AMCS Amicas (MM)

 

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

 

Form 10-K

 

 

Commission File Number 000-25311

 

 

AMICAS, INC.

(Exact name of registrant as specified in its charter)

 

 

20 Guest Street, Suite 400, Boston, Massachusetts 02135

(Address of principal executive offices, including zip code)

 

Registrant’s telephone number, including area code:

(617) 779-7878

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  o   No  þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  o   No  þ

 

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  þ   No  o

 

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  o   No  o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

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 the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(Do not check if a smaller reporting company)

 

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

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates as of June 30, 2009 was approximately $97.4 million based on the closing price of $2.78 at which the common equity was last sold. Solely for the purpose of this calculation, directors and officers of the registrant are deemed to be affiliates.

 

As of March 9, 2010, there were 37,020,131 shares outstanding of the Registrant’s $0.001 par value common stock.

 

Documents Incorporated by Reference

 

Portions of the Registrant’s Proxy Statement for the 2010 Annual Meeting of Stockholders, expected to be held in August, 2010, are incorporated into Part III herein by reference.

 

 

AMICAS, INC.

 

Form 10-K

 

Table of Contents

 

 

AMICAS, AMICAS One Suite, AMICAS PACS, AMICAS RIS, AMICAS Financials, AMICAS VERICIS,

AMICAS Hemodynamics, AMICAS ECM, AMICAS Documents, AMICAS Dashboards, AMICAS Watch,

AMICAS Reach, AMICAS RadStream, RealTime Worklist, Halo Viewer, and Cashfinder Worklist are

trademarks, service marks or registered trademarks and service marks of AMICAS, Inc. All other

trademarks and company names mentioned are the property of their respective owners.

 

 

AMICAS, Inc. (“we,” “us,” “our,” “AMICAS” or the “Company”), is a leading independent provider of imaging IT solutions. AMICAS offers a comprehensive suite of image and information management solutions for healthcare providers — from radiology picture archiving communication system (“PACS”) to cardiology PACS, from radiology information systems to cardiovascular information systems, from business intelligence tools to enterprise content management tools, from revenue cycle management solutions to teleradiology solutions. AMICAS provides a complete, end-to-end solution for imaging centers, ambulatory care facilities, and radiology practices. Hospitals are provided with a comprehensive image management solution for cardiology and radiology as well as an enterprise-wide image management infrastructure that complements existing electronic medical record (“EMR”) strategies to enhance clinical, operational, and administrative functions.

 

We were incorporated in Delaware in November 1996 as InfoCure Corporation. On November 25, 2003, we acquired 100% of the outstanding capital stock of Amicas PACS Corp. (formerly known as Amicas, Inc.), a developer of Web-based diagnostic image management software solutions. The addition of Amicas PACS Corp. (“Amicas PACS”) provided us with the ability to offer radiology groups and imaging center customers a comprehensive information and image management solution that incorporates the key components of a complete radiology data management system (i.e., image management, workflow management and financial management). The acquisition was completed to position us to achieve our goal of establishing a leadership position in the growing PACS market. PACS allows radiologists to access, archive and distribute diagnostic images for interpretation as well as to enable fundamental workflow changes that can result in improvements in operating efficiency. The AMICAS PACS solution also supports radiologists and other groups to distribute images and digital information to their customers — the referring physicians.

 

On January 3, 2005, we completed the sale of substantially all of the assets and liabilities of our medical division, together with certain other assets, liabilities, properties and rights of the Company relating to our anesthesiology business (the “Medical Division”) to Cerner Corporation (“Cerner”) and certain of Cerner’s wholly-owned subsidiaries. The Medical Division provided IT-based, specialty-specific solutions for medical practices specializing in anesthesiology, ophthalmology, emergency medicine, plastic surgery, dermatology and internal medicine. The sale was completed in accordance with the terms and conditions of the Asset Purchase Agreement between the Company and Cerner dated as of November 15, 2004.

 

On April 2, 2009 we completed the acquisition of Emageon Inc (“Emageon”). As a result of the acquisition we expanded our presence in the image and information management market. The resultant combined solution suite now includes radiology PACS, cardiology PACS, radiology information systems, cardiology information systems, revenue cycle management systems, referring physician tools, business intelligence tools, and enterprise content management or vendor-neutral medical imaging archive capabilities that enable the electronic medical record with imaging content capabilities (the imaging “EMR”). We now have operations in Canada, acquired as part of the Emageon acquisition.

 

On December 24, 2009, we entered into an Agreement and Plan of Merger by and among AMICAS, Project Alta Holdings Corp., and Project Alta Merger Corp., which provides for the acquisition of 100% of the capital stock of AMICAS by an affiliate of Thoma Bravo, LLC (the “Thoma Bravo Merger Agreement”), for $5.35 per share in cash. On February 23, 2010, we received from Merge Healthcare Incorporated (“Merge”) a proposal to acquire all of the outstanding shares of AMICAS for $6.05 per share in cash, which included an executed definitive commitment letter for $200 million of financing from Morgan Stanley and confirmation that Merge would place a portion of the pre-funded proceeds received from its mezzanine investors into an escrow account directly accessible by AMICAS. After reviewing the proposal, on March 1, 2010, our Board of Directors determined that the proposal constituted a “Superior Proposal” as defined under the Thoma Bravo Merger Agreement. In accordance with the terms of the Thoma Bravo Merger Agreement, we negotiated in good faith with Thoma Bravo during the five business day period to make such adjustments in the terms and conditions of the Thoma Bravo Agreement such that the Merge proposal would cease to constitute a Superior Proposal.

On March 4, 2010, Thoma Bravo notified AMICAS that it was not offering a counter proposal and waived the remainder of the notice period. On March 5, 2010, we terminated the Thoma Bravo Merger Agreement and paid a termination fee of approximately $8.6 million, half of which was reimbursed by Merge. Subsequently, we entered into an Agreement and Plan of Merger (the “Merge Merger Agreement”), dated as of February 28, 2010, by and among AMICAS, Merge and Project Ready Corp. pursuant to which Merge will acquire all of the outstanding shares of AMICAS for $6.05 per share in cash. Under the terms of the Merge Merger Agreement, Merge will commence a cash tender offer for all of AMICAS’ outstanding common stock. Merge will then consummate a merger pursuant to which any untendered shares of AMICAS common stock (other than those shares held by AMICAS’ stockholders who have properly exercised their dissenters’ rights under Section 262 of the Delaware General Corporation Law) will be converted into the right to receive the same $6.05 per share cash price. The tender offer and merger are subject to certain closing conditions, including, but not limited to, a successful tender of a minimum number of shares of AMICAS common stock, antitrust clearance and other regulatory approvals. The merger is expected to close in the second quarter of 2010. There is no financing condition to the consummation of the Acquisition.

 

Industry Background

 

The healthcare market is one of the largest vertical markets in the United States with annual spending of more than $2.2 trillion in 2007, representing over 16% of the U.S. gross domestic product. Spending on healthcare continues to outpace the rest of the economy, with experts predicting that healthcare expenditures will reach 19.5% of the U.S. gross domestic product by 2017. ¹ Within the healthcare market vertical, diagnostic imaging service lines (which includes general radiography, computed tomography, magnetic resonance imaging, nuclear medicine, ultrasound and positron emission tomography, among others) and certain cardiovascular service lines (which includes both invasive and non-invasive cardiology) represents two fast-growing and large revenue generating specialties.

 

Diagnostic imaging represents approximately $100 billion of the overall healthcare spending per year — second only to pharmaceuticals in terms of overall expense within healthcare. This $100 billion amount includes everything from the cost of scanners to radiologist salaries to the costs of managing the images produced from the scanners (e.g., buying, developing, storing, moving and filing costly, hard-to-transport x-ray film and older-generation information systems). Millennium Research Group reports that diagnostic imaging procedure volume in the United States is expected to continue to grow over 3% annually to nearly 600 million annual procedures by 2013. Advances in diagnostic technologies, an aging population, and a more health-conscious consumer all contribute to an increase in the number of diagnostic imaging procedures. With this increase in utilization comes a comparable increase in the cost of imaging services and complexity of managing imaging services. Comprehensive image and information management technology and applications can help to improve throughput and reduce costs as utilization of these services continues to increase rapidly.

 

Diagnostic imaging scanners have become much more sophisticated in recent years — primarily by producing an increased volume of high-quality images in a shorter time period. These improvements aid early diagnosis and detection and are believed to improve the overall patient experience. For healthcare providers, these improvements have resulted in both a higher utilization of imaging services and increased complexity of managing those imaging services. Multi-slice and helical computed tomography scanners, for example, produce many more images per procedure than traditional scanners, allowing for detection of smaller abnormalities and better reconstruction of three dimensional models to aid treatment decisions. For providers without PACS, this increase in images per scan results in increased film costs, longer reading time for primary diagnosis, and cumbersome management of the increasing volume of film.

 

The number of cardiovascular procedures performed in U.S. hospitals is also increasing, going from less than 50 million annual procedures in 2007 to over 60 million annual procedures in 2011 according to Frost & Sulllivan, a global business research and consulting firm. This increase in cardiovascular utilization is being driven by the aging of the population, a greater awareness and need for management of cardiovascular disease, and technological advances in diagnosis and treatment. Experts anticipate the incidence of cardiovascular disease will continue to rise

 

 

  ¹  Centers for Medicare & Medicaid Services, Office of the Actuary.

because risks for coronary artery disease, arrhythmia, and other conditions are all associated with advanced age. This trend, combined with improved public and physician awareness of cardiovascular health issues and the ability to use non-invasive and minimally invasive procedures as alternatives to open surgery, will continue to drive utilization. With this increase in utilization comes a commensurate increase in the images and data generated by cardiology departments. The growth in images and data generation requires sophisticated tools to collect and analyze data for the purposes of both patient care and productivity.

 

This increased demand for diagnostic imaging and cardiovascular procedures and related services comes at a time when there is an industry-wide staffing shortage. While the volume of diagnostic imaging procedures has continued to grow, the number of clinicians has remained relatively flat. Hospitals, imaging centers, radiology group practices, and healthcare organizations have found themselves under increasing pressure from referring physicians and specialists to process more procedures, increase patient throughput, and improve the turn-around time of both the initial diagnostic interpretation and the final written report. Analog film-based practices have numerous inefficiencies, including lost or misplaced prior imaging studies, non-scalable methods for capturing orders, an inability to obtain detailed accurate patient demographic information, issues with scheduling appointments and resources, as well as challenges coding and preparing billing and reimbursement data. Often, these practices are not able to meet the increased demands from their referring physicians and specialists.

 

Trends in Imaging

 

A variety of products and services have emerged to help make healthcare providers more efficient and address these increases in complexity, cost, and utilization. For example, radiology PACS helps ensure that prior imaging studies are not misplaced and that the time spent searching for those studies is minimized. PACS solutions also improve radiologist productivity with advanced clinical and workflow tools. Hemodynamics solutions automate the collection and distribution of critical patient information from the cardiac catheterization lab. This helps streamline reporting and communications of critical patient results. Revenue cycle management solutions help ensure that exam coding and the billing and reimbursement data for payers and patients is done faster with a higher quality level to ensure that payment is accurate and timely.

 

At the same time, payers nationwide — including both government and private payers — continue to seek different mechanisms to curtail the utilization and expense of imaging. One example of this was the Deficit Reduction Act of 2005 (“DRA”). This legislation enacted special payment rules limiting Medicare reimbursements, beginning in 2006, for certain portions of imaging services performed in the office, ambulatory and other non-hospital settings. In some cases, the reduction in Medicare reimbursement was greater than 30% per procedure. In addition, President Obama has committed to work with Congress to pass a comprehensive healthcare reform bill in 2010 in order to control rising health care costs, guarantee choice of doctor, and assure high-quality, affordable health care for all Americans. Part of this bill may include further reductions in reimbursement for the technical component for advanced diagnostic imaging (computed tomography, ,magnetic resonance imaging, nuclear medicine, and positron emission tomography) as well as a potential freeze on or even reduction of professional fees for Medicare via the Sustainable Growth Rate formula, ultimately followed by decreases in professional reimbursement for both radiology and cardiology.

 

A second example of utilization controls is the introduction of radiology benefits management (“RBM”) organizations that seek to help health plans control the growth in imaging costs. These firms pre-authorize physician imaging orders on behalf of health plans to ensure providers are not performing expensive exams that do not meet a set of pre-determined guidelines. Whereas legislation such as the DRA is designed to minimize the use of imaging by reducing the per study reimbursement, RBM organizations attempt to reduce the use of imaging by screening exams for what they deem to be medical necessity and appropriateness. RBM organizations have the potential to reduce utilization while at the same time creating an administrative burden for care providers.

 

We believe that legislation targeting reductions in reimbursement, such as the DRA and healthcare reform bill, and utilization controls such as those offered by RBM organizations put financial pressure on imaging service providers. As a result of the DRA and the potential impacts of the healthcare legislation, providers of imaging services are required to operate on a lower per study revenue run rate. As a result of RBM organizations, imaging providers may have a higher cost basis and may have more exams rejected from payers. We believe that our

automation solutions help providers of imaging solutions reduce their overall cost basis and increase volumes, which would offset these reimbursement reductions.

 

Another noteworthy trend that has emerged in imaging is telemedicine. Telemedicine refers to the practice where the physician providing the interpretation of an imaging exam is physically at a different location from where the patient is or was scanned, and is using some form of image management software and a network connection to receive and interpret the exam. By reducing some of the geographic constraints in providing interpretation services, telemedicine offers the potential to effectively provide remote physician staffing for areas that do not have coverage due to sub-specialty expertise, inability to recruit physicians, or difficulty in providing temporary coverage. On a macro level, telemedicine offers the potential to help alleviate transient and/or regional supply-demand mismatches. We believe this represents another growth opportunity for AMICAS solutions as customers look to drive growth initiatives through teleradiology and telemedicine.

 

Image and Information Management Solutions

 

According to Millennium Research Group, certain segments of the market for image and information management solutions remain underpenetrated — such as the market for radiology PACS in small community hospitals and diagnostic imaging centers. In addition, there is a noteworthy market for replacement solutions in other segments of the market — including radiology and cardiology PACS in large hospitals. The following table illustrates the total market opportunity anticipated for new (or “greenfield”) contracts as well as replacement contracts from 2010 through 2013 by market segment.

 

 

“CAGR” means compound annual growth rate.

 

Source: US Markets for PACS, RIS, & CVIS 2009: Millennium Research Group

 

Business Strategy

 

AMICAS is a leading independent provider of imaging IT solutions. AMICAS offers a comprehensive suite of image and information management solutions for image-intensive specialties — including radiology, cardiology, and other image-intensive specialties, and enterprise imaging automation solutions at healthcare provider organizations. Our offerings include software solutions, professional services, electronic data interchange (“EDI”) services, support and maintenance, which enable our customers to transform an organization from an analog to a digital operation. Our go-to-market strategy focuses on two primary market segments:

 

 

Ambulatory Imaging Businesses

 

In the ambulatory imaging businesses segment, AMICAS offers a comprehensive automation solution across the entire provider operation. We believe that we are the only vendor of significant size focused on providing image and information management solutions that is not encumbered with competing and sometimes conflicting priorities like those that may come with being a legacy healthcare information system vendor or a large multi-national modality manufacturer. We believe that we are the only major independent vendor focused on ambulatory imaging businesses that owns and directly offers a comprehensive software suite for image management, enterprise workflow, revenue cycle management, administrative, financial, and clinical information management functions — what we call the AMICAS ONE Suite ^tm  — that is singularly focused on the needs of ambulatory imaging businesses.

 

In general, ambulatory imaging businesses are small to medium sized businesses that have significant automation needs to support their operations. These needs include tools to facilitate marketing efforts, workflow tools to provide high quality services in the most efficient manner, and tools to help efficiently collect fees for the services rendered. Ambulatory imaging businesses need automation support in all of these areas to gain operating

efficiencies and remain competitive in their markets. While these businesses have significant automation needs, they typically have limited staff and expertise in IT related matters. We believe these businesses prefer not to purchase software applications from multiple vendors due to the inherent complexities of managing multiple vendors’ products, multiple relationships, and multiple maintenance arrangements and contracts. A critical value proposition to these businesses is the ability to establish a partnership with a single vendor that offers a complete, end-to-end solution for their entire operation. The AMICAS ONE Suite is a comprehensive solution for ambulatory businesses that can be purchased as a single, comprehensive solution or as a modular solution that can be adopted over time.

 

Within the ambulatory imaging business segment, radiology practices represent an important sub-segment for AMICAS. In general, radiology practices provide interpretation services for area hospitals and often times own imaging centers in their respective markets. In addition to the value propositions noted above, AMICAS is well positioned to serve radiology practices in two additional respects. The first is that AMICAS offers the ability to create a “single worklist” environment spanning their work for area hospitals as well as any owned imaging centers. This drives significant operating efficiencies for radiologists. AMICAS also uses relationships with radiology groups as a strategy to secure visibility and exposure with affiliated hospitals to win the image management business at those affiliated hospitals. We accomplish this by leveraging our relationships with the radiology practices and the exposure that AMICAS gains from being the image management platform for the radiology practice to gain traction within the hospital.

 

Acute Care Facilities

 

In the acute care segment, we provide top-flight departmental solutions for radiology and cardiology departments and an enterprise-wide imaging infrastructure that serves as the imaging component for the enterprise electronic medical record. Our departmental solutions for radiology include a web-based PACS that features innovative image management capabilities at what we believe is a low total cost of ownership. For example, AMICAS RadStream’s innovative critical results management capability helps our customers meet the national patient safety goals from The Joint Commission (a national accreditation and certification organization focused on quality in healthcare). In addition, we believe that the total cost of ownership of an AMICAS solution is relatively low and helps produce an attractive return on investment. Furthermore, unlike several of our major competitors, AMICAS’ PACS is already web-based, providing the customer the comfort of knowing that they are already on a current generation technology platform.

 

Our departmental solutions for cardiology include a multi-modality image management platform, a web-based structured reporting solution, and a hemodynamic monitoring solution. This comprehensive cardiovascular solution offers a complete, end-to-end automation solution for all aspects of a cardiology department. For example, the combination of AMICAS VERICIS and AMICAS Hemodynamics provides a complete solution for the cardiac catheterization lab. Our products , including our web-based structured reporting platform codifies clinical data for national and state level registries and facilitates the report generation and distribution process for cardiologists. AMICAS’ cardiology platform is a mature platform, used at over 250 institutions across the United States.

 

Our enterprise solutions include vendor neutral archive for image management infrastructure. A vendor neutral archive allows healthcare providers to consolidate their medical imaging infrastructure for multiple departmental image management solutions from multiple vendors and multiple locations. AMICAS ECM (Enterprise Content Manager) can be deployed as a standalone medical image archive solution or it can be deployed complete with an integrated viewing platform to allow providers to use AMICAS ECM as the imaging component of their overall EMR strategy.

 

Many hospitals continue to pursue “best of breed” purchasing habits as it relates to image management decisions. This dynamic can be attributed to the fact that the imaging industry has very well defined standards for systems interoperability and the fact that many large healthcare IT vendors do not offer an image management solution or they offer suboptimal image management solutions. AMICAS is able to capitalize on this through a strong focus on standards-based interoperability, including integration to hospital information systems, radiology information systems and electronic medical record systems products, and relationships with leading EMR vendors, such as MEDITECH, Epic Systems, and Patient Keeper.

We believe that our target market offers significant potential opportunities represented by a large and growing imaging services market with a low penetration of efficient image and information management systems. In 2008, we refined our ambulatory go-to-market strategy through radiology practices, expanded our product offerings, and established several key strategic partnerships. In 2009, we greatly expanded our strategy and solution set for large hospitals and IDN’s with our acquisition of Emageon. This acquisition gave us additional solutions in the enterprise and cardiovascular space and gave us a number of additional referenceable large customer accounts. With our existing market presence, industry-recognized product and service offerings, experienced management team, strong financial condition and momentum, we believe that we are well-positioned to capitalize on the opportunities available in the future.

 

AMICAS Solutions

 

AMICAS invests in research and development with a goal of further establishing the Company as an innovative solution provider of image and information management-related needs for the healthcare industry. We invest in complementary products and services that help the businesses in our target market grow and gain further efficiency and effectiveness in their operations and marketing activities.

 

The AMICAS Suite of solutions includes the following:

 

 

 

Payer and Patient Services offerings, commonly referred to as EDI, include the following services which are offered through third parties;

 

 

Innovative New Products

 

We believe that innovation is a critical component to our success in a highly competitive market with a dramatic need for automation. During 2009, we continued to invest in research and development in order to refine and expand our comprehensive solution suite. We continue to extend the capabilities of our solution suite through the addition of modules and functionality that help with workflow, business and operations execution; we believe that these additional capabilities will provide competitive advantages for our customers.

 

Our plan with respect to new product development is to continue to invest in research and development and we are continually evaluating strategic technology acquisitions. Examples of certain offerings in development include:

 

 

Similarly, some examples of potential future offerings include:

 

 

AMICAS Professional Services

 

We offer professional services to provide additional assistance before, during and after installation of our software. We recognize that our customers can be more successful in realizing their goals and objectives through a services offering combined with our software. We offer project management, implementation, integration, training, and support. We utilize best practice methodologies that we continually improve based upon our customer implementation experiences that are optimized via the utilization of well-trained and experienced staff. We believe that the customer obtains the greatest benefits from our products when they are implemented and supported by the AMICAS professional services team.

 

Technical Support

 

Software Support.   Under the terms of our standard support and maintenance agreement, our customers pay a periodic (e.g., monthly, quarterly, annually) support and maintenance fee associated with the software modules. The support and maintenance fee entitles the customer to telephone and Web-based technical support as well as software updates if and when updates are released. The initial support and maintenance fee is generally a fixed percentage of the list price of the licensed software at the time of contract signing.

 

Hardware Support.   Customers may contract with us for maintenance of the hardware that runs our software. In return for periodic maintenance fees, the customer is provided comprehensive telephone diagnostic support and on-site support. We subcontract with various third-party hardware support firms and manufacturers to help provide our hardware support services.

 

Research and Development

 

We believe that a strong product development capability is essential to our strategy of enhancing our core technology, developing additional applications, incorporating that technology into new products and maintaining comprehensive product and service offerings The priority of our research and development organization is to enhance and expand the capabilities of our core product offerings and to develop new and innovative solutions that will meet the needs of our increasingly sophisticated customers. Our development organization is responsible for product definition, product architecture, core technology development, product testing and quality assurance.

 

Our research and development organization consisted of 85 employees as of December 31, 2009, and is supplemented by contracted resources.

 

In 2009, 2008 and 2007, our research and development expenses were $15.1 million, $8.7 million and $8.5 million, or 16.9%, 17.4% and 17.1% of total revenues, respectively. We did not capitalize any software development costs in 2009, 2008 or 2007.

 

Sales and Marketing

 

We market and sell our products primarily in the United States through a direct sales force, composed of 55 sales and marketing personnel as of December 31, 2009. We have marketing and sales personnel located in our Daytona Beach, Florida; Hartland, Wisconsin and Boston, Massachusetts offices and in other cities around the country. We organize our sales force by region for both radiology and cardiology solutions. Members of our sales

organization participate in sales and product training that enables them to understand strategic selling points, as well as the specific needs and requirements of our respective customers.

 

Within our existing customer base, we promote and sell system upgrades, maintenance contracts, product add-ons, ancillary products, support services, and EDI services. In addition, we target new customers principally through trade shows, direct mail campaigns, telemarketing, referral programs, and advertisements in various trade publications. Moreover, our senior personnel and members of management assist in sales and marketing initiatives to larger and more technically advanced prospective customers. Sales cycles generally range from an average of six to twelve months, to as long as twelve months to two years for large-scale or multi-location systems.

 

For each of the past three fiscal years, no single customer has accounted for more than 10% of our total revenues.

 

Intellectual Property

 

We rely primarily on a combination of patent, copyright and trademark laws, trade secrets, confidentiality procedures, and contractual provisions to protect our intellectual property and proprietary rights. These laws and procedures afford only limited protection.

 

Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or obtain and use information that we regard as proprietary. Policing unauthorized use of our products is difficult, and such problems may persist. There can be no assurance that our means of protecting our proprietary rights will be adequate. In addition, our competitors could independently develop similar technology, and if they are able to obtain a patent or other protection of their intellectual property, then we could be restricted with respect to the development of our own technology.

 

Some of our programs have been delivered to our customers along with their applicable source code, which is protected by contractual provisions. In other cases, we have entered into source code escrow agreements with a limited number of our customers requiring release of the applicable source code under certain limited conditions, including any bankruptcy proceeding by or against us, cessation of our business, or our failure to meet our contractual obligations. Our source code agreements typically enable the customer to utilize the source code for their internal use only.

 

We rely upon certain software that is licensed from third parties, including software that is integrated with some of our internally developed software and/or is used with some of our products to perform certain functions. There can be no assurance that these third-party software licenses will continue to be available to us on commercially reasonable terms, if at all, which could adversely affect our business, operating results and financial condition. In addition, there can be no assurance that third parties will not claim infringement by us with respect to our products, any parts thereof, or enhancements thereto.

 

We distribute our software under software license agreements that grant customers a nonexclusive, nontransferable, perpetual or, in some cases, a term license to our products. Such agreements contain terms and conditions prohibiting the unauthorized reproduction or transfer of our products.

 

We have four issues patents in the United States and one in Canada: U.S. Patent No. 7,426,567 entitled “Methods and Apparatus for Streaming DICOM Images through Data Element Sources and Sinks” (issued September 16, 2008); U.S. Patent No. 7,170,521 entitled “Method and System for Storing, Communicating and Displaying Image data” (issued January 20, 2007); U.S. Patent No. 7,000,186 entitled “Method and structure for Electronically Transmitting a Text Document and Linked Information (issued February 14, 2006); U.S. Patent No. 5,908,387 entitled “Device and Method for Improved Quantitative Coronary Artery Analysis (issued June 1, 1999); and Canadian Patent No. 2230032 entitled “Method and System for testing and Adjusting Threshold Voltages in FLAS and EEPROMS” (issued June 12, 2001). These patents provide us with the exclusive rights to practice and exploit the claimed inventions, and provide defensive protections in the event that claims are asserted against us. We also have several patent applications pending, and we have acquired licenses under certain third party patents to practice and sublicense certain technologies.

We have registered or have applied for registration a number of trademarks in the U.S. Patent and Trademark Office which are currently used by us including: AMICAS, VERICIS and RADSTREAM. In addition, we use and believe that we have priority in right to use, the following unregistered trademarks; AMICAS One Suite, AMICAS PACS, AMICAS RIS, AMICAS Financials, AMICAS Hemodynamics, AMICAS ECM, AMICAS Documents, AMICAS Dashboards, AMICAS Watch, AMICAS Reach, AMICAS RadStream, RealTime Worklist, Halo Viewer, HeartSuite, MammoSuite, OrthoSuite, RadSuite, WorkFlow Accelerator and Cashfinder Worklist.

 

There can be no assurance that the registration of our patents or trademarks, our patent licenses or such rights as have arisen by virtue of our use of our trademarks will be sufficient to enable us to continue to use such intellectual property in the event that a claim of infringement is asserted against us.

 

Competition

 

Our principal competitors include international, national, and regional clinical, practice management and image management system vendors. These competitors include medical device manufacturers, large healthcare IT vendors, film manufacturers, business conglomerates, and start-up software companies. In addition, we compete with national and regional providers of computerized billing, insurance processing, and record management services to healthcare practices, hospitals and integrated delivery networks or “IDNs.” As the market for our products and services expands, additional competitors are likely to enter this market. We believe that the primary competitive factors in our markets are:

 

 

In the market for ambulatory imaging businesses, one of AMICAS’ primary competitive advantages is our ability to offer a comprehensive solution automating the entire provider operation. We believe that we are the only major independent vendor focused on ambulatory imaging businesses that owns and directly offers a comprehensive software suite for image management, enterprise workflow, revenue cycle management, administrative, financial, and clinical information management functions. We believe that ambulatory imaging businesses prefer not to purchase software applications from multiple vendors due to the inherent complexities of managing multiple vendors’ products, multiple relationships, and multiple maintenance contracts. A critical value proposition to these businesses is the ability to establish a partnership with a single vendor that offers a complete, end-to-end solution for their entire operation. We also believe that our ability to offer technology, such as AMICAS Reach, that is designed to help these providers meet their business goals and objectives provides a competitive advantage for AMICAS.

 

Our strategy and competitive position in the market for ambulatory imaging businesses could be compromised by a number of tactics by our competitors. Large modality vendors, such as General Electric and Fuji, could adversely impact our strategy by bundling IT solutions with their imaging modalities. Larger competitors, such as McKesson, Cerner or Philips, might build or acquire technologies to enable them to offer an end-to-end solution for ambulatory imaging businesses. In addition, other companies might enter the ambulatory imaging market with new products and/or technologies that this market values that we do not have available in our solution.

 

In the market for acute care facilities, AMICAS’ primary competitive advantage is our ability to offer innovative departmental solutions that offer a low total cost of ownership as well as our ability to offer a proven, enterprise-wide image management infrastructure. We believe that AMICAS PACS offers lower up-front costs in

terms of hardware, software, professional services, and related products and services than many of our larger competitors. We also believe that the ongoing costs for system administration and maintenance are lower with AMICAS PACS than our competition. This creates a compelling return on investment for our customers. We also believe that AMICAS VERICIS is one of the most proven, complete multi-modality cardiovascular automation solutions on the market with installations at over 200 sites spanning the last 10 years. Finally, we believe that offering a vendor-neutral archive solution in AMICAS ECM will be a critical point of differentiation for both radiology and cardiology PACS replacement decisions as well as an emerging market for vendor neutral archives serving as the imaging component of a provider’s overall EMR strategy.

 

Our strategy and competitive position in the market for acute care facilities could also be compromised by a number of competitive tactics. Leading healthcare IT vendors could enter the market for image and information management, creating new competitors for AMICAS. In addition, large modality vendors, such as General Electric or Siemens, may bundle IT solutions with their imaging modalities. Acute care facilities might move away from a “best of breed” purchasing program and prefer to purchase image management solutions from modality or healthcare IT companies. Finally, the market for vendor-neutral archives has become increasingly crowded with competition from start-ups, large storage vendors, and traditional PACS providers. This could compromise our strategy in this market segment.

 

We have experienced, and we expect to continue to experience, increased competition from current and potential competitors, many of whom have significantly greater financial, technical, marketing, distribution and other resources than us. Such competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements, or devote greater resources to the development, promotion, and sale of their products than us. Also, certain current and potential competitors have greater name recognition or more extensive customer bases that could be leveraged, thereby gaining market share to our detriment. We expect to face additional competition as other established and emerging companies enter into the clinical and practice management software markets and as new products and technologies are introduced. Increased competition could result in price reductions, fewer customer orders, reduced gross margins and loss of market share, any of which would materially adversely affect our business, operating results, cash flows and financial condition.

 

Current and potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third parties, thereby increasing the ability of their products to address the needs of our existing and prospective customers. Further competitive pressures, such as those resulting from competitors’ discounting of their products, may require us to reduce the price of our software and complementary products, which would materially and adversely affect our business, operating results, cash flows and financial condition.

 

There can be no assurance that we will be able to compete successfully against current and future competitors, and the failure to do so would have a material adverse effect upon our business, operating results, cash flows and financial condition.

