the first quarter of 2009 is due to recent client preferences for subscription-type transactions that spread their license payments over time. In any period, some software revenues can be considered one-time in nature for that period, and we do not recognize these periodic revenues on a ratable basis. These periodic revenues include traditional license fees associated with new contracts signed in the period, including add-on licenses to existing clients and new client transactions, as well as revenues from contract backlog that had not previously been recognized pending contract performance that occurred or was completed during the period, and certain other activities during the period associated with client relationships. In the aggregate, these periodic revenues can contribute significantly to earnings in the period because relatively little in-period costs are associated with such revenues. We expect these periodic revenues, which depend on economic conditions, client preferences and other factors, to continue to fluctuate as a result of significant variations in the type and magnitude of sales and other contract and client activity in any period, and these variations make it difficult to predict the nature and amount of these periodic revenues. Prior year content software license revenues of $1.0 million have been reclassified from Eclipsys software related fees to third party software related fees to conform to current year presentation.

Hardware Revenues

Hardware revenues increased by $0.8 million, or 38.1%, for the three months ended March 31, 2010, as compared to the three months ended March 31, 2009. The increase in hardware revenues is primarily attributable to lower volumes in 2009 due to fewer enterprise deals sold in late 2008 and early 2009 and due to increased demand in 2010 reflecting increased client upgrade activity.

Operating Expenses

Cost of Systems and Services

Our cost of systems and services decreased $1.7 million, or 2.5%, for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009. The decrease reflects a $0.5 million decrease in labor related costs and a $0.6 million decrease in travel related costs. The labor decrease of $0.5 million includes a $1.1 million decrease in core wages reflecting professional services headcount reductions during 2009 partially offset by higher self-insured medical costs caused by unusual high dollar claim activity in the first quarter of 2010. The travel related reductions reflect cost savings initiatives implemented during 2009 and to a lesser extent lower professional services activity in the first quarter 2010 compared to the first quarter 2009.

Cost of Hardware

Cost of hardware increased $0.8 million, or 48.1%, for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009. This increase was directly attributable to increased hardware revenues in the quarter. Hardware revenues are recorded when the hardware is delivered. The amount of hardware revenues in any quarter depends on shipments associated with active implementations.

Sales and Marketing

Our sales and marketing expenses decreased $3.0 million, or 13.2%, for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009. This decrease included $3.4 million of lower labor related costs primarily impacted by lower wages of $2.1 million, lower annual incentive compensation of $0.7 million and lower stock compensation of $0.6 million. The reduction in wages reflects headcount reductions late in the first quarter of 2009 and in the fourth quarter of 2009 including unfilled fourth quarter 2009 vacancies. We expect savings to continue for the remainder of 2010, but to a lesser extent as certain headcount vacancies are filled.

Research and Development

Our research and development expenses were flat for the three months ended March 31, 2010 as compared to the same period in 2009. Offsetting changes included a reduction in research and development expenses of $0.9 million as a result of an increase in internal labor cost capitalization associated with Sunrise XA 5.5, which was released in April 2010, and higher consulting related project expenses of $0.5 million. Capitalized hours increased throughout the Sunrise XA 5.5 development and accelerated prior to the April 2010 release date. Research and development labor was generally flat in 2010 compared to 2009 as we stabilized headcount growth in India during 2009.

Our gross research and development spending, which consists of research and development expenses and capitalized software development costs, was as follows (in thousands):


	For The Three Months Ended March 31,				Change ($)			Change (%)
	2010		2009		Change ($)			Change (%)
Research and development expenses	$	13,461	$	13,493	$	(32	)	-0.2	%
Capitalized software and development costs		8,091		7,216		875		12.1	%

Gross research and development expenditures	$	21,552	$	20,709	$	843		4.1	%

Amortization of capitalized software development costs	$	3,857	$	3,752	$	105		2.8	%

General and Administrative

Our general and administrative expenses decreased $3.5 million, or 28.7%, for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009. The decrease reflects lower labor costs of $1.5 million as a result of headcount reductions during 2009. This decrease in labor costs included lower accrued annual incentive compensation of $0.4 million.

The $3.5 million general and administrative decrease also includes lower legal fees of $0.5 million, lower bad debt expense of $0.5 million, lower recruiting costs of $0.6 million and various other expense reductions in the business totaling $0.4 million.

Restructuring

During the first quarter of 2009, we executed a workforce reduction which included terminating the employment of approximately 175 employees. We reduced staff in our services and client solutions organizations to better align with current and projected business volumes, and we also made other workforce reductions across various businesses and back office divisions. These reductions, together with severance costs resulting from the departure of an executive officer of approximately $0.6 million, resulted in a total charge of $5.4 million for severance related costs. No such restructuring occurred in the first quarter of 2010.

Depreciation and Amortization

Depreciation and amortization expense increased $0.2 million, or 2.4%, for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009.

Gain on Sale of Assets

We recorded a $0.4 million gain for the three months ended March 31, 2009 resulting from the completion of earn out post-closing milestones associated with our fourth quarter 2007 sale of our Clinical Practice Model Resource Center (CPMRC) business. All remaining earn out payments were received in 2009 with no further payments expected.

Loss on Investments, Net

We recorded an unrealized gain of $0.2 million reflecting an increase in the fair value of our auction rate securities, or ARS, purchased through UBS Financial Services, or UBS, for the three months ended March 31, 2010. In addition, we recorded an unrealized loss of $0.4 million for the three months ended March 31, 2010 reflecting the change in the fair value of our UBS put option.

Interest Income

Interest income decreased $0.4 million, or 50.8%, for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009. The decrease was primarily attributable to lower ARS investment balances due to sales and redemptions during 2009 and 2010 and lower interest rates on our ARS investments and cash and cash equivalents in 2010 as compared to 2009.

Interest Expense

Interest expense decreased $0.8 million, or 69.9%, for the three months ended March 31, 2010 as compared to the corresponding period in 2009. The decrease in interest expense reflects lower average outstanding debt balances due to lower interest rates and the timing of payments on the $125.0 million long-term revolving line of credit financing arrangement we entered into in August 2008 (the “Credit Facility”).

Provision for Income Taxes

For the three months ended March 31, 2010, we recorded income tax expense of $5.1 million as compared to $0.7 million for the three months ended March 31, 2009. The increase in income tax expense year over year is directly related to the increase in income before income taxes. The effective tax rate was 48.6% for the three months ended March 31, 2010 and was negative for the three months ended March 31, 2009. The tax rates for these periods were based on the forecasted pretax earnings mix by jurisdiction of Eclipsys and its subsidiaries after considering any discrete items in the interim periods. The negative effective tax rate for the three months ended March 31, 2009 was impacted by the pre-tax loss for the quarter and the respective shortfall for share-based compensations awards to the extent that the cumulative recognized book stock compensation expense for that award exceeds the associated tax deductions. The 48.6% effective rate for the three months ended March 31, 2010 was higher than statutory rates primarily due to the tax effect of share-based compensation shortfalls and deemed dividend distributions from foreign subsidiaries.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents at March 31, 2010 were $118.7 million representing a $4.5 million decrease from December 31, 2009. During the three months ended March 31, 2010, operating activities provided $15.9 million of cash compared to $19.7 million for the same period in 2009. Cash flow from operating activities reflects income generated from operations of $26.7 million, after adjusting for non-cash items of $21.2 million, which included depreciation and amortization, stock compensation, provision for bad debts, non-cash deferred tax provision, gain on sale of assets, loss on investments, net, and other reconciling items. Cash flow from operating activities after non-cash items, described above, decreased $9.8 million for the three months ended March 31, 2010 as compared to the same period in 2009.

