EMAGEON INC.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2007
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-51149
EMAGEON INC.
(Exact name of registrant as specified in its charter)
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Delaware
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63-1240138 |
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(State or other jurisdiction of
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(I.R.S. Employer Identification No.) |
incorporation or organization) |
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1200 Corporate Drive, Suite 200 |
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Birmingham, Alabama
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35242 |
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(Address of principal executive offices)
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(Zip Code) |
(205) 980-9222
(Registrants 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 a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer o Accelerated Filer þ Non-Accelerated Filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
o Yes þ No.
Common stock, par value $0.001 per share: 21,332,583 shares outstanding as of July 27, 2007
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
EMAGEON INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
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(Unaudited) |
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June 30, 2007 |
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December 31, 2006 |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
20,897 |
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$ |
23,008 |
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Trade
accounts receivable, net of allowances of $270 at June 30, 2007
and $277 at December 31, 2006 |
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20,916 |
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26,706 |
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Inventories |
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6,452 |
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8,579 |
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Prepaid expenses and other current assets |
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5,787 |
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4,459 |
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Total current assets |
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54,052 |
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62,752 |
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PROPERTY AND EQUIPMENT, net |
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16,568 |
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18,362 |
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OTHER NONCURRENT ASSETS |
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1,376 |
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1,808 |
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INTANGIBLE ASSETS, net |
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28,972 |
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30,090 |
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TOTAL ASSETS |
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$ |
100,968 |
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$ |
113,012 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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CURRENT LIABILITIES: |
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Accounts payable |
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$ |
7,359 |
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$ |
9,738 |
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Accrued payroll and related costs |
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1,802 |
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3,770 |
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Deferred revenue |
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17,136 |
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23,953 |
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Other accrued expenses |
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2,411 |
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2,946 |
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Current portion of long-term debt and capital lease obligations |
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100 |
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953 |
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Total current liabilities |
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28,808 |
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41,360 |
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LONG-TERM DEFERRED REVENUE |
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6,413 |
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5,851 |
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OTHER LONG-TERM LIABILITIES |
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632 |
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686 |
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LONG-TERM PORTION OF CAPITAL LEASE OBLIGATIONS |
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64 |
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8 |
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TOTAL LIABILITIES |
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35,917 |
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47,905 |
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STOCKHOLDERS EQUITY: |
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Common stock, $0.001 par value, 165,050 shares authorized; 21,508
shares and 21,434 shares issued, and 21,332 shares and 21,258
shares outstanding at June 30, 2007 and December 31, 2006,
respectively |
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22 |
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21 |
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Additional paid-in capital |
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124,349 |
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122,538 |
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Accumulated other comprehensive income |
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517 |
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262 |
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Deficit |
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(59,562 |
) |
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(57,439 |
) |
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65,326 |
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65,382 |
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Treasury stock, 176 shares, at cost |
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(275 |
) |
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(275 |
) |
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Total stockholders equity |
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65,051 |
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65,107 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
100,968 |
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$ |
113,012 |
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The accompanying notes are an integral part of these financial statements.
3
EMAGEON INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
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Unaudited |
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2007 |
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2006 |
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2007 |
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2006 |
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REVENUE: |
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System sales |
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$ |
11,235 |
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$ |
17,601 |
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$ |
24,903 |
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$ |
34,870 |
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Support services |
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14,341 |
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12,415 |
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28,023 |
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22,147 |
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Total revenue |
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25,576 |
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30,016 |
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52,926 |
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57,017 |
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COST OF REVENUE: |
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System sales |
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6,310 |
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9,977 |
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15,032 |
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23,261 |
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Support services |
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6,894 |
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6,495 |
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14,054 |
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12,752 |
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Total cost of revenue |
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13,204 |
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16,472 |
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29,086 |
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36,013 |
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GROSS PROFIT |
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12,372 |
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13,544 |
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23,840 |
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21,004 |
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OPERATING EXPENSES: |
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Research and development |
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4,668 |
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3,978 |
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9,807 |
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8,162 |
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Sales and marketing |
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4,500 |
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4,524 |
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8,892 |
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8,591 |
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General and administrative |
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2,796 |
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4,013 |
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6,419 |
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8,173 |
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Amortization of intangible assets related to
Camtronics acquisition |
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345 |
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885 |
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690 |
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1,770 |
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Integration costs related to Camtronics acquisition |
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1,077 |
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2,281 |
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Restructuring charge |
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578 |
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578 |
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Total operating expenses |
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12,887 |
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14,477 |
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26,386 |
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28,977 |
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OPERATING LOSS |
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(515 |
) |
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(933 |
) |
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(2,546 |
) |
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(7,973 |
) |
INTEREST INCOME |
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250 |
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160 |
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479 |
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316 |
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INTEREST EXPENSE |
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(23 |
) |
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(84 |
) |
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(56 |
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(193 |
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NET LOSS |
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$ |
(288 |
) |
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$ |
(857 |
) |
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$ |
(2,123 |
) |
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$ |
(7,850 |
) |
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NET LOSS PER SHARE BASIC AND DILUTED |
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$ |
(0.01 |
) |
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$ |
(0.04 |
) |
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$ |
(0.10 |
) |
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$ |
(0.38 |
) |
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WEIGHTED
AVERAGE SHARES OUTSTANDING, BASIC AND DILUTED |
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21,315 |
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20,866 |
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21,294 |
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20,725 |
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The accompanying notes are an integral part of these financial statements.
4
EMAGEON INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
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Six Months Ended |
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June 30, |
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2007 |
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2006 |
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OPERATING ACTIVITIES |
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Net loss |
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$ |
(2,123 |
) |
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$ |
(7,850 |
) |
Adjustments
to reconcile net loss to net cash used in operating activities: |
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Depreciation |
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3,281 |
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3,584 |
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Amortization of intangible assets |
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1,482 |
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2,510 |
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Stock-based compensation expense |
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1,340 |
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1,366 |
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Loss on
disposal of fixed assets |
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213 |
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5 |
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Changes in operating assets and liabilities, net |
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(4,491 |
) |
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(2,301 |
) |
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Net cash used in operations |
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(298 |
) |
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(2,686 |
) |
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INVESTING ACTIVITIES |
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Purchases of property and equipment |
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(1,631 |
) |
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(3,507 |
) |
Maturities of marketable securities |
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5,000 |
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Capitalized software development costs |
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(120 |
) |
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(426 |
) |
Other investing activities |
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(125 |
) |
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65 |
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Net cash (used in) provided by investing activities |
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(1,876 |
) |
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1,132 |
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FINANCING ACTIVITIES |
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Proceeds of issuance of common stock, net of issue costs |
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472 |
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2,127 |
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Payment of debt and capital lease obligations |
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(866 |
) |
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(1,394 |
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Decrease in restricted cash |
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446 |
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Net cash provided by financing activities |
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52 |
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|
733 |
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EFFECT OF EXCHANGE RATE CHANGES ON CASH |
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11 |
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2 |
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NET DECREASE IN CASH |
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(2,111 |
) |
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(819 |
) |
CASH at beginning of period |
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23,008 |
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|
15,520 |
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CASH at end of period |
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$ |
20,897 |
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$ |
14,701 |
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The accompanying notes are an integral part of these financial statements.
5
EMAGEON INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements include the accounts of
Emageon Inc. (Emageon, or the Company) and its majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
In the opinion of management, the accompanying financial statements contain all adjustments
(consisting of normal recurring items) necessary for a fair presentation of results for the interim
periods presented. These unaudited interim financial statements should be read in conjunction with
the audited consolidated financial statements and related notes contained in the Companys Annual
Report on Form 10-K for the year ended December 31, 2006.
Certain reclassifications have been made to prior year amounts to provide comparability with the
current year presentation.
In 2007,
the Company revised its presentation of accounts receivable and
deferred revenue. Previously, accounts receivable and deferred
revenue relating to advance customer billings for services were recorded on a
gross basis. The effect of this revision reduced both accounts
receivable and deferred revenue by $896 at December 31, 2006. The
revision had no effect on the Companys results of operations.
Operating results for the three month and six month periods ended June 30, 2007 are not necessarily
indicative of results that may be expected for the year ending December 31, 2007.
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States requires that management use judgments to make estimates and assumptions that
affect the amounts reported in the financial statements. As a result, there is some risk that
reported financial results could have been materially different had different methods, assumptions,
and estimates been used. The Company believes that of its significant accounting policies, those
related to revenue recognition, research and development costs, and intangible and other long-lived
assets may involve a higher degree of judgment and complexity than other accounting policies used
in the preparation of its consolidated financial statements. There have been no significant
changes during the six months ended June 30, 2007 to the items disclosed as Critical Accounting
Policies and Estimates in the Companys Annual Report on Form 10-K for the year ended December 31,
2006 or in the Companys method of application of these critical accounting policies.
All numbers of shares and dollar amounts in the financial statements and footnotes, except per
share amounts, are expressed in thousands.
NOTE
2. RESTRUCTURING CHARGE AND EXIT LIABILITY
In May 2007, the Company acted to align its operating expenses with the current level of revenue by
reducing its workforce through elimination of certain existing positions and normal attrition. In
connection with that action, the Company eliminated thirty positions, primarily in the customer
service and engineering areas. The cost of those position eliminations of $578, consisting
primarily of employee severance pay and related benefits, is included in the Companys statement of
operations for the three months ended June 30, 2007. At
June 30, 2007, $78 of this charge remained as an accrued expense
in the balance sheet. This remaining liability was settled during
July 2007, and the Company does not expect to incur further
costs related to this reduction in workforce.
During third quarter 2006 the Company, as part of the integration of Camtronics into the
operations of the Company (see Note 3), vacated a leased facility and combined the operations
formerly at that facility with those at a location acquired in the Camtronics acquisition. In
connection with that action, the Company identified and recorded a future net negative cash flow of
$1.2 million expected to arise from the continuing lease obligation, which extends through January,
2013, and related expenses. The charge was included in the 2006 statement of operations as
Integration Costs Related to Camtronics Acquisition and in current and long-term accrued expenses
in the balance sheet. Activity with respect to that liability for the three and six month periods
ended June 30, 2007 follows:
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Three Months Ended |
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Six Months Ended |
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June 30, 2007 |
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June 30, 2007 |
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Beginning liability balance |
|
$ |
968 |
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|
$ |
1,057 |
|
Lease payments |
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|
(87 |
) |
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|
(174 |
) |
Payment of related expenses |
|
|
(29 |
) |
|
|
(31 |
) |
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|
Ending liability balance |
|
$ |
852 |
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|
$ |
852 |
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|
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|
The Company does not expect to incur further expenses related to this vacated facility.
NOTE 3 . ACQUISITIONS AND INTANGIBLE ASSETS
On November 1, 2005 the Company acquired all of the outstanding capital stock of Camtronics Medical
Systems, Ltd. (Camtronics), a developer and manufacturer of cardiology image and information
management systems, for a cash purchase price, including acquisition expenses and net of cash
acquired, of $40,359. The results of operations of Camtronics have been included in the Companys
statement of operations since the acquisition date.
6
The purchase price of Camtronics was allocated to the assets and liabilities of Camtronics on a
fair-value basis, including the identification and valuation of its intangible assets and the
assignment of value to goodwill. Goodwill represents, among other things, the synergistic value
and potential competitive benefits that may be realized as a result of the acquisition, any future
products that may arise from the acquired technology, and the skilled and specialized workforce
acquired. In total, intangible asset value of $11,603 and goodwill value of $17,325 related to the
Camtronics acquisition was identified and recorded.
Summarized below are the Companys intangible assets, which include those arising from the
acquisition of Camtronics and other businesses and the capitalized portion of costs of internally
developed software. These assets are amortized on a straight-line basis over lives ranging from
one to six years, with the exception of goodwill, which is not amortized but is tested for
impairment at least annually or as circumstances arise that may indicate impairment.
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|
June 30, 2007 |
|
December 31, 2006 |
|
|
Gross |
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|
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|
|
Gross |
|
|
|
|
|
|
Carrying |
|
Total |
|
Net Carrying |
|
Carrying |
|
Total |
|
Net Carrying |
|
|
Amount |
|
Amortization |
|
Amount |
|
Amount |
|
Amortization |
|
Amount |
Acquired technology |
|
$ |
5,240 |
|
|
$ |
3,999 |
|
|
$ |
1,241 |
|
|
$ |
5,240 |
|
|
$ |
3,404 |
|
|
$ |
1,836 |
|
Customer relationships |
|
|
8,010 |
|
|
|
2,302 |
|
|
|
5,708 |
|
|
|
10,028 |
|
|
|
3,629 |
|
|
|
6,399 |
|
Trade names |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
501 |
|
|
|
501 |
|
|
|
|
|
Software development
costs |
|
|
1,570 |
|
|
|
1,001 |
|
|
|
569 |
|
|
|
1,451 |
|
|
|
806 |
|
|
|
645 |
|
Goodwill |
|
|
21,454 |
|
|
|
|
|
|
|
21,454 |
|
|
|
21,210 |
|
|
|
|
|
|
|
21,210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
36,274 |
|
|
$ |
7,302 |
|
|
$ |
28,972 |
|
|
$ |
38,430 |
|
|
$ |
8,340 |
|
|
$ |
30,090 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average amortization periods are 4.6 years for acquired technology, 5.8 years for
customer relationships, and 1.3 years for software development costs.
Amortization expense was $4,969 for the year ended December 31, 2006 and $1,482 for the six months
ended June 30, 2007. Estimated amortization expense for the remainder of 2007 and beyond is as
follows:
|
|
|
|
|
Remainder of 2007 |
|
$ |
1,514 |
|
2008 |
|
|
2,368 |
|
2009 |
|
|
1,381 |
|
2010 |
|
|
1,335 |
|
2011 and thereafter |
|
|
920 |
|
|
|
|
|
|
Total |
|
$ |
7,518 |
|
|
|
|
|
|
NOTE 4. INVENTORIES
Inventories consist of the following:
7
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007 |
|
December 31, 2006 |
Third-party components |
|
$ |
3,255 |
|
|
$ |
2,716 |
|
Work-in-process |
|
|
474 |
|
|
|
336 |
|
Completed systems |
|
|
2,723 |
|
|
|
5,527 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,452 |
|
|
$ |
8,579 |
|
|
|
|
|
|
|
|
Inventories include the
costs of materials, labor, and overhead. The costs of purchased third-party
hardware and software associated with customer sales contracts are included as inventory in the
consolidated balance sheet and charged to system sales cost of revenue in the statement of
operations when customer acceptance has been received and all other revenue recognition criteria
have been met.
NOTE 5. SUPPLEMENTARY CASH FLOW INFORMATION
Changes in operating assets and
liabilities of the Company in reconciling net loss to net cash provided by or used in operations are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
2007 |
|
2006 |
(Increase) decrease in: |
|
|
|
|
|
|
|
|
Trade accounts receivable, net |
|
$ |
5,790 |
|
|
$ |
609 |
|
Inventories, net |
|
|
2,127 |
|
|
|
(3,747 |
) |
Prepaid expenses and other current assets |
|
|
(1,328 |
) |
|
|
(829 |
) |
Other noncurrent assets |
|
|
111 |
|
|
|
(129 |
) |
Increase (decrease) in: |
|
|
|
|
|
|
|
|
Accounts payable |
|
|
(2,379 |
) |
|
|
(3,492 |
) |
Accrued payroll and related costs |
|
|
(1,968 |
) |
|
|
(882 |
) |
Other accrued expenses |
|
|
(589 |
) |
|
|
2,732 |
|
Deferred revenue |
|
|
(6,255 |
) |
|
|
3,437 |
|
|
|
|
|
|
|
|
|
|
Net changes in operating assets and liabilities |
|
$ |
(4,491 |
) |
|
$ |
(2,301 |
) |
|
|
|
|
|
|
|
There were no significant non-cash investing and financing transactions in the six month
periods ended June 30, 2007 and 2006.
NOTE 6. COMPUTATION OF NET LOSS PER SHARE
Basic and diluted net loss per share is computed using the weighted average common shares
outstanding during the period. Common share equivalents consist of common stock warrants,
restricted stock awards, and stock options granted to employees and directors. All common stock
equivalents, consisting of 2,137 shares as of June 30, 2007 (2,167 shares as of June 30, 2006) were
excluded from the computation for these net loss periods because their inclusion would have been
anti-dilutive.
NOTE 7. STOCK BASED COMPENSATION
The Companys stock-based compensation plans are administered by the Compensation Committee of the
Board of Directors, which selects persons eligible to receive awards and determines the number of
shares and/or options subject to each award and the terms, conditions, performance measures, and
other provisions of the award. Note 14
8
of the Companys consolidated financial statements included in its Annual Report on Form 10-K for
the year ended December 31, 2006 contains additional information related to these stock-based
compensation plans.
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123
(Revised), Share-Based Payment (SFAS 123R) utilizing the modified prospective approach. Prior to
the adoption of SFAS 123R, the Company accounted for stock option grants in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees (the intrinsic value method), and
accordingly recognized no compensation expense for stock options that
were granted with an exercise price that was at or above fair
market value of the Companys common stock on the date of grant.
The Company used the Black-Scholes option pricing model to estimate the fair value of stock-based
awards utilizing the following assumptions for the three month and six month periods ended June 30,
2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Dividend yield |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Expected volatility |
|
|
50.0 |
% |
|
|
70.9 |
% |
|
|
50.0 |
% |
|
|
70.9 |
% |
Risk-free interest rate |
|
|
4.80 |
% |
|
|
4.87 |
% |
|
|
4.65 |
% |
|
|
4.87 |
% |
Expected life of options, in years |
|
|
5.0 |
|
|
|
5.0 |
|
|
|
5.0 |
|
|
|
5.0 |
|
The assumptions above are based on multiple factors, including historical exercise patterns of
employees in relatively homogeneous groups with respect to exercise and post-vesting employment
termination behaviors, expected future exercising patterns for these same homogeneous groups, and
the volatility of the Companys stock price.
The change made in the Companys assumption for stock price volatility from 70.9% in 2006 to 50.0%
in 2007 did not materially affect results of operations for the three month or six month period
ending June 30, 2007.
The following table presents activity in the Companys stock option and restricted stock
unit plans for the periods shown (in thousands, except per share
amounts).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Stock options: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grants, in shares |
|
|
53 |
|
|
|
470 |
|
|
|
350 |
|
|
|
470 |
|
Weighted average grant
date fair value, per share |
|
$ |
3.89 |
|
|
$ |
10.14 |
|
|
$ |
5.78 |
|
|
$ |
10.14 |
|
Exercises, in shares |
|
|
34 |
|
|
|
126 |
|
|
|
74 |
|
|
|
459 |
|
Proceeds of exercises |
|
$ |
191 |
|
|
$ |
609 |
|
|
$ |
472 |
|
|
$ |
2,087 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grants, in shares |
|
|
|
|
|
|
64 |
|
|
|
61 |
|
|
|
78 |
|
Weighted average grant
date fair value, per share |
|
|
|
|
|
$ |
16.56 |
|
|
$ |
12.46 |
|
|
$ |
16.38 |
|
Shares vested in the period |
|
|
8 |
|
|
|
6 |
|
|
|
15 |
|
|
|
8 |
|
9
Stock-based compensation expense recognized in the statement of operations for the three months
ended June 30, 2007 was $673 ($791 for the three months ended June 30, 2006), and was $1,340 for
the six months ended June 30, 2007 ($1,366 for the six months ended June 30, 2006). At June 30,
2007 there was $6,838 of unrecognized compensation cost related to stock-based payments. The
Company expects this compensation cost to be recognized over a weighted-average period of 2.88
years.
10
NOTE 8. COMPREHENSIVE LOSS
The Companys comprehensive loss differs from its reported net loss due to foreign currency
translation adjustments. Comprehensive loss for the three months ended June 30, 2007 was $62 ($529
for the three months ended June 30, 2006), and for the six months ended June 30, 2007 was $1,868
($7,517 for the six months ended June 30, 2006). Net accumulated comprehensive income adjustments
as of June 30, 2007 are $255.
NOTE 9. INCOME TAXES
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48,
Accounting For Uncertainty In Income Taxes (FIN 48). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprises financial statements in accordance with
Statement of Financial Accounting Standards No. 109, Accounting For Income Taxes. FIN 48 requires
recognition in the financial statements of only those tax positions determined to be more likely
than not of being sustained upon examination based on the technical merits of the positions, and
also provides guidance on derecognition, classification, interest and penalties, interim period
accounting, disclosure, and transition. The Company adopted the provisions of FIN 48 effective
January 1, 2007.
The Company has not had taxable income since incorporation and therefore has not paid any income
taxes or recognized any tax benefit or tax expense in its statements of operations. At January 1,
2007, the Company had net deferred tax assets of $21.8 million, the majority of which relates to
the tax benefit of net operating loss carryforwards that will be realized only if the Company is
profitable in future years. Because future profitability is uncertain, the Company has provided a
valuation allowance against its net deferred tax assets, including its net operating loss
carryforwards, in full. The valuation allowance will remain at the full amount until it is more
likely than not that the related tax benefits will be realized through deduction against taxable
income during the carryforward periods, which extend from 2019 through 2026. Given its lack of
historical taxable income and the full amount of the deferred tax asset valuation allowance,
adoption of FIN 48 has had no effect on the Companys statement of operations for the six months
ended June 30, 2007 or on the balance of its accumulated deficit as of the January 1, 2007 date of
adoption.
The Company files income tax returns in the United States and Canada federal jurisdictions and in
various state jurisdictions. The Companys federal income tax returns have never been examined, and
all years since the Companys incorporation in 1998 remain subject to federal and state tax
examinations. The Company believes that any adjustments resulting from tax examinations would have
an immaterial effect on its results of operations and financial position.
As of January 1, 2007, the gross amount of unrecognized tax benefits and the total amount of
unrecognized tax benefits that, if recognized, would affect the Companys financial statement
effective rate of tax were zero.
The Company has not recognized significant interest or penalties related to unrecognized tax
benefits.
NOTE 10. WARRANTY OBLIGATION
The Company provides for the estimated costs of product warranties at the time revenue is
recognized if the customer does not purchase a service contract. Its warranty obligations depend
upon product failure rates and service delivery costs incurred to correct any product failures. The
Companys estimates of warranty obligation are based on specific warranty claims, historical data,
and engineering estimates. If actual product failure rates or service delivery costs differ from
estimates, the estimated warranty liability is revised.
The Company warrants that its software products will perform in all material respects in accordance
with standard published specifications in effect at the time of delivery of the licensed products
as long as the warranty remains in effect, and warrants that its services will be performed by
qualified personnel in a manner consistent with normally accepted industry standards.
Activity in the Companys warranty liability for the three and six month periods ended June 30,
2007 follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, 2007 |
|
|
June 30, 2007 |
|
Beginning liability balance |
|
$ |
623 |
|
|
$ |
700 |
|
Additions charged to expense |
|
|
155 |
|
|
|
341 |
|
Deductions for claim resolution |
|
|
(243 |
) |
|
|
(506 |
) |
|
|
|
|
|
|
|
Ending liability balance |
|
$ |
535 |
|
|
$ |
535 |
|
|
|
|
|
|
|
|
|
|
|
ITEM 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
FORWARD-LOOKING STATEMENTS
Some of the statements made in this Quarterly Report on Form 10-Q contain forward-looking
statements that reflect the Companys plans, beliefs, and current views with respect to, among
other things, future events and
11
financial performance. These statements are often identified by use of forward-looking words
such as believe, expect, potential, continue, may, will, should, could, would,
intend, plan, estimate, anticipate, and comparable words or the negative version of these
and other words. Any forward-looking statement contained in this Form 10-Q is based upon the
Companys historical performance and on current plans, estimates, and expectations. The inclusion
of this forward-looking information should not be regarded as a representation by the Company or
any other person that the future plans, estimates, or expectations contemplated by the Company will
be achieved. Such forward-looking statements are subject to various risks and uncertainties. In
addition, there are or will be important factors that could cause actual results to differ
materially from those indicated in the statements. These factors include, but are not limited to,
those described in Item 1A of the Companys Annual Report on Form 10-K for the year ended December
31, 2006 under the caption Risk Factors.
This cautionary statement should not be regarded as exhaustive and should be read in
conjunction with other cautionary statements and other information contained in the Companys
Annual Report on Form 10-K for the year ended December 31, 2006. The Company operates in a
continually changing business environment, and new risks and uncertainties emerge from time to
time. Management cannot predict these new risks and uncertainties, nor can it assess the impact,
if any, that any such risks and uncertainties may have on the Companys business or the extent to
which any factor or combination of factors may cause actual results to differ from those projected
in any forward-looking statement. Accordingly, the risks and uncertainties to which the Company is
subject can be expected to change over time, and the Company undertakes no obligation to update
publicly or review the risks or uncertainties described herein or in the Companys Annual Report on
Form 10-K for the year ended December 31, 2006. The Company also undertakes no obligation to
update publicly or review any of the forward-looking statements made in this Form 10-Q, whether as
a result of new information, future developments, or otherwise.
This Managements Discussion and Analysis of Financial Condition and Results of Operations
section should be read in conjunction with the unaudited financial statements and footnotes
appearing in Part I of this Form 10-Q and the audited financial statements included in the
Companys Annual Report on Form 10-K for the year ended December 31, 2006.
COMPANY OVERVIEW
Emageon provides an enterprise-level information technology solution for the clinical analysis
and management of digital medical images within multi-hospital networks, community hospitals, and
diagnostic imaging centers. The Companys solution consists of advanced visualization and image
management software, third-party components, and comprehensive support services. The Companys
web-enabled advanced visualization software, which is hosted by the customer, provides physicians
across the enterprise, in multiple medical specialties and at any network access point, with
dynamic tools to manipulate and analyze images in both a two dimensional and three dimensional
perspective. With these tools, physicians have the ability to better understand internal anatomic
structure and pathology, which can improve clinical diagnoses, disease screening, and therapy
planning. The Companys open standard solution is designed to help customers improve staff
productivity, enhance revenue opportunities, automate complex medical imaging workflow, lower total
cost of ownership, and provide better service to physicians and patients.
RESULTS SUMMARY
Revenue for the three months ended June 30, 2007 (the Companys second fiscal quarter of 2007)
was $25.6 million, a 14.8% decrease from the second quarter of 2006. For the six months ended June
30, 2007, total revenue was $52.9 million, a 7.2% decrease from the comparable prior year period.
The net loss for the second quarter was $0.3 million, or $0.01 per share, compared to a net loss of
$0.9 million, or $0.04 per share, in the second quarter of 2006. For the six months ended June 30,
2007, the Companys net loss was $2.1 million, or $0.10 per share, compared to a net loss of $7.9
million, or $0.38 per share, in the first half of 2006. The
Companys loss from operations in the second quarter of 2007 was
improved over that of second quarter of 2006 by $0.4 million,
and was improved for the six months ended June 30, 2007 by $5.4 million over the comparable prior year period.
For both of these comparative periods, the revenue declines described
above were offset by improved gross margins earned on revenue and by
declines in operating expenses, including Camtronics integration
charges incurred in 2006 only. Further details of the changes in
revenue, gross margin, and operating expenses are included below.
Included in the results of the Company for the three month and six month periods ended June
30, 2007 are the following:
12
|
1) |
|
Second quarter non-cash expenses of $0.3 million, or $0.02 per share, in amortization
of intangible assets acquired in the Camtronics acquisition, ($0.7 million, or $0.03 per
share, for the six months ended June 30), |
|
|
2) |
|
Second quarter non-cash expenses of $0.7 million, or $0.03 per share, for stock-based
compensation ($1.3 million, or $0.06 per share, for the six months ended June 30), and |
|
|
3) |
|
A restructuring charge of $0.6 million, or $0.03 per share, representing the
severance and related costs of the Companys workforce
reduction in
May 2007 in its effort to align operating expenses with the current level of revenue. |
Cash
provided by operations in the second quarter of 2007 was $3.7 million and for the six
months ended June 30, 2007 was a net usage in operations of $0.3 million. At June 30, 2007 the
Company had approximately $20.9 million in cash and cash
equivalents. In addition, in August 2007
the Company increased the credit available under its line of credit
agreement with a bank from $10 million to $15 million.
Revenue and Gross Margin
Revenue consists of system sales and support services revenue. System sales revenue is
comprised of revenue from sales of the Companys software and
third-party components, consisting primarily of
computer hardware. Costs of system sales revenue consist of purchases of hardware and software
from third party vendors for use by customers, system integration
costs, and the internal costs of the Companys software
licenses. Software development expenses are generally included in research and development expense
in the Companys statement of operations.
Support services revenue is comprised of revenue from professional services such as
implementation and training, as well as ongoing maintenance services. Costs of support services
revenue consist of labor, overhead, and associated costs of implementation, installation, and
training on behalf of customers, and the costs of providing continuous support of hardware and
software sold to customers.
The characteristics of individual system sales can vary significantly as to length of
implementation time, total value of the sale, and gross margin earned. In addition, in any given
period, the mix of system sales revenue to support services revenue and the mix of hardware and
software comprising system sales revenue can produce significant variability in the levels of
revenue and total gross margin reported.
The following table sets forth comparative revenue and gross margin data for the three and six
month periods ended June 30, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System sales |
|
$ |
11,235 |
|
|
$ |
17,601 |
|
|
$ |
24,903 |
|
|
$ |
34,870 |
|
Support services |
|
|
14,341 |
|
|
|
12,415 |
|
|
|
28,023 |
|
|
|
22,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
25,576 |
|
|
$ |
30,016 |
|
|
$ |
52,926 |
|
|
$ |
57,017 |
|
Cost of Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System sales |
|
$ |
6,310 |
|
|
$ |
9,977 |
|
|
$ |
15,032 |
|
|
$ |
23,261 |
|
Support services |
|
|
6,894 |
|
|
|
6,495 |
|
|
|
14,054 |
|
|
|
12,752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
13,204 |
|
|
$ |
16,472 |
|
|
$ |
29,086 |
|
|
$ |
36,013 |
|
Gross Profit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System sales |
|
$ |
4,925 |
|
|
$ |
7,624 |
|
|
$ |
9,871 |
|
|
$ |
11,609 |
|
Support services |
|
|
7,447 |
|
|
|
5,920 |
|
|
|
13,969 |
|
|
|
9,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
12,372 |
|
|
$ |
13,544 |
|
|
$ |
23,840 |
|
|
$ |
21,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Gross Margin: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System sales |
|
|
43.8 |
% |
|
|
43.3 |
% |
|
|
39.6 |
% |
|
|
33.3 |
% |
Support services |
|
|
51.9 |
% |
|
|
47.7 |
% |
|
|
49.8 |
% |
|
|
42.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
48.4 |
% |
|
|
45.1 |
% |
|
|
45.0 |
% |
|
|
36.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary
Total revenue in second quarter 2007 was $25.6 million, a 14.8% decrease from second quarter
2006. For the six months ended June 30, 2007, total revenue was $52.9 million, a 7.2% decrease
from the comparable prior year period. These declines in revenue reflect soft system sales
bookings experienced by the Company in late fourth quarter 2006 and extending through first quarter
2007, as further explained below. Gross margin on total revenue improved
by 3.3 percentage points for second quarter and by 8.2 percentage points for the six months
ended June 30, 2007 compared to comparable prior year periods. The two components of the Companys revenue and gross margin are discussed
individually below in comparison to prior year periods.
Sequentially, second quarter 2007 total revenues decreased by $1.8 million from the first
quarter of 2007.
System Sales Revenue
Second quarter 2007 system sales revenue declined by $6.4 million, or 36.2%, compared to the
second quarter of 2006. For the six months ended June 30, 2007, system sales revenue was $24.9
million, or 28.6% less than first half 2006 system sales revenue. The most significant factors contributing
to both the second quarter and year to date declines are an increasingly longer sales cycle in the
Companys primary radiology market, which is now largely a replacement market among the Companys
traditional larger-sized existing and potential customers, delays in the award of several specific
sales contracts from not-for-profit hospitals and other customers, and lower than anticipated sales
from the Companys cross selling efforts with customers obtained through the Companys acquisition
of Camtronics Medical Systems in late 2005. Offsetting these factors
was closure of one individually significant system software sale in
second quarter 2007. Revenue from the Companys cardiology products
exhibited some strength in both the second quarter and year to date periods in 2007 compared to
corresponding periods in 2006.
Despite
these declines, the Company continues to believe that prospective
sales identified in its sales pipeline will restore revenue growth and that its cardiology customer
cross selling efforts will be successful. In addition, in June 2007
the Company announced a plan to introduce its products to the medium-to-smaller-sized hospital market.
System Sales Gross Margin
The
Companys system sales gross margin was 43.8% for second quarter
2007, relatively even with that of second quarter 2006, and
approximately in line with expectations. In second quarter 2007, a
higher mix of cardiology revenue to total system sales revenue and a lower
volume of sales, both of which tend to lower system sales gross
margin, were offset by the positive effects of higher software
content in the systems sold.
For the six months ended June 30, 2007, system sales gross margin was 39.6% compared to 33.3%
for the same period in 2006. Current year to date gross margin was
adversely affected by lower volume and by
a higher mix of cardiology to total system sales revenue, as described above. First half 2006
system sales gross margin was adversely affected by first quarter 2006 system sales revenue
characterized by a high hardware content in the systems sold.
In general, the costs of third party hardware components tend to lower the Companys system
sales gross margin, and cardiology revenues typically bring lower
system sales margins than do radiology revenues. The
Companys system sales gross margin may significantly fluctuate from period to period depending on
the mix of revenue recognized in a given
14
reporting period, hardware versus software content of sales recognized, and the timing of
completion of installation and customer acceptance of larger dollar individual sales.
Support Services Revenue
The Companys support services revenue increased by $1.9 million, or 15.5%, in second quarter
2007 compared to the prior year period, and by $5.9 million, or 26.5%, for the six months ended June 30,
2007 compared to the same period in 2006. Support services revenue, which consists primarily of system
installation services, customer training, professional services, and system maintenance services,
are ancillary to the Companys system sales revenues. Second quarter and year to date 2007
support services revenue was characterized by completion of several significant professional
services orders. That, together with a higher number of customers in the installed base
subscribing to the Companys maintenance services, accounts for support services revenue growth in
both second quarter and first half 2007. Sequentially, support services revenue was $0.7 million,
or 4.8%, higher in second quarter 2007 than in first quarter 2007.
Support Services Gross Margin
The Companys support services gross margin was 51.9% in second quarter 2007, a 4.2 percentage
point increase over the second quarter 2006 level, and was 49.8% for the six months ended June 30,
2007, a 7.4 percentage point increase over the comparable prior year period. The second quarter
2007 margin, which is slightly higher than its historical level, is the result of closure of
several individually significant professional services orders in 2007. In addition, the
Companys workforce reduction and restructuring in May 2007 lowered the level of second
quarter and year to date support services salaries and related benefits, improving its support
services gross margin. The Company further believes that its support services gross margin is
higher for both the second quarter 2007 and six months ended June 30, 2007 as the result of gradually
increasing labor and other efficiencies in its installation, training, and maintenance activities
as the cost of these services is spread over a larger installed base of customers.
Going forward, the Company expects support services gross margin in the mid- to- high forty
percent range assuming its installed base of customers continues to grow and its staff efficiencies
continue, but also expects some timing-based variability in support services gross margin from
period to period as the result of timing of closure of individual services contracts.
Research & Development, Sales & Marketing, and General & Administrative Expenses
Total research and development, sales and marketing, and general and administrative expenses
for the quarter ended June 30, 2007 were $12.0 million as compared to $12.5 million in the
corresponding prior year quarter, a decrease of $0.5 million or 4.4%. This net decline was the
result of a) an increase in research and development expenses due primarily to increased
utilization and costs of outsourced services and b) a decrease in general and administrative
expenses resulting from a decline in the administrative duties of support services personnel. As a
percentage of revenue, these expenses were 46.8% in second quarter 2007 compared to 41.7% in second
quarter 2006.
For the six months ended June 30, 2007, total research and development, sales and marketing,
and general and administrative expenses were flat with the prior year period at $25.1 million, the
result primarily of significantly increased research and development expenses offset by a decline
in general and administrative expenses, both as described above. As a percentage of revenue, these
expenses were 47.5% in the six months ended June 30, 2007, compared to 43.7% in the comparable
prior year period.
The
Company continues to try to identify opportunities to reduce or
limit the growth of its operating expenses in an effort to better
align these expenses with the
expected level of revenue growth.
15
Research and Development Expenses
Research and development expenses increased by $0.7 million, or 17.3%, in second quarter 2007
compared to second quarter 2006. The increase is primarily the result of higher utilization and higher costs
of outsourced research and development and related services in 2007 and the undertaking of fewer
projects qualifying for software development cost capitalization than in 2006. Offsetting these
increases in 2007 are reduced salary and related costs resulting from
the workforce reduction in May 2007. As a percentage of revenue, research and development expenses were 18.3% in second
quarter 2007 compared to 13.2% in second quarter 2006.
For the six months ended June 30, 2007, research and development expenses increased by $1.6
million, or 20.2%, over the prior year period for the same reasons
such expenses increased for second quarter
2007. As a percentage of revenue, research and development expenses were 18.5% in the first
half of 2007 compared to 14.3% in the first half of 2006.
