Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002

COMMISSION FILE NUMBER: 000-24539

ECLIPSYS CORPORATION

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

(561)-322-4321
(Telephone number of registrant)

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

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

Table of Contents

ECLIPSYS CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2002

INDEX

2

Table of Contents

PART I.

ITEM 1.

ECLIPSYS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
AS OF MARCH 31, 2002 AND DECEMBER 31, 2001
(IN THOUSANDS)

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

3

Table of Contents

ECLIPSYS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

4

Table of Contents

ECLIPSYS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(IN THOUSANDS)

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART TO THESE UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

5

Table of Contents

ECLIPSYS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1.

BASIS OF PRESENTATION

         The condensed consolidated financial statements include all adjustments that, in the opinion of management, are necessary for a fair presentation of the results for the periods presented. All such adjustments are considered of a normal recurring nature. Quarterly results of operations are not necessarily indicative of annual results.

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

2.

MARKETABLE SECURITIES

         Marketable securities consist of funds that are highly liquid and are classified as available-for-sale. Marketable securities are recorded at fair value and unrealized gains and losses are recorded as a component of other comprehensive income.

3.

ACCOUNTS RECEIVABLE

         The non-current portion of unbilled accounts receivable was $1.6 million and $1.8 million as of March 31, 2002 and December 31, 2001, respectively, and is included in other assets in the accompanying condensed consolidated balance sheets.

         Accounts receivable was composed of the following as of:

4.

OTHER COMPREHENSIVE INCOME

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

6

Table of Contents

5.

PUBLIC OFFERING

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

6.

NEW ACCOUNTING PRONOUNCEMENTS

         In June 2001, the Financial Accounting Standard Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 142 “Goodwill and other Intangibles.” Under this new standard the FASB eliminated amortization of goodwill and created indefinite life intangible assets and established new impairment measurement procedures for goodwill. In accordance with SFAS 142, amortization of goodwill is no longer amortized, but instead tested for impairment at least annually. There was no impairment of goodwill upon adoption of SFAS 142 and amortization ceased as of January 1, 2002, leaving a recorded balance of $454,000 for goodwill as of December 31, 2001 and March 31, 2002. The effect of adopting SFAS 142 was to reduce depreciation and amortization expense by $227,000 for the quarter ended March 31, 2002. Net income and earnings per share for the three months ended March 31, 2001 adjusted to exclude amortization expense is as follows:

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

7.

AMENDMENT TO STOCK OPTION PLANS

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

7

Table of Contents

PART I.

ITEM 2.

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

         This report contains forward-looking statements. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “intends,” and similar expressions are intended to identify forward-looking statements. The important factors discussed under the caption “Certain Factors that May Affect Future Operating Results/Risk Factors,” presented from time to time in the Company’s filings with the Securities and Exchange Commission, among others, could cause actual results to differ materially from those indicated by forward-looking statements made herein. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

OVERVIEW

         Eclipsys is a healthcare information technology company that provides software and services to help healthcare organizations improve the quality of care and the level of patient satisfaction, while reducing costs and enhancing revenues.

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

         Our software and services provide comprehensive functionality to help healthcare organizations solve the clinical problems and business issues they face and achieve balanced outcomes through an appropriate and sustainable combination of clinical quality, resource utilization and patient satisfaction.

         We believe the open, modular nature of our software architecture reduces the overall cost of ownership and reduces the time to productive use because our solutions do not require the initial investment and disruption associated with a complete replacement of a customer’s existing systems. To facilitate rapid adoption by our customers, we have engineered our solutions to take advantage of Web-based technologies. Our software applications are available to our customers for implementation in-house or through our remote hosting service, and are designed to work in a variety of healthcare settings.

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

         We maintain decentralized sales and customer support teams in each of our six North American regions to provide direct, sustained customer contact. We market our solutions primarily to large healthcare organizations, particularly academic medical centers. We have one or more of our products installed or being installed in over 1,500 facilities worldwide. Of 2,800 U.S. hospitals with over 200 beds, more than 50% are Eclipsys customers. Of the 16 top-ranked hospitals in the July 23, 2001 issue of U.S. News & World Report, all 16 use one or more of our products. Additionally, of the 50 largest integrated delivery networks, 37, or 74%, use one or more of Eclipsys’ products.