Based on the reconciliation of net income (loss) to operating cash flow, net changes in operating assets and liabilities used $10.8 million of cash related to operating activities. This change is primarily the result of the following changes in working capital from December 31, 2009:

•

A cash flow decrease due to an increase in accounts receivable of $1.5 million related to cash collections that were lower than current period billings and revenues recognized;

•

A cash flow increase due to an increase in deferred revenue of $2.5 million due to an increase in billings in excess of software license and maintenance fees revenues recognized;

•

A cash flow decrease due to a decrease in accounts payable and other current liabilities of $3.8 million due to timing of cash payments; and

•

A cash flow decrease due to a decrease in accrued compensation of $9.4 million primarily due to payment under the 2009 incentive compensation plan.

Investing activities used $10.2 million of cash during the first quarter of 2010, which included:

•

Proceeds of $4.6 million related to redemptions of UBS purchased securities,

•

Payments of $6.7 million related to capital expenditures, and

•

Payments of $8.1 million related to capitalized investments in software development.

Financing activities used cash of $10.4 million during the first quarter of 2010 as a result of our $14.0 million long-term debt pay down, offset by $3.6 million received from stock option exercises and employee stock purchases.

Future Capital Requirements

Our future cash requirements will depend on a number of factors including the timing and level of our new sales volumes and cash collections, the cost of our development efforts, expenditures for property and equipment and acquisitions, the success and market acceptance of our future product releases, and other items. As of March 31, 2010, our principal source of liquidity is our cash and cash equivalents balances of $118.7 million and cash generated from our operations. We also have $108.1 million available for borrowings under the $125.0 million Credit Facility. All loans under the Credit Facility may be prepaid at any time and are due and payable on August 26, 2011 subject to mandatory prepayment obligations upon material asset sales, as described in the Credit Facility.

We believe that our current cash and cash equivalents combined with our anticipated cash flows from operations and, if necessary, available borrowings under our Credit Facility, will be sufficient to fund our current operations and capital requirements for the next twelve months. We will also have the option beginning June 30, 2010 to redeem the par value of our UBS investments totaling $31.2 million. During April 2010, we repaid the remaining $15 million on the Credit Facility.

Fair Value of Investments

As of March 31, 2010, we held approximately $86.6 million par value of investments in ARS of which $31.2 million was purchased through UBS and $55.4 million was purchased through Goldman Sachs. As of March 31, 2010, the par value of our ARS is comprised of the following (in thousands):


	UBS		Goldman Sachs
Triple-A rated pools of student loans	$	28,025	$	40,050
A3 rated pools of student loans		3,150		—
B3 rated pools of student loans		—		15,400

Total	$	31,175	$	55,450

These investments have long-term nominal maturities for which the interest rates were structured to be reset through a Dutch auction each month. Prior to February 2008, monthly auctions historically provided a liquid market for these securities. However, in February 2008, the broker-dealers managing our ARS portfolio experienced failed auctions in which the amount of ARS submitted for sale exceeded the amount of purchase orders. Our ARS continued to fail to settle at auctions through the first quarter of 2010. We continue to earn interest on these investments at the contractual rate.

On November 12, 2008, we entered into a settlement agreement with UBS pursuant to which we (1) received the right (the “put option”) to sell the ARS, originally purchased through UBS, at par value, to UBS between June 30, 2010 and July 2, 2012, and (2) gave UBS the right to purchase the ARS, originally purchased through UBS, from us any time after the acceptance date of the settlement agreement as long as we receive the par value of the securities.

As of March 31, 2010, we recorded these investments, including the put option, at their estimated fair value of $81.4 million. Each of our individual ARS holdings was in an unrealized loss position as of March 31, 2010. Due to events in the credit markets, quoted prices of the ARS in active markets are not readily available at this time. We estimate the fair value of these ARS based on various factors using a trinomial discount model. The model considers possible cash flows and probabilities which are forecasted under a number of potential scenarios. Each scenario’s cash flow is multiplied by the probability of that scenario occurring. The major inputs are as follows: forecasted maximum interest rates, probability of passing auction or early redemption, probability of failing auction, probability of default at auction, severity of default, and the discount rate. We also considered the credit quality and duration of the securities. We accounted for illiquidity by using a discount rate within the valuation, with an additional spread representing the additional rates of return investors would require for certain securities to hold those securities in an illiquid environment. The put option was valued using a valuation approach for forward contracts in which one party agrees to sell a financial instrument to another party at a particular time for a particular price. In this approach, the present value of all expected future cash flows are subtracted from the current fair value of the security. The resulting value is calculated as a future value at an interest rate reflective of counterparty risk. There have not been any changes in our valuation model for ARS and the put option from December 31, 2009.

The assumptions that we used to determine the fair value estimates of the ARS and put option were highly subjective and, therefore, were considered Level 3 unobservable inputs in the fair value hierarchy. The fair value of these assets represents 53.8% of total assets measured at fair value. The estimate of the fair value of the ARS we hold could change significantly based on future market conditions. For additional information on our investments, see Note I – Fair Value Measurement.

We have accounted for the put option as a freestanding financial instrument and elected to record the value under the fair value option. The fair value of the put option, previously recorded as an asset, decreased $0.4 million during the first quarter of 2010, with a corresponding charge to earnings for the change in the fair value. We expect that the future changes in the fair value of the put option will generally offset the fair value movements in the related UBS purchased ARS. We have recorded a cumulative temporary loss on the ARS purchased through Goldman Sachs of $5.3 million, as of March 31, 2010, in accumulated other comprehensive loss, reflecting the decline in the fair value of these securities, as these securities remain classified as available for sale.

In evaluating our ARS purchased from Goldman Sachs for other than temporary impairment, as of March 31, 2010, we considered several factors related to the recognition and presentation of other-than-temporary impairments including a number of qualitative factors such as: the loans are sufficiently collateralized; all of the underlying student loans in the Goldman Sachs’ portfolio are guaranteed by the Federal Family Education Loan Program (“FFELP”); there have been principal repayments of some of the securities to investors; we continue to earn interest on the securities at market rates; and there was continued evidence of improvement in the secondary market for ARS during the first quarter of 2010. We believe these investments continue to be of high credit quality, and we currently do not intend to sell the securities, “more likely than not” will not be required to sell the securities before recovering our cost, and expect to recover the securities’ entire amortized cost basis. Accordingly, we have classified these securities as long-term investments in our Condensed Consolidated Balance Sheets. We have concluded that no other-than-temporary impairment losses, including any credit loss, occurred for the three months ended March 31, 2010. We will continue to analyze our ARS purchased from Goldman Sachs each reporting period for impairment and may be required to record an impairment charge in our Condensed Consolidated Statements of Operations if the decline in fair value of the Goldman Sachs purchased ARS is determined to be other-than-temporary. In April 2010, as a result of unsolicited offers, we sold $15.4 million of available for sale ARS for $13.9 million. The realized loss of $1.5 million will be recorded in the second quarter of 2010.

CRITICAL ACCOUNTING POLICIES

There were no material changes to our critical accounting policies as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009 filed with the SEC on February 25, 2010.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We do not currently use derivative financial instruments or enter into foreign currency hedge transactions. Foreign currency fluctuations through March 31, 2010 have not had a material impact on our financial position or results of operations. We continually monitor our exposure to foreign currency fluctuations and may use derivative financial instruments and hedging transactions in the future if, in our judgment, the circumstances warrant their use. We believe most of our international operations are naturally hedged for foreign currency risk as our foreign subsidiaries invoice their clients and satisfy their obligations primarily in their local currencies with the exception of our development center in India. Our development center in India is not naturally hedged for foreign currency risk since their obligations are paid in their local currency but are funded in U.S. dollars. There can be no guarantee that the impact of foreign currency fluctuations in the future will not be significant and will not have a material impact on our financial position or results of operations.

