| ECLIPSYS CORP Item 1A Risk Factors Many risks affect our business |
| These risks include, but are not limited to, those described below, each of which may be relevant to decisions regarding ownership of our stock |
| We have attempted to organize the description of these risks into logical groupings to enhance readability, but many of the risks interrelate or could be grouped in other ways, so no special significance should be attributed to these groupings |
| Any of these risks could have a significant adverse effect on our business, financial condition or results of operations |
| Risks relating to development and operation of our software Since October 2003, we have worked to overcome the effects of technical issues we experienced at that time, and the success of our recent software releases, particularly Sunrise Clinical Manager 4dtta5 XA, is critical |
| In October 2003, we announced the existence of response time issues within some components of the version of our next-generation core clinical software that we were developing at that time |
| We concluded that this was attributable to the technical design of the software, which did not adequately support the throughput required in the highly interactive patient care environment |
| These issues harmed our reputation in the marketplace and set back our software development plans |
| In addition, they resulted in significant expense associated with re-development and warranty claims |
| Our 2003 operating results include a dlra1dtta2 million write-down of capitalized software development costs for some of our software components, and to date we have recorded provisions related to warranty costs of dlra4dtta6 million |
| We still have warranty and related issues with clients associated with the October 2003 problem |
| Our sales bookings, market position, and financial performance have suffered as a result |
| We took steps to address these issues, and our subsequent releases of Sunrise Clinical Manager 3dtta5 XA (3dtta5) in June 2004 and Sunrise Clinical Manager 4dtta0 XA (4dtta0) in March 2005 to date have not manifested these same throughput shortcomings |
| Combined, these versions have been installed in approximately 60 locations; we believe they have performed well and achieved market acceptance |
| However, they are still relatively recent releases and issues may appear in the future |
| Due to our recent history, the marketplace can be expected to be particularly sensitive to any future technical issues we may encounter with our software, so any serious issues associated with 3dtta5 or 4dtta0 that may emerge could seriously impair our reputation, sales, client relationships and results of operations |
| We believe that Sunrise Clinical Manager 4dtta5 XA (4dtta5) which we released in January 2006 largely completes the development objectives that we had envisioned before October 2003 |
| Many clients, investors and market observers have anticipated the 4dtta5 release as an important milestone in the evolution of our software offering and our market position |
| However, 4dtta5 has not yet been widely implemented in clinical environments, so it is too early to assess its operational performance |
| It is an ambitious software release that incorporates a large number of new features and functions and was completed relatively quickly |
| As is typical with new software releases in general, 4dtta5 may require additional work to address issues that may be discovered as the software comes into use in our client base |
| If these issues are significant, our reputation, sales, client relationships and results of operations could be significantly impaired |
| Our software may not operate properly, which could damage our reputation and impair our sales |
| Software development is time consuming, expensive and complex |
| Unforeseen difficulties can arise |
| We may encounter technical obstacles, and it is possible that we could discover additional problems that prevent our software from operating properly |
| If our software contains errors or does not function consistent with product specifications or client expectations, clients could assert liability claims against us and/or attempt to cancel their contracts with us |
| It is also possible that future releases of our software, which would typically include additional features for our software, may be delayed |
| Our software development efforts may not meet the needs of our clients, which could adversely affect our results of operations |
| We continuously strive to develop new software, and improve our existing software to add new features and functionality |
| We schedule and prioritize these development efforts according to a variety of factors, including our perceptions of market trends, client requirements, and resource availability |
| Our software is complex and requires a significant investment of time and resources to develop, test and introduce into use |
| Sometimes this takes longer than we expect |
| Sometimes we encounter unanticipated difficulties that require us to re-direct or scale-back our efforts |
| Sometimes we change our plans in response to changes in client requirements, market demands, resource availability, regulatory requirements, or other factors |
| All of this can result in acceleration of some initiatives and delay of others |
| If we make the wrong choices or do not manage our development efforts well, we may fail to produce software that responds appropriately to our clients’ needs or fails to meet client expectations regarding new or enhanced features and functionality |
| If we fail to deliver software within the timeframes and with the features and functionality as described in our product specifications, we could be subject to significant contractual damages |
| Market changes or mistaken development decisions could decrease the demand for our software, which could harm our business and decrease our revenues |
