EMAGEON INC.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year Ended
December 31, 2005
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File No.: 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 incorporation or organization)
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(I.R.S. Employer Identification
No.)
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1200 Corporate Drive,
Suite 200
Birmingham, Alabama
(Address of principal
executive offices)
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35242
(zip
code)
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Registrants telephone number, including area code:
(205) 980-9222
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, $0.001 Par Value Per Share
(Title of Class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. YES o NO þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. YES o NO þ
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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer.
Large accelerated
filer o Accelerated
filer o Non-accelerated
filer þ
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). YES o NO þ
The aggregate market value of the common stock held by
non-affiliates of the registrant (which, for purposes hereof,
are all holders other than executive officers, directors, and
holders of 10% or more of the outstanding common stock of the
registrant) as of June 30, 2005 was approximately
$208,717,000 based on the closing sale price of such stock as
reported by The NASDAQ Stock Market, Inc. on June 30, 2005.
The basis of this calculation does not constitute a
determination by the registrant that any of the persons referred
to in the immediately preceding sentence are affiliates of the
registrant.
As of March 23, 2006 there were 20,806,339 shares of
Emageon Inc. common stock, $0.001 par value, outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Companys Proxy Statement for the
May 25, 2006 Annual Meeting of Shareholders are
incorporated by reference into Part III.
PART I
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements made under the headings
Business and Managements Discussion and
Analysis of Financial Condition and Results of Operations
and elsewhere in this Annual Report on
Form 10-K
contain forward-looking statements which reflect our plans,
beliefs and current views with respect to, among other things,
future events and financial performance. We often identify these
forward-looking statements by the use of forward-looking words
such as believe, expect,
potential, continue, may,
will, should, could,
would, seek, predict,
intend, plan, estimate,
anticipate or the negative version of those words or
other comparable words. Any forward-looking statements contained
in this Annual Report are based upon our historical performance
and on current plans, estimates and expectations. The inclusion
of this forward-looking information should not be regarded as a
representation by us or any other person that the future plans,
estimates or expectations contemplated by us 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 our actual results to differ materially
from those indicated in these statements. We believe these
factors include, but are not limited to, those described in
Item 1A of this Annual Report under the caption Risk
Factors.
These cautionary statements should not be construed as
exhaustive and should be read in conjunction with the other
cautionary statements that are included in this Annual Report.
Moreover, we operate in a continually changing business
environment, and new risks and uncertainties emerge from time to
time. Management cannot predict these new risks or
uncertainties, nor can it assess the impact, if any, that any
such risks or uncertainties may have on our 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 we are subject can be expected to change
over time, and we undertake no obligation to update publicly or
review the risks or uncertainties described herein. We also
undertake no obligation to update publicly or review any of the
forward-looking statements made in this Annual Report, whether
as a result of new information, future developments or otherwise.
ITEM 1: BUSINESS
Overview
We provide enterprise-level information technology solutions for
the clinical analysis and management of digital medical images
within health care provider organizations. Our solutions consist
of advanced visualization and image management software for
multiple medical specialties, comprehensive knowledge tools for
cardiology, support services and third-party components. Our
web-enabled advanced visualization software provides physicians
across the enterprise in multiple medical
specialties and at any network access
point with tools to manipulate and analyze
images in two dimensions (2D) and three dimensions
(3D). We enable physicians to better understand
internal anatomic structure and pathology, which can improve
clinical diagnoses, disease screening and therapy planning. We
believe our solutions improve physician productivity and patient
care, enhance customer revenue opportunities, automate complex,
mission-critical medical imaging workflow, and maximize our
customers return on investment in capital equipment and
clinical information systems.
We sell to multi-hospital networks, community hospitals,
physician clinics and diagnostic imaging centers. Health care
providers produce growing volumes of medical imaging data that
must be analyzed, managed and stored efficiently and
cost-effectively. We focus on developing corporate-level
relationships with large multi-facility organizations, which can
result in substantial cross-selling opportunities and represent
an important competitive advantage for us. Since our first
commercial implementation in December 2000, we have implemented
our solutions at facilities affiliated with some of the largest
multi-facility health care providers in the U.S.
As of December 31, 2005, we had $158.0 million in
contracted backlog, consisting primarily of fees for contracted
future installations and for the support of existing
installations, compared with a contracted backlog of
$118.2 million at December 31, 2004. We expect to
recognize revenue of approximately $73.3 million from
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our current contracted backlog during fiscal year 2006,
$27.0 million during fiscal year 2007, and substantially
all of the approximately $57.7 million remaining by 2010.
We were founded in December 1998 as an Alabama corporation and
reincorporated in Delaware in January 2000. On February 14,
2005, we completed our initial public offering. We acquired
Camtronics Medical Systems, Ltd. (Camtronics) on
November 1, 2005.