We hold investments in ARS. These ARS are debt instruments with long-term nominal maturities that previously could be sold via Dutch auctions every 7, 14, 21, 28, or 35 days, creating a short-term instrument. In February 2008, broker-dealers holding our ARS portfolio experienced failed auctions in which the amount of ARS submitted for sale exceeded the amount of related purchase orders. Our ARS continued to fail to settle at auctions through the first quarter of 2010. We continue to earn interest on these investments at the contractual rate, and the ARS that we hold have not been placed on credit watch by credit rating agencies. The average interest rate, based on the par value of the ARS, earned on the majority of these investments for the three months ended March 31, 2010 was 1.5%. For further information on ARS investments, see “Liquidity and Capital Resources” discussion above.

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 declined 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 for hypothetical ARS balances (we currently earn interest on $86.6 million par value of ARS):


Hypothetical Interest Rate	Investment balances (in thousands)
	$	65,000	$	75,000	$	85,000

0.5%		325		375		425
1.0%		650		750		850
1.5%		975		1,125		1,275
2.0%		1,300		1,500		1,700
2.5%		1,625		1,875		2,125

We estimate that a one-percentage point decrease in interest rates for our long-term investment securities portfolio as of March 31, 2010 would have resulted in a decrease in interest income of $0.9 million for a 12 month period, based on an $85.0 million investment balance. This sensitivity analysis contains certain simplifying assumptions, including a constant level of investment securities and an immediate across-the-board increase or decrease in the level of interest rates with no other subsequent changes for the remainder of the period, and it does not consider the impact of changes in the portfolio as a result of our business needs or as a response to changes in the market. Therefore, although it gives an indication of our exposure to changes in interest rates, it is not intended to predict future results, and our actual results will likely vary.

As of March 31, 2010, our cash and cash equivalents balance earning interest was $104.1 million of the $118.7 million in cash and cash equivalents held as of that date. The weighted average interest rate on our cash and cash equivalents was 0.2% as of March 31, 2010. The following table illustrates potential fluctuations in annualized interest income based upon hypothetical values for blended interest rates for hypothetical cash and cash equivalents balances:


Hypothetical Interest Rate	Cash and cash equivalent balances (in thousands)
	$	90,000	$	100,000	$	110,000

0.1%		90		100		110
0.2%		180		200		220
0.3%		270		300		330
0.4%		360		400		440
0.5%		450		500		550

We estimate that a one tenth-percentage point decrease in interest rate for our cash and cash equivalents earning interest as of March 31, 2010 would have resulted in a decrease in interest income of $100,000 for a 12 month period, based on a $100.0 million investment balance. This sensitivity analysis contains certain simplifying assumptions, including a constant level of cash and cash equivalents and an immediate across-the-board increase or decrease in the level of interest rates with no other subsequent changes for the remainder of the period, and it does not consider the impact of changes in the balance of cash and cash equivalents as a result of our business needs. Therefore, although it gives an indication of our exposure to changes in interest rates, it is not intended to predict future results, and our actual results will likely vary.

On August 26, 2008, we entered into a credit agreement pursuant to which we received a senior secured revolving credit facility in the aggregate principal amount of $125.0 million. As of March 31, 2010, borrowings under the Credit Facility totaled $15.0 million. The interest rate applicable to the borrowed amount is based, at our option, on the prime rate, one-month LIBOR rate, three-month LIBOR rate, six-month LIBOR rate or 12-month LIBOR rate at the initial debt draw date and interest rate contract end date plus an applicable margin. The applicable margin, which is based on our leverage ratio, was 1.5% as of March 31, 2010. The leverage ratio, as defined in the credit agreement, is the ratio of (i) funded debt to (ii) earnings before interest, taxes, depreciation and amortization plus or minus certain other adjustments, for the four consecutive fiscal quarters as of the last day of each current fiscal quarter. As of March 31, 2010, our effective interest rate was 1.75%. Based on borrowings of $15 million, as of March 31, 2010, for each percentage point increase in the interest rate, annual interest expense would increase $0.2 million. This sensitivity analysis contains certain simplifying assumptions, including a constant level and rate of outstanding debt under the Credit Facility, an immediate across-the-board increase or decrease in the level of interest rates with no other subsequent changes for the remainder of the period, and it does not consider the impact of changes in the outstanding debt as a result of our business needs or as a response to changes in the market. Therefore, although it gives an indication of our exposure to changes in interest rates, it is not intended to predict future results, and our actual results will likely vary.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act as of March 31, 2010. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives of ensuring that information we are required to disclose in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures, and is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. There is no assurance that our disclosure controls and procedures will operate effectively under all circumstances. Based upon the evaluation described above our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2010, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter-ended March 31, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

The information set forth under Note K - Contingencies to the unaudited Condensed Consolidated Financial Statements of this quarterly report on Form 10-Q is incorporated herein by reference.

ITEM 1A.

RISK FACTORS

Many risks affect our business. These risks include, but are not limited to, those described below, each of which may be relevant to decisions regarding an investment in or ownership of our stock. We have attempted to organize the description of these risks into logical groupings to enhance readability, but many of the risks interrelate or could be grouped or ordered in other ways, so no special significance should be attributed to these groupings or order. The occurrence of any of these risks could have a significant adverse effect on our reputation, business, financial condition or results of operations.

RISKS RELATING TO DEVELOPMENT AND OPERATION OF OUR SOFTWARE

Our software may not operate properly, which could damage our reputation and impair our sales.

Software development is time consuming, expensive and complex. Unforeseen difficulties can arise. We may encounter technical obstacles and additional problems that prevent our software from operating properly. Client environments and practice patterns are widely divergent; consequently, there is significant variability in the configuration of our software from client to client, and we are not able to identify, test for, and resolve in advance all issues that may be encountered by clients. These risks are generally higher for newer software, until we have enough experience with the software to have addressed issues that are discovered in disparate client circumstances and environments, and for new installations, until potential issues associated with each new client’s particular environment and configurability are identified and addressed. Due to our ongoing development efforts, at any point in time, we generally have significant software that could be considered relatively new and therefore more vulnerable to these risks. It is also possible that future releases of our software, which would typically include additional features, may be delayed or may require additional work to address issues that may be discovered as the software is introduced into our client base. If our software contains errors or does not function consistent with software specifications or client expectations, we could be subject to significant contractual damages or contract terminations and face serious harm to our reputation, and our sales could be negatively affected.

Our software development efforts may be inefficient or ineffective, which could adversely affect our results of operations.

We face intense competition in the marketplace and are confronted by rapidly changing technology, evolving industry standards and user needs and the frequent introduction of new software and enhancements by our competitors. Our future success will depend in part upon our ability to enhance our existing software and services, and to timely develop and introduce competing new software and services with features and pricing that meet changing client and market requirements. We schedule and prioritize these development efforts according to a variety of factors, including our perceptions of market trends, client requirements, and resource availability. Our software solutions are complex and require a significant investment of time and resources to develop, test, introduce into use, and enhance. These activities can take longer than we expect. We may encounter unanticipated difficulties that require us to re-direct or scale-back our efforts and we may need to modify our plans in response to changes in client requirements, market demands, resource availability, regulatory requirements, or other factors. These factors place significant demands upon our software development organization, require complex planning and decision making, and can result in acceleration of some initiatives and delay of others. If we do not manage our development efforts efficiently and effectively, we may fail to produce, or timely produce, software that responds appropriately to our clients’ needs, or we may fail to meet client expectations regarding new or enhanced features and functionality.

Market changes could decrease the demand for our software or increase our development costs.