RESULTS OF OPERATIONS

         Total revenues for the quarter ended March 31, 2002 increased approximately $7.5 million, or 13.7%, to $62.2 million, from $54.7 million for the same period in 2001. Systems and services revenues increased approximately $4.7 million, or 9.1%, to $56.5 million for the quarter ended March 31, 2002, from $51.8 million for the same period in 2001. The increase in systems and services revenues was primarily attributable to revenues generated under our comprehensive solutions offerings, which we began to offer in 2000, and other new contracted business. The comprehensive offerings may bundle software license fees (including the right to future products) within the applicable suite, implementation, maintenance, outsourcing, remote hosting, networking services and other related services

8

Table of Contents

into comprehensive contracts that generally provide for monthly or annual payments over the term of the contracts. Revenues under these arrangements are recognized on a monthly basis over the term of the contract, which typically ranges from seven to ten years. The increase in revenues was also contributed to by improvements we made in our product delivery area, which includes research and development, implementation and customer support. These functions were consolidated under one management team to help improve all aspects of the product delivery cycle. Significant investments were made in this area to standardize the development, implementation and ongoing support of our products. These investments among other things have helped shorten the product development and implementation cycles while improving quality in each area. Additionally, we continue to gain market acceptance of our products. Our flagship product, Sunrise Clinical Manager, which was generally released in 1999, continues to gain market acceptance and has received strong ratings by independent market research firms. We also have seen increased activity in the revenue management area as hospitals have begun to replace legacy systems. Finally, outside organizations, including the Institute of Medicine, the Leapfrog Group and various state and local governments have begun to influence the industry with respect to patient safety initiatives.

         Hardware revenues increased $2.8 million, or 96.6%, to $5.7 million for the quarter ended March 31, 2002, from $2.9 million for the same period in 2001. The increase in hardware revenues was primarily due to increased shipments under contracts entered into in the last twelve months.

         Cost of systems and services revenues decreased $4.1 million, or 13.3%, to $26.7 million, or 47.3% of systems and services revenues, for the quarter ended March 31, 2002, compared to $30.8 million, or 59.5% of systems and services revenues, for the same period in 2001. These costs decreased primarily from lower amortization of acquisition related acquired technology and network services assets that amounted to $2.0 million for the quarter ended March 31, 2002, compared to $4.7 million for the same period in 2001. Another factor contributing to the decrease were certain expense reduction initiatives undertaken related to telecommunications, outside consulting and data center related costs. These cost savings were partially offset by higher software royalties and associated higher license fee revenue. Also higher was amortization of capitalized software development costs that amounted to $1.3 million for the quarter ended March 31, 2002, compared to $1.1 million for the same period in 2001. This increase was due to certain products becoming available for general release.

         Cost of hardware revenues increased $2.3 million, or 100.0%, to $4.6 million, or 80.7% of hardware revenues, for the quarter ended March 31, 2002, compared to $2.3 million, or 79.3% of hardware revenues, for the same period in 2001. The increase in cost of hardware revenues was directly attributable to higher hardware revenues and somewhat lower margins due to pricing pressure in the hardware sector.

         Sales and marketing expenses increased $0.7 million, or 6.6%, to $11.3 million, or 18.2% of total revenues, for the quarter ended March 31, 2002, from $10.6 million, or 19.4% of total revenues, for the same period in 2001. The increase in sales and marketing expenses was primarily due to an increased number of marketing events held in the first quarter of 2002. Additionally, during the fourth quarter of 2001, we initiated a program to significantly increase the size of our sales and marketing organization. This program is expected to be completed by the end of 2002 and will result in higher expenses. The program was implemented to increase the sales presence of our sales organization and enhance the market awareness of our company and its products and services.

         Research and development expenses increased approximately $0.8 million, or 8.5%, to $10.2 million, or 16.4% of total revenues, for the quarter ended March 31, 2002, compared to $9.4 million, or 17.2% of total revenues, for the same period in 2001. The increase in research and development expenses was due primarily to a program we implemented in the fourth quarter of 2001. This program accelerates the development of our products with respect to our SunriseXAtm initiative, which among other things, will migrate our products onto the Microsoft.NET platform. This initiative is expected to be substantially completed within the next 15 months and to result in higher expenses over this period. The percentage of research and development expenditures capitalized for the quarter ended March 31, 2002 was 16.3%, compared to 15.4% for the same period in 2001. Research and development expenses that were capitalized amounted to $2.0 million and $1.7 million for the quarters ended March 31, 2002 and 2001, respectively.

         General and administrative expenses increased approximately $0.2 million, or 8.7%, to $2.5 million, or 4.0% of total revenues, for the quarter ended March 31, 2002, compared to $2.3 million, or 4.2% of total revenues, for the same period in 2001. The increase in general and administrative expenses was in large part due to the relocation of our corporate offices to Boca Raton, Florida.

9

Table of Contents

         Depreciation and amortization decreased $1.4 million, or 36.8%, to $2.4 million, or 3.9% of total revenues, for the quarter ended March 31, 2002, from $3.8 million, or 6.9% of total revenues, for the same period in 2001. The decrease was primarily the result of the complete amortization of certain intangibles, which became fully amortized during the fourth quarter of 2001, as well as the adoption of SFAS 142, which eliminated the amortization of goodwill, partially offset by higher depreciation of fixed assets purchased during 2001. For the quarter ended March 31, 2002 and 2001, respectively, we recorded acquisition related amortization of $2.1 million and $6.5 million.

         Interest income decreased $0.3 million to $1.1 million for the quarter ended March 31, 2002, from $1.4 million for the same period in 2001. This decrease was due to a significant decline in interest rates partially offset by higher balances of cash and marketable securities. Cash and marketable securities increased primarily due to the public offering in January 2001, as well as cash generated from operations.

         As a result of these factors, we had net income of $5.3 million for the quarter ended March 31, 2002, compared to a net loss of $3.2 million for the same period in 2001.

LIQUIDITY AND CAPITAL RESOURCES

         During the quarter ended March 31, 2002, operations provided $10.5 million of cash. Investing activities used $66.5 million of cash, of which $60.6 million was for the purchase of marketable securities, $3.9 million was for the purchase of fixed assets and $2.0 million was for the funding of development costs. Financing activities provided $1.3 million of cash, as a result of the exercise of stock options and the purchase of common stock under our employee stock purchase plan.

         As of March 31, 2002, our principal source of liquidity is our combined cash and marketable securities balance of $174.5 million. Our future capital requirements will depend upon a number of factors, including the rate of growth of our sales and the timing and level of research and development activities. As of March 31, 2002, we did not have any material commitments for capital expenditures. We believe that our available cash and cash equivalents and anticipated cash generated from our future operations will be sufficient to meet our operating requirements for at least the next 12 months.

10

Table of Contents

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         We do not currently use derivative financial instruments. We generally buy investments that are highly liquid. Based upon the nature of our investments, we do not expect any material loss from our investments.

         Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if forced to sell securities that have seen a decline in market value due to changes in interest rates. The following table illustrates potential fluctuation in annualized interest income based upon hypothetical values for blended interest rates and cash and marketable securities account balances.

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

*

(This sensitivity analysis is not a forecast of future interest income.)

         The Company accounts for cash equivalents and marketable securities in accordance with SFAS No. 115. “Accounting for Certain Investments in Debt and Equity Securities.” Cash equivalents are short-term highly liquid investments with original maturity dates of three months or less. Cash equivalents are carried at cost, which approximates fair market value. Marketable securities consist of funds that are highly liquid and are classified as available-for-sale. Marketable securities are recorded at fair value and unrealized gains and losses are recorded as a component of other comprehensive income.

         We do not currently enter into foreign currency hedge transactions. Through March 31, 2002, foreign currency fluctuations have not had a material impact on our financial position or results of operations.

11

Table of Contents

PART II.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         At the Annual Meeting of Stockholders of the Company held on May 8, 2002, the shareholders voted upon three proposals. They consisted of (i) the election of two Class I directors for a three-year period (“Proposal One”); (ii) the amendment and restatement of the Company's 2000 Stock Incentive Plan, the 1999 Stock Incentive Plan, the 1998 Stock Incentive Plan, and the Amended and Restated 1998 Employee Stock Purchase Plan to reflect an increase in the number of shares of Voting Common Stock authorized for issuance under all the Company's stock plans (the 2000 Stock Incentive Plan, the 1999 Stock Incentive Plan, the Amended and Restated 1998 Employee Stock Purchase Plan, the 1998 Stock Incentive Plan and the 1996 Stock Plan) from 12,000,000 to 15,000,000 (“Proposal Two”); and (iii) the ratification of the selection of PricewaterhouseCoopers LLP by the Board of Directors as the Company’s independent auditors for the current fiscal year.

         The outcome of the voting on Proposal One was as follows:

         The outcome of the voting on Proposal Two was as follows:

         The outcome of the voting on Proposal Three was as follows:

         The Company’s Proxy Statement filed pursuant to Section 14 of the Securities and Exchange Act contains a detailed discussion of the proposals that the shareholders were asked to vote upon.

         In addition to the directors elected above, the other members of the Company’s board of directors include:

         The terms for Class II and Class III directors end at the Annual Meeting of Shareholders of the Company, to be held in 2003 and 2004, respectively.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

         (a)  Exhibits: See Index to exhibits.

         (b)  Reports on Form 8-K:

	(1) No reports on Form 8-K were filed with the Securities and Exchange Commission during the quarter ended March 31, 2002.

12

Table of Contents

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.

13

Table of Contents

ECLIPSYS CORPORATION
EXHIBIT INDEX

14