| The healthcare information technology market is characterized by rapidly changing technologies, evolving industry standards and new software introductions and enhancements that may render existing software obsolete or less competitive |
| Our position in the market could erode rapidly due to the development of regulatory or industry standards that our software may not fully meet, or due to changes in the features and functions of competing software, as well as the pricing models for such software |
| Our future success will depend in part upon our ability to enhance our existing software and services, and to develop and introduce competing new software and services that are appropriately priced to meet changing client and market requirements |
| The process of developing software and services such as those we offer is extremely complex and is expected to become more complex and expensive in the future as new technologies are introduced |
| As we evolve our offering in an attempt to anticipate and meet market demand, clients and potential clients may find our software and services less appealing |
| If software development for the healthcare information technology market becomes significantly more expensive due to changes in regulatory requirements or healthcare industry practices, or other factors, we may find ourselves at a disadvantage to larger competitors with more financial resources to devote to development |
| If we are unable to enhance our existing software or develop new software to meet changing client requirements, demand for our software could suffer |
| 7 _________________________________________________________________ [8]Table of Contents Our software strategy is dependent on the continued development and support by Microsoft of its |
| NET Framework and other technologies |
| Our software strategy is substantially dependent upon Microsoft’s |
| NET Framework and other Microsoft technologies |
| NET Framework, in particular, is a relatively new and evolving technology |
| If Microsoft were to cease actively supporting |
| NET or other technologies, fail to update and enhance them to keep pace with changing industry standards, encounter technical difficulties in the continuing development of these technologies or make them unavailable to us, we could be required to invest significant resources in re-engineering our software |
| This could lead to lost or delayed sales, unanticipated development expenses and harm to our reputation, and would cause our financial results and business to suffer |
| Any failure by us to protect our intellectual property, or any misappropriation of it, could enable our competitors to market software with similar features, which could reduce demand for our software |
| We are dependent upon our proprietary information and technology |
| Our means of protecting our proprietary rights may not be adequate to prevent misappropriation |
| The laws of some foreign countries may not protect our proprietary rights as fully as do the laws of the United States |
| Also, despite the steps we have taken to protect our proprietary rights, it may be possible for unauthorized third parties to copy aspects of our software, reverse engineer our software or otherwise obtain and use information that we regard as proprietary |
| In some limited instances, clients can access source-code versions of our software, subject to contractual limitations on the permitted use of the source code |
| Furthermore, it may be possible for our competitors to copy or gain access to our content |
| Although our license agreements with clients attempt to prevent misuse of the source code or trade secrets, the possession of our source code or trade secrets by third parties increases the ease and likelihood of potential misappropriation of our software |
| Furthermore, others could independently develop technologies similar or superior to our technology or design around our proprietary rights |
| Failure of security features of our software could expose us to significant expense and reputational harm |
| Clients use our systems to store and transmit highly confidential patient health information |
| Because of the sensitivity of this information, security features of our software are very important |
| If, notwithstanding our efforts, our software security features do not function properly, or client systems using our software are compromised, we could face damages for contract breach, penalties for violation of applicable laws or regulations, significant costs for remediation and re-engineering to prevent future occurrences, and serious harm to our reputation |
| Risks related to sales and implementation of our software The length of our sales and implementation cycles may adversely affect our future operating results |
| We have experienced long sales and implementation cycles |
| How and when to implement, replace, expand or substantially modify an information system, or modify or add business processes, are major decisions for hospitals, our target client market |
| Furthermore, our software generally requires significant capital expenditures by our clients |
| The sales cycle for our software ranges from 6 to 18 months or more from initial contact to contract execution |
| Our implementation cycle has generally ranged from 6 to 36 months from contract execution to completion of implementation |
| During the sales and implementation cycles, we will expend substantial time, effort and resources preparing contract proposals, negotiating the contract and implementing the software |
| We may not realize any revenues to offset these expenditures and, if we do, accounting principles may not allow us to recognize the revenues during corresponding periods |
| Additionally, any decision by our clients to delay purchasing or implementing our software may adversely affect our revenues |
| We may experience implementation delays that could harm our reputation and violate contractual commitments |
| Some of our software is complex and requires a lengthy and expensive implementation process |