The healthcare information technology market is characterized by rapidly changing technologies, evolving industry standards and new software introductions and enhancements that may render existing software obsolete or less competitive. Our position in the market could erode rapidly due to the development of regulatory or industry standards that our software may not fully meet or due to changes in the features and functions of competing software, as well as the pricing models for such software. If software development for the healthcare information technology market becomes significantly more expensive due to changes in regulatory requirements or healthcare industry practices, or other factors, we may find ourselves at a disadvantage to larger competitors with more financial resources to devote to development. If we are unable to enhance our existing software and services, and to timely develop and introduce competing new software and services with features and pricing that meet changing client and market requirements, demand for our software will suffer and it will be more difficult for us to recover the cost of product development.

Any failure by us to protect our intellectual property, or any misappropriation of it, could enable our competitors to market software with similar features, which could reduce demand for our software.

We are dependent upon our proprietary information and technology. Our means of protecting our proprietary rights may not be adequate to prevent misappropriation. In addition, the laws of some foreign countries may not enable us to protect our proprietary rights in those jurisdictions. 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 software, reverse engineer our software or otherwise obtain and use information that we regard as proprietary. In some limited instances, clients can access source-code versions of our software, subject to contractual limitations on the permitted use of the source code. Furthermore, it may be possible for our competitors to copy or gain access to our software. Although our license agreements with clients attempt to prevent misuse of our source code and other trade secrets, the possession of our source code or trade secrets by third parties increases the ease and likelihood of potential misappropriation of our software. Furthermore, others could independently develop technologies similar or superior to our technology or design around our proprietary rights.

Failure of security features of our software could expose us to significant liabilities.

Clients use our systems to store and transmit highly confidential patient health information. Because of the sensitivity of this information, security features of our software are very important. If, notwithstanding our efforts, our software security features do not function properly, or client systems using our software are compromised, we could face claims for contract breach, fines, penalties and other liabilities for violation of applicable laws or regulations, and significant costs for remediation and re-engineering to prevent future occurrences.

RISKS RELATED TO SALES AND IMPLEMENTATION OF OUR SOFTWARE

Our sales process can be long and expensive and may not result in revenues, and the length of our sales and implementation cycles may adversely affect our operating results.

The sales cycle for our hospital software ranges from 6 to 18 months or more from initial contact to contract execution. Our hospital implementation cycle has generally ranged from 6 to 36 months from contract execution to completion of implementation. During the sales and implementation cycles, we expend substantial time, effort and resources preparing contract proposals, negotiating the contract and implementing the software. Our sales efforts may not result in a sale, in which case we will not realize any revenues to offset these expenditures. If we do complete a sale, revenue recognition can be delayed or fall below expectations if accounting principles do not allow us to recognize revenues in the same periods in which corresponding sales and implementation expenses were incurred, or clients decide to delay purchasing or implementing our software or reduce the scope of products purchased.

We may experience implementation delays that could harm our reputation and violate contractual commitments.

Some of our software, particularly our hospital enterprise software, is complex, requires a lengthy and expensive implementation process, and requires our clients to make a substantial commitment of their own time and resources and to make significant organizational and process changes. If our clients are unable to fulfill their implementation responsibilities in a timely fashion, our projects may be delayed or become less profitable. Each client’s situation is different, and unanticipated difficulties and delays may arise as a result of failures by us or the client to meet our respective implementation responsibilities or other factors. Because of the complexity of the implementation process, delays are sometimes difficult to attribute solely to us or the client. Implementation delays could motivate clients to delay payments or attempt to cancel their contracts with us or seek other remedies from us. Any inability or perceived inability to implement our software consistent with a client’s schedule could harm our reputation and be a competitive disadvantage for us as we pursue new business. Our ability to improve sales depends upon many factors, including successful and timely completion of implementation and successful use of our software in live environments by clients who are willing to become reference sites for us.

Implementation costs may exceed our expectations, which can negatively affect our operating results.

Each client’s circumstances may include unforeseen issues that make it more difficult or costly than anticipated to implement our software. As a result, we may fail to project, price or manage our implementation services correctly. If we do not have sufficient qualified personnel to fulfill our implementation commitments in a timely fashion, or if our personnel take longer than budgeted to implement our solutions, our operating results will be negatively affected. Similarly, if we must supplement our capabilities with third-party consultants, who are generally more expensive, our costs will increase.

RISKS RELATED TO OUR INFORMATION TECHNOLOGY (IT) OR TECHNOLOGY SERVICES

Various risks could interrupt clients’ access to their data residing in our service center, exposing us to significant costs and other liabilities.

We provide remote hosting services that involve running our software and third-party vendors’ software for clients in our Technology Solutions Center. The ability to access the systems and the data that the Technology Solution Center hosts and supports on demand is critical to our clients. Our operations are vulnerable to interruption and/or damage from a number of sources, many of which are beyond our control, including, without limitation: (i) power loss and telecommunications failures; (ii) fire, flood, hurricane and other natural disasters; (iii) software and hardware errors, failures or crashes; and (iv) computer viruses, hacking and similar disruptive problems. We attempt to mitigate these risks through various means including redundant infrastructure, disaster recovery plans, separate test systems and change control and system security measures, but our precautions may not protect against all problems. In addition, our disaster recovery and business continuity plans rely upon third-party providers of related services, and if those vendors fail us at a time that our center is not operating correctly, we could be unable to fulfill our contractual service commitments notwithstanding our attempts to mitigate the risks. If clients’ access is interrupted because of problems in the operation of our Technology Solutions Center, we could be exposed to significant claims by clients or their patients. Furthermore, interruption of access to data could result in a loss of revenue and liability under our client contracts, and any significant instances of system downtime could negatively affect our reputation and ability to sell our remote hosting services.

Any breach of confidentiality of client or patient data in our possession could expose us to significant expense and harm our reputation.

We must maintain facility and systems security measures to preserve the confidentiality of data belonging to our clients and their patients that resides on computer equipment in our Technology Solution Center that we handle in our outsourcing operations, or that is otherwise in our possession. Notwithstanding the efforts we undertake to protect data, our measures can be vulnerable to infiltration as well as unintentional lapse, and if confidential information is compromised, we could face claims for contract breach, penalties and other liabilities for violation of applicable laws or regulations, significant costs for remediation and re-engineering to prevent future occurrences, and serious harm to our reputation.

Recruiting challenges and higher than anticipated costs in outsourcing our clients’ IT operations may adversely affect our profitability.

We provide outsourcing services that involve operating clients’ IT departments using our employees. At the initiation of these relationships, clients often require us to hire, at substantially the same compensation, the IT staff that had been performing the services we take on. In these circumstances, our costs may be higher than we target unless and until we are able to transition the workforce, methods and systems to a more scalable model. Various factors can make this transition difficult, including geographic dispersion of client facilities and variation in client needs, IT environments, and system configurations. Also, under some circumstances, we may incur significant costs as a successor employer by inheriting obligations of that client for which we may not be indemnified. Further, facilities management contracts require us to provide the IT services specified by contract, and in some places or at some times it can be difficult to recruit qualified IT personnel, which cause us to incur higher costs by raising salaries or relocating personnel.

Inability to obtain consents needed from third party software providers could impair our ability to provide remote IT or technology services.

We and our clients need consent from some third-party software providers as a condition to running the providers’ software in our service center, or to allow our employees who work in client locations under facilities management arrangements to have access to their software. Vendors’ refusal to give such consents, or insistence upon unreasonable conditions to such consents, could reduce our revenue opportunities and make our IT or technology services less viable for some clients.

RISKS RELATED TO THE HEALTHCARE IT INDUSTRY AND MARKET

We operate in an intensely competitive market that includes companies that have greater financial, technical and marketing resources than we do.

