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Eclipsys Corp (ECLP) SEC Filing 10-Q Quarterly report for the period ending Tuesday, March 31, 2009

Eclipsys Corp

CIK: 1034088 Ticker: ECLP

Exhibit 99.1

Eclipsys Announces First-Quarter 2009 Results

ATLANTA--(BUSINESS WIRE)--May 6, 2009--Eclipsys Corporation® (NASDAQ: ECLP), The Outcomes Company®, today announced results for the first quarter ended March 31, 2009.

GAAP Results

Revenues for the quarter ended March 31, 2009 were $130.2 million, compared to revenues of $124.4 million for the quarter ended March 31, 2008.

GAAP net loss for the first quarter of 2009 was $0.9 million, or $0.02 per diluted common share, compared to net income of $0.3 million, or $0.01 per diluted common share for the first quarter of 2008.

Non-GAAP Results

Non-GAAP net income for the first quarter of 2009 was $9.6 million, or $0.17 per diluted common share, compared to first quarter 2008 non-GAAP net income of $8.1 million, or $0.15 per diluted common share.

Non-GAAP net income excludes stock-based compensation expense, acquisition related amortization, and certain additional items that the company does not consider to be indicative of its underlying business performance. For first quarter 2008, these additional items were costs associated with the relocation of the corporate headquarters from Boca Raton, FL to Atlanta, GA, the derivative litigation that was ultimately settled in September 2008, and a change in the company’s estimate for uncertainties in income taxes, as well as a gain resulting from completion of post-closing milestones associated with the sale of the Clinical Practice Model Resource Center business, which was completed in December 2007. For first quarter 2009, these additional items were costs associated with the previously announced reduction in our professional services capacity to reflect current and projected business volume and other staff reductions and severance obligations incurred in the quarter, as well as the effect of the purchase accounting adjustments in connection with the acquisition of Premise Corporation.

A reconciliation of GAAP to non-GAAP results is included in the attached tables.

“We are pleased to complete a good first quarter in the face of fluid market conditions,” said R. Andrew Eckert, Eclipsys president and chief executive officer. “Over the past several weeks, we have observed an increase in client and prospect activity related to the American Recovery and Reinvestment Act of 2009 (ARRA). We are excited that ARRA is accelerating demand for healthcare information technology solutions and have several ongoing initiatives to help ensure we are well positioned to take advantage of this opportunity.”

Today’s Conference Call

Eclipsys executives will discuss the first-quarter results on a teleconference scheduled for 4:30 p.m. Eastern time on May 6. Persons interested in participating in the teleconference should call (800) 230-1092 approximately 15 minutes before the conference call is slated to begin. For listen-only mode, participants can go to www.eclipsys.com prior to the conference call to register and download the necessary audio software.

Replay

About two hours after its completion, an audio replay of the conference call will be available on www.eclipsys.com for approximately 48 hours.


The following information was filed by Eclipsys Corp (ECLP) on Wednesday, May 6, 2009 as an 8K 2.02 statement, which is an earnings press release pertaining to results of operations and financial condition. It may be helpful to assess the quality of management by comparing the information in the press release to the information in the accompanying 10-Q Quarterly Report statement of earnings and operation as management may choose to highlight particular information in the press release.
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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, 2009

OR

 

¨ 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   ¨  (Do not check if a smaller reporting company)    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 May 4, 2009

Common Stock, $0.01 par value   56,174,606

 

 

 


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ECLIPSYS CORPORATION AND SUBSIDIARIES

FORM 10-Q

For the period ended March 31, 2009

Table of Contents

 

Part I.    Financial Information    1
Item 1.    Financial Statements - Unaudited    1
  

Condensed Consolidated Balance Sheets (unaudited) - As of March 31, 2009 and December 31, 2008

   1
  

Condensed Consolidated Statements of Operations (unaudited) - For the Three Months Ended March 31, 2009
and March 31, 2008

   2
  

Condensed Consolidated Statements of Cash Flows (unaudited) - For the Three Months Ended March 31, 2009
and March 31, 2008

   3
  

Notes to Condensed Consolidated Financial Statements (unaudited)

   4
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    38
Item 6.    Exhibits    39
Signatures       40


Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ECLIPSYS CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (unaudited)

(in thousands, except share data)

 

     March 31,
2009
    December 31,
2008
 

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 111,882     $ 108,304  

Marketable securities

     —         154  

Accounts receivable, net of allowance for doubtful accounts of $3,421 and $4,912, respectively

     113,303       121,811  

Prepaid expenses

     26,417       23,975  

Deferred tax asset

     2,224       2,643  

Other current assets

     3,957       5,712  
                

Total current assets

     257,783       262,599  

Long-term investments

     105,232       107,215  

Property and equipment:

    

Property and equipment

     151,936       143,103  

Accumulated depreciation and amortization

     (93,902 )     (89,107 )
                

Property and equipment, net

     58,034       53,996  

Capitalized software development costs, net

     41,323       37,718  

Acquired technology, net

     37,144       39,710  

Intangible assets, net

     9,546       10,258  

Goodwill

     97,695       96,973  

Deferred tax asset

     87,350       89,063  

Other assets

     12,064       11,343  
                

Total assets

   $ 706,171     $ 708,875  
                

Liabilities and Stockholders’ Equity

    

Current liabilities:

    

Accounts payable

   $ 16,134     $ 20,924  

Deferred revenue

     120,984       123,733  

Accrued compensation costs

     23,978       16,457  

Other current liabilities

     19,787       22,481  
                

Total current liabilities

     180,883       183,595  

Deferred revenue

     4,605       5,743  

Long-term debt and capital leases

     105,917       105,000  

Other long-term liabilities

     14,660       16,540  
                

Total liabilities

     306,065       310,878  

Stockholders’ Equity:

    

Common stock, $0.01 par value, 200,000,000 shares authorized; 56,143,447 and 56,126,674 issued and oustanding, respectively

     562       561  

Additional paid-in capital

     574,152       569,717  

Accumulated deficit

     (165,577 )     (164,712 )

Accumulated other comprehensive loss

     (9,031 )     (7,569 )
                

Total stockholders’ equity

     400,106       397,997  
                

Total liabilities and stockholders’ equity

   $ 706,171     $ 708,875  
                

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

 

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ECLIPSYS CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)

(in thousands, except per share amounts)

 

     Three Months Ended
March 31,
 
     2009     2008  

Revenues:

    

Systems and services

   $ 128,137     $ 119,138  

Hardware

     2,029       5,242  
                

Total revenues

     130,166       124,380  
                

Costs and expenses:

    

Cost of systems and services (excluding depreciation and amortization shown below)

     66,874       67,560  

Cost of hardware

     1,656       4,336  

Sales and marketing

     22,751       20,871  

Research and development

     13,493       17,154  

General and administrative

     12,021       10,962  

In-process research and development charge

     —         850  

Restructuring

     5,434       —    

Depreciation and amortization

     8,034       4,766  
                

Total costs and expenses

     130,263       126,499  
                

Income (loss) from operations

     (97 )     (2,119 )

Gain on sale of assets

     400       2,064  

Loss on investments

     (158 )     —    

Interest income

     847       2,382  

Interest expense

     (1,143 )     (263 )
                

Income (loss) before income taxes

     (151 )     2,064  

Provision for income taxes

     714       1,774  
                

Net income (loss)

   $ (865 )   $ 290  

Income allocated to participating securities

     —         3  
                

Net income (loss) available to common stockholders

   $ (865 )   $ 287  
                

Earnings (loss) per common share:

    

Basic

   $ (0.02 )   $ 0.01  

Diluted

   $ (0.02 )   $ 0.01  

Shares used in computing earnings (loss) per common share:

    

Basic

     55,470       53,548  

Diluted

     55,470       54,515  

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

 

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ECLIPSYS CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

 

     Three Months Ended March 31,  
     2009     2008  

Operating activities:

    

Net income (loss)

   $ (865 )   $ 290  

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    

Depreciation and amortization

     12,035       10,188  

Provision for bad debt

     1,046       950  

In-process research and development

     —         850  

Stock compensation expense

     4,408       3,347  

Gain on sale of assets

     (400 )     (2,064 )

Deferred provision for income taxes

     452       68  

Changes in operating assets and liabilities:

    

Accounts receivable

     3,695       (2,092 )

Prepaid expenses and other current assets

     (1,454 )     (6,000 )

Other assets

     (237 )     534  

Deferred revenue

     (807 )     (3,351 )

Accrued compensation

     7,465       (4,537 )

Accounts payable and other current liabilities

     (6,596 )     5,952  

Other long-term liabilities

     751       2,343  

Other reconciling items

     243       427  
                

Total adjustments

     20,601       6,615  
                

Net cash provided by operating activities

     19,736       6,905  
                

Investing activities:

    

Purchases of property and equipment

     (7,273 )     (6,940 )

Purchase of marketable securities

     —         (102,000 )

Proceeds from sales of marketable securities

     150       134,791  

Capitalized software development costs

     (7,216 )     (2,923 )

Proceeds from sale of assets

     —         698  

Earnout on disposition

     842       400  

Cash paid for acquisitions, net of cash acquired

     (2,763 )     (53,634 )
                

Net cash used in investing activities

     (16,260 )     (29,608 )
                

Financing activities:

    

Proceeds from stock options exercised

     74       1,486  

Proceeds from employee stock purchase plan

     242       169  

Proceeds from secured financing

     —         45,000  
                

Net cash provided by financing activities

     316       46,655  
                

Effect of exchange rates on cash and cash equivalents

     (214 )     (264 )
                

Net increase in cash and cash equivalents

     3,578       23,688  

Cash and cash equivalents — beginning of period

     108,304       22,510  
                

Cash and cash equivalents — end of period

   $ 111,882     $ 46,198  
                

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

 

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ECLIPSYS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE A – PREPARATION OF INTERIM FINANCIAL STATEMENTS

In this report, Eclipsys Corporation and its subsidiaries are referred to as “we,” “the Company,” or “Eclipsys.”