 

Privacy Issues

 

Because our customers use our applications and services to transmit and manage highly sensitive and confidential health information, we must address the security and confidentiality concerns of our customers and their patients. To enable the use of our applications and services for the transmission of sensitive and confidential medical information, we use various methods to ensure an appropriate level of security. These methods generally include:

 

 

The level of data encryption used by our products is in compliance with the encryption guidelines set forth in rules regarding security and electronic signature standards in connection with the Health Insurance Portability and Accountability Act of 1996 (see “Government Regulation” below). We also encourage our customers to implement their own firewall and security procedures to protect the confidentiality of information being transferred into and out of their computer networks.

 

Internally, we work to ensure the safe handling of confidential data by employees in our electronic services department by:

 

 

We monitor proposed regulations that might affect our applications and services to ensure our compliance with such regulations when and if they are implemented.

 

Government Regulation

 

United States Food and Drug Regulation

 

In the United States, radiology and medical image and information management systems are regulated as medical devices. Before a new medical device can be marketed, its manufacturer must either obtain marketing clearance through a premarket notification under Section 510(k) of the Federal Food, Drug and Cosmetic Act or marketing approval of a premarket approval application, or PMA. The information that must be submitted to the Food and Drug Administration (“FDA”) in order to obtain clearance or approval to market a new medical device varies depending on how the medical device is classified by the FDA. Medical devices are classified into one of three classes on the basis of the controls deemed by the FDA to be necessary to reasonably ensure their safety and effectiveness. Class I devices are subject to general controls, including labeling, premarket notification and adherence to the quality systems regulations, or QSRs, which sets forth good manufacturing practices applicable to medical devices. Class II devices are subject to general controls and special controls, including performance standards and post-market surveillance. Class III devices are subject to most of the previously identified requirements as well as to pre-market approval.

 

A 510(k) premarket notification must demonstrate that the device in question is substantially equivalent to another legally marketed device, or predicate device, that does not require premarket approval. Most 510(k) notifications do not require clinical data for clearance, but a minority do require clinical data support. The FDA has an internal performance goal for issuing a decision letter within 90 days of receipt of a 510(k) if it has no additional questions, however, the FDA does not always meet its internal performance goal review time. In addition, requests for additional data, including clinical data, will increase the time necessary to review the notice. Most Class I devices and many Class II devices are exempt from the 510(k) requirement. Modifications to a 510(k)-cleared medical device may require the submission of another 510(k) or a PMA if the changes could significantly affect the safety or effectiveness or constitute a major change in the intended use of the device. Our marketed products are Class I or II medical devices.

 

The PMA process is more complex, costly and time consuming than the 510(k) clearance procedure.

 

After a device is placed on the market, numerous regulatory requirements apply. These include compliance with:

 

 

 

Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include, among other things, warning letters; fines, injunctions, and civil penalties; operating restrictions, partial suspension or total shutdown of production; refusal to grant or withdrawal of 510(k) clearance or PMA approvals; and criminal prosecution.

 

The FDA audits the facilities and operations of medical device manufacturers on a periodic basis. Our facilities and operations in Daytona, Florida, Hartland, Wisconsin and Boston, Massachusetts have been audited over recent years. Each such audit has resulted in a “voluntary actions indicated” report that contains recommendations of the examining official imposing corrective actions and follow-up reporting.

 

We believe that we are in compliance with FDA regulations and with the requirements arising from FDA audits, abut thee can be no assurance that we will continue to be in compliance in the future.

 

Other Government Regulation

 

The testing, marketing and manufacturing of our products requires regulatory approval, including approval from the FDA and, in some cases, governmental authorities outside of the United States that perform roles similar to those of the FDA, including the Australian Therapeutic Goods Administration, or TGA. In particular, we have a partnership with a distributor in Australia that requires our products to receive clearance from the TGA.

 

Health Insurance Portability and Accountability Act of 1996 (“HIPAA”)

 

The Health Insurance Portability and Accountability Act of 1996, and the regulations implementing its administrative simplification provisions (“HIPAA”), include five healthcare-related standards governing, among other things:

 

 

HIPAA regulations governing the electronic exchange of information establish a standard format for the most common healthcare transactions, including claims, remittances, eligibility, and claims status. Many of our customers are required to comply with the transaction standards as they exchange health-related administrative information. Our products and services must facilitate compliance with these standards.

 

HIPAA also establishes privacy standards for the protection of PHI used and disclosed by certain healthcare organizations or “Covered Entities.” Covered Entities are health plans, health care clearing houses, and health care providers who conduct certain health care transactions electronically. Covered Entities must ensure that all uses and disclosures of PHI are permissible under HIPAA and comply with other aspects of the rule. We are not a Covered Entity, however many of our customers are. As a result, a substantial part of our business involves the receipt of PHI. We have access to PHI when we assist our Covered Entity customers with the processing of healthcare transactions and the provision of technical services such as software maintenance. When we provide such services involving the use or disclosure of PHI, we are considered a “Business Associate” of a customer, and as such, we are subject to significant regulatory compliance obligations as discussed further below. HIPAA requires a Business Associate to sign a specific agreement (called a “Business Associate Agreement”) and to provide assurances that it will safeguard PHI in accordance with HIPAA standards in the course of providing services. Careful review of all Business Associate Agreements is critical to compliance with HIPAA standards. Additionally, over-reaching Business Associate Agreements or the failure to execute a Business Associate Agreement when one is required, may result in contractual liability or regulatory risk.

 

HIPAA has required and will continue to require significant business and operational changes on the part of our customers and on our part and may require additional changes in the future. HIPAA-mandated changes to our

applications, services, policies, and procedures may require us to charge higher prices to our customers or may also affect our customers’ purchasing practices. In addition, many states have patient confidentiality and data breach laws that are more restrictive than HIPAA and that could impose additional obligations with regard to the use and disclosure of PHI and additional notification obligations and penalties in the event of breach.

 

HIPAA Amendments under the HITECH Act

 

On February 17, 2009, Congress enacted Subtitle D of the Health Information Technology for Economic and Clinical Health Act (“HITECH”) provisions of the American Recovery and Reinvestment Act of 2009. HITECH amends HIPAA and, among other things, creates significant new regulatory compliance obligations for Business Associates. Additionally, HITECH expands and strengthens HIPAA enforcement, imposes new penalties for noncompliance and establishes new breach notification requirements for Covered Entities and Business Associates.

 

Prior to HITECH, HIPAA imposed privacy and security requirements on Covered Entities only. Business associates (e.g., third-party administrators, consultants, and other vendors) were not directly covered by HIPAA, but they were indirectly regulated through Business Associate Agreements. Under HITECH, certain of HIPAA’s privacy and all of HIPAA’s security provisions apply to Business Associates.

 

The HIPAA security standards require the adoption of administrative, physical, and technical safeguards and the adoption of written security policies and procedures. HITECH expanded this requirement to Business Associates who must now comply with the HIPAA security standards in the same way and to the same extent as a covered entity. Accordingly, in order to comply with HITECH, we must conduct a formal security risk assessment, appoint a security officer, adopt written security policies and procedures, and train our employees among other things. We must also implement safeguards to protect electronic PHI (or “ePHI”), such as encrypting emails and computer files and limiting access to records.

 

HITECH imposes new notification requirements on Covered Entities and Business Associates in the event of a breach of unsecured PHI. Covered Entities must, within 60 days of discovery, notify each individual whose information has been, or is reasonably believed to have been, accessed, acquired, or disclosed as a result of a breach. If a breach is discovered by a Business Associate, the Business Associate is required to notify the Covered Entity. Covered Entities must also report breaches to the Department of Health and Human Services (“HHS”), and in some cases, publish information about the breach in local or prominent media outlets. Consequently, we must ensure that breaches of PHI are promptly detected and reported within the Company, so that we can provide notification to our Covered Entity customers. Additionally, there may be reputational harm from the public nature of the breach notification process.

 

Under HITECH, both Covered Entities and Business Associates are directly subject to prosecution or administrative enforcement and increased civil and criminal penalties, including a new four-tiered system of monetary penalties, for HIPAA violations. HITECH extends criminal penalties for wrongful disclosure of PHI to individuals who without authorization obtain or disclose such information maintained by a Covered Entity, whether or not they are employees of the Covered Entity, and extends HIPAA enforcement authority to state attorneys general. Both Covered Entities and Business Associates are subject to audit by the Office of Civil Rights, the agency responsible for HIPAA enforcement.

 

Health Canada.

 

Our radiology and cardiology EVMS and hemodynamic measurement recording software products are medical devices subject to regulation by the Medical Devices Bureau of the Therapeutic Products Directorate, or TPD, Health Canada. Health Canada is the Canadian federal regulator responsible for licensing medical devices in accordance with the Food and Drugs Act and Regulations and the Medical Devices Regulations. The TPD applies the Food and Drug Regulations and the Medical Devices Regulations under the authority of the Food and Drugs Act to ensure that the pharmaceutical drugs and medical devices offered for sale in Canada are safe, effective and of high quality. Each device that we wish to distribute commercially in Canada, unless otherwise exempt, requires attainment of the appropriate type of medical device license prior to commercial distribution. We have procedures in place to ensure that we are compliant with the Canadian Medical Device Regulation as documented in the Food

and Drugs Act: Medical Devices Regulations for Canada: SOR/98-282 which includes quality system certificates for ISO 13485:2003, and CMDCAS for the classes of our devices.

 

Compliance with Fraud and Abuse Laws

 

Once our products are sold, we must comply with various U.S. federal and state laws, rules and regulations pertaining to healthcare fraud and abuse, including anti-kickback laws and physician self-referral laws, rules and regulations. Violations of the fraud and abuse laws are punishable by criminal and civil sanctions, including, in some instances, exclusion from participation in federal and state healthcare programs, including Medicare, Medicaid, Veterans Administration health programs, workers’ compensation programs and TRICARE. There is bipartisan agreement in Congress and with the Obama Administration on the need to increase enforcement efforts to combat health care fraud.

 

Anti-Kickback Statute

 

The federal Anti-Kickback Statute prohibits persons from knowingly or willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce:

 

 

The definition of “remuneration” has been broadly interpreted to include anything of value, including such items as gifts, certain discounts, waiver of payments, and providing anything at less than its fair market value. In addition, several courts have interpreted the law to mean that if “one purpose” of an arrangement is intended to induce referrals, the statute is violated.

 

The Anti-Kickback Statute is broad and prohibits many arrangements and practices that are lawful in businesses outside of the healthcare industry. The statutory penalties for violating the Anti-Kickback Statute include imprisonment for up to five years and criminal fines of up to $25,000 per violation. In addition, through application of other laws, conduct that violates the Anti-Kickback Statute can also give rise to False Claims Act lawsuits, civil monetary penalties and possible exclusion from Medicare and Medicaid and other federal healthcare programs. In addition to the Federal Anti-Kickback Statute, many states have their own anti-kickback laws. Often, these laws closely follow the language of the federal law, although they do not always have the same scope, exceptions, safe harbors or sanctions. In some states, these anti-kickback laws apply not only to payment made by a government health care program but also with respect to other payers, including commercial insurance companies.

 

Government officials have focused recent kickback enforcement efforts on, among other things, the sales and marketing activities of healthcare companies, including medical device manufacturers, and recently have brought cases against individuals or entities with personnel who allegedly offered unlawful inducements to potential or existing customers in an attempt to procure their business. This trend is expected to continue. Settlements of these cases by healthcare companies have involved significant fines and/or penalties and in some instances criminal plea or deferred prosecution agreements.

 

Physician Self-Referral Laws

 

The federal ban on physician self-referrals, commonly known as the “Stark Law,” prohibits, subject to certain exceptions, physician referrals of Medicare and Medicaid patients to an entity providing certain “designated health services” if the physician or an immediate family member of the physician has any financial relationship with the entity. The Stark Law also prohibits the entity receiving the referral from billing for any good or service furnished pursuant to an unlawful referral, and any person collecting any amounts in connection with an unlawful referral is obligated to refund these amounts. A person who engages in a scheme to circumvent the Stark Law’s referral prohibition may be fined up to $100,000 for each such arrangement or scheme. The penalties for violating the Stark Law also include civil monetary penalties of up to $15,000 per service and possible exclusion from federal healthcare programs. In addition to the Stark Law, many states have their own self-referral laws. Often, these laws

closely follow the language of the federal law, although they do not always have the same scope, exceptions, safe harbors or sanctions. In some states these self-referral laws apply not only to payment made by a federal health care program but also with respect to other payers, including commercial insurance companies. In addition, some state laws require physicians to disclose any financial interest they may have with a healthcare provider to their patients when referring patients to that provider even if the referral itself is not prohibited.

 

Other Fraud and Abuse Laws

 

The federal False Claims Act, or FCA, prohibits any person from knowingly presenting, or causing to be presented, a false claim or knowingly making, or causing to made, a false statement to obtain payment from the federal government. Those found in violation of the FCA can be subject to fines and penalties of three times the damages sustained by the government, plus mandatory civil penalties of between $5,000 and $10,000 (adjusted for inflation) for each separate false claim. Actions filed under the FCA can be brought by any individual on behalf of the government, a “qui tam” action, and this individual, known as a “relator” or, more commonly, as a “whistleblower,” may share in any amounts paid by the entity to the government in damages and penalties or by way of settlement. Congress strengthened the False Claims Act in amendments contained in the Fraud Enforcement and Recovery Act of 2009 (Pub.L. 111-21). In addition, certain states have enacted laws modeled after the FCA, and this legislative activity is expected to increase. Qui tam actions have increased significantly in recent years, causing greater numbers of healthcare companies, including medical device manufacturers, to defend false claim actions, pay damages and penalties or be excluded from Medicare, Medicaid or other federal or state healthcare programs as a result of investigations arising out of such actions.

 

The Department of Health and Human Services Office of Inspector General (“OIG”), specifically the Office of Counsel to the Inspector General, Administrative and Civil Remedies Branch, also has authority to bring administrative actions against entities for alleged violations of a number of prohibitions, including the Anti-Kickback Statute and the Stark Law. The OIG may seek to impose civil monetary penalties or exclusion from the Medicare, Medicaid and other federal healthcare programs. Civil monetary penalties can range from $2,000 to $50,000 for each violation or failure plus, in certain circumstances, three times the amounts claimed in reimbursement or illegal remuneration. Typically, the OIG seeks to impose exclusions for a minimum five year period.

 

In addition, we must comply with a variety of other laws, such as laws prohibiting the filing of false claims for reimbursement under Medicare and Medicaid, all of which can also be triggered by violations of federal anti-kickback laws; the Health Insurance Portability and Accounting Act of 1996, which makes it a federal crime to commit healthcare fraud and make false statements; and the Federal Trade Commission Act and similar laws regulating advertisement and consumer protections. Again, many states have similar laws and states Attorneys General have become increasingly involved in using these authorities to combat health care fraud.

 

Third-Party Reimbursement

 

Because we expect to receive payment for our products directly from our customers, we do not anticipate relying directly on payment for any of our products from third-party payers, such as Medicare, Medicaid, commercial health insurers and managed care companies. However, our business will be affected by policies adopted by federal and state governmental authorities, such as Medicare and Medicaid, as well as private payers, which often follow the policies of these public programs. For example, our business will be indirectly impacted by the ability of a hospital or medical facility to obtain coverage and third-party reimbursement for procedures performed using our products. These third-party payers may deny coverage if they determine that a device used in a procedure was not medically necessary, was not used in accordance with cost-effective treatment methods, as determined by the third-party payer, or was used for an unapproved indication. They may also pay an inadequate amount for the procedure which could cause healthcare providers to used a lower cost competitor’s device or perform a medical procedure without our device.

 

Access to Our Filings with the Securities and Exchange Commission

 

Our Internet address is www.amicas.com . The information on our website is not a part of, or incorporated into, this Annual Report on Form 10-K. We make our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,

Current Reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended available, without charge, on our website as soon as reasonably practicable after they are filed electronically with, or otherwise furnished to, the Securities and Exchange Commission (“SEC”).

 

Employees

 

As of December 31, 2009, our workforce consisted of 393 employees, including 55 in sales and marketing, 206 in customer support and services, 85 in research and development and 47 in finance, senior management, administration, human resources, and information technology. Our research and development and customer support organizations are supplemented by contracted resources. None of our employees is subject to a collective bargaining agreement. We consider our relations with our employees to be satisfactory.