| Each client’s situation is different, and unanticipated difficulties and delays may arise as a result of failures by us or the client to meet our respective implementation responsibilities |
| Because of the complexity of the implementation process, delays are sometimes difficult to attribute solely to us or the client |
| Implementation delays could motivate clients to delay payments or attempt to cancel their contracts with us or seek other remedies from us |
| Any inability or perceived inability to implement consistent with a client’s schedule may be a competitive disadvantage for us as we pursue new business |
| Implementation also requires our clients to make a substantial commitment of their own time and resources and to make significant organizational and process changes, and if our clients are unable to fulfill their implementation responsibilities in a timely fashion our projects may be delayed or become less profitable |
| Implementation costs may exceed expectations, which can negatively affect our operating results |
| Each client’s circumstances may include unforeseen issues that make it more difficult or costly than anticipated to implement our software |
| We may fail to project, price or manage our implementation services correctly |
| If we do not have sufficient qualified personnel to fulfill our implementation commitments in a timely fashion, related revenue may be delayed, and if we must supplement our capabilities with expensive third-party consultants, our costs will increase |
| Risks related to our outsourcing services Various risks could interrupt clients’ access to their data residing in our service center, exposing us to significant costs |
| We provide remote hosting services that involve running our software and third- party vendor’s software for clients in our Technology Solutions Center (TSC) |
| The ability to access the systems and the data the TSC hosts and supports on demand is critical to our clients |
| Our operations and facilities are vulnerable to interruption and/or damage from a number of sources, many of which are beyond our control, including, without limitation: (i) power loss and telecommunications failures; (ii) fire, flood, hurricane and other natural disasters; (iii) software and hardware errors, failures or crashes, and (iv) computer viruses, hacking and similar disruptive problems |
| We attempt to mitigate these risk through various means including redundant infrastructure, disaster recovery plans, separate test systems and change control and system security measures, but our precautions may not protect against all problems |
| If clients’ access is interrupted because of problems in the operation of our facilities, we could be exposed to significant claims by clients or their patients, particularly if the access interruption is associated with problems in the timely delivery of medical care |
| We must maintain disaster recovery and business continuity plans that rely upon third-party providers of related services, and if those vendors fail us at a time that our center is not operating correctly, we could incur a loss of revenue and liability for failure to fulfill our contractual service commitments |
| Any significant instances of system downtime could negatively affect our reputation and ability to sell our remote hosting services |
| 8 _________________________________________________________________ [9]Table of Contents Any breach of confidentiality of client or patient data in our service center could expose us to significant expense and reputational harm |
| We must maintain facility and systems security measures to preserve the confidentiality of data belonging to our clients and their patients that resides on computer equipment in our TSC Notwithstanding the efforts we undertake to protect data, our measures can be vulnerable to infiltration as well as unintentional lapse, and if confidential information is compromised we could face damages for contract breach, penalties for violation of applicable laws or regulations, significant costs for remediation and re-engineering to prevent future occurrences, and serious harm to our reputation |
| Recruiting challenges and higher than anticipated costs in outsourcing our client’s IT operations may adversely affect our profitability |
| We provide outsourcing services that involve operating clients’ IT departments using our employees |
| At the initiation of these relationships, clients often require us to hire, at substantially the same compensation, the entire IT staff that had been performing the services we take on |
| In these circumstances our costs may be higher than we target unless and until we are able to transition the workforce, methods and systems to a more scalable model |
| Various factors can make this difficult, including geographic dispersion of client facilities and variation in client needs, IT environments, and system configurations |
| Also, under some circumstances we may incur unanticipated costs as a successor employer by inheriting unforeseen liabilities that the client had to these employees |
| Further, facilities management contracts require us to provide the IT services specified by contract, and in some places it can be difficult to recruit qualified IT personnel |
| Changes in circumstances or failure to assess the client’s environment and scope our services accurately can mean we must hire more staff than we anticipated in order to meet our responsibilities |
| If we have to increase salaries or relocate personnel, or hire more people than we anticipated, our costs may increase under fixed fee contracts |
| Inability to obtain consents needed from third parties could impair our ability to provide remote outsourcing services |
| We and our clients need consent from some third-party software providers as a condition to running their software in our data center, or to allowing our employees who work in client locations under facilities management arrangements to have access to their software |
| Vendors’ refusal to give such consents, or insistence upon unreasonable conditions to such consents, could reduce our revenue opportunities and make our outsourcing services less viable for some clients |
| Risks related to the healthcare IT industry and market We operate in an intensely competitive market that includes companies that have greater financial, technical and marketing resources than we do |
| We face intense competition in the marketplace |
| We are confronted by rapidly changing technology, evolving user needs and the frequent introduction of new software to meet the needs of our current and future clients |
| Our principal competitors in our software business include Cerner Corporation, Epic Systems Corporation, Meditech, GE Medical Systems (which recently acquired IDX Systems Corporation, formerly a separate competitor), McKesson Corporation, QuadraMed Corporation and Siemens AG Other software competitors include providers of practice management, general decision support and database systems, as well as segment-specific applications and healthcare technology consultants |
| Our services business competes with large consulting firms such as Deloitte & Touche and Cap Gemini, as well as independent providers of technology implementation and other services |
| Our outsourcing business competes with large national providers of technology solutions such as International Business Machines Corporation (IBM), Computer Sciences Corp |
| (CSC), Perot Systems Corporation, as well as smaller firms |
| Several of our existing and potential competitors are better established, benefit from greater name recognition and have significantly more financial, technical and marketing resources than we do |
| Some competitors, particularly those with a more diversified revenue base or that are privately held, may have greater flexibility than we do to compete aggressively on the basis of price |
| We expect that competition will continue to increase, which could lead to a loss of market share or pressure on our prices and could make it more difficult to grow our business profitably |
| The principal factors that affect competition within our market include software functionality, performance, flexibility and features, use of open industry standards, speed and quality of implementation and client service and support, company reputation, price and total cost of ownership |
| We anticipate that competition will increase as a result of continued consolidation in both the information technology and healthcare industries |
| We expect large integrated technology companies to become more active in our markets, both through acquisition and internal investment |
| There is a finite number of hospitals and other healthcare providers in our target market |
| As costs fall, technology improves, and market factors continue to compel investment by healthcare organizations in software and services like ours, market saturation may change the competitive landscape in favor of larger competitors with greater scale |
| Clients that use our legacy software are vulnerable to competition |
| A significant part of our revenue comes from relatively high-margin legacy software that was installed by our clients many years ago |
| We attempt to convert these clients to our newer generation software, but such conversions require significant investments of time and resources by clients |
| This reduces our advantage as the incumbent vendor and has allowed our competitors to target these clients, with some success |
| If we are not successful in retaining a large portion of these clients by continuing to support legacy software – which is increasingly expensive to maintain – or by converting them to our newer software, our results of operations will be negatively affected |
| The healthcare industry faces financial constraints that could adversely affect the demand for our software and services |
| The healthcare industry faces significant financial constraints |
| For example, the shift to managed healthcare in the 1990’s put pressure on healthcare organizations to reduce costs, and the Balanced Budget Act of 1997 dramatically reduced Medicare reimbursement to healthcare organizations |
| Our software often involves a significant financial commitment by our clients |
| Our ability to grow our business is largely dependent on our clients’ information technology budgets |
| If healthcare information technology spending declines or increases more slowly than we anticipate, demand for our software could be adversely affected |
| Healthcare industry consolidation could impose pressure on our software prices, reduce our potential client base and reduce demand for our software |
| Many hospitals have consolidated to create larger healthcare enterprises with greater market power |
| If this consolidation trend continues, it could reduce the size of our target market and give the resulting enterprises greater bargaining power, which may lead to erosion of the prices for our software |
| In addition, when hospitals combine they often consolidate infrastructure including IT systems, and acquisition of our clients could erode our revenue base |
| 9 _________________________________________________________________ [10]Table of Contents Potential changes in standards applicable to our software could require us to incur substantial additional development costs |
| Integration and interoperability of the software and systems provided by various vendors are important issues in the healthcare industry |
| Market forces or regulatory authorities could cause emergence of software standards applicable to us, and if our software is not consistent with those standards we could be forced to incur substantial additional development costs to conform |
| If our software is not consistent with emerging standards, our market position and sales could be impaired |
| Risks related to our operating results, accounting controls and finances We have a history of operating losses and we cannot predict future profitability |
| We had a profit of dlra485cmam000 in 2005 although we had a loss from operations of dlra2dtta6 million |
| We had a net loss of dlra32dtta6 million for the year ended December 31, 2004 |
| In 2001, we had net income of dlra4dtta4 million, although we had a loss from operations of dlra1dtta6 million |
| It is not certain that we will remain profitable, or that our profitability will increase |
| We may incur net losses in the future |
| We have experienced significant variations in revenues and operating results from quarter to quarter |
| Our operating results may continue to fluctuate due to a number of factors, including: · the performance of our software and our ability to promptly and efficiently address software performance shortcomings or warranty issues; · the cost, timeliness and outcomes of our software development and implementation efforts; · the timing, size and complexity of our software sales and implementations; · overall demand for healthcare information technology; · the financial condition of our clients and potential clients; · market acceptance of new services, software and software enhancements by us and our competitors; · client decisions regarding renewal of their respective contracts; · software and price competition; · the relative proportions of revenues we derive from software, services and hardware; · changes in our operating expenses; · the timing and size of future acquisitions; · personnel changes; · significant judgments and estimates made by management in the application of generally accepted accounting principles; · healthcare reform measures and healthcare regulation in general; and · fluctuations in general economic and financial market conditions, including interest rates |
| It is difficult to predict the timing of revenues that we receive from software sales, because the sales cycle can vary depending upon several factors |
| These include the size and terms of the transaction, the changing business plans of the client, the effectiveness of the client’s management, general economic conditions and the regulatory environment |
| In addition, the timing of our revenue recognition could vary considerably depending upon whether our clients license our software under our subscription model or our traditional licensing arrangements |
| Because a significant percentage of our expenses are relatively fixed, a variation in the timing of sales and implementations could cause significant variations in operating results from quarter to quarter |
| We believe that period-to-period comparisons of our historical results of operations are not necessarily meaningful |
| Investors should not rely on these comparisons as indicators of future performance |
| Early termination of client contracts could adversely affect results of operations |
| Client contracts can change or terminate early for a variety of reasons |
| Change of control, financial issues, or other changes in client circumstances may cause us or the client to seek to modify or terminate a contract |
| Further, either we or the client may generally terminate a contract for material uncured breach by the other |
| If we breach a contract, we may be required to refund money previously paid to us by the client, or to pay other damages |
| Even if we have not breached, we may deal with various situations from time to time for the reasons described above which may result in the amendment of a contract |
| These steps can result in significant current period charges and/or reductions in future revenue |
| Because in many cases we recognize revenues for our software monthly over the term of a client contract, downturns or upturns in sales will not be fully reflected in our operating results until future periods |
| We recognize a significant portion of our revenues from clients monthly over the terms of their agreements, which are typically 5-7 years and can be up to 10 years |
| As a result, much of the revenue that we report each quarter is attributable to agreements executed during prior quarters |
| Consequently, a decline in sales, client renewals, or market acceptance of our software in one quarter will not necessarily be reflected in lower revenues in that quarter, and may negatively affect our revenues and profitability in future quarters |
| In addition, we may be unable to adjust our cost structure to compensate for these reduced revenues |
| This monthly revenue recognition also makes it difficult for us to rapidly increase our revenues through additional sales in any period, as a significant portion of revenues from new clients must generally be recognized over the applicable agreement term |
| Payment defaults by large customers could have significant negative impact on our liquidity and overall financial condition |
| During the fiscal year ended December 31, 2005, approximately 40dtta2 % of our revenues were attributable to our 20 largest clients |
| In addition, approximately 51dtta7prca of our accounts receivable as of December 31, 2005 were attributable to 20 clients |
| Significant payment defaults by these clients could have a significant negative impact on our liquidity and overall financial condition |
| A significant portion of our assets consists of intangible assets, including capitalized development costs, goodwill and other intangibles acquired in connection with acquisitions |
| Current accounting standards require us to evaluate goodwill on an annual basis and other intangibles if certain triggering events occur, and adjust the carrying value of these assets to net realizable value when such testing reveals impairment of the assets |
| Various factors, including regulatory or competitive changes, could affect the value of our intangible assets |
| If we are required to write-down the value of our intangible assets due to impairment, our reported expenses will increase, resulting in a corresponding decrease in our reported profit |
| Failure to maintain effective internal controls could adversely affect our operating results and the market price of our common stock |
| Section 404 of the Sarbanes-Oxley Act of 2002 requires that we maintain internal control over financial reporting that meets applicable standards |