We face intense competition in the marketplace. We are confronted by rapidly changing technology, evolving user needs and the frequent introduction by our competitors of new and enhanced software. Our principal competitors in our software business include Cerner Corporation, Epic Systems Corporation, GE Healthcare, Medical Information Technology, Inc., McKesson Corporation, and Siemens AG. Other software competitors include providers of practice management, general decision support and database systems, as well as segment-specific applications and healthcare technology consultants. Our services business competes with large consulting firms, as well as independent providers of technology implementation and other services. Our outsourcing business competes with large national providers of technology solutions such as Computer Sciences Corporation, Dell Perot Systems, and IBM Corporation, as well as smaller firms. Several of our existing and potential competitors are better established, benefit from greater name recognition and have significantly more financial, technical and marketing resources than we do. In addition, some competitors, particularly those with a more diversified revenue base or that are privately held, may have greater flexibility than we do to compete aggressively on the basis of price and to provide favorable financing terms to clients. Vigorous and evolving competition could lead to a loss of our market share or pressure on our prices and could make it more difficult to grow our business profitably.

The principal factors that affect competition within our market include software functionality, performance, flexibility and features, use of open industry standards, compliance with industry standards, speed and quality of implementation and client service and support, company reputation, price and total cost of ownership. We anticipate continued consolidation in both the information technology and healthcare industries and large integrated technology companies may become more active in our markets, both through acquisition and internal investment. There is a finite number of hospitals and other healthcare providers in our target market. As costs fall, technology improves, and market factors continue to compel investment by healthcare organizations in software and services like ours, market saturation may change the competitive landscape in favor of larger competitors with greater scale.

Clients that use our legacy software are vulnerable to sales efforts of our competitors.

A significant part of our revenue comes from relatively high-margin legacy software that was installed by our clients many years ago. As the marketplace becomes more saturated and technology advances, there will be increased competition to retain existing clients, particularly those using older generation products, and loss of this business would adversely affect our results of operations. We attempt to convert clients using legacy software to our newer generation software, but such conversions may require significant investments of time and resources by clients.

The healthcare industry faces financial constraints that could adversely affect the demand for our software and services.

Our software often involves a significant financial commitment by our clients. Our ability to grow our business is largely dependent on our clients’ information technology budgets, which in part depend on our clients’ cash generation and access to other sources of liquidity. Recent financial market disruptions have adversely affected the availability of external financing, and led to tighter lending standards and interest rate concerns. In addition, the healthcare industry faces significant financial constraints specific to the industry. Managed healthcare puts pressure on healthcare organizations to reduce costs, and regulatory changes and payor requirements have reduced reimbursements to healthcare organizations. For example, the Inpatient Prospective Payment System rules, published by the Centers for Medicare & Medicaid in the U.S., identified several “hospital-acquired conditions” for which treatment will no longer be reimbursed by Medicare. Federal, state and local governments and private payors are imposing other requirements that may have the effect of reducing payments to healthcare organizations.

These factors can reduce access to cash for our clients and potential clients. In addition, many of our clients’ budgets rely in part on investment earnings, which decrease when portfolio investment values decline. Economic factors are causing many clients to take a conservative approach to investments, including the purchase of systems like those we sell, and to seek pricing and financing concessions from vendors like us. If healthcare information technology spending declines or increases more slowly than we anticipate, or if we are not able to offer competitive pricing or financing terms, demand for our software could be adversely affected and our revenue could fall short of our expectations. Challenging economic conditions also may impair the ability of our clients to pay for our software and services for which they have contracted. As a result, reserves for doubtful accounts and write-offs of accounts receivable may increase, resulting in increased bad debt expense.

Healthcare industry consolidation could put pressure on our software prices, reduce our potential client base and reduce demand for our software.

Many healthcare organizations have consolidated to create larger healthcare enterprises. If this consolidation trend continues, it could reduce our potential client base and give the resulting enterprises greater bargaining power, each of which may lead to erosion of the prices for our software. In addition, when healthcare organizations combine they often consolidate infrastructure including IT systems, and acquisitions of our clients could erode our revenue base.

Changes in standards applicable to our software could require us to incur substantial additional development costs.

Integration and interoperability of the software and systems provided by various vendors are important issues in the healthcare industry. Market forces, regulatory authorities and industry organizations are causing the emergence of standards for software features and performance that are applicable to our products. Healthcare standards and ultimately the functionality demands of the electronic health record, or EHR, are now expanding to support community health, public health, public policy and population health initiatives. In addition, interoperability and health information exchange features that support emerging and enabling technologies are becoming increasingly important to our clients and require us to undertake large scale product enhancements and redesign.

For example, the Certification Commission for Healthcare Information Technology, or CCHIT, maintains comprehensive and growing sets of criteria for the functionality, interoperability, and security of healthcare software in the U.S. Achieving CCHIT certification is evolving as a de facto competitive requirement, resulting in increased research and development expense to conform to these requirements. Similar dynamics are evolving in international markets. CCHIT requirements may diverge from our software’s characteristics and our development direction. We may choose not to apply for CCHIT certification of certain modules of our software or to delay applying for certification. The CCHIT application process requires conformity with 100% of all criteria applicable to each module in order to achieve certification and there is no assurance that we will receive or retain certification for any particular module notwithstanding application. Certification for a software module lasts for two years and must then be re-secured, and certification requirements evolve, so even certifications we receive may be lost. In addition, U.S. government initiatives, such as the HITECH Act described below, and related industry trends are resulting in comprehensive and evolving standards related to interoperability, privacy, and other features that are becoming mandatory for systems purchased by governmental healthcare providers and other providers receiving governmental payments, including Medicare and Medicaid reimbursement. Various state and foreign governments are also developing similar standards, which may be different and even more demanding.

Our software does not conform to all of these standards, and conforming to these standards is expected to consume a substantial and increasing portion of our development resources. If our software is not consistent with emerging standards, our market position and sales could be impaired and we will have to upgrade our software to remain competitive in the market. We expect compliance with these kinds of standards to become increasingly important to clients and therefore to our ability to sell our software. If we make the wrong decisions about compliance with these standards, or are late in conforming our software to these standards, or if despite our efforts our software fails standards compliance testing, our offerings will be at a disadvantage in the market to the offerings of competitors who have complied.

The HITECH Act is resulting in new business imperatives, and failure to provide our clients with health information technology systems that are “certified” under the HITECH Act could result in breach of some client obligations and put us at a competitive disadvantage.

The HITECH Act, which is a part of the American Recovery and Reinvestment Act of 2009, provides financial incentives for hospitals and doctors that are “meaningful EHR users,” which includes use of health information technology systems that are “certified” according to technical standards developed under the supervision of the Secretary of Health and Human Services. In addition, the HITECH Act imposes certain requirements upon governmental agencies to use, and require health care providers, health plans, and insurers contracting with such agencies to use, systems that are certified according to such standards. This has at least four important implications for us. First, we have invested in conforming our applicable clinical software to these standards and further significant investment will be required as certification standards evolve. Second, because the HITECH Act authorizes provider incentive payments to be made available beginning in calendar year 2011 and some lead time is required to implement the technologies and for clients to satisfy any associated use requirements, the work we need to do to comply with the standards must be done in a compressed timeframe and may displace other important initiatives. Third, new client prospects are requiring us to agree that our software will be certified according to applicable HITECH technical standards so that, assuming clients satisfy the meaningful use and other requirements of the HITECH Act, they will qualify for available incentive payments. We plan to meet these requirements as part of our normal software maintenance obligations, and failure to comply could result in costly contract breach and jeopardize our relationships with clients who are relying upon us to provide certified software. Fourth, if for some reason we are not able to comply with these standards in a timely fashion after their issuance, our offerings will be at a severe competitive disadvantage in the market to the offerings of vendors who have complied.

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 employees with experience in our industry can be intense and we maintain at-will employment terms with our employees. 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.

RISKS RELATED TO OUR INTERNATIONAL BUSINESS STRATEGY

Our growing operations in India expose us to risks that could have an adverse effect on our results of operations.

We have a significant workforce employed in India engaged in a broad range of development, support and corporate infrastructure activities that are integral to our business and critical to our profitability. Further, while there are certain cost advantages to operating in India, significant growth in the technology sector in India has increased competition to attract and retain skilled employees with commensurate increases in compensation costs. In the future, we may not be able to hire and retain such personnel at compensation levels consistent with our existing compensation and salary structure. Many of the companies with which we compete for hiring experienced employees have greater resources than we have and may be able to offer more attractive terms of employment. In addition, our operations in India require ongoing capital investments and expose us to foreign currency fluctuations, which may significantly reduce or negate any cost benefit anticipated from such expansion.

In addition, our reliance on a workforce in India exposes us to disruptions in the business, political and economic environment in that region. Maintenance of a stable political environment is important to our operations, and terrorist attacks and acts of violence or war may directly affect our physical facilities and workforce or contribute to general instability. Our operations in India may also be affected by trade restrictions, such as tariffs or other trade controls, as well as other factors that may adversely affect our operations.

Our business strategy includes expansion into markets outside North America, which will require increased expenditures and if our international operations are not successfully implemented, such expansion may cause our operating results and reputation to suffer.

We are working to expand operations in markets outside North America. There is no assurance that these efforts will be successful. We have limited experience in marketing, selling, implementing and supporting our software abroad. Expansion of our international sales and operations will require a significant amount of attention from our management, establishment of service delivery and support capabilities to handle that business and commensurate financial resources, and will subject us to risks and challenges that we would not face if we conducted our business only in the United States. We may not generate sufficient revenues from international business to cover these expenses.

The risks and challenges associated with operations outside the United States may include: the need to modify our software to satisfy local requirements and standards, including associated expenses and time delays; laws and business practices favoring local competitors; compliance with multiple, conflicting and changing governmental laws and regulations, including healthcare, employment, tax, privacy, healthcare information technology, and data and intellectual property protection laws and regulations; laws regulating exports of technology products from the United States; fluctuations in foreign currency exchange rates; difficulties in setting up foreign operations, including recruiting staff and management; and longer accounts receivable payment cycles and other collection difficulties. One or more of these requirements and risks may preclude us from operating in some markets.

Foreign operations subject us to numerous stringent U.S. and foreign laws, including the Foreign Corrupt Practices Act, or FCPA, and comparable foreign laws and regulations that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. and other business entities for the purpose of obtaining or retaining business. As we expand our international operations, there is some risk of unauthorized payments or offers of payments by one of our employees, consultants, sales agents or distributors, which could constitute a violation by Eclipsys of various laws including the FCPA, even though such parties are not always subject to our control. Safeguards we implement to discourage these practices may prove to be less than effective and violations of the FCPA and other laws may result in severe criminal or civil sanctions, or other liabilities or proceedings against us, including class action law suits and enforcement actions from the SEC, Department of Justice and overseas regulators.

RISKS RELATED TO OUR OPERATING RESULTS, ACCOUNTING CONTROLS AND FINANCES

Our operating results may fluctuate significantly depending upon periodic software revenues and other factors.

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 performance of our software and our ability to promptly and efficiently address software performance shortcomings or warranty issues;

•

The cost, timeliness and outcomes of our software development and implementation efforts, including expansion of our presence in India;

•

The timing, size and complexity of our software sales and implementations;

•

Healthcare industry conditions and the overall demand for healthcare information technology;

•

Variations in periodic software license revenues (as discussed more fully below);

•

The financial condition of our clients and potential clients;

•

Market acceptance of new services, software and software enhancements introduced by us or our competitors;

•

Client decisions regarding renewal or termination of their contracts;

•

Software and price competition;

•

Investment required to support our international expansion efforts;

•

Personnel changes and other organizational changes and related expenses;

•

Significant judgments and estimates made by management in the application of generally accepted accounting principles;

•

Healthcare reform measures and healthcare regulation in general;

•

Lower investment returns due to disruptions in U.S. and international financial markets;

•

Fluctuations in costs related to litigation, strategic initiatives, and acquisitions; and

•

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

It is difficult to predict the timing of revenues that we receive from software sales, because the sales cycle can vary depending upon several factors. These include the size and terms of the transaction, the changing business plans of the client, the effectiveness of the client’s management, general economic conditions and the regulatory environment. The periodic software revenues we recognize in any financial reporting period include traditional license fees associated with sales made in that period, as well as revenues from contract backlog that had not previously been recognized pending contract performance that occurred or was completed during the period, and certain other activities during the period associated with existing client relationships. Although these periodic software revenues represent a relatively small portion of our overall revenue in any period, they generally have high margins and are therefore an important element of our earnings. The type and amount of these periodic revenues can fluctuate significantly from period to period for various reasons including economic conditions, market factors, and client-specific situations. These variations make it difficult to predict the nature and amount of these periodic revenues. We offer clients a subscription pricing model that allows them to pay software license fees over time, and we believe economic conditions and cash conservation by clients, attempts by clients to match their software costs more closely to funds they anticipate receiving in the future under the HITECH Act, and other factors are likely to motivate many clients in 2010 to prefer subscription pricing. While this is beneficial to our backlog and long-term revenue visibility, it may adversely affect our periodic software revenues in 2010, which will adversely affect earnings if we are not able to compensate through other revenue sources or expense controls.

Because a significant percentage of our expenses are relatively fixed, variation in the timing of sales and implementations could cause significant variations in operating results and resulting stock price volatility from quarter to quarter. We believe that period-to-period comparisons of our historical results of operations are not necessarily meaningful. Investors should not rely on these comparisons as indicators of future performance.

In addition, prices for our common stock may be influenced by investor perception of us and our industry in general, research analyst recommendations, and our ability to meet or exceed quarterly performance expectations of investors or analysts.

Early termination of client contracts or contract penalties could adversely affect our results of operations.

Client contracts can change or terminate early for a variety of reasons. Change of control, financial issues, declining general economic conditions or other changes in client circumstances may cause us or the client to seek to modify or terminate a contract. Further, either we or the client may generally terminate a contract for material uncured breach by the other. If we breach a contract or fail to perform in accordance with contractual service levels, we may be required to refund money previously paid to us by the client, or to pay penalties or other damages. Even if we have not breached, we may deal with various situations from time to time for the reasons described above which may result in the amendment or termination of a contract. These steps can result in significant current period charges and/or reductions in current or future revenue.

Because in many cases we recognize revenues for our software monthly over the term of a client contract, downturns or upturns in sales may not be fully reflected in our operating results until future periods.

We recognize a significant portion of our revenues from clients monthly over the terms of their agreements, which are generally for periods of 5 to 7 years and can be up to 10 years. As a result, much of the revenue that we report each quarter is attributable to agreements executed during prior quarters. Consequently, a decline in sales, client renewals, or market acceptance of our software in one quarter may negatively affect our revenues and profitability in future quarters. In addition, we may be unable to rapidly adjust our cost structure to compensate for reduced revenues. This monthly revenue recognition also makes it more difficult for us to rapidly increase our revenues through additional sales in any period, as a significant portion of revenues from new clients or new sales may be recognized over the applicable agreement term.

Loss of revenue from large clients could have significant negative impact on our results of operations and overall financial condition.

During the fiscal year ended December 31, 2009, approximately 42% of our revenues were attributable to our 20 largest clients and one client represented 13.2% of our revenues. In addition, approximately 49% of our accounts receivable as of December 31, 2009 were attributable to 20 clients. Loss of revenue from significant clients or failure to collect accounts receivable, whether as a result of client payment default, contract termination, or other factors could have a significant negative impact on our results of operation and overall financial condition.

Impairment of intangible assets could increase our expenses.