 

 

Warning About Forward-Looking Statements and Risk Factors That May Affect Future Results

 

Our disclosure and analysis in this Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that set forth anticipated results based on management’s plans and assumptions. From time to time, we may also provide forward-looking statements in other materials that we release to the public as well as oral forward-looking statements. Forward-looking statements discuss our strategy, expected future financial position, results of operations, cash flows, financing plans, intellectual property, competitive position, and plans and objectives of management. We often use words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “will,” “should,” “might,” “may” and similar expressions to identify forward-looking statements. Additionally, forward-looking statements include those relating to future actions, prospective products, future performance, financing needs, liquidity, sales efforts, expenses, interest rates and the outcome of contingencies, and financial results.

 

We cannot guarantee that any forward-looking statement will be realized. Achievement of future results is subject to risks, uncertainties and potentially inaccurate assumptions. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could differ materially from past results and those anticipated, estimated or projected by our forward-looking statements. You should bear this in mind as you consider forward-looking statements.

 

We undertake no obligation to publicly update forward-looking statements. You are advised, however, to consult any further disclosures we make on related subjects in our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. We provide the following cautionary discussion of risks, uncertainties and possibly inaccurate assumptions relevant to our businesses. These are important factors that, individually or in the aggregate, could cause our actual results to differ materially from expected and historical results. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider the following to be a complete discussion of all potential risks or uncertainties.

 

Our operating results will vary from period to period. In addition, we have experienced losses in the past and may never achieve consistent profitability.

 

Our operating results will vary significantly from quarter to quarter and from year to year. We had net losses of $4.0 million, $30.1 million (including impairment charges of $27.5 million), and $0.9 million for the years ended December 31, 2009, 2008, and 2007, respectively. On a continuing operations basis, we had losses of $4.0 million, $30.1 million, and $0.9 million, respectively, for the years ended December 31, 2009, 2008, and 2007.

 

Our operating results have been and/or may be influenced significantly by factors such as:

 

 

 

Quarterly and annual revenues and operating results are highly dependent on the volume and timing of the signing of license agreements and product deliveries during each quarter, which are very difficult to forecast. A significant portion of our quarterly sales of software product licenses and computer hardware is concluded in the last month of the fiscal quarter, generally with a concentration of our quarterly revenues earned in the final ten business days of that month. A portion of our revenues are contingent upon the successful implementation of our products, and can only be recognized once the customer’s solution is installed and ready for productive use. Also, our projections for revenues and operating results include significant sales of new product and service offerings. Due to these and other factors, our revenues and operating results are very difficult to forecast. A major portion of our costs and expenses, such as personnel and facilities, is of a fixed nature and, accordingly, a shortfall or decline in quarterly and/or annual revenues typically results in lower profitability or losses. As a result, comparison of our period-to-period financial performance is not necessarily meaningful and should not be relied upon as an indicator of future performance. Due to the many variables in forecasting our revenues and operating results, it is likely that our results for any particular reporting period will not meet our expectations or the expectations of public market analysts or investors. Failure to attain these expectations would likely cause the price of our common stock to decline.

 

Failure to complete the pending tender offer and merger with Merge could materially and adversely affect our results of operations and our stock price.

 

On March 5, 2010, we entered into the Merge Merger Agreement, pursuant to which Merge will acquire all of the outstanding shares of AMICAS for $6.05 per share in cash. Under the terms of the Merge Merger Agreement, Merge will commence a cash tender offer for all of AMICAS’ outstanding common stock. Merge will then consummate a merger pursuant to which any untendered shares of AMICAS common stock (other than those shares held by AMICAS’ stockholders who have properly exercised their dissenters’ rights under Section 262 of the

Delaware General Corporation Law) will be converted into the right to receive the same $6.05 per share cash price. Following the consummation of the merger, the Company will continue as the surviving corporation and will be a wholly-owned subsidiary of Merge.

 

The tender offer and merger are subject to certain closing conditions, including, but not limited to, a successful tender of a minimum number of shares of AMICAS common stock, antitrust clearance and other regulatory approvals. We cannot assure you that these conditions will be satisfied or waived, that the necessary approvals will be obtained, or the tender offer and the merger will be successfully completed as contemplated under the Merge Merger Agreement or at all. If for any reason the tender offer and merger are not consummated: our investors may not receive $6.05 in cash or $6.05 in fair market value of shares of AMICAS common stock that Merge has agreed to provide in the tender offer and the merger, and our stock price would likely decline unless some other party were to offer an equivalent or higher price for our shares (and we have no expectation that there is any other party willing to offer an equivalent or higher price); and under some circumstances, we may have to pay a termination fee to Merge of 4% of the aggregate consideration to be paid in the tender offer and merger and/or reimburse Merge for its out-of-pocket transaction-related expenses up to $3.0 million.

 

In addition, the pendency of the tender offer and the merger could adversely affect our operations because:

 

 

The occurrence of any of these events individually or in combination could have a material adverse affect on our results of operations and our stock price.

 

If our new and existing products, including product upgrades, and services do not achieve and maintain sufficient market acceptance, our business, financial condition, cash flows, revenues, and operating results will suffer.

 

The success of our business depends and will continue to depend in large part on the market acceptance of:

 

 

There can be no assurance that our customers will accept any of these products, product upgrades, support or services. In addition, even if our customers accept our products and services initially, we cannot assure you that they will continue to purchase our products and services at levels that are consistent with, or higher than, past quarters. Customers may significantly reduce their relationships with us or choose not to expand their relationship with us. In addition, any pricing strategy that we implement for any of our products, product upgrades, or services may not be economically viable or acceptable to our target markets. Failure to achieve or to sustain significant penetration in our target markets with respect to any of our products, product upgrades, or services could have a material adverse effect on our business.

Achieving and sustaining market acceptance for our products, product upgrades and services is likely to require substantial marketing and service efforts and the expenditure of significant funds to create awareness and demand by participants in the healthcare industry. In addition, deployment of new or newly integrated products or product upgrades may require the use of additional resources for training our existing sales force and customer service personnel and for hiring and training additional sales and customer service personnel. There can be no assurance that the revenue opportunities for our new products, product upgrades and services will justify the amounts that we spend for their development, marketing and rollout.

 

If we are unable to sell our new and next-generation software products to healthcare providers that are in the market for healthcare information and/or image management systems, such inability will likely have a material adverse effect on our business, revenues, operating results, cash flows and financial condition. If anticipated software sales and services do not materialize, or if we lose customers or experience significant declines in orders from our customers, our revenues would decrease over time due to the combined effects of attrition of existing customers and a shortfall in new client additions.

 

Our ability to realize the anticipated benefits of our acquisitions will depend on successfully integrating the acquired businesses.

 

Our recently completed acquisition of Emageon continues to require substantial integration and management efforts and we expect future acquisitions to require similar efforts. Acquisitions of this nature involve a number of risks, including:

 

 

As a result of these and other risks, if we are unable to successfully integrate acquired businesses, we may not realize the anticipated benefits from our acquisitions. Any failure to achieve these benefits or failure to successfully integrate acquired businesses and technologies could seriously harm our business.

 

Our business, financial condition and operating results could be adversely affected as a result of legal, business and economic risks specific to international operations.

 

We now have operations in Canada as a result of our acquisition of Emageon. Consequently, we are and will continue to be, subject to risks related to operating in a foreign country. International operations are subject to many inherent risks, including:

 

 

 

These risks may increase our cost of doing business. Moreover, as our customers are adversely affected by these conditions, our business with them may be disrupted and our results of operations could be adversely affected.

 

National and regional competitors could cause us to lower our prices or to lose customers.

 

Our principal competitors include both national and regional practice management and clinical systems vendors. In general, until recently, larger, international and national vendors have targeted primarily large healthcare providers. We believe that the larger, national vendors may broaden their markets to include both small and large healthcare providers. In addition, we compete with national and regional providers of computerized billing, insurance processing and record management services to healthcare practices. As the market for our products and services expands, additional competitors are likely to enter this market. We believe that the primary competitive factors in our markets are:

 

 

We have experienced, and we expect to continue to experience, increased competition from current and potential competitors, such as McKesson, Cerner, General Electric, Fuji, AGFA, Philips, Merge Healthcare and others many of which have significantly greater financial, technical, marketing and other resources than us. Such competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements or devote greater resources to the development, promotion and sale of their products than we can. Also, certain current and potential competitors have greater name recognition or more extensive customer bases that could be leveraged, which could cause us to lose customers. We expect additional competition as other established and emerging companies enter into the practice management and clinical software markets and as new products and technologies are introduced. Increased competition could result in price reductions, fewer customer orders, losses in customers, reduced gross margins and loss of market share, any of which could materially adversely affect our business, operating results, cash flows and financial condition.

Current and potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third parties, thereby increasing their abilities to address the needs of our existing and prospective customers. Further competitive pressures, such as those resulting from competitors’ discounting of their products, may require us to reduce the price of our software and complementary products, which would materially adversely affect our business, operating results, cash flows and financial condition. There can be no assurance that we will be able to compete successfully against current and future competitors, and our failure to do so would have a material adverse effect upon our business, operating results, cash flows and financial condition.

 

We rely on some of our existing customers to serve as reference sites for us in developing and expanding relationships with other customers and potential customers, and if the customers who serve as reference sites become unwilling to do so, our ability to obtain new customers or to expand customer relationships could be materially harmed.

 

As an integral part of the process of establishing new client relationships and expanding existing relationships, we rely on current clients who agree to serve as reference sites for potential customers of our products and services. The reference sites allow potential customers to observe the operation of our products and services in a true-to-life environment and to ask questions of actual customers concerning the functionality, features and benefits of our product and service offerings. We cannot assure you that the sites that we currently have will continue to be willing to serve as reference sites, nor that the availability of the reference sites will be successful in establishing or expanding relationships with existing or new customers. If we lose reference sites and are unable to establish new ones in a timely manner, this could have a material adverse effect on our business and results of operations.

 

The U.S. government is considering healthcare reform legislation, which may have a negative impact on our business. Among other things, reductions in Medicare and Medicaid reimbursement rates for imaging procedures and professional services could negatively affect revenues of our hospital and imaging clinic customers, which could reduce our customers’ ability to purchase our software and services.

 

The Congress and the Obama administration are currently considering far-reaching healthcare legislation that could have a negative impact on our business. There are significant differences between the legislation passed by the House of Representatives and the Senate, and the President of the United States has offered compromise proposals. While the outcome and impact of this legislative process is difficult to predict, pressure will continue to control spending in government programs (e.g., Medicare and Medicaid) and by third party payors. The ability of customers to obtain appropriate reimbursement for imaging services they provide from these programs and payors is critical to the success of our company. One specific change this year was enacted by the Department of Health and Human Services in the Medicare Physician Fee Schedule regulation increases the equipment utilization assumption, which is part of the practice expense component of the technical part of the reimbursement rate, for MRI and CT services to 90 percent from 50 percent over a 4-year transition period. House and Senate health care reform bills make certain adjustments to this regulation. These changes in the utilization rate once fully implemented or further adjusted by future legislation have the potential to dramatically decrease technical reimbursements for radiology procedures, and could have a particularly negative impact on hospitals and imaging clinics in rural regions of the country where utilization rates are naturally lower. A second significant potential reimbursement change relates to the Sustainable Growth Rate (“SGR”) component of the Medicare Physician Fee Schedule. The SGR is part of the update factor process used to set the annual rate of growth in allowed expenditures, and is determined by a formula specified by Congress. Because the annual calculation of the SGR would have led to reimbursement reductions that Congress found unacceptable, every year Congress has interceded to delay the implementation of this statutory SGR update factor. While these changes have provided temporary reimbursement relief, because of the significant budgetary impacts, Congress has left the SGR formula, thereby allowing annual unimplemented payment reductions to accumulate in the Medicare statute. As a result, for 2010, if this SGR had been allowed to be implemented, it would have caused a reduction in the update adjustment factor of 21.3 percent in the calculation of the Physician Fee Schedule. The Congress and Obama administration are currently considering various legislation to attempt to fix this problem, but the prospects for enactment remain uncertain. These changes being considered have the potential to negatively impact the professional component of reimbursement.

Either of these changes related to the equipment utilization assumption or the SGR calculation or other changes in a health care reform bill could result in a reduction in software and service procurement of our customers, and have a material adverse effect on our revenues and operating results.

 

If the marketplace demands subscription pricing, application service provider, or ASP delivered offerings or software as a service or SAAS delivered offerings, our revenues may be adversely impacted.

 

We currently derive a substantial portion of our revenues from traditional perpetual software license, maintenance and service fees, as well as from the resale of computer hardware. Our revenues from application service provider and/or software as a service are immaterial. Increased marketplace demands for subscription pricing, multi-year financing arrangements, application service provider offerings and/or software as a service offering, may cause us to adjust our strategy accordingly by offering a higher percentage of our products and services on such terms. Shifting to subscription pricing, multi-year financing arrangements, application service provider and/or software as a service offerings could materially adversely impact our financial condition, cash flows and quarterly and annual revenues and results of operations, as our revenues could continue to be negatively impacted.

 

Our business could suffer if our products and services contain errors, experience failures, result in loss of our customers’ data or do not meet customer expectations.

 

The products and services that we offer are inherently complex. Despite testing and quality control, we cannot be certain that errors will not be found in prior, current or future versions, or enhancements of our products and services. We also cannot assure you that our products and services will not experience partial or complete failure, especially with respect to our new product or service offerings. It is also possible that as a result of any of these errors and/or failures, our customers may suffer loss of data. The loss of business, medical, diagnostic, or patient data or the loss of the ability to process data for any length of time may be a significant problem for some of our customers who have time-sensitive or mission-critical practices. We could face breach of warranty or other claims or additional development costs if our software contains errors, if our customers suffer loss of data or are unable to process their data, if our products and/or services experience failures, do not perform in accordance with their documentation, or do not meet the expectations that our customers have for them. Even if these claims do not result in our having any liability, investigating and defending against them could be expensive and time-consuming and could divert management’s attention away from our operations. In addition, negative publicity caused by these events may delay or reduce market acceptance of our products and services, including unrelated products and services. Such errors, failures or claims could also cause us to lose customers or to experience significant decreases in orders from existing customers, and could materially adversely affect our business, revenues, operating results, cash flows and financial condition.

 

Our competitive position could be significantly harmed if we fail to protect our intellectual property rights from third-party challenges.

 

Our ability to compete depends in part on our ability to protect our intellectual property rights. We rely on a combination of copyright, patent, trademark, and trade secret laws and restrictions on disclosure to protect the intellectual property rights related to our software applications. Most of our software technology is not patented and existing copyright laws offer only limited practical protection. Our practice is to require all new employees to sign a confidentiality agreement and most of our employees have done so. However, not all existing employees have signed confidentiality agreements. In addition, third parties with whom we share confidential information are required to sign confidentiality agreements. We cannot assure you that the legal protections that we rely on will be adequate to prevent misappropriation of our technology.

 

Further, we may need to bring lawsuits or pursue other legal or administrative proceedings to enforce our intellectual property rights. Generally, lawsuits and proceedings of this type, even if successful, are costly, time consuming and could divert our personnel and other resources away from our business, which could harm our business.

Moreover, these protections do not prevent independent third-party development of competitive technology or services. Unauthorized parties may attempt to copy or otherwise obtain and use our technology. Monitoring use of our technology is difficult, and we cannot assure you that the steps we have taken will prevent unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States.

 

Intellectual property infringement claims against us could be costly to defend and could divert our management’s attention away from our business.

 

As the number of software products and services in our target markets increases and as the functionality of these products and services overlaps, we are increasingly subject to the threat of intellectual property infringement claims. Any infringement claims alleged against us, regardless of their merit, will be time-consuming and expensive to defend. Infringement claims will also divert our management’s attention and resources and could also cause delays in the delivery of our products and services to our customers. Settlement of any infringement claims could require us to enter into royalty or licensing agreements on terms that are costly or cost-prohibitive. If a claim of infringement against us was successful and if we were unable to license the infringing or similar technology or redesign our products and services to avoid infringement, our business, financial condition, cash flows, and results of operations will be harmed.