| If we fail to maintain effective internal controls and procedures in accordance with the requirements of Section 404, as such standards may be modified, supplemented or amended, we may be required to disclose our deficiencies |
| If we are unable, or are perceived as unable, to produce reliable financial reports due to internal controls deficiencies, investors could lose confidence in our reported financial information and our operating results and the market price of our common stock could be adversely affected |
| Adoption of FAS 123R will increase our expenses and have a significant effect on our reported profit |
| In 2006 and beyond, recorded expenses will increase as a result of our adoption of FAS 123R, which requires us to record expense associated with stock options based upon their fair value at the date of grant |
| If we had adopted this methodology we would have recorded stock option related expense of dlra10dtta7 million, dlra9dtta6 million and dlra16dtta2 million in 2005, 2004 and 2003, respectively, using the Black-Scholes valuation model |
| Actual amounts recorded in the future will vary depending upon the number of options actually granted, the fair market value at the date of grant, and other variables affecting the calculation |
| Inability to obtain additional financing could limit our ability to conduct necessary development activities and make strategic investments |
| While our available cash and cash equivalents and the cash we anticipate generating from operations appear at this time to be adequate to meet our foreseeable needs, we could incur significant expenses as a result of unanticipated events in our business or competitive, regulatory, or other changes in our market |
| As a result, we may in the future need to obtain additional financing |
| If additional financing is not available on acceptable terms, we may not be able to respond adequately to these changes, which could adversely affect our operating results and the market price of our common stock |
| Risk of liability to third parties Our software and content are used to assist clinical decision-making and provide information about patient medical histories and treatment plans |
| If our software fails to provide accurate and timely information or is associated with faulty clinical decisions or treatment, clients, clinicians or their patients could assert claims against us that could result in substantial cost to us, harm our reputation in the industry and cause demand for our software to decline |
| We provide software and content that provides practice guidelines and potential treatment methodolgies, and other information and tools for use in clinical decision-making, provides access to patient medical histories and assists in creating patient treatment plans |
| If our software fails to provide accurate and timely information, or if our content or any other element of our software is associated with faulty clinical decisions or treatment, we could have liability to clients, clinicians or patients |
| The assertion of such claims, whether or not valid and ensuing litigation, regardless of its outcome, could result in substantial cost to us, divert management’s attention from operations and decrease market acceptance of our software |
| We attempt to limit by contract our liability for damages and to require that our clients assume responsibility for medical care and approve all system rules and protocols |
| Despite these precautions, the allocations of responsibility and limitations of liability set forth in our contracts may not be enforceable, may not be binding upon patients, or may not otherwise protect us from liability for damages |
| We maintain general liability and errors and omissions insurance coverage, but this coverage may not continue to be available on acceptable terms or may not be available in sufficient amounts to cover one or more large claims against us |
| In addition, the insurer might disclaim coverage as to any future claim |
| Complex software such as ours may contain errors or failures that are not detected until after the software is introduced or updates and new versions are released |
| It is challenging for us to envision and test our software for all potential problems because it is difficult to simulate the wide variety of computing environments or treatment methodologies that our clients may deploy or rely upon |
| Despite extensive testing by us and clients, from time to time we have discovered defects or errors in our software, and such defects or errors can be expected to appear in the future |
| Defects and errors that are not timely detected and remedied could expose us to risk of liability to clients, clinicians and patients and cause delays in software introductions and shipments, result in increased costs and diversion of development resources, require design modifications or decrease market acceptance or client satisfaction with our software |
| Our software and our vendors’ software that we include in our offering could infringe third-party intellectual property rights, exposing us to costs that could be significant |
| Infringement or invalidity claims or claims for indemnification resulting from infringement claims could be asserted or prosecuted against us based upon design or use of software we provide to clients, including software we develop as well as software provided to us by vendors |
| Regardless of the validity of any claims, defending against these claims could result in significant costs and diversion of our resources, and vendor indemnity might not be available |
| The assertion of infringement claims could result in injunctions preventing us from distributing our software, or require us to obtain a license to the disputed intellectual property rights, which might not be available on reasonable terms or at all |
| We might also be required to indemnify our clients at significant expense |