A significant portion of our assets consists of intangible assets, including capitalized software development costs and goodwill and other intangibles acquired in connection with acquisitions. Current accounting standards require us to evaluate goodwill on an annual basis and other intangibles if certain triggering events occur, and adjust the carrying value of these assets to net realizable value when such testing reveals impairment of the assets. Various factors, including regulatory or competitive changes, could affect the value of our intangible assets. If we are required to write-down the value of our intangible assets due to impairment, our reported expenses will increase, resulting in a corresponding decrease in our reported profit.

Failure to maintain effective internal controls could cause our investors to lose confidence and adversely affect the market price of our common stock.

Section 404 of the Sarbanes-Oxley Act of 2002 requires that we maintain internal control over financial reporting that meets applicable standards. We may err in the design or operation of our controls, and all internal control systems, no matter how well designed and operated, can provide only reasonable assurance that the objectives of the control system are met. Because there are inherent limitations in all control systems, there can be no absolute assurance that all control issues have been or will be detected. If we are unable, or are perceived as unable, to produce reliable financial reports due to internal control deficiencies, investors could lose confidence in our reported financial information and operating results, which could result in a negative market reaction.

Funds invested in auction rate securities may not be liquid or accessible for in excess of 12 months, and our auction rate securities may experience further fair value adjustments or other-than-temporary declines in value, which would adversely affect our financial condition, cash flow and reported earnings.

Our long-term investment portfolio is invested in auction rate securities, or ARS. Beginning in February 2008, negative conditions in the credit and capital markets resulted in failed auctions of our ARS. The ratings on some of the ARS in our portfolio have been downgraded, and there may be further deterioration in creditworthiness in the future. We reevaluate the fair value of these securities on a quarterly basis. See Note E – “Long-Term Investments” in Notes to the Consolidated Financial Statements for further information. If uncertainties in the credit and capital markets continue, these markets deteriorate further or we experience further deterioration in creditworthiness on any investments in our portfolio, funds associated with these securities may not be liquid or available to fund current operations for in excess of 12 months. This could result in further fair value adjustments or other-than-temporary impairments in the carrying value of our investments, which would negatively affect our financial condition, cash flow and reported earnings.

Our commercial credit facility subjects us to operating restrictions and risks of default.

On August 26, 2008, we entered into a credit agreement with certain lenders and Wachovia Bank, as Administrative Agent, providing for a senior secured revolving credit facility in the aggregate principal amount of $125 million. This credit facility is subject to certain financial ratio and other covenants that could restrict our ability to conduct business as we might otherwise deem to be in our best interests, and breach of these covenants could cause the debt to become immediately due. Depending on borrowing levels in such an event, our liquid assets might not be sufficient to repay in full the debt outstanding under the credit facility. Such an acceleration also would expose us to the risk of liquidation of collateral assets at unfavorable prices.

Inability to obtain other financing could limit our ability to conduct necessary development activities and make strategic investments.

Although we believe at this time that our available cash and cash equivalents, the cash we anticipate generating from operations, and our available line of credit under our credit facility will be adequate to meet our foreseeable needs, we could incur significant expenses or shortfalls in anticipated cash generated as a result of unanticipated events in our business or competitive, regulatory, or other changes in our market. As a result, we may in the future need to obtain other financing. The availability of such financing may be limited by the tightening of the global credit markets. In addition, the commitment under our credit facility expires on August 26, 2011. Our ability to renew such credit facility or to enter into a new credit facility to replace the existing facility could be impaired if market conditions experienced in 2008 and 2009 continue or worsen. In addition, if credit is available, lenders may seek more restrictive lending provisions and higher interest rates that may reduce our borrowing capacity and increase our costs.

If other financing is not available on acceptable terms, or at all, we may not be able to respond adequately to these changes or maintain our business, which could adversely affect our operating results and the market price of our common stock. Alternatively, we may be forced to obtain additional financing by selling equity, and this could be dilutive to our existing stockholders.

RISKS OF LIABILITY TO THIRD PARTIES

Our software and content are used by clinicians in the course of treating patients. If our software fails to provide accurate and timely information or is associated with faulty clinical decisions or treatment, clients, clinicians or their patients could assert claims against us that could result in substantial cost to us, harm our reputation in the industry and cause demand for our software to decline.

We provide software and content that provides information and tools for use in clinical decision-making, provides access to patient medical histories and assists in creating patient treatment plans. If our software fails to provide accurate and timely information, or if our content or any other element of our software is associated with faulty clinical decisions or treatment, we could have exposure to claims by clients, clinicians or their patients. The assertion of such claims, whether or not valid, and ensuing litigation, regardless of its outcome, could result in substantial cost to us, divert management’s attention from operations and decrease market acceptance of our software. We attempt to limit by contract our liability for damages and to require that our clients assume responsibility for medical care and approve all system rules and protocols. Despite these precautions, the allocations of responsibility and limitations of liability set forth in our contracts may not be enforceable, may not be binding upon our client’s patients, or may not otherwise protect us from liability for damages. We maintain general liability and errors and omissions insurance coverage, but 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.

Complex software such as ours may contain errors or failures that are not detected until after the software is introduced or updates and new versions are released. It is challenging for us to envision and test our software for all potential problems because it is difficult to simulate the wide variety of computing environments, medical circumstances or treatment methodologies that our clients may deploy or rely upon. Despite extensive testing by us and clients, from time to time we have discovered defects or errors in our software, and additional defects or errors can be expected to appear in the future.

Defects and errors that are not timely detected and remedied could expose us to risk of liability to clients, clinicians and their patients and cause delays in software introductions and shipments, result in increased costs and diversion of development resources, require design modifications or decrease market acceptance or client satisfaction with our software.

Our software and software provided by third parties that we include in our offering could infringe third-party intellectual property rights, exposing us to costs that could be significant.

Infringement or invalidity claims or claims for indemnification resulting from infringement claims could be asserted or prosecuted against us based upon design or use of software we provide to clients, including software we develop as well as software provided to us by third parties. Regardless of the validity of any claims, defending against these claims could result in significant costs and diversion of our resources, and vendor indemnity might not be available. The assertion of infringement claims could result in injunctions preventing us from distributing our software, or require us to obtain a license to the disputed intellectual property rights, which might not be available on reasonable terms or at all. We might also be required to indemnify our clients at significant expense.

RISKS RELATED TO OUR STRATEGIC RELATIONSHIPS AND INITIATIVES

Our software strategy is dependent on the continued development and support by Microsoft of its .NET Framework and other technologies.

Our software strategy is substantially dependent upon Microsoft’s .NET Framework and other Microsoft technologies. If Microsoft were to cease actively supporting .NET or other technologies that we use, fail to update and enhance them to keep pace with changing industry standards, encounter technical difficulties in the continuing development of these technologies or make them unavailable to us, we could be required to invest significant resources in re-engineering our software. This could lead to lost or delayed sales, loss of functionality, increased client costs associated with platform changes, and unanticipated development expenses.

We depend on licenses from third parties for rights to some of the technology we use, 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 software from a number of third-party vendors. 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 software sales 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 software.

Our software offering often includes modules provided by third parties, and if these third parties do not meet their commitments, our relationships with our clients could be impaired.

Some of the software modules we offer to clients are provided by third parties. We often rely upon these third parties to produce software that meets our clients’ needs and to implement and maintain that software. If these third parties are unable or unwilling to fulfill their responsibilities, our relationships with affected clients could be impaired, and we could be responsible to clients for the failures. We might not be able to recover from these third parties for any or all of the costs we incur as a result of their failures.

Any acquisitions we undertake 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 and while there is no assurance that we will identify and complete any future acquisitions, any acquisitions would involve a number of risks, including the following:

•

The anticipated benefits from the acquisition may not be achieved, including as a result of loss of customers or personnel of the target.