 

We may undertake additional acquisitions, which may involve significant uncertainties and may increase costs and divert management resources from our core business activities, or we may fail to realize anticipated benefits of such acquisitions.

 

We announced our acquisition of Emageon on in April 2009. We may undertake additional acquisitions if we identify companies with desirable applications, products, services, customer bases, businesses or technologies. We may not achieve any of the anticipated synergies and other benefits that we expected to realize from these acquisitions. In addition, software companies depend heavily on their employees to maintain the quality of their software offerings and related customer services. If we are unable to retain the acquired companies’ personnel or integrate them into our operations, the value of the acquired applications, products, services, distribution capabilities, business, technology, and/or customer base could be compromised. The amount and timing of the expected benefits of any acquisition are also subject to other significant risks and uncertainties. These risks and uncertainties include:

 

 

Further, our profitability may also suffer because of acquisition-related costs and/or amortization or impairment of intangible assets.

Technology solutions may change faster than we are able to update our technologies, which could cause a loss of customers and have a negative impact on our revenues.

 

The information technology market in which we compete is characterized by rapidly changing technology, evolving industry standards, emerging competition and the frequent introduction of new services, software and other products. Our success depends partly on our ability to:

 

 

We cannot be sure that we will be able to accomplish these goals. Our development of new and enhanced products and services may take longer than originally expected, require more testing than originally anticipated and require the acquisition of additional personnel and other resources. In addition, there can be no assurance that the products and/or services we develop or license will be able to compete with the alternatives available to our customers. Our competitors may develop products or technologies that are better or more attractive than our products or technologies, or that may render our products or technologies obsolete. If we do not succeed in adapting our products, technology and services or developing new products, technologies and services, our business could be harmed.

 

Our customers and potential customers may not be able to obtain financing, which could impact their purchasing decisions with respect to our products.

 

Our future revenues and orders growth depend on sales of our image and information management solution for imaging businesses and hospitals, which require a significant investment in software, professional services and hardware. Our sales prospects often seek financing to fund these initiatives. Economic conditions in the credit markets could limit our potential customers’ ability to obtain financing. The inability to obtain financing could cause a prospective customer to delay and/or refrain from making new purchases from us, which could adversely impact our results of operations, cash flows and financial condition.

 

Our inability to renew, or make material modifications to, agreements with our third-party product and service providers could lead to a loss of customers and have a negative impact on our revenues.

 

Some of our customers demand the ability to acquire a variety of products from one provider. Some of these products are not owned or developed by us. Through agreements with third parties, we currently resell the desired hardware, software and services to these customers. However, in the event these agreements are not renewed or are renewed on less favorable terms, we could lose sales to competitors who market the desired products to these customers or recognize less revenue. If we do not succeed in maintaining our relationships with our third-party providers, our business could be harmed.

 

The nature of our products and services exposes us to product liability claims that may not be adequately covered by insurance or contractual indemnification.

 

As a product and service provider in the healthcare industry, we operate under the continual threat of product liability claims being brought against us. Errors or malfunctions with respect to our products or services could result in product liability claims. In addition, certain agreements require us to indemnify and hold others harmless against certain matters. Although we believe that we carry adequate insurance coverage against product liability claims, we cannot assure you that claims in excess of our insurance coverage will not arise. In addition, our insurance policies must be renewed annually. Although we have been able to obtain what we believe to be adequate insurance coverage at an acceptable cost in the past, we cannot assure you that we will continue to be able to obtain adequate insurance coverage at an acceptable cost.

 

In many instances, agreements which we enter into contain provisions requiring the other party to the agreement to indemnify us against certain liabilities. However, any indemnification of this type is limited, as a practical matter, to the creditworthiness of the indemnifying party. If the contractual indemnification rights

available under such agreements are not adequate, or inapplicable to the product liability claims that may be brought against us, then, to the extent not covered by our insurance, our business, operating results, cash flows and financial condition could be materially adversely affected.

 

We may be subject to claims resulting from the activities of our strategic partners.

 

We rely on third parties to provide certain services and products critical to our business. For example, we use national clearinghouses in the processing of insurance claims and we outsource some of our hardware maintenance services and the printing and delivery of patient billings for our customers. We also sell third-party products, several of which manipulate clinical data and information. We also have relationships with certain third parties where these third parties serve as sales channels through which we generate a portion of our revenues. Due to these third-party relationships, we could be subject to claims as a result of the activities, products, or services of these third-party service providers even though we were not directly involved in the circumstances leading to those claims. Even if these claims do not result in liability to us, defending against and investigating these claims could be expensive and time-consuming, divert personnel and other resources from our business and result in adverse publicity that could harm our business.

 

We are subject to government regulation and legal uncertainties, compliance with which could have a material adverse effect on our business.

 

HIPAA

 

Federal regulations impact the manner in which we conduct our business. We have been, and may continue to be, required to expend additional resources to comply with regulations under the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) as amended by Subtitle D of the Health Information Technology for Economic and Clinical Health Act (“HITECH”). The total extent and amount of resources to be expended is not yet known. Because HITECH is relatively new, and there has been little guidance published regarding significant aspects of the law, there is uncertainty as to how we must comply, and how HITECH will be interpreted and enforced.

 

Although we have made, and will continue to make, a good faith effort to ensure that we comply with, and that our future products enable compliance with, applicable law, we may not be able to conform all of our operations and products to such requirements in a timely manner, or at all. The failure to do so could subject us and our customers to penalties and damages, as well as civil liability and criminal sanctions. We also face significant reputational harm in the event that we are responsible for a breach that is publicly reported under the law. In addition, any delay in developing or failure to develop products and/or deliver services that would enable HIPAA compliance for our current and prospective customers could put us at a significant disadvantage in the marketplace. Accordingly, our business, and the sale of our products and services, could be materially harmed by failures with respect to our compliance with HIPAA and HITECH.

 

E-Commerce Regulations

 

We may be subject to federal and state statutes and regulations in connection with offering services and products via the Internet. On an increasingly frequent basis, federal and state legislators are proposing laws and regulations that apply to Internet commerce and communications. Areas being affected by these regulations include user privacy, pricing, content, taxation, copyright protection, distribution, and quality of products and services. To the extent that our products and services are subject to these laws and regulations, the sale of our products and services could be harmed.

 

FDA

 

Our PACS and Hemodynamics products are regulated as Class I or Class II medical devices by the FDA. As a result, we are required to register with the FDA, obtain clearance to market our FDA-regulated products and comply with applicable FDA requirements including its quality systems regulations. Satisfaction of the clearance requirements and other regulatory requirements is time consuming and costly. Failure to comply could result in enforcement actions such as withdrawal of clearances, delays in or refusal to clear new products, product recalls

or seizures, injunctions, civil fines and criminal prosecutions. Any of these enforcement actions could have a material adverse effect on our business, revenues, operating results, cash flows and financial condition.

 

The FDA currently is reevaluating the criteria that it uses in its review of 510(k) premarket notifications and has indicated that it expects to issue new guidance on the 510(k) requirements by September 2010. We cannot predict how or whether the new requirements will affect any of our then pending or subsequent 510(k) notifications for new products.

 

The FDA audits the facilities and operations of medical device manufacturers on a periodic basis. Our facilities and operations in Daytona, Florida, Hartland, Wisconsin and Boston, Massachusetts have been audited over recent years. Each such audit has resulted in a “voluntary actions indicated” report that contains recommendations of the examining official imposing corrective actions and follow-up reporting.

 

We believe that we are in compliance with FDA regulations and with the requirements arising from FDA audits, abut thee can be no assurance that we will continue to be in compliance in the future. Our failure to comply with FDA regulations or to maintain compliance with the recommendations contained in recent FDA audits could result in the imposition of enforcement actions, any of which could have a material adverse effect on our business, revenues, operating results, cash flows and financial condition.

 

We and our customers must comply with various federal and state anti-kickback, self-referral, false claims and similar laws, the breach of which could cause a material adverse effect on our business, financial condition and results of operations.

 

Our relationships with our customers are subject to scrutiny under various federal anti-kickback, self-referral, false claims and similar laws, often referred to collectively as healthcare fraud and abuse laws. The scope and enforcement of all of these laws is uncertain and subject to rapid change, especially in light of the lack of applicable precedent and regulations. There can be no assurance that federal or state regulatory or enforcement authorities will not investigate or challenge our current or future activities under these laws. Any such investigation or challenge could have a material adverse effect on our business, financial condition and results of operations. Any state or federal regulatory or enforcement review of us, regardless of the outcome, would be costly and time consuming. Additionally, we cannot predict the impact of any changes in these laws, whether or not retroactive.

 

State and federal laws relating to confidentiality of patient medical records could limit our customers’ ability to use our services and expose us to liability.

 

The confidentiality of patient records and the circumstances under which records may be released are already subject to substantial governmental regulation, and these regulations as well as patient confidentiality rights are evolving rapidly. A breach of any privacy rights of a customer and/or patient of a customer by one of our employees could subject us to significant liability, civil or criminal enforcement, and reputational harm. In addition to the obligations being imposed at the state level, there is also legislation governing the privacy, security and dissemination of medical information at the federal level. Federal law requires holders of this information to implement security measures, which could entail substantial expenditures on our part. Adoption of additional legislation, changes to state or federal laws or our failure to comply with them could materially affect or restrict the ability or willingness of healthcare providers to submit information from patient records using our products and services. These kinds of restrictions would likely decrease the value of our applications to our customers, which could materially harm our business.

 

We depend on our partners and suppliers for delivery of electronic data interchange (e.g., insurance claims processing and invoice printing services), commonly referred to as EDI, hardware maintenance services, third-party software or software or hardware components of our offerings, and sales lead generation. Any failure, inability or unwillingness of these suppliers to perform these services or provide their products could negatively impact our customers’ satisfaction and our revenues.

 

We use various third-party suppliers to provide our customers with EDI transactions and on-site hardware maintenance. EDI revenues would be particularly vulnerable to a supplier failure because EDI revenues are earned on a daily basis. We rely on numerous third-party products that are made part of our software offerings and/or that

we resell. Although other vendors are available in the marketplace to provide these products and services, it would take time to switch suppliers. If these suppliers were unable or unwilling to perform such services, provide their products or if the quality of these services or products declined, it could have a negative impact on our customers satisfaction and result in a decrease in our revenues, cash flows and operating results.

 

Our systems may be vulnerable to security breaches and viruses.

 

The success of our strategy to offer our products depends on the confidence of our customers in our ability to securely transmit confidential information. Our products rely on encryption, authentication and other security technology licensed from third parties to achieve secure transmission of confidential information. We may not be able to stop unauthorized attempts to gain access to or disrupt the transmission of communications by our customers. Some of our customers have had their use of our software significantly impacted by computer viruses. Anyone who is able to circumvent our security measures could misappropriate confidential user information or interrupt our operations and those of our customers. In addition, our products may be vulnerable to viruses, physical or electronic break-ins, and similar disruptions. Any failure to provide secure electronic communication services could result in a lack of trust by our customers, causing them to seek out other vendors, and/or damage our reputation in the market, making it difficult to obtain new customers. Moreover, any such failure could cause us to be sued. Even if these law suits do not result in any liability to us, defending against and investigating these law suits could be expensive and time-consuming, and could divert personnel and other resources from our business.

 

Our growth could be limited if we are unable to attract and retain qualified personnel.

 

We believe that our success depends largely on our ability to attract and retain highly skilled technical, managerial and sales personnel to develop, sell and implement our products and services. Individuals with the information technology, managerial and selling skills we need to further develop, sell and implement our products and services are in short supply and competition for qualified personnel is particularly intense. We may not be able to hire the necessary personnel to implement our business strategy, or we may need to pay higher compensation for employees than we currently expect. We cannot assure you that we will succeed in attracting and retaining the personnel we need to continue to grow and to implement our business strategy. In addition, we depend on the performance of our executive officers and other key employees. The loss of any member of our senior management team could negatively impact our ability to execute our business strategy. In addition, healthcare reform initiatives, if enacted, and existing government stimulus legislation may stimulate greater demand for personnel skilled in creating and delivering solutions in the electronic medical records and related markets. As such, AMICAS and other companies in our market space may experience a significant increase in the demand for and compensation payable to qualified healthcare IT personnel in areas such as sales, implementation, and training, and we may encounter greater difficulty in attracting and retaining qualified employees in these areas.

 

We may be exposed to credit risks of our customers.

 

We recorded revenues of $89.1 million in fiscal year 2009 and we bill substantial amounts to many of our customers. A deterioration of the creditworthiness of our customers could impact our ability to collect receivables or sell future services to those customers, which could negatively impact the results of our operations. In addition, we have provided payment terms in excess of one year to certain customers, which exposes us to future credit risk with those customers. At December 31, 2009, no one customer represented more than 10% of our accounts receivable. If any group of our significant customers were unable to pay us in a timely fashion, or if we were to experience significant credit losses in excess of our reserves, our results of operations, cash flows and financial condition could be harmed.

 

Our future success depends on our ability to successfully develop new products and adapt to new technological change.

 

To remain competitive, we will need to develop new products, evolve existing products, and adapt to technological change. Technical developments, customer requirements, computer programming languages and industry standards change frequently in our markets. As a result, success in current markets and new markets will depend upon our ability to enhance current products, develop and introduce new products that meet customer needs,

keep pace with changes in technology, respond to competitive products, and achieve market acceptance. Product development requires substantial investments for research, refinement and testing. There can be no assurance that we will have sufficient resources to make necessary product development investments. We may experience difficulties that will delay or prevent the successful development, introduction or implementation of new or enhanced products. Our inability to introduce or implement new or enhanced products in a timely manner would adversely affect our future financial performance. Our products are complex and may contain errors. Computer programming errors in products will require us to ship corrected products to customers. Errors in products could cause the loss of or delay in market acceptance or sales and revenue, the diversion of development resources, injury to our reputation, and increased service, indemnification and warranty costs which would have an adverse effect on our financial performance.

 

We are exposed to potential risks and we will continue to incur increased costs as a result of the internal control testing and evaluation process mandated by Section 404 of the Sarbanes-Oxley Act of 2002.

 

We assessed the effectiveness of our internal control over financial reporting as of December 31, 2009 and assessed all deficiencies on both an individual basis and in combination to determine if, when aggregated, they constitute a material weakness. As a result of this evaluation, no material weaknesses were identified. Although we have completed the documentation and testing of the effectiveness of our internal control over financial reporting for the fiscal year ended December 31, 2009, as required by Section 404 of the Sarbanes-Oxley Act of 2002, we expect to continue to incur costs, including increased accounting fees and increased staffing levels, in order to maintain compliance with that section of the Sarbanes-Oxley Act. We continue to monitor controls for any weaknesses or deficiencies. No evaluation can provide complete assurance that our internal controls will detect or uncover all failures of persons within the company to disclose material information otherwise required to be reported. The effectiveness of our controls and procedures could also be limited by simple errors or faulty judgments.

 

In the future, if we fail to complete the Sarbanes-Oxley 404 evaluation in a timely manner, or if our independent registered public accounting firm cannot attest to the effectiveness of our internal controls in a timely manner, we could be subject to regulatory scrutiny and a loss of public confidence in our internal controls. In addition, any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations.

 

The trading price of our common stock has been volatile and will likely remain volatile.

 

The trading prices of many publicly-traded companies are highly volatile, particularly companies such as ours that have limited operating histories. The trading price of our common stock has been subject to wide fluctuations. Factors that will continue to affect the trading price of our common stock include:

 

 

In addition, if the market for healthcare stocks or healthcare services or the stock market in general experiences loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, operating results or financial condition.

If securities analysts do not publish research or reports about our business, or if they downgrade our stock, the price of our stock could decline.

 

The trading market for our common stock will rely in part on the availability of research and reports that third-party industry or financial analysts publish about us. There are many large, publicly-traded companies active in the healthcare services industry, which may mean it will be less likely that we receive widespread analyst coverage. Furthermore, if one or more of the analysts who do cover us downgrade our stock, our stock price would likely decline. If one or more of these analysts cease coverage of our company, we could lose visibility in the market, which in turn could cause our stock price to decline.

 

 

Not applicable.

 

 

We lease and occupy the following properties:

 

Boston, Massachusetts :   We lease 27,081 square feet of space for our corporate headquarters. We renewed the lease effective January 11, 2008 with a base rent of $65,446 per month and increases by $1.00 per square foot annually over the lease term of five years. The lease will expire on January 11, 2013.

 

Daytona Beach, Florida :   We lease 35,655 square feet of space for a customer support facility at a monthly cost of $25,500. The lease will expire in April 2012. The monthly rent increases by $1,000 per month in the April, 2010 and by an additional $500 per month in the subsequent year.

 

Hartland, Wisconsin :   We lease 2,400 square feet of office space at a monthly cost of $2,000, for research and development. The lease will expire in April 2010. We also own 79,500 square feet of office and manufacturing space, including approximately 13 acres of land.

 

Ottawa, Ontario :   We lease 6,000 square feet of office space for a customer support facility at a monthly cost of $10,720. The lease will expire in December 2013.

 

Birmingham, Alabama :   We lease 43,500 square feet of office space, at a monthly cost of $72,293. The lease will expire in March 2010 and $6,382 under a lease that will expire in June 2013. During the third quarter of 2009, the Company completed the exit of the facility. We have recorded a liability of $0.5 million associated with the lease costs of the vacated space recorded as of December 31, 2009.

 

Winter Park, Florida :   We lease 2,000 square feet of office space at a monthly cost of $2,882 per month. The lease expires in October 2010. We vacated this space and relocated the employees to our Daytona Beach, Florida office during the second quarter of 2009. We have recorded a liability of approximately $36,000 associated with the lease costs of the vacated space as of December 31, 2009.

 

Madison, Wisconsin :   In connection with the acquisition of Emageon (see Note E to our Consolidated Financial Statements), we acquired an existing lease obligation which extends through January, 2013. The facility has been subleased to another entity. The net lease obligation has been accrued and at December 31, 2009 the accrued liability was $0.3 million.

 

 

From time to time, in the normal course of business, we are involved with disputes and have various claims made against us. We are a party to various legal proceedings arising out of the ordinary course of our business. Except for the proceedings described below, there are no material proceedings to which we are a party and management is unaware of any material contemplated actions against us.

 

On January 14, 2010, a purported stockholder class action complaint was filed in the Superior Court of Suffolk County, Massachusetts in connection with the announcement of the proposed merger of AMICAS with a subsidiary of Thoma Bravo, LLC (the “Thoma Bravo Merger”), entitled Progress Associates, on behalf of itself and all others similarly situated v. AMICAS, Inc., et al., Civil Action No. 10-0174. The complaint names as defendants the

Company and its directors, as well as Thoma Bravo. The plaintiff purports to represent similarly situated stockholders of AMICAS. The complaint alleges that the Company and its directors breached fiduciary duties owed to its stockholders in connection with the Thoma Bravo Merger. Specifically, the complaint alleges that the process used was unfair because our directors supposedly failed to solicit strategic buyers and deterred potential buyers other than Thoma Bravo; that the per share price of the proposed Thoma Bravo Merger is inadequate; that our directors had a conflict of interest due to the accelerated vesting of their options and payments thereon and rights to indemnification; and that the proxy statement was materially misleading and/or incomplete because it allegedly failed to disclose the consideration that each director would receive from vesting of his options, the amount of severance to be received by Dr. Kahane, the Company’s Chief Executive Officer, the amount of the fee paid to Raymond James & Associates, Inc. (“Raymond James”), our financial advisor, the number of potential acquirers that were financial and those that were strategic, whether companies not contacted by Raymond James expressed an interest in the Company, and the substance of the discussions between Raymond James and Thoma Bravo between October 8, 2009 and October 18, 2009. The complaint further alleges that Thoma Bravo aided and abetted the alleged breach of fiduciary duties by the Company and its directors. The plaintiff seeks certification of a class, damages, costs and fees.

 

On February 1, 2010, a follow-on stockholder class action complaint was filed in the same court entitled Lawrence Mannhardt, on behalf of himself and all others similarly situated v. AMICAS, Inc., et al. , Civil Action 0-0412, making substantially the same allegations and seeking the same relief. On February 12, 2010, the parties appeared before the Court for a hearing on the plaintiffs’ motion for a preliminary injunction seeking to postpone the special meeting of stockholders scheduled for February 19, 2010. Also on February 12, 2010, the Court entered an order consolidating the two purported stockholder class actions. On February 16, 2010 , Merge Healthcare, Inc. (“Merge”) filed an intervenor complaint. On February 17, 2010, Merge filed a motion for a preliminary injunction. The parties appeared before the Court on February 17, 2010. On February 18, 2010, the Court ordered that the special meeting of stockholders scheduled to be held on February 19, 2010 be adjourned pending a full hearing on the merits of the plaintiff’s allegation concerning the adequacy of the Company’s disclosures in its proxy statement. On February 22, 2010, the Company filed an amendment and supplement to its definitive proxy of January 19, 2010. On March 5, 2010, the parties appeared before the Court for a status conference during which the Company informed the Court that the Company had terminated the Thoma Bravo Merger and entered into the Merge Merger Agreement. In light of these developments, the Court indicated that it would prepare an order dissolving the preliminary injunction and dismissing the plaintiffs’ claims as moot. The Court has yet to issue this order. On March 9, 2010 Merge filed a Notice of Dismissal, without prejudice, with respect to its complaint. The Court has scheduled a status conference for March 25, 2010 to address the handling of impounded documents and any application for attorneys fees submitted by plaintiffs. Although the Company intends to oppose any fee application, the Company cannot predict the amount of fees, if any, the Court may award to plaintiffs.

 

 

 

Market Information.   Our trading symbol on The NASDAQ Global Market is “AMCS.” On March 8, 2010, the last reported sale price of our common stock on The NASDAQ Global Market was $6.00 The high and low sale prices of our common stock for each quarter during the last two full fiscal years are set forth below:

 

 

Stock Price Performance Graph.   The graph below compares the cumulative total return on our common stock with the NASDAQ Global Market index (U.S. companies) and Russell 2000 index for the period from December 31, 2004 to December 31, 2009. The comparison assumes that $100 was invested on December 31, 2004 in our common stock and in each of the comparison indices, and assumes reinvestment of dividends, where applicable. We have selected the Russell 2000 index for comparison purposes as we do not believe we can reasonably identify an appropriate peer group index. The comparisons shown in the graph below are based upon historical data and we caution that the stock price performance shown in the graph below is not indicative of, nor intended to forecast, the potential future performance of our common stock. Information used in the graph was obtained from Research Data Group, a source believed to be reliable, but we are not responsible for any errors or omissions in such information.

 

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among AMICAS, Inc, The NASDAQ Composite Index
And The Russell 2000 Index

 

 

*$100 invested on 12/31/04 in stock or index, including reinvestment of dividends.

Fiscal year ending December 31.

 

 

Stockholders.   As of March 9, 2010, there were approximately 1,044 record holders of our common stock.

 

Dividend Policies.   In December 2002, the Company adopted a stockholder rights plan, as amended (the “Rights Plan”) and declared a dividend of one right (the “Right”) on each share of our common stock. The dividend was paid on December 27, 2002, to stockholders of record on December 27, 2002. We currently intend to retain our future earnings for use in the operation and expansion of our business and do not anticipate declaring or paying any cash dividends in the foreseeable future. Any future determination as to the declaration and payment of dividends will be at the discretion of our board of directors and will depend on then existing conditions, including our financial condition, results of operations, contractual restrictions, capital requirements, business prospects and other factors that our board of directors considers relevant.

 

Sales of Unregistered Securities.   We did not sell any unregistered securities during fiscal year 2009.

Issuer Purchases of Equity Securities.   On November 3, 2008, our Board of Directors approved our repurchase of shares of our common stock having an aggregate value of up to $5 million. During the fiscal year ended December 31, 2009, we repurchased 87,766 shares of stock under a Rule 10b5-1 trading plan. In aggregate, we have repurchased 280,903 shares of stock under this plan. The table below sets forth repurchases of our common stock in each of the three months of the fourth quarter of the year ended December 31, 2009.

 

 

 

The following tables set forth selected consolidated financial data of our Company as of and for each of the years in the five-year period ended December 31, 2009 and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.

 

The selected consolidated financial data as of December 31, 2009 and 2008 and for each of the three years in the period ended December 31, 2009 have been derived from our consolidated financial statements which are included elsewhere in this Annual Report on Form 10-K and were audited by BDO Seidman, LLP, an independent registered public accounting firm. The selected consolidated financial data as of December 31, 2007, 2006 and 2005 and for each of the years ended December 31, 2006 and 2005 have been derived from our consolidated financial statements not included herein, which were audited by BDO Seidman, LLP.

 

 

 

 

 

 

The following discussion should be read in conjunction with the other parts of this report, including the audited consolidated financial statements and related notes. Historical results and percentage relationships set forth in the statement of operations, including trends that might appear, are not necessarily indicative of future operations. Please see “Risk Factors — Warning About Forward-Looking Statements and Risk Factors that May Affect Future Results” for a discussion of the uncertainties, risks and assumptions associated with these statements.

Overview

 

We are a leading independent provider of imaging IT solutions in the United States and Canada. AMICAS offers a comprehensive suite of image and information management solutions — from radiology PACS to cardiology PACS, from radiology information systems to cardiovascular information systems, from business intelligence tools to enterprise content management tools, and from revenue cycle management solutions to teleradiology solutions. AMICAS provides a complete, end-to-end solution for imaging centers, ambulatory care facilities, radiology practices and billing services. Solutions include automation support for workflow, imaging, billing and document management. Hospitals are provided with a comprehensive image management solution for cardiology and radiology as well as an enterprise-wide image management infrastructure that complements existing electronic medical record (“EMR”) strategies to enhance clinical, operational, and administrative functions. Complementing the product suites is AMICAS professional services, a set of client-centered professional and consulting services that assist the Company’s customers with a well-planned transition to a digital enterprise.

 

The Company is focused in two primary markets, ambulatory imaging businesses and acute care facilities. The ambulatory imaging business is composed of radiology groups, teleradiology businesses, imaging centers, multi-specialty groups and billing services. Acute care facilities consist primarily of integrated delivery networks (“IDNs”) and hospitals. In the ambulatory imaging market, the Company is focused on delivering an end-to-end solution. Our revenues in this market consist of software license fees and systems, services, maintenance, and EDI revenues. The end-to-end solution is modular and customers can purchase one component or several and add enhancements over time. We believe radiology groups need an automation solution focused on improving their competitiveness, service delivery capabilities, and operating financial performance.

 

In the acute care market, we provide top-flight departmental solutions for radiology and cardiology departments and an enterprise-wide imaging infrastructure that serves as the imaging component for the enterprise electronic medical record. Our departmental solutions for radiology include a web-based PACS that features innovative image management capabilities at what we believe is a low total cost of ownership. Our departmental solutions for cardiology include a multi-modality image management platform, a web-based structured reporting solution, and a hemodynamic monitoring solution. This comprehensive cardiovascular solution offers a complete, end-to-end automation solution for all aspects of a cardiology department.

 

Our enterprise solutions include vendor neutral archive for image management infrastructure. A vendor neutral archive allows healthcare providers to consolidate their medical imaging infrastructure for multiple departmental image management solutions from multiple vendors and multiple locations. AMICAS ECM (Enterprise Content Manager) can be deployed as a standalone medical image archive solution or it can be deployed complete with an integrated viewing platform to allow providers to use AMICAS ECM as the imaging component of their overall EMR strategy.

 

In fiscal year 2009, the Company continued the trend of large multi-site customers in the ambulatory market, where payments have shifted from a license fee in advance to a multi-year financing arrangement. We believe that this shift is due to the need for radiology groups to reduce the up front capital needs typically required in a traditional software sale. Our revenues continue to be impacted as a result of the need to recognize the revenue over extended periods as compared to prior periods. Software discounts have remained relatively constant during fiscal year 2009; however, uncertainty could impact both the level of discounts as well as delay capital purchasing decisions. Revenues in the acute care market consist primarily of software and the associated maintenance and services. We believe the acute care market continues to be driven by the replacement market for existing PACS systems, especially to reduce total cost of ownership and reduce overhead costs. We believe the replacement market represents an attractive opportunity for our solution to improve return on investment and lower costs. However, continued uncertainty could cause potential customers to delay or eliminate capital expenditures when they have an existing system.

 

On April 2, 2009, we completed the acquisition of Emageon. As a result of the acquisition, we expanded our presence in the image and information management market. The combined solution suite includes radiology PACS, cardiology PACS, radiology information systems, cardiology information systems, revenue cycle management systems, referring physician tools, business intelligence tools, and electronic medical record-enabling enterprise content management capabilities. We now have operations in Canada, acquired as part of the Emageon acquisition.

On December 24, 2009, we entered into the Thoma Bravo Merger Agreement, which provides for the acquisition of 100% of the capital stock of AMICAS by an affiliate of Thoma Bravo for $5.35 per share in cash. On February 23, 2010, we received from Merge a proposal to acquire all of the outstanding shares of AMICAS for $6.05 per share in cash, which included an executed definitive commitment letter for $200 million of financing from Morgan Stanley and confirmation that Merge would place a portion of the pre-funded proceeds received from its mezzanine investors into an escrow account directly accessible by AMICAS. After reviewing the proposal, on March 1, 2010, our Board of Directors determined that the proposal constituted a “Superior Proposal” as defined under the Thoma Bravo Merger Agreement. In accordance with the terms of the Thoma Bravo Merger Agreement, we negotiated in good faith with Thoma Bravo during the five business day period to make such adjustments in the terms and conditions of the Thoma Bravo Agreement such that the Merge proposal would cease to constitute a Superior Proposal.

 

On March 4, 2010, Thoma Bravo notified AMICAS that it was not offering a counter proposal and waived the remainder of the notice period. On March 5, 2010, we terminated the Thoma Bravo Merger Agreement and paid a termination fee of approximately $8.6 million, half of which was reimbursed by Merge. Subsequently, we entered into the Merge Merger Agreement, pursuant to which Merge will acquire all of the outstanding shares of AMICAS for $6.05 per share in cash. Under the terms of the Merge Merger Agreement, Merge will commence a cash tender offer for all of AMICAS’ outstanding common stock. Merge will then consummate a merger pursuant to which any untendered shares of AMICAS common stock (other than those shares held by AMICAS’ stockholders who have properly exercised their dissenters’ rights under Section 262 of the Delaware General Corporation Law) will be converted into the right to receive the same $6.05 per share cash price. The tender offer and merger are subject to certain closing conditions, including, but not limited to, a successful tender of a minimum number of shares of AMICAS common stock, antitrust clearance and other regulatory approvals. The merger is expected to close in the second quarter of 2010. There is no financing condition to the consummation of the Acquisition.

 

RESULTS OF OPERATIONS

 

Revenues

 

 

The Company has two primary revenue-generating areas: software license fees and system revenues, and maintenance and services revenues. Software license fees and system revenues are derived from the sale of software product licenses and computer hardware. Maintenance and services revenues come from providing ongoing software and hardware maintenance, EDI and services revenues. Approximately 69%, 67% and 62% of our total revenues were of a recurring nature, such as support and transaction processing services, in 2009, 2008 and 2007, respectively.

 

Maintenance and services revenues

 

There are three primary components of maintenance and services revenues: (1) software and hardware maintenance, (2) EDI revenues, and (3) service revenues.