The accompanying unaudited condensed consolidated financial statements have been prepared based upon Securities and Exchange Commission (“SEC”) rules that permit reduced disclosure for interim periods. In our 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 our significant accounting policies and other information, you should read this report in conjunction with the consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2008 that was filed with the SEC on February 24, 2009.

The Company manages its business as one reportable segment.

NOTE B – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Recently Adopted Standards

In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141 (Revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R continues to require the purchase method of accounting to be applied to all business combinations, but it significantly changes the accounting for certain aspects of business combinations. Under SFAS 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS 141R will change the accounting treatment for certain specific acquisition related items including: (1) expensing acquisition related costs as incurred; (2) valuing noncontrolling interests at fair value at the acquisition date; and (3) expensing restructuring costs associated with an acquired business. SFAS 141R also includes a substantial number of new disclosure requirements. We adopted SFAS 141R on January 1, 2009. SFAS 141R is to be applied prospectively to business combinations for which the acquisition date is on or after January 1, 2009.

In April 2008, the FASB issued FASB Staff Position (“FSP”) SFAS 142-3, “Determination of the Useful Life of Intangible Assets.” This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets.” The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141R and other United States generally accepted accounting principles. This FSP shall be effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. We adopted this FSP January 1, 2009. This FSP did not have a material impact on our condensed consolidated financial statements.

In June 2008, the FASB issued FSP Emerging Issues Task Force (“EITF”) 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (EPS) under the two-class method. This FSP shall be effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those years. The adoption of this FSP on January 1, 2009 did not materially affect our earnings per share and was applied retrospectively to all periods presented (see Note C for details).

Recently Issued Standards

In April 2009, the FASB issued FSP SFAS 115-2 and SFAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments.” This FSP changes existing guidance for determining whether an impairment of debt securities is other than temporary. The FSP requires other than temporary impairments to be separated into the amount representing the decrease in cash flows expected to be collected from a security (referred to as credit losses) which is recognized in earnings and the

 

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ECLIPSYS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

amount related to other factors which is recognized in other comprehensive income. This noncredit loss component of the impairment may only be classified in other comprehensive income if the holder of the security concludes that it does not intend to sell and it will not more likely than not be required to sell the security before it recovers its value. If these conditions are not met, the noncredit loss must also be recognized in earnings. When adopting the FSP, an entity is required to record a cumulative effect adjustment as of the beginning of the period of adoption to reclassify the noncredit component of a previously recognized other than temporary impairment from retained earnings to accumulated other comprehensive income. FSP SFAS 115-2 and SFAS 124-2 is effective for interim and annual periods ending after June 15, 2009. Management is currently evaluating the requirements of the FSP and has not yet determined the impact on Eclipsys’ condensed consolidated financial statements, which could be material.

In April 2009, the FASB issued FSP SFAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” This FSP provides additional guidance on estimating fair value when the volume and level of activity for an asset or liability have significantly decreased in relation to normal market activity for the asset or liability. The FSP also provides additional guidance on circumstances that may indicate that a transaction is not orderly. FSP SFAS 157-4 is effective for interim and annual periods ending after June 15, 2009. Eclipsys does not believe the adoption of this FSP will materially impact its condensed consolidated financial statements.

 

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ECLIPSYS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE C – EARNINGS (LOSS) PER SHARE

For all periods presented, basic and diluted earnings (loss) per common share (“EPS”) is presented in accordance with SFAS 128, “Earnings per Share,” as clarified by EITF Issue No. 03-6, “Participating Securities and the Two Class Method under FASB Statement No. 128, Earnings per Share” (“EITF 03-6”) as clarified by FSP EITF 03-6-1. Basic earnings (loss) per common share is calculated by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding during the period.

Non-vested restricted stock carries non-forfeitable dividend rights and is therefore a participating security, in accordance with FSP EITF 03-6-1 (See Note B - Recently Issued Accounting Pronouncements). 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 as a participating security and used the two class method of computing earnings per share as of January 1, 2009, with retroactive application to all prior periods presented. Because the Company does not pay dividends, earnings allocated to each participating security and share of common stock is equal. For the period 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. For the three months ended March 31, 2009 and 2008, 5,367,054 and 2,538,563 anti-dilutive shares were excluded from the calculation of diluted earnings per common share, respectively. The earnings (loss) amounts used for per-share calculations are the same for both the basic and diluted EPS calculations.

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

 

     Three Months Ended
March 31,
     2009     2008

Basic EPS:

    

Net income (loss)

   $ (865 )   $ 290

Income allocated to participating securities (1)

     —         3
              

Net income (loss) available to common stockholders

   $ (865 )   $ 287
              

Basic weighted average common shares outstanding

     55,470       53,548

Basic earnings (loss) per common share

   $ (0.02 )   $ 0.01

Diluted EPS:

    

Net income (loss)

   $ (865 )   $ 290

Income allocated to participating securities (1)

     —         3
              

Net income (loss) available to common stockholders

   $ (865 )   $ 287
              

Basic weighted average common shares outstanding

     55,470       53,548

Dilutive effect of potential common shares (2)

     —         967
              

Diluted weighted average shares common outstanding

     55,470       54,515

Diluted earnings (loss) per common share

   $ (0.02 )   $ 0.01
 
 

(1)

The Company has retroactively allocated earnings to 579 non-vested shares of restricted stock considered to be participating securities for the basic and diluted EPS calculation, in accordance with FSP EITF 03-6-1, for the three month period ended March 31, 2008. For the three month period ended March 31, 2009 the Company was in a net loss position and therefore did not allocate any loss to participating securities.

 

(2)

No potential common shares were included in weighted average diluted shares outstanding for the three month period ended March 31, 2009, as the Company has a net loss and potential common shares would create an antidilutive effect on earnings per share. If the company had net income, 131 potential common shares would be included in diluted weighted average shares outstanding.

 

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ECLIPSYS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE D – ACCOUNTS RECEIVABLE

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

 

     March 31,
2009
   December 31,
2008

Accounts Receivable:

     

Billed accounts receivable, net

   $ 79,561    $ 90,144

Unbilled accounts receivable

     33,742      31,667
             

Total accounts receivable, net

   $ 113,303    $ 121,811
             

NOTE E – INVESTMENTS

Investment balances consist of the following (in thousands):

 

     March 31,
2009
   December 31,
2008

Security Type:

     

Auction rate securities

     

UBS purchased (1)

   $ 32,636    $ 32,413

Goldman Sachs purchased (2)

     69,675      71,499

Auction rate securities put option (3)

     2,921      3,303

Other marketable securities

     —        154
             

Total

   $ 105,232    $ 107,369
             
 
 

(1)

These securities are classified as trading, and the changes in fair value of these securities are included in earnings. For the three month period ended March 31, 2009, we have recorded a $0.2 million unrealized gain related to the increase in the fair value of these ARS.

 

(2)

As of March 31, 2009 the maturity dates of our Goldman Sachs purchased ARS range from August 1, 2027 to November 1, 2047. These securities are classified as available for sale, and the changes in fair value of these securities are included in accumulated other comprehensive income. For the three month period ended March 31, 2009, we recorded a $1.8 million unrealized loss to accumulated other comprehensive income in the balance sheet.

 

(3)

Our auction rate securities put option is exercisable from June 30, 2010 to July 30, 2012. We have accounted for the put option as a freestanding financial instrument and elected to record the value under the fair value option of SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities”. Therefore, the changes in fair value of the put option are included in earnings. For the three month period ended March 31, 2009, we recorded a $0.4 million unrealized loss related to the decrease in the fair value of the put option.

As of March 31, 2009 the Company held approximately $116.6 million par value of investments in auction-rate securities (“ARS”) of which $36.3 million was purchased through UBS Financial Services (“UBS”) and $80.3 million was purchased through Goldman Sachs. As of March 31, 2009, our ARS purchased through UBS are comprised of $32.2 million triple-A rated pools of student loans and $4.1 million “A3” rated pools of student loans, and our ARS purchased through Goldman Sachs are comprised of $64.8 million triple-A rated pools of student loans and $15.5 million “B3” rated pools of student loans. 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 historically 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. Our ARS continued to fail to settle at auctions through the first quarter of 2009. The Company continues to earn interest on these investments at the contractual rate.

