UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended March 31, 2005

OR

For the transition period from                                           to                                         .

Commission File Number 000-25311

AMICAS, Inc.

20 Guest Street, Suite 200, Boston MA 02135
(Address of principal executive offices, including zip code)

(617) 779-7878
(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes þ  No o

As of May 8, 2005 there were 44,930,073 shares of the registrant’s common stock, $.001 par value, outstanding.

AMICAS, Inc.

Form 10-Q

INDEX

For further information, refer to the AMICAS, Inc. Annual Report on Form 10-K filed on March 30, 2005.
AMICAS and VitalWorks are registered trademarks of AMICAS, inc. All other trademarks and company names mentioned are the property of their respective owners.

AMICAS, Inc.

See accompanying notes

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AMICAS, Inc.

See accompanying notes.

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AMICAS, Inc.

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AMICAS, Inc.

A. Business

     AMICAS, Inc. (“AMICAS” or the “Company”), formerly known as VitalWorks Inc., is a leader in radiology and medical image and information management solutions. The AMICAS Vision Series™ products provide a complete, end-to-end solution for imaging centers, ambulatory care facilities, and radiology practices. Acute care and hospital customers are provided a fully-integrated, hospital information system (“HIS”)/radiology information system (“RIS”)-independent picture archiving communication system (“PACS”), featuring advanced enterprise workflow support and scalable design. Complementing the Vision Series product family is AMICAS Insight Services^TM, 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 provides its clients with ongoing software support, implementation, training, and electronic data interchange (“EDI”) services for patient billing and claims processing.

     On January 3, 2005, the Company completed the sale of substantially all of the assets and liabilities of its medical division, together with certain other assets, liabilities, properties and rights of the Company relating to its anesthesiology business (the “Medical Division”) to Cerner Corporation (“Cerner”) and certain of Cerner’s wholly-owned subsidiaries (the “Asset Sale”). The Asset 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 (the “Purchase Agreement”).

     Effective January 3, 2005, the Company changed its name from VitalWorks Inc. to AMICAS, Inc.

B. Summary of Significant Accounting Policies

Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring accruals, considered necessary for a fair presentation have been included in the accompanying unaudited financial statements. Operating results for the three-month period ended March 31, 2005 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2005. These interim financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

Principles of Consolidation

     The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Amicas PACS, Corp. (“Amicas PACS”), formerly known as Amicas, Inc., which was acquired on November 25, 2003. All significant intercompany accounts and transactions have been eliminated.

Reclassifications

     Certain prior year financial statement items have been reclassified to conform to the current year presentation.

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AMICAS, Inc.

Use of Estimates

     The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Recent Accounting Pronouncements

     In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment”, Statement No. 123R, which requires companies to measure and recognize compensation expense for all stock-based payments at fair value. See below for information related to the pro forma effects on the reported income (loss) from continuing operations and loss per share from continuing operations of applying the fair value recognition provisions of the previous Statement No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation.

     On April 14, 2005, the standard was delayed to the first fiscal year beginning after June 15, 2005, the compliance date. Accordingly, beginning January 1, 2006, the Company will be required to apply the standard to all awards granted, modified, cancelled or repurchased after that date as well as the unvested portion of prior awards. SFAS 123(R) permits public companies to adopt its requirements using one of two methods:

	•	A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123(R) for all awards granted to employees prior to the effective date of SFAS 123(R) that remain unvested on the effective date.
	•	A “prospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS 123(R) for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

The Company is currently evaluating the impact of Statement No. 123R on its results of operations.

Stock-Based Compensation

     The Company periodically grants stock options for a fixed number of shares to employees and directors with an exercise price equal to the fair market value of underlying the shares at the date of the grant. The Company accounts for stock option grants to employees and directors using the intrinsic value method. Under the intrinsic value method, compensation associated with stock awards to employees and directors is determined as the difference, if any, between the current fair value of the underlying common stock on the date compensation is measured and the price the employee or director must pay to exercise the award. The measurement date for employee awards is generally the date of grant.

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AMICAS, Inc.

     If stock-based compensation expense had been recorded based on the fair value of stock awards at the date of grant, the Company’s net income (loss) would have been adjusted to the pro forma amounts presented below (in thousands, except for per share amounts):

The fair value for stock option awards is estimated at the date of the grant using a Black-Scholes option-pricing model.

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AMICAS, Inc.

Net Income (Loss) Per Share

     Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted average number of common shares outstanding during the period, plus the dilutive effect, if any, of potential common shares, which consists of stock options. The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except for per share amounts):

     Stock options and warrants to purchase the Company’s common stock were excluded from the calculation of diluted earnings per share for the three months ended March 31, 2005 and 2004, because their effect would have been anti-dilutive. However, these options could be dilutive in the future.

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AMICAS, Inc.

Comprehensive Income

     Comprehensive income is a measure of all changes in equity of an enterprise that results from recognized transactions and other economic events of a period other than transactions with owners in their capacity as owners. For the Company, comprehensive income (loss) is equivalent to its consolidated net income (loss).

C. Gain on the Sale of Discontinued Operations

     On January 3, 2005, the Company completed the sale of its Medical Division to Cerner. The Asset Sale was completed in accordance with the terms and conditions of the Purchase Agreement. As consideration for the Asset Sale, the Company received cash proceeds of $100 million.

     In the first quarter of 2005, the Company recorded a net gain from the sale of approximately $46.1 million, which is net of approximately: (a) $16.2 million of net assets transferred to Cerner, (b) $1.2 million of post closing purchase price adjustments, (c) $34.6 million of income taxes, (d) $0.9 million relating to the modification of stock options granted to certain employees of the Medical Division and (e) $1.0 million of additional fees and transaction costs related to the sale.