 

Maintenance and services revenues grew 80.6% or $32.1 million in the fiscal year of 2009 as compared to the fiscal year of 2008. The components of the change are as follows:

 

 

 

Maintenance and services revenues grew 4.5% or $1.7 million in fiscal year 2008 as compared to fiscal year 2007. The components of the change are:

 

 

Software license and systems revenues

 

Software license and system revenues increased 63.6% or $6.7 million in fiscal year 2009 as compared to fiscal year 2008.

 

The increase in software license and systems revenues was due to an increase of $7.9 million of additional revenues from our acquisition of Emageon offset by a decrease of $1.2 million versus the twelve months ended December 31, 2008. The decrease of $1.2 million was primarily attributable to the effect of extended payment terms, which increases the time it takes to convert the software license and systems orders to revenue and the effect of a large system sale that occurred in the first quarter of 2008. In general, the recognition of software license and systems revenues under generally accepted accounting principles can depend on product mix (i.e. whether systems or software are being sold), and whether there are changes in the prevailing terms (such as payment terms) under which our sales are concluded, all of which may vary over time and from quarter to quarter.

 

Software license and system revenues decreased 10.6% or $1.2 million in fiscal year 2008 as compared to fiscal year 2007.

 

The decrease in software license and systems revenues is primarily attributable to the effect of extended payment terms, which increased our time to convert the order to software license and systems revenues by approximately 50%. Software license and systems revenues are highly dependent on our product mix, such as large third party purchases or significant software license volumes to our customers, the level of software discounts, and software revenue recognition policies under generally accepted accounting principles, which can delay revenue recognition.

 

We believe our customers and potential customers continue to look for automation solutions as they try to grow their businesses. Underlying these trends is the public demand for non-invasive diagnostic procedures and a public

interest in health and fitness which we believe will continue to drive growth in the imaging industry. We believe these trends support our end-to-end strategy and are consistent with our goal to approach the market with our AMICAS One Suite product. However we believe that there will be intense competition in this market as demand grows which can threaten our competitive position.

 

Quarterly and annual revenues and related operating results are highly dependent on the volume and timing of the signing of license agreements and product deliveries during each quarter, which are very difficult to forecast. A significant portion of our quarterly sales of software product licenses and computer hardware is concluded in the last month of each quarter, generally with a concentration of our quarterly revenues earned in the final ten business days of that month. Also, our projections for revenues and operating results include significant new sales of product and service offerings, including our AMICAS PACS, AMICAS RIS, AMICAS Financials, RadStream, Dashboards and AMICAS Documents, AMICAS Vericis and AMICAS Hemo. Due to these and other factors, our revenues and operating results are very difficult to forecast.

 

Cost of Revenues

 

 

Cost of maintenance and services revenues

 

Cost of maintenance and services revenues primarily consists of the cost of EDI insurance claims processing, outsourced hardware maintenance, EDI billing and statement printing services, postage, third party consultants and personnel salaries, benefits and other allocated indirect costs related to the delivery of services and support.

 

Cost of maintenance and services revenue for the fiscal year 2009 increased 77.5% or $13.9 million as compared to the fiscal year 2008.

 

 

Cost of maintenance and services revenues increased by $1.2 million to $17.9 million or 7.2% in fiscal year 2008 as compared to fiscal year 2007.

 

 

 

Cost of software license and system sales

 

Cost of software license and system revenues primarily consists of costs incurred to purchase computer hardware, third-party software and other items for resale in connection with sales of new systems, as well as amortization of software product costs.

 

Cost of software licenses and hardware sales increased 139.9% or $6.7 million for the fiscal year 2009 as compared to fiscal year 2008. The increase in the cost of software license and systems revenues was primarily due to the acquisition of Emageon, including $6.7 million of third party hardware and internal manufacturing costs. The increase in third party and internal costs is directly related to the increase in third party software and hardware revenue.

 

Amortization of software increased by $0.6 million or 28.0% in fiscal year 2009 as compared to fiscal year 2008. The increase in amortization is directly related to the acquisition of technology assets from the purchase of Emageon.

 

Cost of software license and system sales as a percentage of software license and system revenues increased to 67.2% in fiscal year 2009 as compared to 45.9% in fiscal year 2008. The increase of approximately 21% is due to the increase in the costs of systems sales related to manufacturing and internal costs for acquired products, which has changed the product mix relative to software revenues.

 

Cost of software license and system sales increased by approximately $0.3 million or 5.9% in fiscal year 2008 as compared to fiscal year 2007. The increase in cost of software license and system sales is attributable to $0.3 million write off of third party costs that were previously capitalized.

 

Amortization of software costs increased by $0.2 million or 12.6% from fiscal year 2008 versus fiscal year 2007 which is related to the purchase of AMICAS Financials, as described below.

 

Cost of software license and system sales as a percentage of software license and system revenues increased to 45.9% in fiscal year 2008 as compared to 38.7% in fiscal year 2007. The increase of approximately 7% is due primarily to the product mix of software revenues versus systems sales.

Operating Expenses

 

 

Selling, general and administrative

 

Selling, general and administrative expenses include fixed and variable compensation and benefits, facilities, travel, communications, bad debt, legal, marketing, insurance, stock-based compensation and other administrative expenses.

 

Selling, general and administrative expenses increased by $5.9 million or 28.6% to $26.8 million in fiscal year 2009 as compared to $20.9 million in fiscal year 2008. This increase was due to the acquisition of Emageon, including additional sales and marketing personnel costs and additional personnel costs in finance and administration.

 

Selling, general and administrative expenses as a percentage of revenue decreased to 30.0% from 41.4% as compared to fiscal year 2008. The decrease in selling, general and administrative expenses as a percentage of revenue is the result of the increased revenue base from the acquisition of Emageon, as the costs to support the organization do not increase proportionally to revenues.

 

Selling, general and administrative expenses decreased by $1.3 million or 5.9% to $20.9 million in fiscal year 2008 as compared to $22.2 million in fiscal year 2007. This decrease was due to primarily to a $0.8 million decrease in personnel salaries and benefits due to reduced headcount and a $0.5 million decrease in stock-based compensation included in general and administrative expenses. Non-personnel related expenses remained consistent with fiscal year 2007.

 

Selling, general and administrative expenses as a percentage of revenue decreased to 41.4% from 44.4% as compared to fiscal year 2007. The decrease in selling and general and administrative expenses as a percentage of revenue is due primarily to the decrease in such expenses of $1.3 million and an increase in revenues.

 

On October 1, 2007, we notified our then President and Chief Operating Officer (“COO”) that the Employment Agreement between our COO and us dated March 28, 2005 (the “Employment Agreement”) would not be renewed. Pursuant to the terms of the Employment Agreement and in connection with the non-renewal by us of that agreement, we and our COO entered into a general release and separation agreement, dated as of October 25, 2007 (the “Separation Agreement”). Pursuant to the Separation Agreement our COO was entitled to receive one year’s salary as a severance payment. In the year ended December 31, 2007, we accrued approximately $0.3 million in general and administrative expenses related to this Separation Agreement. The severance payments per the agreement were paid in fiscal year 2008.

Research and development

 

Research and development expenses include fixed and variable compensation and benefits, facilities, travel, communications, stock-based compensation and other administrative expenses related to our research and development activities.

 

Research and development expense increased from $8.8 million to $15.1 million or 72.2% in fiscal year 2009 as compared to fiscal year 2008. The increase in research and development expense represents operating increases in personnel costs and benefits. The increase in research and development expense is due to increased personnel costs related to the acquisition of Emageon, as there are additional products to develop and support. As a percentage of revenue, research and development expenses were 16.9% of revenues in fiscal year 2009 as compared to 17.4% of revenues in fiscal year 2008.

 

Research and development expense increased from $8.6 million to $8.8 million or 1.5% in fiscal year 2008 as compared to fiscal year 2007. The increase in research and development expense represents operating increases in personnel costs and benefits. The Company continues to invest in research and development to develop new and innovative products and features and enhance the Company’s existing product suite. As a percentage of revenue, research and development expenses were 17.4% of revenues in fiscal year 2008 as compared to 17.3% of revenues in fiscal year 2007, which reflects this continued investment.

 

Acquisition costs

 

We incurred approximately $3.0 million in acquisition related and integration costs in fiscal year 2009. Approximately $2.4 million related to our acquisition of Emageon Inc, and the remaining $0.6 million was incurred in connection with the proposed acquisition by Thoma Bravo announced on December 24, 2009. These costs consisted primarily of legal, accounting, and fees for consulting services.

 

Restructuring costs

 

We incurred restructuring costs of $3.8 million related to our acquisition of Emageon during fiscal year 2009, which included $0.9 million in excess facilities charges, $2.2 million in severance and termination costs, and $0.6 million in disposal of leasehold improvements, furniture and equipment in the sites exited under the restructuring, and $0.1 million of other equipment relocation and storage charges.

 

Amortization of intangibles

 

Amortization increased from $402,000 in the year ended December 31, 2008 to $548,000 or 36.3% in the year ended December 31, 2009. The increase is due to the increased amortization resulting from intangible assets acquired that were acquired as part of the acquisition of Emageon.

 

Amortization decreased from $427,000 in the year ended December 31, 2007 to $402,000 or 5.9% in the year ended December 31, 2008. The decrease is due to the reduction in the amortization of an intangible asset that became fully amortized in November, 2008.

 

During the period ended March 31, 2007, we acquired certain ownership rights to a practice management software application for $2.3 million. We now market this product as AMICAS Financials. AMICAS Financials became commercially available in April 2008, at which point we began amortization of the costs over the estimated life of approximately seven years, which is reflected in the cost of software license and systems revenue. We did not capitalize any internal costs prior to commercial availability as such amounts were immaterial.

 

Impairment

 

We performed our annual goodwill impairment test at September 30, 2009 and determined that the fair value of equity exceeded the carrying value of equity, therefore goodwill was not impaired as of that date.

 

In the fourth quarter of 2008, we incurred $27.5 million of impairment charges of which $27.3 million related to goodwill. We performed our annual goodwill impairment test at September 30, 2008 and determined that the fair value of equity exceeded the carrying value of equity, therefore goodwill was not impaired as of that date.

Subsequent to September 30, 2008, there were certain triggering events that required us to perform an interim goodwill impairment test at December 31, 2008. These triggering events primarily include the duration of the decline of our stock price at a market value below the carrying value of equity from September 30, 2008 through December 31, 2008, and the continued deterioration of the credit markets and the economy in the fourth quarter, which negatively impacts our customers’ ability to obtain financing to purchase our products and services. As a result, we recorded an impairment charge of $27.3 million in the fourth quarter, (see note C to consolidated financial statements). We also incurred a $0.2 million charge related to internal use purchased software that we determined during the fourth quarter will not be utilized.

 

Interest Income (Expense)

 

 

Interest income decreased by approximately $1.4 million or 64.9% in fiscal year 2009 as compared to fiscal year 2008. The decrease in interest income is the result of the decrease in cash and marketable securities as a result of our use of cash to purchase Emageon and lower yields on our balances.

 

Interest income decreased by approximately $1.7 million or 43.5% in fiscal year 2008 as compared to fiscal year 2007. The decrease in interest income is the result of the combination of (i) the decrease in cash and marketable securities as a result of our stock repurchase plan and (ii) lower yields on our investments due to the current economic climate. We attribute approximately $0.8 million of the decline in interest income to the change in cash balances and the remaining $0.9 million due to lower yields.

 

We incurred approximately $37,000 of interest expense in fiscal year 2009 related to leases. We had no interest expense during 2008 or 2007.

 

Income Taxes

 

We recorded an income tax benefit of $1,570,000 from continuing operations in fiscal year 2009. The income tax benefit for the year ended December 31, 2009 is primarily due to the reversal of reserves for uncertain tax positions, and an alternative minimum tax refund.

 

In fiscal year 2008 we recorded an income tax provision of approximately $158,000. The provision decreased versus fiscal year 2007 by approximately $51,000. The income tax provision in fiscal year 2008 is the result of state franchise tax liabilities and accrued interest and penalties associated with uncertain tax positions. We did not record a federal tax provision as we did not have federal taxable income in fiscal year 2008.

 

Management has assessed the recovery of our deferred tax assets of $47.7 million and as a result of this assessment, recorded a valuation allowance of $45.9 million as of December 31, 2009. The valuation allowance, along with deferred tax liabilities of $1.8 million, reduces the net deferred tax asset to zero. A full valuation allowance has been recorded against the net deferred tax asset since management believes it is more likely than not that the deferred tax asset will not be realized.

 

LIQUIDITY AND CAPITAL RESOURCES

 

On December 31, 2009, our cash and cash equivalents and marketable securities were $47.7 million, a decrease of $7.3 million from $55.0 million of cash and cash equivalents and marketable securities at December 31, 2008.

 

Net cash provided by operating activities was $12.0 million in fiscal year 2009 as compared to cash provided by operating activities of $4.4 million in fiscal year 2008. Net cash from operations in fiscal year 2009 included approximately $6.7 million of cash generated from changes in working capital, primarily due to the increases in deferred revenue, and prepaid expense and other current assets. The Company generated approximately $5.3 million

of cash from operations due to; net loss of $4.0 million, adjusted for non-cash items of $2.8 million of amortization, $3.2 million of depreciation, $2.0 million of stock based compensation and $0.3 million of bad debt expense.

 

Investing activities used $12.8 million of cash in fiscal year 2009. We decreased our marketable securities balances by approximately $8.6 million and invested $0.7 million in fixed assets during fiscal year 2009, and used $20.1 million to purchase Emageon.

 

Net cash provided by financing activities was $2.3 million. The primary source of cash was from the exercise of stock options by certain employees.

 

Net cash provided by operating activities was $4.4 million in fiscal year 2008 as compared to cash provided by operating activities of $7.0 million in fiscal year 2007. Net cash from operations in fiscal year 2008 included approximately $2.1 million of cash generated from changes in working capital, primarily an increase of $4.3 million of deferred revenue, offset by a decrease of $2.8 million related to accounts payable. Net loss, after adjusting for non-cash items of $2.2 million of amortization, $1.1 million of depreciation, $27.3 million of goodwill impairment charges, $1.5 million of stock based compensation and $0.1 million of bad debt expense generated approximately $2.4 million of cash from operations. In fiscal year 2008 our product mix included a higher percentage of term deals than in fiscal year 2007.

 

Net cash provided by investing activities provided $18.8 million of cash in fiscal year 2008. We decreased our marketable securities balances by approximately $19.5 million and invested $0.6 million in fixed assets during fiscal year 2008.

 

Net cash used in financing activities was $24.4 million. The primary use of cash related to $24.8 million used to fund our stock repurchase programs which were authorized by our Board of Directors in December 2007 and November 2008. The primary source of cash used to fund these repurchases was the sale of our marketable securities, with the remainder provided by working capital.

 

Our primary source of liquidity is our cash and cash equivalents and marketable securities. We believe our cash and cash equivalents and marketable securities, together with cash provided by operations, will be sufficient to meet our projected cash requirements for at least the next 12 months.

 

Contractual Obligations

 

The following table summarizes the payments due in connection with specific contractual obligations during the periods specified.

 

 

 

 

 

We anticipate capital expenditures for computer software and equipment, other equipment, and leasehold improvements of approximately $1.2 million for 2010.

 

To date, the overall impact of inflation on us has not been material.

 

From time to time, in the normal course of business, we are involved with disputes and have various claims made against us. There are no material proceedings to which we are a party currently pending, and management is unaware of any material contemplated actions against us.

 

As permitted under Delaware law, we have agreements under which we indemnify our executive officers and directors for certain events or occurrences while the officer or director is or was serving at our request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have a director and officer insurance policy that limits our exposure and enables us to recover a portion of any future amounts paid. Given the insurance coverage in effect, we believe the estimated fair value of these indemnification agreements is minimal. We have no liabilities recorded for these agreements as of December 31, 2009.