Our
Opportunity
Demand for advanced visualization and image management solutions
is growing as the number and size of imaging exams increase due
to accelerating physician adoption of advanced imaging, the
growing health care needs of an aging U.S. population and
the increasing sophistication of imaging devices such as
computed tomography (CT), magnetic resonance imaging (MRI),
positron emission tomography (PET) and cardiac catheterization.
We do not believe existing film-based workflow or
department-level Picture Archiving and Communications
Systems (PACS) are sufficient to meet this growing demand.
Health care providers need digital infrastructure, storage and
image management capabilities to alleviate the operating strain
created by medical image records.
Frost & Sullivan, a leading health care consulting and
research firm, estimated in a 2004 report that the total
U.S. medical imaging market, including capital equipment
and technology, would reach $16.6 billion in 2008. They
report that information technology spending associated with
medical imaging accounted for approximately 15% of the total
medical imaging market in 2003 and estimate that it will grow at
an average compound annual growth rate of 15% from 2002 through
2008. Further, in 2005 Frost & Sullivan forecasted a
16.8% compound annual growth rate in enterprise cardiology PACS
from 2004 through 2011.
We believe the rapid expansion in the number and complexity of
medical images and the need to automate complex, manual workflow
processes are driving health care providers to invest in systems
that maximize their return on capital investments in expensive
imaging devices and clinical information technology. We
facilitate the convergence of imaging technology and clinical
automation at the enterprise level by enhancing analysis,
integration and automation of medical imaging data. Effective
image management can shorten report turnaround times, lower the
potential for manual error in data entry and filing, increase
staff efficiency, eliminate costs associated with traditional
radiological workflow and improve overall diagnostic and
clinical quality. We believe the following factors have
collectively increased the demand for our solution:
Increasing Number, Size and Complexity of Imaging
Exams. The number of imaging exams performed each
year is increasing as a result of a number of factors, including
increased physician use of advanced imaging as a non-invasive
diagnostic and clinical tool, lowered costs of imaging devices
and increased health care needs of an aging
U.S. population. At the same time, technological
advancements are increasing the size and complexity of
individual imaging exams. For example, new CT scanners produce
20 times as much data as prior models, with exams consisting of
thousands of individual images yielding 500 to
1,000 megabytes of data per exam, versus only 25 to
50 megabytes just three years ago. One modality
manufacturer has announced that they plan to have a 256-slice CT
scanner on the market by 2008, and that scanner will produce
images that are at least ten times the size of the images
produced by todays most advanced scanners. The increasing
prevalence of fusion techniques used to combine images from
multiple imaging devices increases the complexity of many exams.
The rapid growth in the data size of medical images means that
medical images also consume a greater share of hospital
resources.
Need for Advanced Visualization Tools. Because
the output of a cross-sectional imaging device, such as a CT
scanner, may consist of thousands of sliced 2D
images, physicians need sophisticated software tools to model
those images in 3D and allow the viewing of a
virtual patient at all angles. Physicians can
benefit from computer-created 3D images and eliminate the need
to mentally reconstruct 2D images into a single useful 3D image.
This improves diagnostic capabilities, treatment and
non-invasive surgical planning. Sophisticated new tools, such as
3D volumetric imaging and volume rendering, maximum intensity
projection (MIP), multi-planar reformat (MPR) and surface
shading, are increasingly essential to present medical images in
a manner that is valuable to the physician for diagnosis and
treatment planning. Moreover, some surgical specialists will not
perform a complex surgery without first
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performing pre-operative 3D planning. Hospitals and hospital
networks that provide these advanced visualization tools to
physicians have the advantage of attracting patient referrals
from those physicians that heavily utilize visualization
technology in their practices.
Need for Complete Electronic Health
Records. The need to improve clinical care and
eliminate inefficiencies in existing paper-based methods,
including film-based image management, continues to drive
investment in clinical information technology. In 2004, the
federal government began several initiatives to accelerate
information technology adoption rates within the health care
system, including the Presidential appointment of a national
health care information technology office and a recommitment to
the Presidents Information Technology Advisory Committee.
Health care providers are implementing clinical information
systems to automate clinical documentation and integrate patient
information into electronic health records. However, these
clinical information systems typically lack the sophistication
or capability to incorporate digital medical images from
radiology modalities, echocardiology, or the cardiac
catheterization lab into patient health records. Incomplete
electronic health records can result in delayed diagnosis,
billing errors and inefficient workflow. A complete electronic
health record, which includes all medical images and complete
data from cardiac catheterization and echocardiology procedures,
enhances the benefits of investment in clinical information
technology.
Shortcomings of Film-Based Image
Management. Many health care providers still use
film to capture medical images from devices such as X-ray
machines, which may produce three to four images per typical
exam, and CT scanners, which can produce 1,000 images per exam.
A film-based system has numerous inefficiencies, including
complex exam scheduling, redundant patient data entry, the
possibility of misplaced or misfiled notations and case
histories, physical films and files that must be copied often or
moved among the technologist, the specialist physician and the
treating physician, and substantial storage space requirements.
Each of these inefficiencies has the potential to increase the
total cost per exam.
Limitations of Current Methodologies for Managing Digital
Medical Images. Current digital medical image
management systems, which correct some of the inefficiencies of
film-based imaging, have traditionally consisted of specialized
services and technologies tied to specific department-level
requirements. For example, a typical PACS installation is a
department-level installation with dedicated hardware components
primarily designed to address the image storage and distribution
needs of a small number of physicians in a single department
(e.g., radiology or cardiology, but not both). While PACS
may offer substantial automation benefits within such a single
department over traditional film-based imaging workflow, they do
not offer the full potential of an integrated, enterprise-level
digital image management solution and these systems also
typically do not integrate with clinical and administrative
systems without expensive custom programming. Many hospitals
that have embraced image automation have had to purchase
multiple PACS and software tools for various departments and
imaging devices, which presents integration challenges and
requires significant investment. Many PACS were developed prior
to the recent growth in the use of 3D imaging techniques and do
not easily scale to handle the data volume of current imaging
devices. PACS visualization tools are typically limited only to
2D and are not distributable across the network except in a very
rudimentary manner.
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Our
Solutions
We provide enterprise-level information technology solutions for
the clinical analysis and management of digital medical images
within health care provider organizations.
With our solutions, our customers and their constituents,
including physicians, technologists and nurses, can improve
overall clinical and diagnostic quality and eliminate much of
the labor and other costs of dealing with film, disparate
department-level information systems, exam scheduling and
redundant data entry. We also help to alleviate heavy burdens on
a health care providers staff by automating medical image
workflow for physicians and technologists. We believe our
enterprise visual medical system (EVMS) solution provides the
benefits of current department-level PACS, including
increased automation and better efficiency over traditional
film-based methods, with added enterprise-level connectivity and
advanced visualization tools that are not available with a
typical PACS installation.
We have designed our solutions to offer benefits to the
following groups:
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Group
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Benefits from our
Solutions
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Administration
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Demonstrable return on
investment
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(CEO, CFO and COO)
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Better service to
physicians
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Improved staff
productivity
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Improved satisfaction
of referring physicians
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Elimination of many
routine, non-productive and non-clinical tasks
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Information Technology
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Lower total cost of
operation
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(CIO and IT Department)
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Fault tolerant,
redundant and reliable
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Ease of integration
with different clinical information systems
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Multi-site,
standards-based integration
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Focused, high quality
implementation services
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Diagnostic Physicians
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Integrated, and
easy-to-use
visualization tools
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(Radiologists)
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Multi-point access to
visualization tools and images
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Productivity gains
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Treating Physicians
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Availability of
easy-to-use,
specialty specific visualization tools
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(Cardiologists, Surgeons, etc.)
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Faster turnaround of
information for treatment planning
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Facilitates
collaborative analysis with diagnostic physicians
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Improved treatment
planning
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Our solutions offer the following:
Single-Source, Enterprise-Level Image
Management. Our solutions provide a single data
repository for medical images created by digital imaging devices
and related patient data across a single or multi-facility
enterprise, whether from radiology, cardiology, pathology,
orthopedics, obstetrics, gynecology or other departments. This
single repository serves as a central point of workflow and
content management for those images. Our solutions catalog,
archive and route these images through our software, combining
centralized control over sensitive patient imaging records with
increased availability to physicians and other authorized users,
in multiple medical specialties and at any network access point.
Our solutions integrate with our customers existing
clinical information and administrative systems, serving as the
patients visual medical record repository, reducing the
risk of billing errors and lowering the average cost per exam
through automation of complex and manual film-based imaging
workflow.
Advanced Visualization Technology. Our
solutions quickly deliver web-enabled software toolsets and
images to physicians throughout the enterprise for diagnostic
analysis and treatment planning. Our advanced visualization
software allows physicians to create 2D and 3D views of human
anatomy based on the output of imaging devices and to
manipulate, navigate within and compare imaging exams in order
to better visualize and understand internal anatomic structure
and pathology. Improvements in the visualization of medical
images can lead to improved clinical diagnosis, disease
screening and treatment planning by physicians. Physicians can
access our advanced visualization software from any network
access point, including home, office or throughout the health
care facility. Our intelligent user interface automatically
adjusts for the specialty of each physician, the preferences of
each user, the type of imaging device used to create the image,
and the particular body part and tissue type being examined.
Specialty-Specific Clinical Applications. With
our acquisition of Camtronics in November, 2005, we added a full
suite of products to enhance capabilities of specialists in the
cardiology department. These solutions manage images and
clinical data relating to cardiac catheterization,
echocardiography, nuclear cardiography, vascular ultrasound, and
hemodynamics. We are focused on the development of enhancements
and additional functionality to our existing advanced
visualization software to further meet the clinical needs of
other clinical specialties, including emergency medicine,
orthopedics, oncology, pathology, obstetrics, gynecology, and
neurology.
Open Standards-Based Software. We believe that
our use of open standards has enabled us to design software that
stores and manages information faster and with fewer hardware
resources than competitive systems, a benefit we believe is
becoming increasingly important as the data size of many imaging
exams grows. We have designed our software to make full use of
the DICOM standard for medical image data. We believe our
commitment to open standards, such as DICOM and the standard
protocol for the storage of text-based patient information,
Health Level 7 (HL7), means that our software will be
compatible with new imaging device technologies and other
clinical information systems that conform to these standards. We
lower our customers total costs by eliminating the need
for translation to and from non-standard or proprietary
communication methods which often require the purchase of
additional hardware and software.
Effective Implementation, User Adoption and Support
Services. We focus on delivering effective
implementation, user adoption and support services as an
integral part of our solution. During the implementation phase
of our solution, we use proven project management principles,
including change management and adult learning techniques, to
facilitate rapid and complete adoption by our customer. After
implementation, we monitor system and user behaviors and, when
appropriate, intervene to make the adjustments we consider
necessary to prevent anticipated problems from occurring.
Additionally, we use tools that measure the ultimate success of
our customers implementation, including providing reports
on productivity, operating performance and return on investment.
We believe our focus on implementation and support services
ensures that our customers investments in our solutions
are well managed and achieve the customers financial and
operational objectives.
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Our
Strategy
Our goal is to become the industry leader in enterprise-level
information technology solutions for the clinical analysis and
management of digital medical images. Key elements of our
strategy include:
Expand Our Market Share by Attracting New
Customers. We believe a full range of health care
organizations, from stand-alone imaging centers to multi-site
hospital systems, represent a largely underserved market for our
solution. Our current base of installed facilities represents a
small portion of the prospective customers for our solution. We
are expanding our sales and marketing efforts so that we may
pursue new customers. As we pursue new customers, we intend to
continue focusing our efforts on the large, multi-site health
care providers that typically recognize the greatest benefits
and fastest return on an investment in our solution and
represent the largest individual sales opportunities. We believe
our position as a sole source provider of an advanced
visualization and image management solution, together with our
implementation expertise and our installed base of nationally
recognized reference customers will help us attract new
customers.
Increase Penetration With Existing
Customers. We believe that using our successful
relationships with existing multi-facility health care customers
to expand our penetration within those organizations and selling
additional functionality to our existing installed base are
effective ways to increase our operating margins by reducing the
average cost of sales and increasing the total revenue from
existing customers.
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Increase Installations with Existing Multi-Facility
Customers. As of December 31, 2005, we had
customer relationships with 17 multi-facility health care
providers that control over 240 hospitals. Our initial contracts
with these customers often provide for implementation of the
content management functions and sometimes the advanced
visualization functions of our EVMS solution at only a portion
of the facilities managed by the parent company. We believe
there are significant opportunities to expand our installed base
at facilities that are part of multi-facility systems in which
we have some level of customer relationship with the parent
company or with an individual facility within the multi-facility
system.
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Cross-Sell to Existing Customers. We are also
in a strong position to sell additional functionality to our
existing customers, including advanced visualization tools for
image-intensive medical specialties that may not have been part
of the initial sale. Typically our initial sale to a customer is
for medical content management. As follow-on sales
opportunities, we offer our advanced visualization software and
additional functionality to radiologists and other specialty
groups within the organization. Our offering of the suite of
cardiology products we recently obtained in the Camtronics
acquisition gives us broader cross-selling opportunities than we
had prior to the acquisition. We believe that our excellent
customer relationships increase our customers comfort in
purchasing new products or enhanced functionality from us.
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Enhance Our Product Offerings. We believe
developing or acquiring additional functionality for our
existing software, including improved advanced visualization
products for multiple specialties, such as emergency medicine,
orthopedics, oncology, pathology, neurology, obstetrics, and
gynecology will further strengthen our position in the market.
Further enhancements to our advanced visualization software and
our suite of cardiology products should assist us in selling our
solution to multi-hospital systems and expanding our existing
customer relationships. We also plan to invest further in
workflow and integration software to speed integration with
existing clinical information systems, including electronic
health record systems.
Continue to Deliver Superior Implementation, User Adoption
and Customer Support Services. As a single-source
provider of advanced visualization and image management
solutions, we believe the quality of our implementation, user
adoption and support services helps to differentiate us from our
competition. We have designed our systems, services and pricing
strategies around this belief. We expect to continue to invest
in, refine and develop new services to provide our customers
with the highest level of services available and to provide us
with a base of recurring revenue. We believe delivering superior
services will
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enable us to capture increased market share and enhance our
existing customer relationships, thereby increasing our
competitiveness.
Maintain Our Open-Standards Focus. We believe
our commitment to open standards, such as DICOM and HL7, lowers
our development costs, accelerates our time to market, lowers
our customers total cost of ownership, improves speed and
quality of our solutions integration and differentiates us
from our competition. By designing our solution around open
standards, we believe we maximize our solutions
integration with our customers existing clinical
information technology systems and imaging devices, which
reduces our customers total cost of ownership. We also
believe our open-standards model lowers the hardware costs
associated with implementing our solution because it enables our
customers to use relatively inexpensive,
off-the-shelf
hardware to visualize, analyze and manipulate images. We plan to
continue this commitment, which we believe enables our customers
to maximize their return on investment in both current and
future imaging devices, computer hardware and clinical
information technology systems.
Our
Product and Service Offerings
We provide an enterprise-level information technology solution
for the clinical analysis and management of digital medical
images within health care provider organizations. Our solution
consists of advanced visualization and image management
software, comprehensive support services and third-party
components.
Software
EVMS includes three principal software components: advanced
visualization tools, clinical content management and clinical
workflow through a dynamic user interface.
Advanced Visualization Tools consist of our suite
of software tools for the advanced visualization and analysis of
digital medical images by physicians and medical professionals.
Components include graphics and image processing modules that
present information to physicians and medical professionals
using relevant multi-specialty tools through a dynamic user
interface. Physicians can manipulate 2D and 3D image-related
content in a variety of ways including organization, rotation,
inversion, magnification and enhancement of images in a
collaborative environment for sharing findings with other
physicians or medical professionals. These tools help physicians
better visualize and understand internal anatomic structure and
pathology. Additional benefits include:
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Sophistication. The software makes use of
complex processing techniques such as multi-planar reformat
(MPR) and volumetric imaging for 3D imaging applications.
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Integration. Imaging tools include integrated
2D and 3D viewing methods that can be used simultaneously with
the same image or images on the same computer.
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Ease of Use. The system is intuitive and
user-friendly so physicians can easily adapt its use into their
current practice patterns.
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Application to Numerous Clinical
Specialties. The user interface automatically
adjusts for the type of physician using the system, user
preferences, the type of imaging device used to create the image
(such as CT, X-ray or MRI), and the particular body part and
tissue type being imaged.
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Platform Compatibility. The system uses a
common personal computer graphics standard, allowing off-site
physicians to use inexpensive personal computers and permitting
the enterprise to make use of lower-priced workstations with
off-the-shelf
graphics hardware.
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Web-enabled. Physicians or other authorized
users have secure access to images and advanced visualization
tools at any network access point.
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Clinical Content Management is our image archival
and distribution management software. Clinical Content
Management supports the DICOM standard for digital medical
images enabling a high level of scalability that facilitates
fast, efficient access to storage and retrieval of such images
in enterprise applications.
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The system includes auto-routing and predictive capabilities
that improve workflow in a clinical environment by performing
time intensive tasks in anticipation of their need, thereby
minimizing network traffic and facilitating responsiveness
across the enterprise.
Clinical Content Management employs a distributed architecture
that enables administrative changes without the need to shut
down the system, minimizes system memory requirements, increases
the speed of access to images through a relational database and
provides customized reporting capabilities. In a distributed
multi-hospital environment, the system also manages local
caches at remote sites, which provide local image
acquisition and temporary storage for rapid retrieval. Permanent
image data is simultaneously stored at the centralized long-term
archive. Each remote cache also acts as a proxy server to
provide a view of images throughout the enterprise, no matter
where the image was originally generated. The use of a local
cache ensures that no individual facility is dependent on the
wide-area network for the sourcing of locally created images.
Additional benefits include:
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Multi-Site and Multi-Department. The system
permits authorized users to access images from any network
access point, including home, office or throughout the health
care facility. It handles images created by multiple hospital
departments and multiple image devices.
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Enterprise-Level Scalability. We can
install Clinical Content Management as a single facility
application or as an enterprise-level solution to support the
medical image management needs of large multi-facility health
care providers. By using predictive technologies and local
caching of images, the system provides optimal network speed and
availability.
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Fault Tolerance. We use an advanced, fault
tolerant, high availability configuration on redundant server
clusters with redundant storage systems. We support either full
backup and recovery or mirrored archives in two different
locations, enabling uninterrupted operation in the event of the
loss of one archive.
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Open Standards. Unlike many competitive image
management systems, our system has been designed using an open
standards architecture that leads to better integration with
imaging devices and clinical information systems, improves the
speed and reliability of transfers of medical image data and
provides a lower total cost of ownership by avoiding unnecessary
translation overhead.
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Clinical Workflow is our standards-based software
used to manage integration and data migration between our
solution and other health information systems throughout the
enterprise. We utilize a DICOM imaging device worklist, which
automates technologist workflow, prioritizing and managing
processes based on other systems such as admissions. In
addition, Clinical Workflow includes tools that enable the
integration of our solution with electronic health records and
other information systems such as voice recognition. The
benefits of the system include the rapid and systematic
integration of the patients digital medical images with
the rest of the enterprises clinical and administrative
information systems without the need for custom programming,
integration services, or third-party translation devices.
Our HeartSuite enterprise solutions for cardiology were added to
our product offerings as a result of our acquisition of
Camtronics on November 1, 2005. Our cardiology solutions
include HeartSuite VERICIS, HeartSuite Hemodynamics and
HeartSuite CVIS.
HeartSuite VERICIS creates a complete digital
record of images and reports for patients in the cardiac
catheterization lab, in echocardiography (including specialized
applications for pediatric echocardiography), in vascular
ultrasound and in nuclear cardiology. Like our EVMS solution,
VERICIS is built to conform to DICOM and HL7 standards. Benefits
include:
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Elimination of film and paper-based processes
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Reduction of redundant tasks, including cine film handling, data
entry, archiving and transcription
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Streamlined access to patient studies and reports
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Scalable and expandable to meet needs of any size cardiology
department
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HeartSuite Hemodynamics is a comprehensive
monitoring and data management system that integrates cardiac
catheterization lab procedural information into the
patients cardiac record. HeartSuite Hemodynamics provides
functionality for data collection, real-time waveform analysis,
inventory control, patient charging and procedure reporting in a
single system. Benefits include the ability to mine data and
create custom reports that aid in driving improvements in
quality and efficiency.
HeartSuite CVIS is a web-based system designed to
provide the cardiology department with all its information needs
in one application. It summarizes the patient cardiovascular
state and aggregates all clinical information in one location,
tracks patient clinical trends and supports care planning. The
system aids in workflow in the department of cardiology by
scheduling labs and office encounters, tracking patients while
they are in the hospital, capturing and aggregating
cardiovascular billing codes. The information in the system is
stored in a central database that provides cross-modality
statistics for operational, administrative and other business
needs.
Service
and Support
We believe that our implementation, user adoption and support
services differentiate us strategically from our competitors.
Large-scale infrastructure information technology installations
can present special challenges to an enterprise, regardless of
its size or sophistication. We believe that IT projects often
fail due to inadequate implementation and support services and
believe that our service model better meets the installation and
investment objectives of our customers.
Our Customer Success Program includes the following
components:
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Adoption Success Management (ASM). ASM is our
services program that facilitates rapid and complete adoption by
all relevant constituents during the implementation phase, which
typically lasts several months. We have designed ASM to maximize
the user implementation experience, promote behavioral change at
all levels and increase the probability of complete
implementation success.
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Total Solution Management (TSM). TSM is an
ongoing set of support services to ensure that our systems are
highly available and optimally configured for the users. Through
continuous remote monitoring of our solution, we analyze system
and user behaviors and, when appropriate, intervene and make the
necessary adjustments to prevent anticipated problems from
occurring. We provide standard
24-hour
service and support for our software and any third-party
components we provide to the customer. Our standard contracts
with customers typically provide for a 99% guarantee of system
availability and a 98% guarantee of component availability. Our
system availability guarantee covers our solution as a whole,
while the component guarantee covers each individual component,
as in certain circumstances a component may fail without
affecting system availability.
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Enterprise Performance Monitoring (EPM). EPM
is an enterprise-level performance monitoring tool that we use
to measure the ultimate success of our customers
implementation, including full adoption and effective use of the
systems we provide. Our EPM service provides the customer with
periodic reporting of system performance, operational
performance and financial performance metrics to aid in
maximizing the return on the customers investment in our
system.
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We provide revenue mix analysis services, using data combined
from hospital information systems and the enterprises
imaging environment data, to understand and prioritize key
equipment and physician revenue producers for a hospital. This
analysis can provide critical data to hospital administrators
for capital and technology investment planning initiatives. We
also provide additional professional information technology
services to our customers that have specific needs related to
system integrations and interfaces and data migration.
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Third-Party
Components
Our solutions typically include the installation and
implementation of platform components that we procure from third
parties. We believe that providing third-party components helps
us deliver a comprehensive solution that meets the needs of our
customers. Some of the third-party components we provide
include:
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Servers. Our software and the database run on
a cluster of standard redundant servers.
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Data Storage. We support industry standard
storage configurations, including fault-tolerant RAID (redundant
array of independent disks) systems.
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Backup/Recovery. Our solution typically
includes a tape library-based backup and recovery system that
provides backup for our database, configuration files and the
digital medical images. We also offer an optional configuration
with mirrored archives in two locations, enabling uninterrupted
operation in the event of the loss of one archive.
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Workstations and Monitors. Customers typically
implement our advanced visualization software using standard
personal computer workstations and high-resolution monitors for
visualization within the facility.
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Database. Our software applications operate on
Oracletm
database technology and other standard relational database
applications.
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Computed Radiography. We offer computed
radiography devices, which are manufactured by Eastman Kodak
Company and Fujifilm Medical Systems USA, Inc. Computed
radiography devices convert analog X-ray images into digital
images.
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We also offer a software toolset for orthopedic surgeons which
is licensed from Orthocrat, Ltd. and a voice recognition
dictation system from Lanier Worldwide, Inc.
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Our
Technology
We believe the following technologies and strategies help us to
compete more effectively:
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Native DICOM Compatibility. We have written
our software to exploit the capabilities of the DICOM standard
for medical image storage and workflow management, as
promulgated by the American College of Radiology and the
National Electronic Manufacturers Association. DICOM is an
industry standard in medical imaging that defines the data
elements, communication protocols, storage formats and workflow
methods associated with medical imaging data and processes. Our
software stores and manages medical images using native DICOM
communications, preserves the DICOM information associated with
the image and follows DICOM workflow methods. Using native DICOM
communication means our solution does not require
translation devices for converting the DICOM
information into a proprietary storage or other format. We
believe our commitment to DICOM as the underlying protocol for
our software is a competitive advantage, delivering faster
streaming, more efficient storage of the image and the ability
to integrate our software to new imaging devices that output
information using DICOM.
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Proprietary DICOM-Toolkit. While DICOM is an
industry standard protocol for medical image data management and
storage, the software toolsets used to process, manage and use
DICOM information are generally unique to particular software
vendors. Unlike many of our competitors who license
DICOM-toolkits from third parties, we have developed and own a
DICOM-toolkit that we believe permits us to more rapidly
integrate DICOM-based information into our software. We believe
that the ownership and continued development of our
DICOM-toolkit is a core technology strategy, in part because it
reduces reliance on third-party software.
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Commitment to the IHE Technical Framework. We
are a leader in the implementation of the Integrated Healthcare
Enterprise (IHE) technical framework. The Radiological Society
of North America and the Healthcare Information and Management
Systems Society created IHE, which represents a consortium of
companies in the radiology and health care information systems
fields. The
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IHE technical framework is a protocol for the integration of
DICOM image information and HL7 text-based patient information.
We believe our commitment to IHE helps to ensure that our
software integrates seamlessly with HL7-based billing and
patient record information systems implemented at our customer
sites.
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Compatibility with the OPEN GL Graphics
Standard. Our advanced visualization software
performs sophisticated 3D rendering and other graphics intensive
functions that provide physicians the ability to view 3D medical
images for diagnosis and treatment planning. Historically,
workstations and graphics hardware that could perform the
advanced rendering and other graphics functions needed for
advanced visualization functionality were cost prohibitive for
widespread use. Our advanced visualization software uses the
OPEN GL graphics standard, which permits our customers, or
off-site physicians affiliated with our customers, to purchase
inexpensive personal computers and graphics hardware to perform
sophisticated image analysis.
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Component-Based Software Engineering. Our
software architecture is based on a component-based services
model. Our software development framework supports common and
domain specific components that can be plugged in while the
system is operating. By building flexible, dynamic, reusable
components, we gain great flexibility to add functionality to
our system and increase the reliability of our system because we
can remedy problems at the component level rather than being
forced to address issues throughout the entire application.
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Customers
Our customers range in size from single imaging centers to large
multi-facility healthcare networks. As of December 31,
2005, we had installed our EVMS solution in 139 hospitals or
other health care facilities, 114 of which are members of
multi-facility networks with which we have customer
relationships. At December 31, 2005, we had implemented our
advanced visualization solution in 66% of our current installed
EVMS customer base. While this is a significant increase over
the 45% of our installed base that used our advanced
visualization software at December 31, 2004, we believe the
additional hospitals that are currently using other
visualization technology represent a growth opportunity for us.
There are also over 300 hospitals where we have installed
our HeartSuite solutions in their cardiology departments. Our
customers include members of the following multi-facility
networks with ten or more facilities: Allina Hospitals and
Clinics, Ascension Health, Aurora Health Care, BJC Healthcare,
Catholic Healthcare West, Kaiser Foundation Hospitals, Sisters
of Mercy Health Systems and Sisters of St. Francis Health
Services.
Contracted implementations for Ascension Health constituted 33%
of our contracted backlog as of December 31, 2005, compared
to 35% as of December 31, 2004.
Sales and
Marketing
We use a direct sales model, with sales representatives who have
substantial experience in health care-related direct sales. Our
sales representatives undergo rigorous training in our products
as well as the needs of each constituent group within our
potential customers. During our sales cycle for a typical
customer we might, at various times, present to the Chief
Information Officer, the Director of Radiology or Cardiology,
the Chief Financial Officer, the Chief Medical Officer, the
Chief Operating Officer and the Chief Executive Officer. We also
typically must present to several key physicians representing
the specialties that are expected to use our system such as
radiologists, cardiologists, emergency room physicians,
neurosurgeons and orthopedists. Each of these constituencies may
have different priorities and evaluation criteria, and our
direct sales representatives must be capable of presenting a
compelling business case to each.
Our sales representatives are supported by our sales support and
marketing communications team, which provides technical,
demonstration, lead generation, market development and proposal
assistance.
Research
and Development
As of December 31, 2005, we had 150 employees who are
primarily dedicated to research and development activities. In
addition to our employees, we also utilize contractors and
consultants on a routine
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basis to perform specified research and development activities.