•

The identification, acquisition and integration of acquired businesses require substantial attention from management. The diversion of management’s attention and any difficulties encountered in the transition process could hurt our business.

•

The identification, acquisition and integration of acquired businesses requires significant investment, including to harmonize product and service offerings, expand management capabilities and market presence, and improve or increase development efforts and software features and functions.

•

In future acquisitions, we could issue additional shares of our common stock, incur additional indebtedness or pay consideration in excess of book value, which could dilute future earnings.

•

Acquisitions also expose us to the risk of assumed known and unknown liabilities.

•

New business acquisitions generate significant intangible assets that result in substantial related amortization charges and possible impairments.

RISKS RELATED TO INDUSTRY REGULATION

Potential regulation by the U.S. Food and Drug Administration of our software and content as medical devices could impose increased costs, delay the introduction of new software and hurt our business.

The U.S. Food and Drug Administration, or FDA, may become increasingly active in regulating computer software or content intended for use in the healthcare setting. The FDA has increasingly focused on the regulation of computer software and computer-assisted products as medical devices under the Food, Drug, and Cosmetic Act, or the FDC Act. If the FDA chooses to regulate any of our software, or third party software that we resell, as medical devices, it could impose extensive requirements upon us, including requiring us to:

•

Seek FDA clearance of pre-market notification submission demonstrating substantial equivalence to a device already legally marketed, or to obtain FDA approval of a pre-market approval application establishing the safety and effectiveness of the software;

•

Comply with rigorous regulations governing the pre-clinical and clinical testing, manufacture, distribution, labeling and promotion of medical devices; and/or

•

Comply with the FDC Act regarding general controls, including establishment registration, device listing, compliance with good manufacturing practices, reporting of specified device malfunctions and adverse device events.

Other countries in which we do business have agencies similar to the FDA that may also impose regulations affecting our software. If we fail to comply with applicable requirements, the FDA or foreign agencies could respond by imposing fines, injunctions or civil penalties, requiring recalls or software corrections, suspending production, refusing to grant pre-market clearance or approval of software, withdrawing clearances and approvals, and initiating criminal prosecution. Any FDA or foreign agency policy governing computer products or content may increase the cost and time to market of new or existing software or may prevent us from marketing our software.

Changes in federal and state regulations relating to patient data could increase our compliance costs, depress the demand for our software and impose significant software redesign costs on us.

Clients use our systems to store and transmit highly confidential patient health information and data. State and federal laws and regulations and their foreign equivalents govern the collection, security, use, transmission and other disclosures of health information. These laws and regulations may change rapidly and may be unclear, or difficult or costly to apply.

Federal regulations under the Health Insurance Portability and Accountability Act of 1996, or HIPAA, and related laws and regulations, impose national health data standards on healthcare providers that conduct electronic health transactions, healthcare clearinghouses that convert health data between HIPAA-compliant and non-compliant formats, and health plans and entities providing certain services to these organizations. The American Recovery and Reinvestment Act of 2009, or ARRA, includes provisions specifying additional HIPAA requirements for such organizations, including more detailed penalty and enforcement provisions and provisions specifying additional data restrictions, and disclosure and reporting requirements. The HIPAA standards, as modified by ARRA, require, among other things, transaction formats and code sets for electronic health transactions; protect individual privacy by limiting the uses and disclosures of individually identifiable health information; 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; and require notification to individuals in the event of a security breach with respect to unsecured protected health information. Most of our clients are covered by these regulations and require that our software and services adhere to HIPAA standards. In addition, ARRA includes provisions that apply several of HIPAA’s security and privacy requirements to us in our role as a “business associate” to certain of the organizations mentioned above, and business associates will now also be subject to certain penalties and enforcement proceedings for violations of applicable HIPAA standards. Any failure or perception of failure of our software or services to meet HIPAA standards and related regulations could expose us to certain notification, penalty and/or enforcement risks and could adversely affect demand for our software and services and force us to expend significant capital, research and development and other resources to modify our software or services to address the privacy and security requirements of our clients.

States and foreign jurisdictions in which we or our clients operate have adopted, or may adopt, privacy standards that are similar to or more stringent than the federal HIPAA privacy standards. This may lead to different restrictions for handling individually identifiable health information. As a result, our clients may demand, and we may be required to provide information technology solutions and services that are adaptable to reflect different and changing regulatory requirements, which could increase our development costs. In the future, federal, state or foreign governmental or regulatory authorities or industry bodies may impose new data security standards or additional restrictions on the collection, use, transmission and other disclosures of health information. We cannot predict the potential impact that these future rules may have on our business. However, the demand for our software and services may decrease if we are not able to develop and offer software and services that can address the regulatory challenges and compliance obligations facing us and our clients.

RISKS RELATED TO OUR EQUITY STRUCTURE

Provisions of our charter documents and Delaware law may inhibit potential acquisition bids that stockholders may believe are 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 5,000,000 shares of preferred stock. Our 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 but in the future we could implement a stockholder rights plan or make other uses of preferred stock that could inhibit a potential acquisition of the company.

Our charter documents contain additional anti-takeover devices, including:

•

Only one of the three classes of directors is elected each year;

•

The ability of our stockholders to remove directors without cause is limited;

•

Our stockholders are not allowed to act by written consent;

•

Our stockholders are not allowed to call a special meeting of stockholders; and

•

Advance notice must be given to nominate directors or submit proposals for consideration at stockholders meetings.

We are also subject to provisions of Section 203 of the Delaware General Corporation Law, which prohibits us from engaging in any business combination with an interested stockholder for a period of three years from the date the person became an interested stockholder, unless certain conditions are met. These provisions make it more difficult for stockholders or potential acquirers to acquire us without negotiation and may apply even if some of our stockholders consider the proposed transaction beneficial to them. For example, these provisions might discourage a potential acquisition proposal or tender offer, even if the acquisition proposal or tender offer is at a premium over the then current market price for our common stock. These provisions could also limit the price that investors are willing to pay in the future for shares of our common stock.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

The following table sets forth information with respect to purchases by Eclipsys of its equity securities registered pursuant to Section 12 of the Exchange Act during the quarter ended March 31, 2010:


	(a)	(b)		(c)	(d)
Period	Total Number of Shares of Common Stock Purchased	Average Price Paid Per Share of Common Stock		Total Number of Shares of Common Stock Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares of Common Stock that May Yet Be Purchased Under the Plans or Programs
January 1-31, 2010	—		—	—	—
February 1-28, 2010 ⁽¹⁾	30,842	$	18.41	—	—
March 1-31, 2010	174		19.52	—	—

Total	31,016	$	18.42	—	—

(1)

These shares were tendered to the Company by employees holding common stock initially issued to them in the form of restricted stock awards in order to reimburse the Company for income tax deposits paid by the Company on their behalf in respect of taxable income resulting from scheduled vesting of restricted shares.

ITEM 6.

EXHIBITS


Exhibit			Incorporated by Reference
Number	Exhibit Description	Form	Exhibit	Filing Date

3.1	Third Amended and Restated Certificate of Incorporation of the Registrant	10-Q	3.1	September 21, 1998

3.2	Amended and Restated Bylaws of the Registrant	8-K	3.2	May 19, 2009

4.1	Speciman certificate for shares of Common Stock	S-1	4.1	April 23, 1998

10.1	Form of Performance Stock Unit Agreement	8-K	10.1	March 19, 2010

31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a)			Filed herewith

31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a)			Filed herewith

32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350			Filed herewith

32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350			Filed herewith

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.

Date: May 4, 2010

ECLIPSYS CORPORATION

Registrant

/s/ Chris E. Perkins

Chris E. Perkins

Chief Financial Officer

(authorized officer and principal financial officer)

ECLIPSYS CORP - FORM 10-Q - May 4, 2010

Attached files

ECLIPSYS CORP Reports