| COMPUTER PROGRAMS & SYSTEMS INC ITEM 1A RISK FACTORS Market factors may cause a decline in spending for information technology and services by our current and prospective customers which may result in less demand for our products, lower prices and, consequently, lower revenues and a lower revenue growth rate |
| The purchase of our information system involves a significant financial commitment by our customers |
| At the same time, the healthcare industry faces significant financial pressures that could adversely affect overall spending on healthcare information technology and services |
| For example, the Deficit Reduction Act of 2005 will significantly reduce Medicare and Medicaid reimbursements to hospitals, leaving them less money to invest in infrastructure |
| Moreover, a general economic decline could cause hospitals to reduce or eliminate information technology related spending |
| To the extent spending for healthcare information technology and services declines or increases slower than we anticipate, demand for our products and services, as well as the prices we charge, could be adversely affected |
| Accordingly, we cannot assure you that we will be able to increase or maintain our revenues or our growth rate |
| 18 ______________________________________________________________________ [84]Table of Contents [85]Index to Financial Statements There are a limited number of hospitals in our target market |
| Continued consolidation in the healthcare industry could result in the loss of existing customers, a reduction in our potential customer base and downward pressure on our products’ prices |
| Saturation of this market with our products or our competitors’ products could eventually limit our revenues and growth |
| Furthermore, many healthcare providers have consolidated to create larger healthcare delivery enterprises with greater market power |
| If this consolidation continues, we could lose existing customers and could experience a decrease in the number of potential purchasers of our products and services |
| The loss of existing and potential customers due to industry consolidation could cause our revenue growth rate to decline |
| In addition, larger, consolidated enterprises could have greater bargaining power, which may lead to downward pressure on the prices for our products and services |
| We may experience fluctuations in quarterly financial performance that cause us to fail to meet revenues or earnings expectations |
| Failure to meet these expectations could adversely impact our stock price |
| There is no assurance that consistent quarterly growth in our business will continue |
| Our quarterly revenues may fluctuate and may be difficult to forecast for a variety of reasons |
| For example, prospective customers often take significant time evaluating our system and related services before making a purchase decision |
| Moreover, a prospective customer who has placed an order for our system could decide to cancel that order or postpone installation of the ordered system |
| If a prospective customer delays or cancels a scheduled system installation during any quarter, we may not be able to schedule a substitute system installation during that quarter |
| The amount of revenues that would have been generated from that installation will be postponed or lost |
| The possibility of delays or cancellations of scheduled system installations could cause our quarterly revenues to fluctuate |
| The following factors may also affect demand for our products and services and cause our quarterly revenues to fluctuate: • changes in customer budgets and purchasing priorities; • market acceptance of new products, product enhancements and services from us and our competitors; • product and price competition; and • delay of revenue recognition to future quarters due to an increase in the sale of our remote access ASP services |
| Variations in our quarterly revenues may adversely affect our operating results |
| In each fiscal quarter, our expense levels, operating costs and hiring plans are based on projections of future revenues and are relatively fixed |
| If our actual revenues fall below expectations, our earnings will also likely fail to meet expectations |
| If we fail to meet the revenue or earnings expectations of securities analysts and investors, then the price of our common stock will likely decrease |
| 19 ______________________________________________________________________ [86]Table of Contents [87]Index to Financial Statements Competition with companies that have greater financial, technical and marketing resources than we have could result in loss of customers and/or a lowering of prices for our products, causing a decrease in our revenues and/or market share |
| Our principal competitors are Meditech and HMS Meditech and HMS compete with us directly in our target market of small and midsize hospitals |
| These companies offer products and services that are comparable to our system and are designed to address the needs of community hospitals |
| Our secondary competitors include McKesson Corporation, Quadramed Corp, Cerner Corporation, and Siemens Corporation |
| These companies are significantly larger than we are, and they typically sell their products and services to larger hospitals outside of our target market |
| However, they sometimes compete directly with us |
| We also face competition from providers of practice management systems, general decision support and database systems and other segment-specific applications, as well as from healthcare technology consultants |
| Any of these companies as well as other technology or healthcare companies could decide at any time to specifically target hospitals within our target market |
| A number of existing and potential competitors are more established than we are and have greater name recognition and financial, technical and marketing resources |
| Products of our competitors may have better performance, lower prices and broader market acceptance than our products |
| We expect increased competition that could cause us to lose customers, lower our prices to remain competitive and experience lower revenues, revenue growth and profit margins |
| Our failure to develop new products or enhance current products in response to market demands could adversely impact our competitive position and require substantial capital resources to correct |
| The needs of hospitals in our target market are subject to rapid change due to government regulation, trends in clinical care practices and technological advancements |
| As a result of these changes, our products may quickly become obsolete or less competitive |
| New product introductions and enhancements by our competitors that more effectively or timely respond to changing industry needs may weaken our competitive position |
| We continually redesign and enhance our products to incorporate new technologies and adapt our products to ever-changing hardware and software platforms |
| Often we face difficult choices regarding which new technologies to adopt |