Sales and Marketing Expenses
Sales
and marketing expenses in second quarter 2007 were flat with that of second quarter 2006
at $4.5 million. Of the primary items comprising sales and marketing expense, salaries and
benefits, including sales commissions, were flat with the prior year period, as was travel and
related expenses, while expenses related to exhibits and trade shows were down slightly. The level
of commission expense recognized in a given period is affected by the timing of receipt of sales
order bookings, revenue recognition, and payment from customers. As a percentage of revenue, sales
and marketing expenses were 17.6% in second quarter 2007 compared to 15.1% in second quarter 2006.
For the six months ended June 30, 2007, sales and marketing expenses increased by $0.3
million, or 3.5%, over the prior year period. Salaries and benefits were up slightly during the
period due to the timing of earning of sales commissions, while both travel and exhibits and trade
show expenses were flat with the prior year period. As a percentage of revenue, sales and
marketing expenses were 16.8% in the first half of 2007 compared to 15.1% in the first half of
2006.
General and Administrative Expenses
General
and administrative expenses decreased by $1.2 million, or 30.3%, in second quarter
2007 compared to second quarter 2006. In 2006, a portion of support services personnel were
temporarily engaged in activities of an administrative nature, and accordingly their cost was
charged to general and administrative expense. These personnel no
longer perform significant administrative duties and therefore these
costs are no longer included in general and administrative expenses. In addition, the Companys bad debts expense was less in second quarter 2007 than in second
quarter 2006. As a percentage of revenue, general and administrative expenses were 10.9% in second
quarter 2007 compared to 13.4% in second quarter 2006.
For the six months ended June 30, 2007, general and administrative expenses decreased by $1.8
million, or 21.5%, over the prior year period. The decline in expenses related to the duties of
customer support personnel and the decline in bad debts expense, both as explained above, are primarily responsible for the year to date decline in general and administrative
expenses. Offsetting these expense declines was a continuing high level of expenses related to
the Companys compliance with portions of the Sarbanes-Oxley Act of 2002. As a percentage of
revenue, general and administrative expenses were 12.1% in the first half of 2007 compared to 14.3%
in the first half of 2006.
LIQUIDITY AND CAPITAL RESOURCES
Summary
The Companys cash and cash equivalents at June 30, 2007 totaled $20.9 million, a decline of
approximately $2.1 million since December 31, 2006. This decline is primarily the result of
funding of the Companys net loss for the first half, but also includes the effects of investment
in property, plant, and equipment of $1.6 million and the payment of scheduled debt installments of
$0.9 million, offset by the proceeds of stock option exercises by employees of $0.5 million. Net
positive cash provided by operating activities in the second quarter of 2007 was $3.7 million
compared to a net use of cash in operations of $4.0 million in the first quarter of 2007. Total
debt remained minimal, and the Company has not drawn on its line of credit
arrangement, which was increased from $10 million to $15 million in
credit availability in August 2007. The Company
16
continues to believe that its existing cash balances, together with its future
cash flows and the availability of funding under its line of credit, if necessary, will be
sufficient to fund its operations for the next twelve months.
Cash Used In Operating Activities
Net cash used in operations for the six months ended June 30, 2007 was $0.3 million compared
to a net usage of cash of $2.7 million in the six months ended June 30, 2006. The net use of cash
in first half 2007 is primarily the result of the Companys net loss for the period, but also
includes the negative effects of declines in accounts payable,
accrued expenses, and deferred revenue (offset somewhat by decreases in
accounts receivable and inventory), all the result of the lower level
of sales order and
operating activity in 2007 compared to 2006.
The net use of cash of $2.7 million in the six months ended June 30, 2006 was the result
primarily of that periods net loss of $7.8 million, but also included the negative effects of an
inventory increase of $3.7 million and a net accounts payable and accrued liability decline of $1.6
million, both due to timing of purchases and payments.
Cash from operating activities in a given period is most affected by the Companys net income
or loss for the period, by the timing of billings to customers
compared to the timing of revenue
recognition, and by the timing of receipt and delivery of sales orders, which can temporarily
affect the levels of inventory and accounts payable. The Company was cash flow positive from
operations in the second quarter of 2007, but is closely monitoring its cash position in view of
the first half 2007 decline in sales order activity.
Cash From Investing Activities
Net cash used in investing activities was $1.9 million in the first half of 2007 compared to a
net provision of cash from investing activities of $1.1 million in the comparable prior year
period. The first half 2007 use of cash included $1.6 million in
capital expenditures, primarily for computer equipment.
The net provision of cash by investing activities of $1.1 million in the six months ended June
30, 2006 consisted of the maturity of $5.0 million of marketable securities, the proceeds of which
were used to finance operating activities, and a use of cash of $3.5 million to purchase property
and equipment items for internal use, primarily in research and development and to equip new
employees.
The Company expects that purchases of property and equipment for internal use and for use at
customer sites will continue commensurate with growth in its customer base, employee headcount, and research
and development activities.
Cash From Financing Activities
Net cash provided by financing activities was $0.1 million in the six months ended June 30,
2007 compared to $0.7 million in the comparable prior year period. First half 2007 financing
activities included payment of scheduled debt of $0.9 million, offset by proceeds of employees
exercises of stock options of $0.5 million.
The net provision of cash from financing activities of $0.7 million in the six months ended
June 30, 2006 consisted of proceeds of $2.1 million on the exercise of stock options offset by
regularly scheduled payments of outstanding debt of $1.4 million.
Contractual Cash Obligations
As of June 30, 2007 the Company had total obligations for the payment of cash of approximately
$5.9 million, consisting of $0.2 million in debt and capital lease obligations and $5.7 million in
operating lease commitments, primarily of office space. Under their present terms, these
obligations come due in the amounts of approximately $1.6 million in less than one year,
$2.9 million in one to three years, and $1.4 million in three years and beyond.
17
Available Credit
In
August 2007, the Company amended its existing credit agreement with a bank to increase the
amount of credit available to $15 million. Credit available under the agreement had previously been
$10 million. Interest on any borrowings under the agreement is at the banks prime rate. The
agreement is for a term of two years, at the end of which all amounts become due and payable.
Security for any amounts borrowed under the agreement consists of all assets of the Company other
than its intellectual property and real estate. At June 30, 2007 there were no amounts outstanding
under the agreement.
The Company believes that existing cash, together with its future cash flows and amounts
available under its credit agreement, if necessary, will be sufficient to execute its
business plan for the next twelve months. However, any projections of cash flow are subject to
uncertainties, including the Companys rate of revenue growth, the expansion of its sales and
marketing activities, the timing and extent of spending in support of product development efforts,
the timing and success of new product introductions, continuing market acceptance of the Companys
products, costs and risks associated with the integration of acquired businesses, and the Companys
ability to manage its growth. In addition, although not currently a party to any letter of intent
or binding agreement, the Company may also invest in or acquire complementary businesses, services,
or technologies, which could require that funding be obtained through additional equity or debt
financing. It is possible that additional financing for any of these purposes could be required,
and that additional funds may not be available on favorable terms or at all.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The debt instruments of the Company do not expose the Company to material market risks
relating to changes in interest rates.
Excess funds of the Company are invested in short-term, interest-bearing, investment-grade
securities. The value of these securities is subject to interest rate risk and could decline in
value if interest rates rise. The effect of a hypothetical one hundred basis point decrease across
all interest rates related to the Companys investments would result in an annual decrease of
approximately $0.1 million in operating results, assuming no change in the amount of investments on
hand at June 30, 2007.
The primary objective of the Companys investing activity is to preserve principal while
maximizing income without significantly increasing risk. Cash is invested principally in U.S.
marketable debt securities from a diversified portfolio of institutions with strong credit ratings
and in U.S. government agency notes. By policy, the amount of credit exposure to any single
institution is limited.
To minimize the exposure to changes in interest rates, the Company schedules its investments to
mature in line with expected cash needs, thus reducing the potential of selling investments prior
to their maturity. The Company believes it has minimal exposure to interest rate risk.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, that are designed to
ensure that information required to be disclosed in the reports filed or submitted by the Company
under the Exchange Act is recorded, processed, summarized, and reported within the time periods
specified in the SECs rules and forms and that such information is accumulated and communicated to
management of the Company, including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. Charles A. Jett, Jr., Chief
Executive Officer and President, and W. Randall Pittman, Chief Financial Officer and Treasurer,
conducted an evaluation of the effectiveness of the design and operation of the Companys
disclosure controls and procedures as of June 30, 2007 and, based on that evaluation, found the
Companys disclosure controls and procedures were effective in ensuring that information required
to be disclosed in the reports filed by the Company and submitted under the Exchange Act is
recorded, processed, summarized and reported as and when required, and that information required to
be disclosed is accumulated and communicated to them as appropriate to allow timely decisions
regarding timely disclosure. There have been no changes in the Companys internal controls over
financial reporting during the six months ended June 30, 2007 that have materially affected,
or are reasonably likely to materially affect, the Companys internal control over financial
reporting.
18
PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, careful consideration should be
given to the factors discussed in Part I, Item 1A. Risk Factors in the Companys Annual Report on
Form 10-K for the year ended December 31, 2006, which could materially affect the Companys
business, financial condition, or future results. The risks described in the Companys Annual
Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties
not currently known or that are currently deemed to be immaterial also may materially adversely
affect the Companys business, financial condition, and/or operating results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Companys initial public offering of its common stock was effected through a Registration
Statement on Form S-1 which was declared effective on February 8, 2005. In the offering the
Company sold 5,750,000 shares of common stock for net proceeds of approximately $67.2 million. On
February 18, 2005 the Company used $4.0 million of the proceeds to repay borrowings under its
subordinated notes, and invested the remaining proceeds in short-term, investment grade securities
pending further use. Since that time and through June 30, 2007, the Company has used approximately
$12.2 million of the net proceeds for capital purchases, substantially all of which have been
equipment, and an additional $40.0 million of the net proceeds to acquire all of the outstanding
stock of Camtronics Medical Systems, Ltd. on November 1, 2005.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Companys annual meeting of stockholders was held May 24, 2007. The results of that
meeting follow.
|
1) |
|
Two directors were elected to the Board of Directors to serve for a three
year term expiring at the annual meeting in 2010 or until their successors have been
duly elected and qualified. Both nominees were serving as directors of the Company at
the time of their nomination for the current term. The terms of office of six other
directors continued after the meeting. |
|
|
|
|
|
|
|
|
|
|
|
Votes For |
|
Votes Withheld |
Mylle H. Mangum |
|
|
17,327,152 |
|
|
|
1,432,627 |
|
Hugh H. Williamson, III |
|
|
17,345,114 |
|
|
|
1,414,665 |
|
|
|
|
|
|
|
|
|
|
Directors whose terms of office continued after the meeting: |
|
|
|
|
|
|
|
|
|
Terms Expiring In 2008 |
|
|
|
|
|
|
|
|
Arthur P. Beattie |
|
|
|
|
|
|
|
|
Fred C. Goad |
|
|
|
|
|
|
|
|
Charles A. Jett, Jr. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terms Expiring In 2009 |
|
|
|
|
|
|
|
|
Roddy J.H. Clark |
|
|
|
|
|
|
|
|
Douglas D. French |
|
|
|
|
|
|
|
|
John W. Thompson |
|
|
|
|
|
|
|
|
19
|
2) |
|
The ratification of the appointment of Ernst&Young LLP as the Companys
independent registered public accountants for the year ending December 31, 2007 was
approved as follows: |
|
|
|
|
Votes for18,603,833 |
|
|
|
|
Votes against138,740 |
|
|
|
|
Abstentions17,206 |
ITEM 6. EXHIBITS
|
|
|
Exhibit No. |
|
Description |
|
31.1*
|
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under
the Securities Exchange Act of 1934 |
|
|
|
31.2*
|
|
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a)
under the Securities Exchange Act of 1934 |
|
|
|
32*
|
|
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
Emageon Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized August 8, 2007.
|
|
|
|
|
|
EMAGEON INC.
|
|
|
By: |
/s/ Charles A. Jett, Jr.
|
|
|
|
Charles A. Jett, Jr. |
|
|
|
Chairman, Chief Executive Officer, and President
(Principal Executive Officer) |
|
|
|
|
|
|
By: |
/s/ W. Randall Pittman
|
|
|
|
W. Randall Pittman |
|
|
|
Chief Financial Officer and Treasurer
(Principal Financial Officer) |
|
|
21