 

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ECLIPSYS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

On November 12, 2008, we entered into a settlement agreement with UBS pursuant to which the Company (1) received the right (the “put option”) to sell its 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.

As of March 31, 2009, the Company has recorded these investments, including the put option, at their estimated fair value of $105.2 million. All of our ARS were at an unrealized loss position as of March 31, 2009. Due to events in the credit markets, quoted prices in active markets are not readily available at this time. The Company estimated the fair value of these ARS and the put option as of March 31, 2009 based on various factors such as credit quality, duration, insurance wraps, assumptions about future cash flows and likelihood of redemption. We accounted for illiquidity by using a discount rate within the valuation, with an additional spread representing the additional required rates of return investors would have for certain securities to hold those securities in an illiquid environment.

The Company has accounted for the put option as a freestanding financial instrument and elected to record the value under the fair value option of SFAS No. 159. The Company has classified the related UBS purchased auction rate securities as trading securities pursuant to SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS 115”). 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 generally offset the fair value movements in the related UBS purchased ARS.

We have recorded a temporary loss on the ARS purchased through Goldman Sachs of $10.6 million, as of March 31, 2009, in accumulated other comprehensive income, 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, 2009, we considered several factors in accordance with FSP FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” and Staff Accounting Bulletin (“SAB”) Topic 5M, “Other Than Temporary Impairment Of Certain Investments In Debt And Equity Securities” including the duration of time and the extent to which the market value has been less than cost, the credit ratings of the securities, the Company’s intent and ability to retain the investments for a period of time sufficient to allow for any anticipated recovery in market value, and the cause of the impairment. We believe these investments continue to be of high credit quality, and we currently have the intent and ability to hold the ARS until such time as successful auctions occur, secondary markets allow for a sufficient price to recover substantially all of our par value, or our put option becomes exercisable. Accordingly, we have classified these securities as long-term investments in our condensed consolidated balance sheet. The Company has concluded that no other-than-temporary impairment losses occurred for the three month period ended March 31, 2009. 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 statement of operations if the decline in fair value of the Goldman Sachs purchased ARS are determined to be other-than-temporary.

 

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ECLIPSYS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE F – ACQUIRED TECHNOLOGY AND INTANGIBLE ASSETS, INCLUDING GOODWILL

The changes in the carrying amount of goodwill for the three month period ended March 31, 2009 were as follows:

 

Beginning Balance December 31, 2008

   $ 96,973

Acquisition adjustments

     722
      

Ending Balance March 31, 2009

   $ 97,695
      

The gross and net amounts for acquired technology, ongoing customer relationships and goodwill consist of the following (in thousands):

 

     March 31, 2009    December 31, 2008    Estimated
Life
     Gross
Carrying
Amount
   Accumulated
Amortization
    Net Book
Value
   Gross
Carrying
Amount
   Accumulated
Amortization
    Net Book
Value
  

Intangibles subject to amortization:

                  

Acquired technology

   $ 45,027    $ (7,883 )   $ 37,144    $ 45,027    $ (5,317 )   $ 39,710    3-4 years

Ongoing customer relationships

     9,409      (1,814 )     7,595      9,409      (1,382 )     8,027    5-6 years

Non-compete agreements

     2,640      (749 )     1,891      2,640      (470 )     2,170    2 years
                                              

Total

   $ 57,076    $ (10,446 )   $ 46,630    $ 57,076    $ (7,169 )   $ 49,907   
                                              

Intangibles not subject to amortization:

                  

Trade names

        $ 60         $ 60   

Goodwill

          97,695           96,973   
                          

Total

        $ 97,755         $ 97,033   
                          

 

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ECLIPSYS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE G – TOTAL COMPREHENSIVE INCOME

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

 

     Three Months Ended March 31,  
     2009     2008  

Net income (loss)

   $ (865 )   $ 290  

Foreign currency translation adjustments

     (358 )     (868 )

Unrealized holding losses arising during period

     (1,826 )     (4,873 )

Income tax expense related to other comprehensive income

     722       —    
                

Total comprehensive income (loss)

   $ (2,327 )   $ (5,451 )
                

NOTE H – RESTRUCTURING

During the first quarter 2009, the Company executed a workforce reduction which included terminating approximately 175 employees. As previously announced, 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 business 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 our consolidated statement of operations. As of March 31, 2009, $1.3 million of these costs have been paid by the Company and the accrued liability is $4.1 million. Payments for these obligations will continue through early 2010 with the majority of payments occurring in the second quarter 2009.

In January 2006, we effected a restructuring of our operations which included a reduction in headcount of approximately 100 employees and the reorganization of our Company. In December 2006, we realigned certain management resources and consolidated some facilities to eliminate excess office space. These activities resulted in total restructuring charges of $14.7 million, which were incurred in the year ended December 31, 2006. Severance charges were $12.2 million, of which $2.8 million was for non-cash stock-based compensation. The excess office space consolidation resulted in charges of $2.5 million related to the closing of three of our facilities. A summary of the restructuring activity related to our 2006 initiatives for the three month period ended March 31, 2009 is as follows (in thousands):

 

     One - time
Employee -
Related
Benefits
    Facility
Closures
    Total  

Balance at December 31, 2008

   $ 17     $ 297     $ 314  

Payments

     (17 )     (126 )     (143 )
                        

Balance at March 31, 2009

   $ —       $ 171     $ 171  
                        

The remaining liability as of March 31, 2009 is expected to be paid out during 2009.

NOTE K – FAIR VALUE MEASUREMENT

We measure our financial assets at fair value in accordance with SFAS 157. The fair value framework prescribed in SFAS 157 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.

 

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ECLIPSYS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table summarizes our financial assets measured at fair value on a recurring basis in accordance with SFAS 157 as of March 31, 2009 (in thousands):

 

     Balance as of
March 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

   $ 102,239    $ 102,239    $ —      $ —  

Long-term investments:

           

Auction rate securities (1)

     102,311            102,311

Put option (2)

     2,921            2,921
                           
   $ 207,471    $ 102,239    $ —      $ 105,232
                           

 

(1)

Our auction rate securities, categorized as Level 3, were $103.9 million as of December 31, 2008. We recorded a net unrealized loss of $1.6 million on our ARS for the three months ended March 31, 2009 to adjust the investment to fair value. The $1.6 million net unrealized loss is comprised of an unrealized gain of $0.2 million recorded in the statement of operations within the line item “Loss on Investments” and an unrealized loss of $1.8 million recorded in the balance sheet as a component of other comprehensive income. See Note E for further information.

(2)

Our put option, categorized as Level 3, had a carrying value of $3.3 million as of December 31, 2008. We recorded an unrealized loss of $0.4 million on our put option for the three months ended March 31, 2009 to adjust the put option to fair value. This adjustment has been recorded in the statement of operations within the line item “Loss on Investments”.

As of March 31, 2009, the Company has recorded these investments at their estimated fair value of $207.5 million. Due to events in the credit markets, quoted prices in active markets are not readily available for the ARS and put option at this time. The Company estimated the fair value of these ARS and the put option as of March 31, 2009 based on various factors such as credit quality, duration, insurance wraps, assumptions about future cash flows and likelihood of redemption. We accounted for illiquidity by using a discount rate within the valuation, with an additional spread representing the additional required rates of return investors would have for certain securities to hold those securities in an illiquid environment. The assumptions that were used to determine the fair value estimates were highly subjective and therefore considered Level 3 unobservable inputs in the fair value hierarchy. The fair value of these assets represents $105.2 million or 50.7% of total assets measured at fair value in accordance with SFAS 157. The estimate of the fair value of the ARS we hold could change significantly based on future market conditions.

As of March 31, 2009, $58.3 million of our money market funds held at Evergreen Investments have been guaranteed by the U.S. Treasury Money Market Guarantee Program. The plan ensures that if a participating fund’s share value declines under $1.00 and a decision is made to liquidate by the fund’s Board of Trustees, the U.S. Treasury would cover any shortfall between the share price at the time of liquidation and $1.00 for investors as of September 19, 2008. This guarantee is effective until September 18, 2009.

NOTE L – INCOME TAXES

In the quarter ended March 31, 2009, the Company recorded income tax expense of $0.7 million as compared to income tax expense of $1.8 million for the first quarter of 2008. The difference in the expense, quarter over quarter, is primarily due to the tax effect of share-based compensation shortfalls recorded in the first quarter of 2009 of $0.5 million and the accrual of tax, interest and penalties as a result of our quarterly review of uncertain tax positions under the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”) recorded in the first quarter of 2008 of $1.5 million.

A shortfall exists for a share-based compensation award to the extent that the cumulative recognized book stock compensation expense for that award exceeds the associated tax deduction. Substantial amounts of share-based compensation shortfalls could occur during the remainder of the year due to the recent volatility of the Company’s stock price. However, we are not able to predict the amount of the shortfalls. The Company must reflect a tax provision for these shortfalls because it has no pool of windfall tax benefits, due to the fact the Company has historically used the “with-and-without” or “incremental” approach for ordering tax benefits derived from the share-based payment of awards.