| 11 _________________________________________________________________ [12]Table of Contents Risks related to our strategic relationships and initiatives We depend on licenses from third parties for rights to some technology we use, and if we are unable to continue these relationships and maintain our rights to this technology, our business could suffer |
| We depend upon licenses for some of the technology used in our software from a number of third-party vendors |
| Most of these licenses expire within one to five years, can be renewed only by mutual consent and may be terminated if we breach the terms of the license and fail to cure the breach within a specified period of time |
| We may not be able to continue using the technology made available to us under these licenses on commercially reasonable terms or at all |
| As a result, we may have to discontinue, delay or reduce software shipments until we obtain equivalent technology, which could hurt our business |
| Most of our third-party licenses are non-exclusive |
| Our competitors may obtain the right to use any of the technology covered by these licenses and use the technology to compete directly with us |
| In addition, if our vendors choose to discontinue support of the licensed technology in the future or are unsuccessful in their continued research and development efforts, particularly with regard to Microsoft, we may not be able to modify or adapt our own software |
| Our offering often includes software modules provided by third parties, and if these third parties do not meet their commitments, our relationships with our clients could be impaired |
| Some of the software modules we offer to clients are provided by third parties |
| We often rely upon these third parties to produce software that meets clients’ needs and to implement and maintain that software |
| If these third parties fail to fulfill their responsibilities, our relationships with affected clients could be impaired, and we could be responsible to clients for the failures |
| We might not be able to recover from these third parties for all of the costs we incur as a result of their failures |
| If we undertake additional acquisitions, they may be disruptive to our business and could have an adverse effect on our future operations and the market price of our common stock |
| An important element of our business strategy has been expansion through acquisitions |
| Since 1997, we have completed ten acquisitions |
| While there is no assurance that we will complete any future acquisitions, any future acquisitions would involve a number of risks, including the following: · The anticipated benefits from any acquisition may not be achieved |
| The integration of acquired businesses requires substantial attention from management |
| The diversion of management’s attention and any difficulties encountered in the transition process could hurt our business |
| · In future acquisitions, we could issue additional shares of our capital stock, incur additional indebtedness or pay consideration in excess of book value, which could have a dilutive effect on future net income, if any, per share |
| · New business acquisitions must be accounted for under the purchase method of accounting |
| These acquisitions may generate significant intangible assets and result in substantial related amortization charges to us |
| Risks related to industry regulation Potential regulation by the US Food and Drug Administration of our software and content as medical devices could impose increased costs, delay the introduction of new software and hurt our business |
| The US Food and Drug Administration, or FDA, is likely to become increasingly active in regulating computer software or content intended for use in the healthcare setting |
| The FDA has increasingly focused on the regulation of computer software and computer-assisted products as medical devices under the Food, Drug, and Cosmetic Act, or the FDC Act |
| If the FDA chooses to regulate any of our software, or third party software that we resell, as medical devices, it could impose extensive requirements upon us, including the following: · requiring us to seek FDA clearance of a pre-market notification submission demonstrating substantial equivalence to a device already legally marketed, or to obtain FDA approval of a pre-market approval application establishing the safety and effectiveness of the software; · requiring us to comply with rigorous regulations governing the pre-clinical and clinical testing, manufacture, distribution, labeling and promotion of medical devices; and · requiring us to comply with the FDC Act regarding general controls including establishment registration, device listing, compliance with good manufacturing practices, reporting of specified device malfunctions and adverse device events |
| If we fail to comply with applicable requirements, the FDA could respond by imposing fines, injunctions or civil penalties, requiring recalls or software corrections, suspending production, refusing to grant pre-market clearance or approval of software, withdrawing clearances and approvals, and initiating criminal prosecution |
| Any FDA policy governing computer products or content, may increase the cost and time to market of new or existing software or may prevent us from marketing our software |
| Changes in federal and state regulations relating to patient data could depress the demand for our software and impose significant software redesign costs on us |
| Clients use our systems to store and transmit highly confidential patient health information and data |
| State and federal laws and regulations and their foreign equivalents govern the collection, use, transmission and other disclosures of health information |
| These laws and regulations may change rapidly and may be unclear or difficult to apply |
| Federal regulations under the Health Insurance Portability and Accountability Act of 1996, or HIPAA, impose national health data standards on healthcare providers that conduct electronic health transactions, healthcare clearinghouses that convert health data between HIPAA-compliant and non-compliant formats and health plans |