| If we fail to anticipate or respond adequately to technological advancements, or experience significant delays in product development or introduction, our competitive position could be negatively affected |
| Moreover, our failure to offer products acceptable to our target market could require us to make significant capital investments and incur higher operating costs to redesign our products, which could negatively affect our financial condition and operating results |
| Potential regulation of our products as medical devices by the US Food and Drug Administration could increase our costs, delay the introduction of new products and slow our revenue growth |
| The US Food and Drug Administration, or the “FDA,” is likely to become more active in regulating the use of computer software for clinical purposes |
| The FDA has increasingly regulated computer products and computer-assisted products as medical devices under the federal Food, Drug and Cosmetic Act |
| If the FDA regulates any of our products as medical devices, we would likely be required to, among other things: • seek FDA clearance by demonstrating that our product is substantially equivalent to a device already legally marketed, or obtain FDA approval by establishing the safety and effectiveness of our product; • comply with rigorous regulations governing pre-clinical and clinical testing, manufacture, distribution, labeling and promotion of medical devices; and • comply with the Food, Drug and Cosmetic Act’s general controls, including establishment registration, device listing, compliance with good manufacturing practices and reporting of specified device malfunctions and other adverse device events |
| 20 ______________________________________________________________________ [88]Table of Contents [89]Index to Financial Statements We anticipate that some of our products currently in development will be subject to FDA regulation |
| If any of our products fail to comply with FDA requirements, we could face FDA refusal to grant pre-market clearance or approval of products; withdrawal of existing clearances and approvals; fines, injunctions or civil penalties; recalls or product corrections; production suspensions; and criminal prosecution |
| FDA regulation of our products could increase our operating costs, delay or prevent the marketing of new or existing products and adversely affect our revenue growth |
| Governmental regulations relating to patient confidentiality and other matters could increase our costs |
| State and federal laws regulate the confidentiality of patient records and the circumstances under which those records may be released |
| These regulations may require the users of such information to implement security measures |
| Regulations governing electronic health data transmissions are also evolving rapidly, and they are often unclear and difficult to apply |
| In our support agreements with our customers, we agree to update our software applications to comply with applicable federal and state laws |
| While we believe we have developed products that will comply with the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) and other regulatory requirements, new laws, regulations and interpretations could force us to further redesign our products |
| Any such product redesign could consume significant capital, research and development and other resources, which could significantly increase our operating costs |
| Our products assist clinical decision-making and related care by capturing, maintaining and reporting relevant patient data |
| If our products fail to provide accurate and timely information, our customers could assert claims against us that could result in substantial cost to us, harm our reputation in the industry and cause demand for our products to decline |
| We provide products that assist clinical decision-making and related care by capturing, maintaining and reporting relevant patient data |
| Our products could fail or produce inaccurate results due to a variety of reasons, including mechanical error, product flaws, faulty installation and/or human error during the initial data conversion |
| If our products fail to provide accurate and timely information, customers and/or patients could sue us to hold us responsible for losses they incur from these errors |
| These lawsuits, regardless of merit or outcome, could result in substantial cost to us, divert management’s attention from operations and decrease market acceptance of our products |
| We attempt to limit by contract our liability for damages arising from negligence, errors or mistakes |
| Despite this precaution, such contract provisions may not be enforceable or may not otherwise protect us from liability for damages |
| We maintain general liability insurance coverage, including coverage for errors or omissions |
| However, this coverage may not be sufficient to cover one or more large claims against us or otherwise continue to be available on terms acceptable to us |
| In addition, the insurer could disclaim coverage as to any future claim |
| 21 ______________________________________________________________________ [90]Table of Contents [91]Index to Financial Statements Breaches of security in our system could result in customer claims against us and harm to our reputation causing us to incur expenses and/or lose customers |
| We have included security features in our systems that are intended to protect the privacy and integrity of patient data |
| Despite the existence of these security features, our system may experience break-ins and similar disruptive problems that could jeopardize the security of information stored in and transmitted through the computer networks of our customers |
| Because of the sensitivity of medical information, customers could sue us for breaches of security involving our system |
| Also, actual or perceived security breaches in our system could harm the market perception of our products which could cause us to lose existing and prospective customers |
| New products that we introduce or enhancements to our existing products may contain undetected errors or problems that could affect customer satisfaction and cause a decrease in revenues |
| Highly complex software products such as ours sometimes contain undetected errors or failures when first introduced or when updates and new versions are released |
| Tests of our products may not detect bugs or errors because it is difficult to simulate our customers’ wide variety of computing environments |
| Despite extensive testing, from time to time we have discovered defects or errors in our products |
| Defects or errors discovered in our products could cause delays in product introductions and shipments, result in increased costs and diversion of development resources, require design modifications, decrease market acceptance or customer satisfaction with our products, cause a loss of revenue, result in legal actions by our customers and cause increased insurance costs |
| Our facilities are located in an area vulnerable to hurricanes and tropical storms, and the occurrence of a severe hurricane, similar storm or other natural disaster could cause damage to our facilities and equipment, which could require us to cease or limit our operations |