     The $34.6 million income tax provision includes the realization of the $28.2 million deferred tax asset that the Company had previously recorded and a current tax liability at March 31, 2005 of $6.4 million.

     Under the terms of the Purchase Agreement, (a) Cerner agreed to pay the Company $100 million in cash, subject to a post-closing adjustment based on the Company’s net working capital as of the closing date, and (b) Cerner agreed to assume specified liabilities of the Medical Division and the anesthesiology business and certain obligations under assigned contracts and intellectual property. As of March 31, 2005, the Company accrued for approximately $1.2 million relating to the post-closing purchase price adjustment. The Company expects to finalize the post-closing adjustments in the second quarter of 2005.

     Condensed results of operations relating to the Medical Division for the three months ended March 31, 2004 (in thousands):

D. Business Combination

     On November 25, 2003, the Company acquired 100% of the outstanding capital stock of Amicas PACS, a developer of Web-based diagnostic image management software solutions, for $31 million in cash, including direct transaction costs. Commonly referred to in the marketplace as PACS (picture archiving and communication systems), these software solutions allow radiologists and other physicians to examine, store, and distribute digitized medical images. The Company financed $15 million of the purchase price through the use of its credit line (see Note F for payment of credit line). The merger agreement provided for an additional purchase payment of up to $25 million based on attainment of specified earnings targets through 2004. In addition, the Company assumed incentive plans for certain management employees of Amicas PACS that provided for up to $5 million of compensation, tied to the attainment of the earnings targets for the contingent earn-out period.

     On December 9, 2004, the merger agreement was amended. The amendment terminated the earn-out consideration obligations set forth in the merger agreement and provides that the Company will pay to Amicas PACS stockholders and certain Amicas PACS employees a total of up to $14.5 million. Amicas PACS stockholders received or will receive an additional $10.0 million, to be paid in the following manner. The Company paid out $4.3 million three days after distribution of escrow fund pursuant to the escrow notice dated December 9, 2004. The additional consideration paid to the Amicas PACS stockholders under the settlement of the earn-out provision was recognized as additional goodwill. As of March 31, 2005, the Company had an accrual for the remaining $5.7 million as a note payable.

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AMICAS, Inc.

     Additionally, certain Amicas PACS employees received or will receive a total of up to $4.5 million in satisfaction of certain obligations under Amicas PACS’ bonus plan, paid or to be paid in the following manner: approximately $2.2 million was paid in December 2004 and in January 2005. Additionally, $0.9 million will be paid in the second quarter of 2005 and the balance of $1.4 million is expected to be paid on or about December 31, 2005. In general, any payment to an Amicas PACS employee is contingent on such employee’s continued employment with the Company.

     In the first quarter of 2005, the Company recorded a charge of approximately $1.1 million of the total $2.3 million relating to the earn-out bonuses. The $1.1 million includes approximately $0.9 million relating to the acceleration of payment of earn-out bonuses of two former Amicas PACS executives (see Note E).

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AMICAS, Inc.

E. Restructuring Costs (Credits), Executive Termination Costs and Credit for Loan Losses

Restructuring Costs (Credits) –

Employee Termination Costs

     The 2004 Plan. On October 15, 2004, the Company notified 57 of its employees that, in connection with the relocation of the Company’s corporate headquarters from Ridgefield Connecticut to Boston, Massachusetts, their employment would be terminated under a plan of termination. Their employment was terminated in the first quarter of 2005 and pursuant to their termination agreements, the Company had agreed to pay their salary and provide certain benefits, during their severance period. In the first quarter ended March 31, 2005, the Company recorded $0.9 million of costs related to their termination; including $0.2 million in stock compensation expense for certain modified stock awards.

     As of March 31, 2005, there was approximately $1.8 million remaining to be paid in costs associated with their termination; including $0.3 million to be paid to an executive officer. The remaining unpaid amounts are expected to be paid over their severance periods, which are scheduled to be completed the second quarter of 2006.

     The 2000 Plan. In August 2000, the Company announced its intention to restructure its operations through a plan of employee reductions and consolidation of office facilities. Since then, the Company closed 14 facilities and terminated approximately 400 employees. The offices that were closed are subject to operating leases that expire at various dates through 2005. In the first quarter ended March 31, 2005, the Company recorded a credit of approximately $0.1 million. As of March 31, 2005, there was no remaining amounts accrued.

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AMICAS, Inc.

Executive and Employee Termination Costs

Executive Termination Costs

     On March 31, 2005, the Company entered into a Separation Agreement with two former executives of the Company, also former executives of Amicas PACS. Pursuant to their agreements, the Company has agreed to pay the executives two months of salary and other compensation obligations. In the first quarter ended March 31, 2005, the Company recorded approximately $80,000 in costs related to the termination of employment of these executives. As of March 31, 2005, no amounts related to the executives’ termination were paid. The Company expects the entire amount to be paid in the second quarter of 2005.

     Additionally, under the Separation Agreement, the Company accelerated the payment of certain earn-out bonus amounts in the amount of $0.9 million (see Note D).

F. Debt

Debt consists of the following:

     On January 3, 2005, using the proceeds from the sale of the Medical Division, the Company repaid the entire outstanding balance of approximately $23.2 million under its credit facility with Wells Fargo and the credit facility was terminated. As a result of the credit facility termination, the Company had written off $0.7 million in deferred financing costs in the first quarter of 2005.

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AMICAS, Inc.

G. Commitments and Contingencies

Commitments

     Future minimum lease payments under all operating and capital leases with non-cancelable terms in excess of one year as follows: