Merger could boost health care software company.

Nine months after first entering a letter-of-intent agreement to merge with Florida-based imaging software firm StorComm Inc., Creative Computer Applications Inc. has finally agreed to the terms of the proposed merger. The news couldn't come any sooner for the Calabasas-based health care software company, as its bottom line over the past year has been hampered by difficulties stemming from the deal.

When CCA first agreed to purchase StorComm it knew that the deal had the potential to adversely impact its short-term operations. In its 10-Q report filed at the end of last year, CCA stated that the merger was risky and subject to a lengthy process to close. The company also was up front about the possibility that it could divert management's time and focus from operating the business.

CCA also cautioned investors that the proposed deal might never close and even if it did it could result in unanticipated operating difficulties and expense.

The complications from the deal did just that. In CCA's most recent quarterly results for the second fiscal quarter ended June 30, 2005, it reported a net loss of $238,500 compared to income of $10,114 for the second quarter of 2004. CCA also reported a decline in revenue, claiming sales of $1.56 million in the second quarter of this year, versus $1.8 million for the same period in 2004.

While Steven Besbeck, CCA's president and CEO, declined to elaborate beyond a written statement given at the time, he blamed CCA's poor quarterly performance on "legal, accounting, consulting and other expenses associated with our pending merger with StorComm."

But now with the deal finally agreed upon, the 67-employee firm is looking forward to absorbing 43-employee StorComm into its fold.

"The strengths of the company will be a broader portfolio and a bigger footprint in the marketplace," Besbeck said. "It will give us great distribution channels, great diversity and a larger more diverse management team."

Besbeck claims that the terms of merger will not result in any local layoffs, though it may lead to growth for the firm.

"We have no plans to change things that much at StorComm, or to move people around. Locally, we have the potential to be in a hiring mode. There aren't going to be any layoffs."

The new CCA and StorComm combined company will find itself jockeying for position in the fiercely competitive, picture archive communications systems (PACS) market.

"Buying StorComm will give CCA something that they don't currently have now. They needed an in-house PACS product to be able to play with the big boys," Joeseph Goedert, the news editor for Health Data Management magazine said. "You need to have one to compete. But it's still going to be a tough road for them. CCA is not profitable and it is a very small company competing with the likes of GE Healthcare and Eastman Kodak."

Dale Hunt, the president of Anaheim-based. The Thomas Group, believes that StorComm's products will only serve to help CCA's chances of becoming profitable again.

"StorComm has been a leader in the radiology PACS field (in which radiology film images are turned digital). They've got a lot of sites set up across the country," Hunt said. "Their products are high quality, they work with all the major vendors and they've been around awhile."

While it will be difficult for CCA to climb to the top of the health care software industry, if it can overcome the competition it will find itself in a favorable position. Most experts say that the health care software industry is booming at the moment, as hospitals continue the process of going digital.

"There's a huge demand for products like these as the Department of Health and Human Services is trying to make all paper records electronic in the next few years," Leslie H. Nickoll, the editor-in-chief of Computers, Informatics and Nursing magazine, said. "All these companies are vying to be the Microsoft of the health care software industry. I don't know if you'll see one dominant Microsoft, but you might have three to five companies at the top tier. A shakeout in the industry is definitely going on."