| All of our facilities and virtually all of our employees are situated on one campus in Mobile, Alabama, which is located on the coast of the Gulf of Mexico |
| Our facilities are vulnerable to significant damage or destruction from hurricanes and tropical storms |
| We are also vulnerable to damage from other types of disasters, including tornadoes, fires, floods and similar events |
| If any disaster were to occur, our ability to conduct business at our facilities could be seriously impaired or completely destroyed |
| This would have adverse consequences for our customers who depend on us for system support or outsourcing services |
| This would have potentially devastating consequences to those customers |
| Although we have an emergency recovery plan, there can be no assurance that this plan will effectively prevent the interruption of our business due to a natural disaster |
| Furthermore, the insurance we maintain may not be adequate to cover our losses resulting from any natural disaster or other business interruption |
| Interruptions in our power supply and/or telecommunications capabilities could disrupt our operations, cause us to lose revenues and/or increase our expenses |
| We currently have backup generators to be used as alternative sources of power in the event of a loss of power to our facilities |
| If these generators were to fail during any power outage, we would be temporarily unable to continue operations at our facilities |
| This would have adverse consequences for our customers who depend on us for system support and outsourcing services |
| Any such interruption in operations at our facilities could damage our reputation, harm our ability to retain existing customers and obtain new customers, and could result in lost revenue and increased insurance and other operating costs |
| We also have customers for whom we store and maintain computer servers containing critical patient and administrative data |
| Those customers access this data remotely through telecommunications lines |
| If our power generators fail during any power outage or if our telecommunications lines are severed or impaired for any reason, those customers would be unable to access their mission critical data causing 22 ______________________________________________________________________ [92]Table of Contents [93]Index to Financial Statements an interruption in their operations |
| In such event our remote access customers and/or their patients could seek to hold us responsible for any losses |
| We would also potentially lose those customers, and our reputation could be harmed |
| If we are unable to attract and retain qualified customer service and support personnel our business and operating results will suffer |
| Our customer service and support is a key component of our business |
| Most of our hospital customers have small information technology staffs, and they depend on us to service and support their systems |
| Future difficulty in attracting, training and retaining capable customer service and support personnel could cause a decrease in the overall quality of our customer service and support |
| That decrease would have a negative effect on customer satisfaction which could cause us to lose existing customers and could have an adverse effect on our new customer sales |
| The loss of customers due to inadequate customer service and support would negatively impact our ability to continue to grow our business |
| We do not have employment or non-competition agreements with our key personnel, and their departure could harm our future success |
| Our future success depends to a significant extent on the leadership and performance of our chief executive officer, chief operating officer and other executive officers |
| We do not have employment or non-competition agreements with any of our executive officers |
| Therefore, they may terminate their employment with us at any time and may compete against us |
| The loss of the services of any of our executive officers could have a material adverse effect on our business, financial condition and results of operations |
| We have limited protection of our intellectual property and, if we fail to adequately protect our intellectual property, we may not be able to compete effectively |
| We consider some aspects of our internal operations, products and documentation to be proprietary |
| To some extent we have relied on a combination of confidentiality provisions in our customer agreements, copyright, trademark and trade secret laws and other measures to protect our intellectual property |
| To date, however, we have not filed any patent applications to protect our proprietary software products |
| In addition, existing copyright laws afford only limited protection |
| Although we attempt to control access to our intellectual property, unauthorized persons may attempt to copy or otherwise use our intellectual property |
| Monitoring unauthorized use of our intellectual property is difficult, and the steps we have taken may not prevent unauthorized use |
| If our competitors gain access to our intellectual property, our competitive position in the industry could be damaged |
| An inability to compete effectively could cause us to lose existing and potential customers and experience lower revenues, revenue growth and profit margins |
| In the event our products infringe on the intellectual property rights of third-parties, our business may suffer if we are sued for infringement or if we cannot obtain licenses to these rights on commercially acceptable terms |
| Others may sue us alleging infringement of their intellectual property rights |
| Many participants in the technology industry have an increasing number of patents and patent applications and have frequently demonstrated a readiness to take legal action based on allegations of patent and other intellectual property infringement |
| Further, as the number and functionality of our products increase, we believe we may become increasingly subject to the risk of infringement claims |
| If infringement claims are brought against 23 ______________________________________________________________________ [94]Table of Contents [95]Index to Financial Statements us, these assertions could distract management |
| We may have to spend a significant amount of money and time to defend or settle those claims |
| If we were found to infringe on the intellectual property rights of others, we could be forced to pay significant license fees or damages for infringement |
| If we were unable to obtain licenses to these rights on commercially acceptable terms, we would be required to discontinue the sale of our products that contain the infringing technology |
| Our customers would also be required to discontinue the use of those products |
| We are unable to insure against this risk on an economically feasible basis |
| Even if we were to prevail in an infringement lawsuit, the accompanying publicity could adversely impact the demand for our system |
| Under some circumstances, we agree to indemnify our customers for some types of infringement claims that may arise from the use of our products |