 

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ECLIPSYS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE M – CONTINGENCIES

On May 22, 2008, The McKenna System (“TMS”) filed in the 274th Judicial District Court, Comal County, Texas, a complaint against the Company stemming from an agreement between the Company and McKenna Health System (“McKenna”) pursuant to which McKenna agreed to acquire software and services from the Company. McKenna terminated that agreement on April 18, 2007. The complaint alleges various causes of action essentially amounting to breach of contract for failing to meet contractual obligations related to the software sold and the timeliness of implementation, and intentionally or negligently misleading McKenna. TMS has asserted damages of approximately $7.5 million, and seeks multiple damages under various theories. The outcome of this case and its impact on the Company’s results of operations depend upon questions of fact and law that are disputed or not clear and cannot be predicted with confidence at this time. The Company intends to contest this matter vigorously, including defending the allegations and pursuing McKenna’s unfulfilled obligations to Eclipsys.

The Company or one of its subsidiaries is a defendant, and/or may be contractually obligated to indemnify defendants, in three separate patent actions; two are pending in Illinois and one in Texas. These actions, which name multiple defendants each, are based upon U.S. patents that allegedly cover various aspects of the creation of patient medical records and related reports. Each of the actions seeks damages for infringement, including treble damages. Plaintiffs also seek injunctive relief, attorneys’ fees and costs. Each case is in early stages, and the outcome of each case and its impact on the Company’s results of operations depend upon questions of fact and law that are disputed or not clear and cannot be predicted with confidence at this time. The Company intends to contest these matters vigorously. However, because the outcomes of such patent lawsuits are often uncertain and such lawsuits are typically expensive to litigate, such cases often settle and the Company would consider settlement on reasonable terms, if appropriate agreements with the plaintiffs could be reached.

In addition to the foregoing, the Company and its subsidiaries are from time to time parties to other 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 our 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, 2009. However, based on our knowledge as of March 31, 2009, 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 our consolidated financial position, results of operations or cash flows.

 

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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; 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. 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 leading provider of advanced integrated clinical, revenue cycle and performance management software, and professional services that help healthcare organizations 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;

 

   

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

 

   

supports clinical and financial planning and analysis; and

 

   

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

We also provide professional services related to our software. These services include software implementation and maintenance, outsourcing, remote hosting of our software, as well as 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 statement of operations since the amount of license revenue related to traditional software contracts is less than 10% of total revenues and 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. Our income statement items of revenue are as follows:

 

   

Systems and services revenues include revenues derived from a variety of sources, including software licenses and contractual software maintenance, and professional services, which include implementation, training and consulting services. Our systems and services revenues include both “subscription” software license revenues and software maintenance revenues (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 and represent less than 10% of total revenues). For some clients, we host the software applications licensed from

 

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us remotely on our own servers, which saves such 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 the license and maintenance revenue are generally significantly higher than margins on the professional services revenues.

 

   

Hardware revenues result from our 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 be negatively impacted. The amount of hardware revenues, and the proportion of our total revenues that they represent, can vary significantly from period to period. Margins on hardware revenues are generally significantly lower than margins on 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. Most 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 our international business, including our operations in India and sales of our solutions outside of North America, such as the Asia-Pacific region and the Middle East. As of March 31, 2009, our India operations have expanded to include two offices and approximately 700 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 economically effective cost, and also represents a potential new market for our software.

Business Environment

Our industry, healthcare information technology, 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 of new and enhanced solutions. We anticipate that the healthcare information technology industry will continue to grow and be seen as a way to curb growing healthcare costs while also improving the quality of healthcare.

Recent disruptions in U.S. and international financial markets have adversely affected the availability of capital for our clients and potential clients, which could negatively impact our sales. In addition, current economic conditions are motivating some clients and potential clients to prefer software subscription contracting to traditional licensing arrangements and we try to be flexible in accommodating clients’ needs, including through structuring transactions as subscriptions. Given that periodic revenue from traditional license arrangements carries high margins and contributes significantly to overall profitability in the transaction period, this client contracting preference may affect our profitability in 2009.

Economic factors contributed to disappointing results for us in the fourth quarter of 2008, and we have responded with various initiatives to reduce and control our expenses, including headcount reductions to better align with current anticipated business conditions. However, the difficult economy, client financial challenges, and significant development requirements, combined with the positive effects of the HITECH Act have resulted in an unusual business environment that makes planning and forecasting challenging.

Initiatives and Challenges for 2009

The HITECH Act

On February 17, 2009, the American Recovery and Reinvestment Act of 2009 (ARRA) was signed into law. This was an important event for Eclipsys and the health information technology industry in general because a portion of ARRA known as the HITECH Act 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 (i) requires governmental agencies that implement, acquire or upgrade health information technology systems used for the exchange of individually identifiable health information between federal entities and agencies and with non-federal entities to utilize systems that are certified according to such standards, and (ii) requires governmental agencies to require in contracts with health care providers, health plans, and insurers that as the providers, health plans, and insurers implement, acquire or upgrade health information technology systems, they use systems that are certified according to such standards. Although the HITECH Act says that private entities are not legally required to adopt or comply with the standards adopted by the Secretary of Health and Human Services, we believe that the HITECH Act’s requirements for Federal agencies and financial incentives for healthcare providers make compliance with these standards a de facto business requirement for us and our competitors.

 

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The HITECH Act provides the potential for aggregate payments over a period of approximately four or five years beginning in 2011 of up to approximately $10 million to qualifying hospitals (based upon a formula that takes into account various factors including total discharges and Medicare and charity patient volumes) and $44,000 to qualifying physicians. These are significant sums for many of those qualified to receive them, particularly in what is otherwise a challenging economic environment, and have provided a strong incentive for many hospitals and doctors to consider implementing HIT systems. We have noticed some increased interest in our offerings in response to this stimulus and we are hopeful that as the regulations to be implemented pursuant to the HITECH Act are written and the practical parameters of these programs come into focus, we will share in a demonstrable increase in market activity.

In order to take advantage of this opportunity, we will need to ensure that our software meets the certification standards described above. This will require additional development investments, which could displace other important initiatives due to the short timeline before stimulus funds become available to meaningful EHR users. If we falter in our efforts to meet the certification standards, we may breach some client commitments and find ourselves at a competitive disadvantage.

CCHIT

The Certification Commission for Healthcare Information Technology (CCHITSM) is a private non-profit organization formed to accelerate the adoption of robust, interoperable healthcare information technology throughout the United States by creating an efficient, credible, sustainable mechanism for the certification of healthcare IT products. CCHIT develops criteria for healthcare IT products based upon standards for such products established by various standards development organizations, and then tests products for adherence to the criteria. Products that pass the test are CCHIT “certified.” Certification for a product lasts for two years and must then be renewed, and the standards applicable to products evolve and become more demanding over time. CCHIT has published certification criteria for only a limited number of products to date, but will continue to add products to its certification list. CCHIT certification is an important factor to many clients and potential clients in our target market and 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. In addition, CCHIT criteria may be used as, and/or overlap with, standards for certification of health information technology systems under the HITECH Act. Accordingly, we are devoting significant resources to conforming our software to current and anticipated CCHIT criteria. This requires us to allocate scarce resources and may mean that other important development initiatives are delayed or foregone.

Performance Management

To help clients address their needs to operate more efficiently in today’s challenging environment, and to differentiate our capabilities, we plan to emphasize development and marketing of our performance management suite of solutions, comprising of Sunrise EPSi TM, Sunrise Patient Flow TM and Sunrise Clinical Analytics TM. 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 will require an investment to develop what were designed as independent applications into an integrated solution.

Speed to Value

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 clients. 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 most complex software. We are currently deploying a new “speed to value” implementation methodology that we have recently developed to address this issue.

International Initiatives

We continue to focus on expanding our international business, including our operations in India and sales of our solutions outside of North America, such as 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

 

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markets. 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 expect to face challenges building brand-name recognition and adapting our software solutions to new international markets.

Acquisitions Integration

Integrating the three companies we acquired in 2008 will present challenges. The anticipated benefits from these acquisitions may not be achieved, and the diversion of management’s attention and any difficulties encountered in the transition process could negatively impact our business. These companies are relatively small and the Peak Practice and Patient Flow offerings in particular are not yet well established in the market, so additional investment is required and there is risk that our expectations for these companies may not be met. However, with Peak Practice, we now have a solution for the independent physician practice market, which we believe has potential to be a high growth area for us, especially given the ARRA, as discussed above.

Recent Performance and Outlook

We recorded $11.0 million of software license revenues in the quarter representing a 32.1% increase compared to the first quarter in 2008. These positive results were impacted by large enterprise deals closed in the quarter and by $2.1 million of contribution from our 2008 acquisitions. This revenue stream can fluctuate dramatically from quarter to quarter depending on whether we are able to record the license revenue at contract signing, which is dependent on each individual customer’s contract terms. Therefore it is difficult to project license revenues in future quarters.

Due to the strong license revenues noted above, we had a great mix of higher margin sales activity in the quarter. Our sales team produced in the quarter as we signed new enterprise clients, closed significant renewal contracts, and added many new performance management clients. In terms of the new contracts we signed in the quarter measured in dollars, 52% were from new clients and 80% in our core clinical business.

We had a very strong collections quarter which sequentially decreased our days sales outstanding by 8 days to 78 days. Operating cash flows were $19.7 million compared to $6.9 million in the first quarter 2008, which was negatively impacted by payouts from our corporate bonus plan.

We continue to improve our customer ratings as evidenced in April 2009 when KLAS released its CPOE Digest for 2009 which highlighted Eclipsys leadership position in: (1) total number of physicians who utilize our computerized physician order entry (“CPOE”) solution (2) percentage of our CPOE client base using the solution and (3) the highest physician satisfaction from clients who use our CPOE solution.

Our total revenues of $130.2 million in the first quarter 2009 were 4.7% higher than the first quarter 2008. The net loss for the quarter of $0.9 million includes a $5.4 million restructuring charge. Overall, we are pleased with the results and remain cautiously optimistic about results for 2009. Although we were pleased with the quarter, we note results by quarter can vary due to the timing of license revenues and capitalized software labor deferrals, which also can fluctuate based on project activity and release dates. We expect the positive impact of these two areas in the first quarter to decrease in the second quarter 2009.

 

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Consolidated Results of Operations (unaudited)

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

 

     March 31,
2009
    March 31,
2008
    Change
($)
    Change
(%)
 

Revenues

        

Systems and services

   $ 128,137     $ 119,138     $ 8,999     7.6 %

Hardware

     2,029       5,242       (3,213 )   -61.3 %
                              

Total revenues

     130,166       124,380       5,786     4.7 %
                              

Costs and expenses

        

Cost of systems and services (excluding depreciation and amortization shown below)

     66,874       67,560       (686 )   -1.0 %

Cost of hardware

     1,656       4,336       (2,680 )   -61.8 %

Sales and marketing

     22,751       20,871       1,880     9.0 %

Research and development

     13,493       17,154       (3,661 )   -21.3 %

General and administrative

     12,021       10,962       1,059     9.7 %

In-process research and development charge

     —         850       (850 )   *  

Restructuring

     5,434       —         5,434     *  

Depreciation and amortization

     8,034       4,766       3,268     68.6 %
                              

Total costs and expenses

     130,263       126,499       3,764     3.0 %
                              

Income (loss) from operations

     (97 )     (2,119 )     2,022     -95.4 %

Gain on sale of assets

     400       2,064       (1,664 )   -80.6 %

Loss on investments

     (158 )     —         (158 )   *  

Interest income

     847       2,382       (1,535 )   -64.4 %

Interest expense

     (1,143 )     (263 )     (880 )   334.6 %
                              

Income (loss) before income taxes

     (151 )     2,064       (2,215 )   -107.3 %

Provision for income taxes

     714       1,774       (1,060 )   -59.8 %
                              

Net income (loss)

   $ (865 )   $ 290     $ (1,155 )   -398.3 %
                              

Basic net income (loss) per common share

   $ (0.02 )   $ 0.01     $ (0.03 )   -300.0 %
                              

Diluted net income (loss) per common share

   $ (0.02 )   $ 0.01     $ (0.03 )  
                          

 

* Not meaningful

Revenues

Total revenues increased by $5.8 million, or 4.7%, for the quarter ended March 31, 2009 as compared to the first quarter of 2008. The increase was driven by a $9.0 million increase in systems and services revenues, net of a $3.2 million decrease in hardware revenues. The 2008 acquisitions contributed an increase of $6.4 million in total revenue for the three month period ended March 31, 2009 as compared to the same period in 2008.

Systems and Services Revenues

Systems and services revenues increased by $9.0 million, or 7.6%, for the quarter ended March 31, 2009 as compared with the same period of 2008. The overall increase resulted from increases of $7.4 million in revenues recognized on a ratable basis and $2.2 million in periodic revenues partially offset by a decrease of $0.6 million in professional services revenues.

 

   

Revenues Recognized Ratably - Revenues recognized ratably from software, maintenance, outsourcing and remote hosting were $88.1 million, an increase of $7.4 million, or 9.2%, as compared to the same period in 2008. The increase was due to previous period sales of our solutions, remote hosting related services, and outsourcing, resulting in growth in our recurring revenue base. In addition, the 2008 acquisitions contributed an increase of $2.9 million in revenues recognized ratably for the three month period ended March 31, 2009 as compared to the same period in 2008.

 

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Periodic Revenues - Periodic revenues for software related fees and third party software related fees were $12.5 million for the quarter ended March 31, 2009 as compared to $10.3 million for the quarter ended March 31, 2008, an increase of $2.2 million. The table below summarizes the components of periodic revenues (in thousands):

 

     Three Months Ended
March 31,
            
     2009    2008    $ Change     % Change  

Eclipsys software related fees

   $ 11,017    $ 8,337    $ 2,680     32.1 %

Third party software related fees

     1,445      1,916      (471 )   -24.6 %
                            

Total periodic revenues

   $ 12,462    $ 10,253    $ 2,209     21.5 %
                            

In any period, some software revenues can be considered one time in nature for that period, and we do not recognize these revenues on a ratable basis. These 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 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. The 2008 acquisitions contributed an increase of $2.2 million in periodic revenues for the three month period ended March 31, 2009 as compared to the same period in 2008.

 

   

Professional Services Revenues - Professional services revenues, which include implementation, training and consulting related services, were $27.6 million for the three month period ended March 31, 2009, a decrease of $0.6 million, as compared to the three month period ended March 31, 2008. The decrease was primarily related to a reduction in education services, customer reimbursed travel, and consulting services. Education services and customer reimbursed travel, exclusive of revenues from acquisitions, decreased $0.7 million for the three month period ended March 31, 2009 as compared to the same period in 2008 reflecting a decrease in new licensed clients. In addition, consulting services, exclusive of revenues from acquisitions, decreased $1.3 million due to the streamlining of our services offering in the first quarter of 2009 as compared to the same period in 2008. The decrease was partially offset by professional services revenues provided by our 2008 acquisitions of EPSi, MediNotes, and Premise. The 2008 acquisitions contributed an increase of $1.3 million in professional services revenues for the three month period ended March 31, 2009 as compared to the same period in 2008.

Hardware Revenues

Hardware revenues decreased by $3.2 million, or 61.3%, for the three month period ended March 31, 2009, as compared to the three month period ended March 31, 2008. The decrease in hardware revenue is primarily attributable to net new customers signing remote hosting contracts as opposed to buying hardware. In addition, there have been increased existing customers who are migrating to our remote hosting services which results in decreased hardware sales to existing clients. The Company anticipates hardware sales to increase in the second half of 2009 related to customer planned Sunrise Clinical Manager release upgrades later in 2009.

Operating Expenses

Cost of Systems and Services

Our cost of systems and services decreased $0.7 million, or 1.0%, for the three months ended March 31, 2009 as compared to the three months ended March 31, 2008. The decrease for the three months ended March 31, 2009 reflects:

 

   

Lower amortization of capitalized software of $1.1 million impacted by the timing of previous releases as the amortization of SunriseXA 4.5, which was released in January 2006, ceased during the first quarter 2009

 

   

Lower third-party royalty fees of $0.7 million reflecting lower volumes under certain contractual obligations

 

   

Higher third party software cost of services of $1.1 million primarily as a result of continued growth in third party revenue activity

 

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Cost of Hardware

Cost of hardware decreased $2.7 million or 61.8% for the three months ended March 31, 2009 as compared to the three months ended March 31, 2008. This decrease was directly due to the 61.3% decrease in our hardware revenues for the same periods.

Sales and Marketing

Our sales and marketing expenses increased $1.9 million, or 9.0%, for the three months ended March 31, 2009 as compared to the three months ended March 31, 2008. The increase in sales and marketing expenses included higher labor related compensation of $2.8 million partially offset by a $0.8 million decrease in sales trade show related expenses. Higher labor related costs include $2.2 million of additional costs due to our three acquisitions during 2008. Trade show activity decreased in the first quarter of 2009 as compared to the same period in 2008 due to the timing of the 2009 HIMSS trade show. The trade show occurred in April in 2009 versus February in 2008; therefore, expenses related to the trade show will be incurred in the second quarter of 2009.

Research and Development

Our research and development expenses decreased $3.7 million, or 21.3%, for the three months ended March 31, 2009, as compared to the three months ended March 31, 2008. The decrease primarily reflects higher internal labor cost capitalization associated with Sunrise XA 5.5 during 2009 and to a lesser extent capitalized labor in the first quarter of 2009 supporting Patient Flow release 5.0, an acquired product in our Premise acquisition.

Our gross research and development spending, which consists of research and development expenses and capitalized software development costs, was $20.7 million in the first quarter of 2009, an increase of $0.6 million compared to $20.1 million in the first quarter of 2008. This increase reflects continued investment in our product development activities in India.

In summary, research and development expense for the three months ended March 31 was as follows

(in thousands):

 

     2009    2008    $ Change     % Change  

Research and development expenses

   $ 13,493    $ 17,154    $ (3,661 )   -21.34 %

Capitalized software development costs

   $ 7,216    $ 2,923    $ 4,293     146.87 %
                            

Gross research and development expenditures

   $ 20,709    $ 20,077    $ 632     3.15 %

Amortization of capitalized software development costs

   $ 3,752    $ 4,832    $ (1,080 )   -22.35 %

Based on current development plans, we anticipate capitalized software costs will be less accretive to earnings in the second and third quarters of 2009, and we expect amortization of capitalized software to exceed amounts capitalized by the fourth quarter 2009.

General and Administrative

Our general and administrative expenses increased $1.1 million, or 9.7%, in the three months ended March 31, 2009 as compared to the three months ended March 31, 2008. The increase primarily reflects higher labor costs of $1.1 million impacted by higher stock compensation. The increase for the quarter also included various other increases including higher recruiting costs, substantially offset by lower legal fees of $1.4 million due to higher costs in the first quarter 2008 related to our derivative litigation that was ultimately settled in September 2008.

In-Process Research and Development Charge

Approximately $0.9 million of the purchase price of our acquisition of EPSi was allocated to in-process research and development and was charged to our income statement in the first quarter of 2008. The $0.9 million acquired in-process research and development was valued using the Multi-Period Excess Earnings Method. The material assumptions, underlying the purchase price allocation, were as follows: projected revenue assumptions, decay rate, cost assumptions, operating expense assumptions, charge assumptions for the use of contributory assets, and discount rate assumptions. At the time of acquisition, the technology was still in the research and development phase and had not yet been completed to a point of an existing or current product offering. At the time of acquisition, the projected cost to complete the project was $0.2 million. The in-process technology was incorporated within an EPSi product module that was released in January 2009.

 

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Restructuring

During the first quarter 2009 the Company executed a workforce reduction which included terminating approximately 175 employees. As previously announced, 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 business 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 our consolidated statement of operations.

Depreciation and Amortization

Depreciation and amortization expense increased $3.3 million, or 68.6%, for the three months ended March 31, 2009 as compared to the three months ended March 31, 2008. The increase in depreciation and amortization is attributable primarily to amortization related to intangible assets acquired in our acquisition of EPSi in February 2008, MediNotes in October 2008, and Premise in December 2008 and to a lesser extent an increased asset base to support our growing operations.

Gain on Sale of Assets

In the first quarter of 2009, we recorded an additional gain on sale of assets of $0.4 million resulting from the completion of post-closing milestones associated with the fourth quarter 2007 sale of our Clinical Practice Model Resource Center (CPMRC) business.

Loss on Investments

In the first quarter of 2009, we recorded an unrealized loss of $0.4 million on our put option to adjust the put option to fair value. This loss was partially offset by an unrealized gain of $0.2 million reflecting an increase in the fair value of our ARS purchased through UBS. During the first quarter of 2008, our ARS purchased through UBS were classified as available-for-sale securities, and therefore changes in the fair value were recorded in accumulated other comprehensive income on the balance sheet.

Interest Income

Interest income decreased $1.5 million, or 64.4%, for the three month period ended March 31, 2009 as compared to the same period in 2008. The decrease was primarily attributable to lower interest rates in 2009 as compared to 2008 on our ARS due to failed Dutch auctions beginning in February 2008. Although the auctions failed, we continued to earn interest on the ARS, but only at the contractual rate. In addition, we had lower ARS investment balances in first quarter of 2009 as compared to the same period in 2008. While our cash balances earning interest were higher in the first quarter of 2009, as compared to the same period in 2008, interest rates decreased, and the interest earned on our cash balances remained relatively flat for the first three months of 2009 as compared to the first three months of 2008.

Interest Expense

For the three month period ended March 31, 2009, we incurred interest expense of $1.1 million as compared to $0.3 million for the same period in 2008. In the first quarter of 2009, we incurred interest on borrowings of $105.0 million outstanding under the $125.0 million long-term revolving line of credit financing arrangement we entered into in August 2008. 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 is based on our leverage ratio and as of March 31, 2009 was 2.0%. 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. The effective interest rate for the first quarter of 2009 was 3.66%.

In the first quarter of 2008 we incurred interest expense on borrowings under the $45.0 million short-term financing arrangement we entered into in February 2008 and repaid in May 2008.

Provision for Income Taxes

In the quarter ended March 31, 2009, the Company recorded income tax expense of $0.7 million as compared to income tax expense of $1.8 million for the first quarter of 2008. The difference in the expense, quarter over quarter, is primarily due to the tax effect of share-based compensation shortfalls recorded in the first quarter of 2009 of $0.5 million and the accrual of tax, interest and penalties as a result of our quarterly review of uncertain tax positions under the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”) recorded in the first quarter of 2008 of $1.5 million.

 

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LIQUIDITY AND CAPITAL RESOURCES

Cash and marketable securities at March 31, 2009 were $111.9 million representing a $3.4 million increase from December 31, 2008. During the three month period ended March 31, 2009, operating activities provided $19.7 million of cash. Cash flow from operating activities reflected income generated from operations of $16.9 million, after adjusting for non-cash items of $17.8 million, which included depreciation and amortization, stock compensation, provision for bad debt, non-cash deferred tax provision, gain on sale of assets, loss on investments, and other reconciling items. Cash flow from operating activities after non-cash items, described above, for the three month period ended March 31, 2009 as compared to the same period in 2008 increased by $2.9 million primarily due to higher revenues and increased cash collections in 2009.

Net changes in operating assets and liabilities contributed $2.8 million to reconcile net income to cash provided by operating activities. This primarily comprises the following changes in working capital from December 31, 2008:

 

   

a decrease in accounts receivable of $3.7 million related to cash collections that were greater than current period billings and revenue recognized;

 

   

an increase in prepaid expenses and other current assets of $1.5 million related to timing of cash payments;

 

   

a decrease in accounts payable and other current liabilities of $6.6 million related to timing of cash payments;

 

   

an increase in accrued compensation of $7.5 million due primarily to an accrual of $4.1 million related to restructuring severance activity in 2009 and an increase in the payroll accrual of $2.8 million related to timing of the last pay period in the first quarter of 2009; and

 

   

a decrease in deferred revenue of $0.8 million due to recognition of software license and maintenance fees greater than those billed and unrecognized.

Investing activities used $16.3 million of cash which included $2.8 million related to prior year acquisitions, $7.3 million of capital expenditures and $7.2 million for investment in software development, partially offset by $0.8 million received as additional earn out on the December 2007 disposition of our CPMRC business and $0.2 million of principal received for a bond that matured in the first quarter of 2009.

Financing activities provided cash inflow of $0.3 million. We received $0.1 million from stock option exercises. Stock-option exercises continue to subside due to the downturn in the economy and related decrease in our stock price. The amount of cash that will be provided by future stock option exercises is uncertain. We also received $0.2 million from employees related to our employee stock purchase plan.

Future Capital Requirements

Our future cash requirements will depend on a number of factors including, among other things, the timing and level of our new sales volumes, the cost of our development efforts, the success and market acceptance of our future product releases, and other related items. As of March 31, 2009, our principal source of liquidity is our cash and cash equivalents balances of $111.9 million. We also have $18.1 million available for borrowings under the $125.0 million credit facility. We believe that our current cash and cash equivalents combined with our anticipated cash flows from operations and available borrowings under our credit facility will be sufficient to fund our current operations and capital requirements for the next twelve months.

As of March 31, 2009, $58.3 million of our money market funds held at Evergreen Investments have been guaranteed by the U.S. Treasury Money Market Guarantee Program. The plan ensures that if a participating fund’s share value declines under $1.00 and a decision is made to liquidate by the fund’s Board of Trustees, the U.S. Treasury would cover any shortfall between the share price at the time of liquidation and $1.00 for investors as of September 19, 2008. This guarantee is effective until September 18, 2009.

As of March 31, 2009, the Company held approximately $116.6 million par value of investments in auction-rate securities (“ARS”) of which $36.3 million was purchased through UBS Financial Services (“UBS”) and $80.3 million was purchased through Goldman Sachs. As of March 31, 2009, our ARS purchased through UBS are comprised of $32.2 million triple-A

 

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rated pools of student loans and $4.1 million “A3” rated pools of student loans, and our ARS purchased through Goldman Sachs are comprised of $64.8 million triple-A rated pools of student loans and $15.5 million “B3” rated pools of student loans. 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 historically 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. Our ARS continued to fail to settle at auctions through the first quarter of 2009. The Company continues 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 the Company (1) received the right (the “put option”) to sell its 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.

As of March 31, 2009, the Company has recorded these investments, including the put option, at their estimated fair value of $105.2 million. All of our ARS were at an unrealized loss position as of March 31, 2009. Due to events in the credit markets, quoted prices in active markets are not readily available at this time. The Company estimated the fair value of these ARS and the put option as of March 31, 2009 based on various factors such as credit quality, duration, insurance wraps, assumptions about future cash flows and likelihood of redemption. We accounted for illiquidity by using a discount rate within the valuation, with an additional spread representing the additional required rates of return investors would have for certain securities to hold those securities in an illiquid environment.

The Company has accounted for the put option as a freestanding financial instrument and elected to record the value under the fair value option of SFAS No. 159. This resulted in the recording of a $0.4 million adjustment to the asset with a corresponding charge to earnings for the decrease in the value of the put option for the three month period ended March 31, 2009. The Company has classified the related UBS purchased auction rate securities as trading securities pursuant to SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS 115”). The Company recorded a $0.2 million unrealized gain to earnings for the change in fair value of the ARS purchased through UBS for the three month period ended March 31, 2009. The Company expects 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. 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. We have recorded a temporary loss on the ARS purchased through Goldman Sachs of $10.6 million, as of March 31, 2009 in accumulated other comprehensive income, 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, 2009, we considered several factors in accordance with FSP FAS 115-1 and Staff Accounting Bulletin (“SAB”) Topic 5M including the duration of time and the extent to which the market value has been less than cost, the credit ratings of the securities, the Company’s intent and ability to retain the investments for a period of time sufficient to allow for any anticipated recovery in market value, and the cause of the impairment. We believe these investments continue to be of high credit quality, and we currently have the intent and ability to hold the ARS until such time as successful auctions occur, secondary markets allow for a sufficient price to recover substantially all of our par value, or our put option becomes exercisable. Accordingly, we have classified these securities as long-term investments in our consolidated balance sheet. The Company has concluded that no other-than-temporary impairment losses occurred for the three month period ended March 31, 2009. 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 consolidated statement of operations if the decline in fair value of the Goldman Sachs purchased ARS are determined to be other-than-temporary.

In April 2009, the FASB issued FSP SFAS 115-2 and SFAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments.” This FSP changes existing guidance for determining whether an impairment of debt securities is other than temporary. The FSP requires other than temporary impairments to be separated into the amount representing the decrease in cash flows expected to be collected from a security (referred to as credit losses) which is recognized in earnings and the amount related to other factors which is recognized in other comprehensive income. This noncredit loss component of the impairment may only be classified in other comprehensive income if the holder of the security concludes that it does not intend to sell and it will not more likely than not be required to sell the security before it recovers its value. If these conditions are not met, the noncredit loss must also be recognized in earnings. When adopting the FSP, an entity is required to record a cumulative effect adjustment as of the beginning of the period of adoption to reclassify the noncredit component of a previously recognized other than temporary impairment from retained earnings to accumulated other comprehensive

 

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income. FSP SFAS 115-2 and SFAS 124-2 is effective for interim and annual periods ending after June 15, 2009. Management is currently evaluating the requirements of the FSP and has not yet determined the impact on Eclipsys’ condensed consolidated financial statements, which could be material.

SFAS 157 “Fair Value Measurements”

Due to events in credit markets, quoted prices in active markets are not readily available at this time for our ARS and put option; therefore, the Company estimated the fair value of these ARS and the put option as of March 31, 2009 based upon various factors such as credit quality, duration, insurance wraps, assumptions about future cash flows and likelihood of redemption. We accounted for illiquidity by using a discount rate within the valuation, with an additional spread representing the additional required rates of return investors would have for certain securities to hold those securities in an illiquid environment. The assumptions that were used to estimate the fair value of the securities were highly subjective and therefore considered Level 3 unobservable inputs in the fair value hierarchy. The fair value of these assets represents $105.2 million or 50.7% of total assets measured at fair value in accordance with SFAS 157. 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 K – Fair Value Measurement.

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, 2008 filed with the SEC on February 24, 2009.

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, 2009 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 customers 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.

We hold investments in auction-rate securities (“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 the Company’s 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 2009. The Company continues to earn interest on these investments at the contractual rate, and the ARS that the Company holds have not been placed on credit watch by credit rating agencies. The average interest rate earned on these investments for the three months ended March 31, 2009 was 2.2%. As of March 31, 2009, the Company held approximately $116.6 million par value of investments in ARS of which $36.3 million was purchased through UBS Financial Services (“UBS”) and $80.3 million was purchased through Goldman Sachs. As of March 31, 2009, our ARS purchased through UBS are comprised of $32.2 million triple-A rated pools of student loans and $4.1 million “A3” rated pools of student loans, and our ARS purchased through Goldman Sachs are comprised of $64.8 million triple-A rated pools of student loans and $15.5 million “B3” rated pools of student loans.

During the year ended December 31, 2008 and the first quarter of 2009, we adjusted the carrying amount of our ARS to estimated fair market value. If uncertainties in the credit and capital markets continue and these markets deteriorate further or the Company experiences any additional rating downgrades on any investments in its portfolio, the Company may incur further temporary impairments or other-than-temporary impairments, which could negatively affect the Company’s financial condition, cash flow and reported earnings.

As discussed further in Liquidity and Capital Resources, in November 2008 we entered into a put option to sell our UBS purchased ARS to UBS between June 30, 2010 and July 2, 2012. Associated with this put, we classified $32.4 million of our ARS as trading as of December 31, 2008. This classification results in fair value changes recorded to income. 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 be generally offset by the fair value movements in the related ARS.

 

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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 $116.6 million par value of ARS):

 

Hypothetical Interest Rate

   ARS balances (in thousands)
   $ 95,000    $ 105,000    $ 115,000
                    

0.0%        

     —        —        —  

0.5%        

     475      525      575

1.0%        

     950      1,050      1,150

1.5%        

     1,425      1,575      1,725

2.0%        

     1,900      2,100      2,300

2.5%        

     2,375      2,625      2,875

We estimate that a one-percentage point decrease in interest rates for our long-term investment securities portfolio as of March 31, 2009 would have resulted in a decrease in interest income of $0.3 million for a three month period or $1.1 million for a 12 month period. This sensitivity analysis contains certain simplifying assumptions, including a constant level and rate of debt 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. Hypothetical interest rates used in the table above are significantly lower than the analysis in the first quarter of 2008 due to changes in market conditions.

Based upon our balance of cash and cash equivalents as of March 31, 2009, a decrease in interest rates of 1.0% would cause a corresponding decrease in our annual interest income of approximately $1.1 million, based upon simplifying assumptions as described above.

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, 2009, borrowings under the credit facility totaled $105.0 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 is based on our leverage ratio and as of March 31, 2009 was 2.0%. 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, 2009, our weighted average interest rate was calculated at 3.66%. Based on borrowings of $105.0 million, as of March  31, 2009, for each percentage point increase in the interest rate, annual interest expense would increase $1.0 million.

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, 2009. 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

 

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effectively under all circumstances. Based upon the evaluation described above our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2009, 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, 2009 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 M - 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.

We have added to the risk factors set forth in our annual report on Form 10-K for the year ended December 31, 2008 a risk factor titled “The HITECH Act will result 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,” related to costs and risk associated with the need to comply with the provisions of the American Recovery and Reinvestment Act of 2009, or ARRA, that call for 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, we updated the risk factor titled “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” to reflect provisions of ARRA subject us to certain provisions of the Health Insurance Portability and Accountability Act of 1996, or HIPAA, as well as additional data restrictions and disclosure and reporting requirements.

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. If our software contains errors or does not function consistent with software specifications or client expectations, clients could assert liability claims against us and/or attempt to cancel their contracts with us. These risks are generally more significant 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 we fail to deliver software with the features and functionality promised to our clients, we could be subject to significant contractual damages and face serious harm to our reputation, and our results of operations could be negatively impacted.

 

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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 user needs and the frequent introduction of new software and enhancements by our competitors to meet the needs of clients. As a result, 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 is complex and requires a significant investment of time and resources to develop, test, and introduce into use. This 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.

As we evolve our offering in an attempt to anticipate and meet market demand, clients and potential clients may find our software and services less appealing. In addition, 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 or develop new software to meet changing healthcare information technology market requirements and standards in a timely manner, demand for our software could suffer.

Market changes could decrease the demand for our software, which could harm our business and decrease our revenues.

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. 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. If our products rapidly become obsolete, it makes it more difficult to recover the cost of product development, which could adversely affect our operating results.

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, client costs associated with platform changes, unanticipated development expenses and harm our reputation, and would cause our financial results and business to suffer.

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 the source code or 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 and harm our reputation.

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, significant costs for remediation and re-engineering to prevent future occurrences, and serious harm to our reputation.

 

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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.

Some of our software, particularly our hospital enterprise software, requires significant capital expenditures by our clients and involves long sales and implementation cycles. 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 will 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, accounting principles may not allow us to recognize revenues in the same periods in which corresponding sales and implementation expenses were incurred. Additionally, any decision by our clients to delay purchasing or implementing our software or reduce the scope of products purchased would likely adversely affect our results of operations.

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, related revenue may be delayed, and if we must supplement our capabilities with third-party consultants, which are generally more expensive, our costs will increase. Similarly, our operating results will be negatively affected if our personnel take longer than budgeted to implement our solutions.

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 has resulted in significant implementation costs, which have made our offering too expensive for some clients. 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 most complex software.

 

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Our earnings can vary significantly depending on periodic software revenues.

In any financial reporting period, the periodic software revenues include traditional license fees associated with sales made in the financial reporting 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 in any period. These periodic revenues can fluctuate because economic conditions, market factors, client-specific situations, and other issues can result in significant variations in the type and magnitude of sales and other contract and client activity in any period. These variations make it difficult to predict the nature and amount of these periodic revenues. We believe economic conditions, and resulting cash conservation by clients, adversely affected our periodic software revenues in the second half of 2008, and if these conditions and client reactions continue in 2009, or if for other reasons periodic software revenues in any period decline from prior periods or fall short of our expectations, our earnings will be adversely affected.

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 and facilities 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. If clients’ access is interrupted because of problems in the operation of our facilities, we could be exposed to significant claims by clients or their patients, particularly if the access interruption is associated with problems in the timely delivery of medical care. We maintain disaster recovery and business continuity plans that 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 fail to fulfill our contractual service commitments, which could result in a loss of revenue and liability under our client contracts. Furthermore, 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 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 entire 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 it can be difficult to recruit qualified IT personnel. Changes in circumstances or failure to assess the client’s environment and scope our services accurately can mean we must hire more staff than we anticipated in order to meet our responsibilities. If we have to increase salaries or relocate personnel, or hire more people than we anticipated, our operating results will be adversely affected.

 

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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, Medical Information Technology, Inc., GE Healthcare, 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 IBM Corporation, Computer Sciences Corp., and Perot Systems 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. 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, 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. 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. As the marketplace becomes more saturated and technology advances, there will be competition to retain existing clients, particularly those using older generation products, and loss of this business would adversely affect our results of operations.

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

The healthcare industry faces significant financial constraints. For example, 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. 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 depends on the client’s 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. 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 we sell. If healthcare information technology spending declines or increases more slowly than we anticipate, 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 contacted. As a result, reserves for doubtful accounts and write-offs of accounts receivable may increase.

 

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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 with greater market power. If this consolidation trend continues, it could reduce the size of our target market 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 delivery 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, is developing comprehensive 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.

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 reputation, business, financial condition and results of operations could be adversely affected.

The HITECH Act will result 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 to be 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 will have to further invest in development of our applicable clinical software so that it can be used by clients to achieve compliance with these standards. 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 to comply with the standards will need to be done quickly and consequently may displace other important initiatives. Third, new client

 

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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 contract breach. Fourth, if for some reason we are not able to comply with these standards in a timely fashion after their promulgation, we will be at a competitive disadvantage to other providers of health information technology who do comply.

RISKS RELATED TO OUR BUSINESS STRATEGY

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 further 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 and foreign government restrictions on acquisitions of U.S.-origin products; 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 and may cause our operating results and reputation to suffer.

Foreign sales subject us to numerous stringent U.S. and foreign laws, including the Foreign Corrupt Practices Act, or FCPA, and comparable foreign laws and regulations which 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, which could adversely affect our reputation, business, financial condition or results of operations.

RISKS RELATED TO OUR OPERATING RESULTS, ACCOUNTING CONTROLS AND FINANCES

Our past stock option practices and related accounting issues have caused costly derivative litigation and may result in additional litigation, regulatory proceedings and governmental enforcement actions.

As a result of the voluntary review of historical stock option practices we undertook from February to May 2007, we concluded that incorrect measurement dates were used for accounting for certain prior stock option grants. As a result, we recorded additional non-cash stock-based compensation expense, and related tax effects, with regard to certain past stock option grants, and we restated certain previously filed financial statements. In 2008 we settled related stockholder derivative litigation. We believe these restatements reflect appropriate judgments in determining the correct measurement dates for our stock option grants, and to date those judgments have not been challenged. We believe the settlement of the derivative suit effectively ends litigation of this matter. However, as with other aspects of our financial statements, the results of our stock option review are subject to regulatory review and additional claims and there is a risk that we may have to further restate prior period results or incur additional costs as a result of such a review or proceeding.

We have a history of operating losses and future profitability is not assured.

We experienced operating losses in the years ended December 31, 2003 through 2006. Although we reported operating income for the years ended December 31, 2007 and 2008, we may incur losses in the future, and it is not certain that we will sustain or increase our recent profitability.

 

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Our operating results may fluctuate significantly and may cause our stock price to decline.

We have experienced significant variations in revenues and operating results from quarter to quarter. Our operating results may continue to fluctuate due to a number of factors, including:

 

   

the 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;

 

   

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 recent disruptions in U.S. and international financial markets; 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. In addition, the timing of our revenue recognition could vary considerably depending upon whether our clients license our software under our subscription model or our traditional licensing arrangements, and current economic conditions are motivating some clients to prefer subscription contracting to traditional licenses, which can result in commensurate decreases in, or failure to achieve our expectations for, in-period license revenue and associated margin. Because a significant percentage of our expenses are relatively fixed, a variation in the timing of sales and implementations could cause significant variations in operating results from quarter to quarter. We believe that period-to-period comparisons of our historical results of operations are not necessarily meaningful. 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 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 will 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 typically 5-7 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

 

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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, 2008, approximately 40% of our revenues were attributable to our 20 largest clients. In addition, approximately 39% of our accounts receivable as of December 31, 2008 were attributable to 20 clients. One client represented 10.7% of our revenues. 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 development costs, 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 adversely affect our operating results and 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. 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. As of December 31, 2008, we recorded changes in fair value of these securities of $8.8 million in accumulated other comprehensive income and $3.9 million as a charge to earnings. We reevaluate the fair value of these securities on a quarterly basis. See Note B – “Recently Issued Accounting Pronouncements” and Note E – “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 could 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. 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.

 

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The conditions of the U.S. and international financial markets may adversely affect our ability to draw on our credit facility.

The U.S. and international credit markets contracted significantly during the second half of 2008. If one or more of the financial institutions that have extended credit commitments to us under our credit facility are adversely affected by the conditions of the U.S. and international capital markets, they may become unwilling or unable to fund borrowings under their credit commitments to us. In such a case we might not be able to locate replacement lenders or other sources of financing, which could have a material and adverse impact on our ability to fund working capital, capital expenditures, acquisitions, research and development and other corporate needs.

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 and the cash we anticipate generating from operations 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 is 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 current market conditions 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, which could have a material adverse effect on our business.

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 liability to 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.

 

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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

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 to us and possible impairments.

 

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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.

If we fail to comply with applicable requirements, the FDA 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 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.

 

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RISKS RELATED TO OUR PERSONNEL AND ORGANIZATION

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

We now 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. This involves significant challenges that are increased by our lack of prior experience managing operations in India. 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 business and operating results.

If we fail to attract, motivate and retain highly qualified technical, marketing, sales and management personnel, our ability to execute our business strategy could be impaired.

Our success depends, in significant part, upon the continued services of our key technical, marketing, sales and management personnel, and on our ability to continue to attract, motivate and retain highly qualified employees. Competition for these employees is intense 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 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 and we terminated, effective as of May 8, 2008, our stockholder rights agreement, which used preferred stock purchase rights designed to enable our board of directors to better respond to any takeover efforts. However, we could implement a new stockholder rights plan in the future, or make other uses of preferred stock to 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;

 

   

the right of stockholders to act by written consent has been eliminated;

 

   

the right of stockholders to call a special meeting of stockholders has been eliminated; and

 

   

advance notice must be given to nominate directors or submit proposals for consideration at 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.

 

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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, 2009:

 

     (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, 2009

   309  (1)   $ 13.26    —      —  

February 1-28, 2009

   32,624 ( 1)     8.74    —      —  

March 1-31, 2009

   —         —      —      —  
                      

Total

   32,933     $ 8.78    —      —  
                      

 

(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.

 

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ITEM 6. EXHIBITS

 

Exhibit

Number

        Incorporated by Reference
  

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    November 19, 2007
  4.1    Specimen certificate for shares of Common Stock    S-1    4.1    April 23, 1998
10.1 *    Employment Agreement between the Registrant and John E. Deady dated December 22, 2005          Filed herewith (1)
10.2 *    Agreement re Specified Acts between the Registrant and John E. Deady dated December 22, 2005          Filed herewith (1)
31.1    Certification of R. Andrew Eckert          Filed herewith
31.2    Certification of W. David Morgan III          Filed herewith
32.1    Certification Pursuant to 18 U.S.C. Section 1350          Filed herewith
32.2    Certification Pursuant to 18 U.S.C. Section 1350          Filed herewith

 

* Indicates a management contract or compensatory plan or arrangement.

(1)

Confidential treatment for these exhibits has expired; therefore, these exhibits are being re-filed in their entirety. These exhibits were originally filed on March 7, 2006 with the Registrant’s annual report on Form 10-K for the year ended December 31, 2005. The Employment Agreement was subsequently amended on February 7, 2008. See Exhibit 10.3 filed on May 12, 2008 with the Registrant’s quarterly report on Form 10-Q for the three month period ended March 31, 2008.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: May 7, 2009

 

ECLIPSYS CORPORATION

Registrant

/s/    W. David Morgan III

W. David Morgan III

Chief Financial Officer

(Principal Financial and Accounting Officer)

 

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Ticker: ECLP
CIK: 1034088
Form Type: 10-Q Quarterly Report
Accession Number: 0001193125-09-103743
Submitted to the SEC: Thu May 07 2009 6:59:15 PM EST
Accepted by the SEC: Fri May 08 2009
Period: Tuesday, March 31, 2009
Industry: Computer Integrated Systems Design

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