| Collectively, these groups are known as covered entities |
| The HIPAA standards prescribe transaction formats and code sets for electronic health transactions; protect individual privacy by limiting the uses and disclosures of individually identifiable health information; and require covered entities to implement administrative, physical and technological safeguards to ensure the confidentiality, integrity, availability and security of individually identifiable health information in electronic form |
| Though we are not a covered entity, most of our clients are and require that our software and services adhere to HIPAA standards |
| Any failure or perception of failure of our software or services to meet HIPAA standards could adversely affect demand for our software and services and force us to expend significant capital, research and development and other resources to modify our software or services to address the privacy and security requirements of our clients |
| 12 _________________________________________________________________ [13]Table of Contents States and foreign jurisdictions in which we or our clients operate have adopted, or may adopt, privacy standards that are similar to or more stringent than the federal HIPAA privacy standards |
| This may lead to different restrictions for handling individually identifiable health information |
| As a result, our clients may demand information technology solutions and services that are adaptable to reflect different and changing regulatory requirements which could increase our development costs |
| In the future, federal or state governmental authorities may impose new data security standards or additional restrictions on the collection, use, transmission and other disclosures of health information |
| We cannot predict the potential impact that these future rules, may have on our business |
| However, the demand for our software and services may decrease if we are not able to develop and offer software and services that can address the regulatory challenges and compliance obligations facing our clients |
| Risks related to our personnel and organization Recent changes in our executive team could distract management and cause uncertainty that could result in delayed or lost sales |
| From April until November 2005, our Chairman, Eugene V Fife, served as our President and Chief Executive Officer on an interim basis, pending a search for a new, long-term Chief Executive Officer |
| In November 2005, R Andrew Eckert replaced Mr |
| Fife as CEO and President |
| Including Mr |
| Eckert, five of our executive officers have joined the Company or assumed their current roles within the past year |
| In January, 2006, we announced a headcount reduction of approximately 100 persons, including seven senior executives, and reorganization of our management structure |
| These changes may disrupt continuity in our organization, disrupt established relationships with clients, prospects and vendors, divert our management’s time and attention from the operation of our business, delay important operational initiatives, and cause some level of uncertainty among our clients and potential clients that could lead to delays in closing new business or ultimately in lost sales |
| If we fail to attract, motivate and retain highly qualified technical, marketing, sales and management personnel, our ability to execute our business strategy could be impaired |
| Our success depends, in significant part, upon the continued services of our key technical, marketing, sales and management personnel, and on our ability to continue to attract, motivate and retain highly qualified employees |
| Competition for these employees is intense and we maintain at-will employment terms with our employees, meaning that they are free to leave at any time |
| Further, while we do utilize non-compete agreements with some employees, such agreements may not be enforceable, or we may choose for various reasons not to attempt to enforce them |
| In addition, the process of recruiting personnel with the combination of skills and attributes required to execute our business strategy can be difficult, time-consuming and expensive |
| We believe that our ability to implement our strategic goals depends to a considerable degree on our senior management team |
| The loss of any member of that team could hurt our business |
| Provisions of our charter documents and Delaware law may inhibit potential acquisition bids that a stockholder may believe is desirable, and the market price of our common stock may be lower as a result |
| Our board of directors has the authority to issue up to 4cmam900cmam000 shares of preferred stock |
| The board of directors can fix the price, rights, preferences, privileges and restrictions of the preferred stock without any further vote or action by our stockholders |
| The issuance of shares of preferred stock may discourage, delay or prevent a merger or acquisition of our company |
| The issuance of preferred stock may result in the loss of voting control to other stockholders |
| We have no current plans to issue any shares of preferred stock |
| In August 2000, our board of directors adopted a shareholder rights plan under which we issued preferred stock purchase rights that would adversely affect the economic and voting interests of a person or group that seeks to acquire us or a 15prca or more interest in our common stock without negotiations with our board of directors |
| Our charter documents contain additional anti-takeover devices including: · only one of the three classes of directors is elected each year; · the ability of our stockholders to remove directors without cause is limited; · the right of stockholders to act by written consent has been eliminated; · the right of stockholders to call a special meeting of stockholders has been eliminated; and · advance notice must be given to nominate directors or submit proposals for consideration at stockholders meetings |