 

We generally include intellectual property indemnification provisions in our software license agreements. Pursuant to these provisions, we hold harmless and agree to defend the indemnified party, generally our business partners and customers, in connection with certain patent, copyright, trademark and trade secret infringement claims by third parties with respect to our products. The term of the indemnification provisions varies and may be perpetual. In the event an infringement claim against us or an indemnified party is made, generally we, in our sole discretion, agree to do one of the following: (i) procure for the indemnified party the right to continue use of the software, (ii) provide a modification to the software so that its use becomes noninfringing; (iii) replace the software with software which is substantially similar in functionality and performance; or (iv) refund all or the residual value of the software license fees paid by the indemnified party for the infringing software. We believe the estimated fair value of these intellectual property indemnification agreements is minimal. We have no liabilities recorded for these agreements as of December 31, 2009.

 

Critical Accounting Policies

 

The discussion and analysis of our financial condition and results of operations is based on our financial statements and accompanying notes, which we believe have been prepared in conformity with generally accepted accounting principles. The preparation of these financial statements requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates, assumptions and judgments, including those related to revenue recognition, allowances for future returns, discounts and bad debts, tangible and intangible assets, deferred costs, income taxes, restructurings, commitments, contingencies, claims and litigation. We base our judgments and estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. However, our actual results could differ from those estimates.

 

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.

 

Revenue Recognition.   We recognize revenue in accordance in accordance with FASB ASC 605 — Revenue Recognition (originally issued as Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” as amended by SOP 98-9, “Modification of SOP 97-2 with Respect to Certain Transactions,” SOP 81-1 “Accounting for Performance of Construction Type and Certain Performance Type Contracts”, the Securities and Exchange Commission’s Staff Accounting Bulletin 104, “Revenue Recognition in Financial Statements” and EITF 01-14, “Income Statement Characterization of Reimbursements for ’Out-of-Pocket’ Expenses Incurred”). We recognize software license revenues and system (computer hardware) sales upon execution of the sales contract and delivery of the software (off-the-shelf application software) and/or hardware. In all cases, however, the fee must be fixed or determinable, collection of any related receivable must be considered probable, and no significant post-contract

obligations of ours shall be remaining. Otherwise, we defer the sale until all of the requirements for revenue recognition have been satisfied. Maintenance fees for routine client support and unspecified product updates are recognized ratably over the term of the maintenance arrangement.

 

We review all contracts that are offered outside our standard payment terms. We review customer credit history to determine probability of collection and we do not have a history of granting post contract concessions. When there is a history of successfully collecting payments from our customer without making post contract concessions, we recognize revenue upon delivery. In instances where we do not have an established payment history and/or if the payment terms are in excess of twelve months we recognize revenue as payments become due and payable. Our license and service arrangements generally do not require significant customization or modification of our software products to meet specific customer needs. In those limited instances that do require significant modification, including significant changes to our software products’ source code or where there are acceptance criteria or milestone payments, we defer the recognition of software license revenue. In instances where we have determined that services are essential to the functionality, we recognize the services revenues and software license and systems revenues using the percentage of completion method.

 

Most of our sales and licensing contracts involve multiple elements, in which case, we allocate the total value of the customer arrangement to each element based on the vendor specific objective evidence, or VSOE, of its fair value of the respective elements. The residual method is used to determine revenue recognition with respect to a multiple-element arrangement when VSOE of fair value exists for all of the undelivered elements (e.g., implementation, training and maintenance services), but does not exist for one or more of the delivered elements of the contract (e.g., computer software or hardware). VSOE of fair value is determined based upon the price charged when the same element is sold separately. If VSOE of fair value cannot be established for the undelivered element(s) of an arrangement, the total value of the customer arrangement is deferred until the undelivered element(s) is delivered or until VSOE of its fair value is established.

 

Contracts and arrangements with customers may include acceptance provisions, which would give the customer the right to accept or reject the product after it is shipped. If an acceptance provision is included, revenue is recognized upon the customer’s acceptance of the product, which occurs upon the earlier receipt of a written customer acceptance or expiration of the acceptance period. The timing of customer acceptances could materially affect the results of operations during a given period.

 

We recognize revenues using contract accounting if payment of the software license fees is dependent upon the performance of consulting services or the consulting services are otherwise essential to the functionality of the licensed software. In these instances we allocate the contract value to services (maintenance and services revenues) based on list price; which is consistent with our VSOE (defined in previous paragraph) for such services, and the residual to product (software licenses and systems sales) in our Consolidated Statement of Operations. We generally determine the percentage-of-completion by comparing the labor hours incurred to date to the estimated total labor hours required to complete the project. We consider labor hours to be the most reliable, available measure of progress on these projects. Adjustments to estimates to complete are made in the periods in which facts resulting in a change become known. When the estimate indicates that a loss will be incurred, such loss is recorded in the period identified. Significant judgments and estimates are involved in determining the percent complete of each contract. Different assumptions could yield materially different results.

 

Recognition of revenues in conformity with generally accepted accounting principles requires management to make judgments that affect the timing and amount of reported revenues.

 

Cash Equivalents and Marketable Debt Securities.   Cash equivalents consist primarily of money market funds and are classified as available for sale and carried at fair value, which approximates cost.

 

Marketable debt securities consist of high quality debt instruments, primarily U.S. government, municipal and corporate obligations. Investments in corporate obligations are classified as held-to-maturity, as we have the intent and ability to hold them to maturity. Held-to-maturity marketable debt securities are reported at amortized cost. Investments in municipal obligations are classified as available-for-sale and are reported at fair value with unrealized gains and losses reported as other comprehensive income. Marketable debt securities include

held-to-maturity investments with remaining maturities of less than one year as of the balance sheet date and available-for-sale investments that may be sold in the current period or used in current operations.

 

Accounts Receivable.   Our accounts receivable are customer obligations due under normal trade terms carried at their face value, less provisions for bad debts. We evaluate the carrying amount of our accounts receivable on an ongoing basis and establish a valuation allowance based on a number of factors, including specific customer circumstances, historical rate of write-offs and the past due status of the accounts. At the end of each reporting period, the allowance is reviewed and analyzed for adequacy and is often adjusted based on the findings. The allowance is increased through an increase in bad debt expense.

 

Inventories.   Inventories are stated at the lower of cost or market (net realizable value) using the specific identification and first-in, first-out methods and include materials, labor and manufacturing overhead. We periodically review the quantities of inventories on hand and compare these amounts to expected usage of each particular product or product line. We record a charge to cost of revenue for the amount required to reduce the carrying value of inventories to estimated net realizable value. Costs of purchased third-party hardware and software associated with our customer contracts are included as inventories in the consolidated balance sheets and charged to cost of system sales when we receive customer acceptance and all other relevant revenue recognition criteria are met.

 

Long-lived Assets.   We review our long-lived assets, such as property and equipment, and purchased intangible assets that are subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In accordance with FASB ASC 360 — Property Plant and Equipment (which includes what was originally issued as SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”), we periodically review long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of those assets are no longer appropriate. Each impairment test is based on a comparison of the undiscounted cash flows to the recorded carrying value for the asset. If impairment is indicated, the asset is written down to its estimated fair value based on a discounted cash flow analysis. In the fourth quarter of 2008 we recorded a $0.2 million charge related to internal use purchased software that is no longer utilized.

 

Goodwill.   Goodwill represents the excess of cost over the fair value of net tangible and identifiable intangible assets of businesses acquired. We assess the impairment of goodwill and intangible assets with indefinite lives on an annual basis and whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. We would record an impairment charge if such an assessment were to indicate that, more likely than not, the fair value of such assets was less than the carrying value. Judgment is required in determining whether an event has occurred that may impair the value of goodwill or identifiable intangible assets. Factors that could indicate that impairment may exist include significant underperformance relative to plan or long-term projections, significant changes in business strategy, significant negative industry or economic trends or a significant decline in our stock price for a sustained period of time.

 

The first step (defined as “Step 1”) of the goodwill impairment test, used to identify potential impairment, compares the fair value of the equity with its carrying amount, including goodwill. If the fair value of the equity exceeds its carrying amount, goodwill of the reporting unit is considered not impaired, thus the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test shall be performed to measure the amount of impairment loss, if any. We performed a Step 1 test at its annual testing date of September 30, 2009 and determined that the fair value of equity exceeding the carrying value of equity, therefore goodwill was not impaired.

 

Subsequent to September 30, 2008, there were certain triggering events that required us to perform an interim Step 1 test at December 31, 2008. These triggering events primarily include the duration of the decline of our stock price at a market value below the carrying value of equity from September 30, 2008 through December 31, 2008, and the continued deterioration of the credit markets and the economy in the fourth quarter which negatively impacts our customers access to capital to purchase our products and services.

 

At December 31, 2008 we completed an interim Step 1 test utilizing the market approach. The market approach considered the Company’s stock price to calculate the market capitalization of equity to compare to the

carrying value of equity. We selected a 30 day moving average of the market value of equity to compare to the carrying value. Using the market approach, the carrying value of invested capital exceeded the market value by approximately 47%. The interim Step 1 test resulted in the determination that the carrying value of equity exceeded the fair value of equity, thus requiring us to measure the amount of any goodwill impairment by performing the second step of the impairment test.

 

An income approach was used to corroborate the interim Step 1 test. The discounted cash flow method is used to measure the fair value of our equity under the income approach. Determining the fair value using a discounted cash flow method requires us to make significant estimates and assumptions, including long-term projections of cash flows, market conditions and appropriate discount rates. Our judgments are based upon historical experience, current market trends, pipeline for future sales, and other information. While we believe that the estimates and assumptions underlying the valuation methodology are reasonable, different estimates and assumptions could result in a different outcome. In estimating future cash flows, we relied on internally generated projections for a defined time period for sales and operating profits, including capital expenditures, changes in net working capital, and adjustments for non-cash items to arrive at the free cash flow available to invested capital. A terminal value utilizing a constant growth rate of cash flows was used to calculate a terminal value after the explicit projection period. The income approach supported the interim Step 1 test that resulted in the determination that the carrying value of equity exceeded the fair value of equity.

 

The second step (defined as “Step 2”) of the goodwill impairment test, used to measure the amount of impairment loss, compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. The guidance in FASB ASC 350 — Intangibles — Goodwill and Other , (originally issued as SFAS No. 142, “Goodwill and Other Intangible Assets), paragraph 21 was used to estimate the implied fair value of goodwill. “If the carrying amount of the Company’s goodwill exceeds the implied fair value of that goodwill, an impairment loss shall be recognized in an amount equal to that excess. The loss recognized cannot exceed the carrying amount of goodwill. After a goodwill impairment loss is recognized, the adjusted carrying amount of goodwill shall be its new accounting basis.”

 

The implied fair value of goodwill was determined in the same manner as the amount of goodwill recognized in a business combination is determined. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied amount of goodwill. We identified several intangible assets that were valued during this process, including technology, customer relationships, trade names, non-compete agreements, and the Company’s workforce. The allocation process was performed only for purposes of testing goodwill for impairment. The Step 2 test resulted in the impairment of goodwill in an amount equal to its carrying value of $27.3 million as of December 31, 2008.

 

In addition, we performed sensitivity analysis on certain key assumptions in the Step 2 test including the discount rate, customer retention rates and royalty rates. The net book value of our tangible net assets was approximately 91 percent of the fair value of equity. Our tangible net assets were adjusted to reflect the fair value of deferred revenue. In addition, the total tangible and intangible net assets, excluding the assembled workforce, were $68.7 million or 122 percent of the fair value of equity. As a result, the assumptions included in the valuation of intangible assets would need to change significantly to avoid goodwill impairment.

 

Software Development Costs.   We begin capitalizing software development costs, only after establishing commercial and technical feasibility. Annual amortization of these costs represents the greater of the amount computed using (i) the ratio that current gross revenues for the product(s) bear to the total current and anticipated future gross revenues of the product(s), or (ii) the straight-line method over the remaining estimated economic life of the product(s); generally, depending on the nature and success of the product, such deferred costs are amortized over a five- to seven-year period. Amortization commences when the product is made commercially available. No products were made commercially available in 2009. In 2009 and 2008 we did not capitalize any costs related to products as such amounts were immaterial.

 

We evaluate the recoverability of capitalized software based on estimated future gross revenues less the estimated cost of completing the products and of performing maintenance and product support. If our gross revenues turn out to be significantly less than our estimates, the net realizable value of our capitalized software intended for sale would be impaired.

Income Taxes.   We provide for taxes based on current taxable income, and the future tax consequences of temporary differences between the financial reporting and income tax carrying values of our assets and liabilities (deferred income taxes). At each reporting period, management assesses the realizable value of deferred tax assets based on, among other things, estimates of future taxable income, and adjusts the related valuation allowance as necessary. In June 2007, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109,” which is now codified in FASB ASC 740 — Income Taxes . This statement clarifies the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company’s financial statements. It prescribes a recognition threshold of more-likely — than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements. Effective January 1, 2007, we adopted the provisions of ASC 740, and there has been no material effect on the financial statements. As a result, there was no cumulative effect related to the adoption of the guidance in ASC 740.

 

Accounting for Share-Based Payment.   We account for share-based payment in accordance with the guidance in the guidance in FASB ASC 718 — Compensation (originally issued as SFAS 123(R), “Share Based Payment”). Under the fair value recognition provisions of this statement, share-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the requisite service period which is generally the vesting period. Determining the fair value of share-based awards at the grant date requires judgment, including estimating expected dividends, share price volatility and the amount of share-based awards that are expected to be forfeited. If actual results differ significantly from these estimates, share-based compensation expense and our results of operations could be materially impacted.

 

Fair Value.   Effective January 1, 2008, we adopted the guidance in FASB ASC 820 — Fair Value Measurements and Disclosures (originally issued as Statement of Financial Accounting Standards No. 157, “Fair Value Measurements”), which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements required under other accounting pronouncements. FASB ASC 820 clarifies that fair value is an exit price, representing the amount that would be received pursuant to the sale of an asset or paid pursuant to the transfer a liability in an orderly transaction between market participants. It also requires that a fair value measurement reflect the assumptions market participants would use in pricing an asset or liability based on the best information available. Assumptions include the risks inherent in a particular valuation technique (such as a pricing model) and/or the risks inherent in the inputs to the model.

 

Business Combinations.   Effective January 1, 2009, we adopted the new accounting standard regarding business combinations. As codified under ASC 805, this update requires an entity to recognize the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair value on the acquisition date. It further requires that acquisition-related costs be recognized separately from the acquisition and expensed as incurred; that restructuring costs generally be expensed in periods subsequent to the acquisition date; and that changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period be recognized as a component of provision for taxes. The adoption had a material impact on the Company’s 2009 consolidated financial statements as our acquisition of Emageon was accounted for under the guidance of ASC 805.

 

Loss Contingencies.   We are subject to legal proceedings, lawsuits and other claims relating to labor, service and other matters arising in the ordinary course of business. Quarterly, we review the status of each significant matter and assess our potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. Significant judgment is required in both the determination of probability and the determination as to whether an exposure is reasonably estimable. Because of uncertainties related to these matters, accruals are based only on the best information available at the time. As additional information becomes available, we reassess the potential liability related to our pending claims and litigation and may revise our estimates. Such revisions in the estimates of the potential liabilities could have a material impact on our results of operations and financial position.

Recent Accounting Pronouncements

 

Adopted Accounting Pronouncements

 

Effective July 1, 2009, we adopted “FASB Accounting Standards Codification” and the Hierarchy of Generally Accepted Accounting Principles (ASC 105). This standard establishes only two levels of U.S. generally accepted accounting principles (“GAAP”), authoritative and nonauthoritative. The FASB Accounting Standards Codification (the “Codification”) became the source of authoritative, nongovernmental GAAP, except for rules and interpretive releases of the SEC, which are sources of authoritative GAAP for SEC registrants. All other non-grandfathered, non-SEC accounting literature not included in the Codification became nonauthoritative. The Company began using the new guidelines and numbering system prescribed by the Codification when referring to GAAP in the third quarter of fiscal 2009. As the Codification was not intended to change or alter existing GAAP, it did not have any impact on our consolidated financial statements.