We also utilize clinical advisory boards and end-user focus
groups that are organized by area of expertise to advise us on
the clinical functionality of our solutions. We have focused our
research and development mission on the continued evolution of
intelligent, fault tolerant, highly scalable image management
and visualization systems for mission-critical medical image
management applications. We adhere to a philosophy of open
standards-based solutions. We believe that we fulfill a critical
technology and performance void in current generation
departmental PACs systems. We further believe we have designed
our visualization platform in a way that enables us to
efficiently add new functionality. We are focusing our research
and development efforts on:
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improving physician and technologist workflow;
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developing and refining visualization capabilities including new
3D and analysis applications; and
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data storage, retrieval, integration and comparison of past and
current images; and
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extending imaging tools to referring physicians in multiple
specialities
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We follow a formal product development process and employ
dedicated product development personnel. Under our formal
product development process, internal and external (customer)
requests for added features or functionality are forwarded to
our strategy and architecture team. This team evaluates and
prioritizes these potential product enhancements taking into
account expected costs, anticipated value to the customer,
regulatory requirements, timing and resource availability. After
our strategy and architecture team approves these enhancements,
our engineering team develops them and subjects them to quality
testing and documentation requirements before we make them
generally available to our customers.
We invested $4.1 million, $6.0 million and
$10.7 million for research and development in 2003, 2004
and 2005, respectively.
Competition
The markets for the digital medical image management and
visualization systems that we offer are highly competitive. Many
customers purchase products and services from us and from our
competitors as well. We compete with companies that fall into
four primary categories:
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companies that manufacture and sell digital imaging devices such
as GE Healthcare, Siemens Medical Solutions and Philips Medical
Systems, who may integrate some of the functionality provided by
our products into their equipment or bundle it with the
equipment sale;
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companies that have traditionally sold imaging films such as
Eastman Kodak Company and Fujifilm Medical Systems USA, Inc.;
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companies that have traditionally sold health care information
technology applications such as McKesson Corp. and Cerner
Corp.; and
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a number of smaller companies that sell department-level or
cardiology-specific PACS or specialty visualization tools.
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Many of our current and potential competitors have significantly
greater name recognition and more established distribution
networks and relationships with health care providers. To
compete effectively, we often must persuade the prospective
customer to separate its purchasing decisions with respect to
imaging equipment from its purchasing decisions with respect to
archival and visualization tools, because many of our
competitors offer imaging devices that they package or bundle
with licensed or owned image management applications.
Our ability to compete successfully will depend on a number of
factors both within and outside our control, including:
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product innovation;
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product quality and performance;
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customer service and support;
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the experience of our sales, marketing and service professionals;
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rapid development of new products and features;
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price;
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continued active involvement in the development of DICOM and
other standards-based medical communication protocols; and
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product and policy decisions announced by competitors.
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Intellectual
Property
We rely generally on a combination of trade secret and copyright
law, employee and third-party nondisclosure agreements and other
protective measures to protect intellectual property rights
pertaining to all of our software technology. In addition, we
have filed patent applications to protect certain aspects of our
software technology. To date, one patent has been issued.
As filed in the U.S., Europe, and Japan, our patent applications
generally relate to DICOM-type image transmission and, in
particular, to methods and apparatus for streaming DICOM-type
images via a network. In addition, we have also filed a patent
application in the U.S. that generally relates to a method
and system for storing, communicating and displaying image data.
In particular, this application relates to methods and systems
for storing image data on a server, communicating at least a
portion of the image data from the server to a client via a
network, and displaying images at the client using the
communicated data.
We have one device and method patent related to improved
quantitative coronary artery analysis. This patent is on file in
the U.S. and Canada. This patent, while enforceable, has
limited use in our current product offerings and product
development efforts.
We have an exclusive, worldwide, royalty-bearing license from
the University of Alabama Birmingham (UAB) Research Foundation
for certain technology used in our Clinical Content Management
software. We pay a nominal royalty for this license.
We do not own all of the software and hardware used in our
solution, but we have all of the licenses from third parties we
believe are necessary to offer our current solution. As we
develop new products and new versions of products, it may be
necessary to renegotiate with such third parties to make sure
our licenses are complete and valid. In such a case, our
existing third-party licensors may not be willing to make the
needed licenses available on terms acceptable to us, but we
believe in most cases there are alternative vendors from whom we
could obtain hardware, other components or any necessary
licenses for software.
Emageon®,
Camtronics®,
Heartsuite,
VERICIS®
and our logo are our trademarks or service marks. All other
trademarks, trade names and service marks appearing in this
Annual Report are the property of their respective owners.
Employees
As of December 31, 2005, we had 469 employees, 150 of whom
were primarily engaged in research and development, 74 of whom
were primarily engaged in sales and marketing, 207 of whom were
primarily engaged in providing technical installation and
support services and 38 of whom were primarily engaged in
administration and finance. With respect to location, 176 of
these employees are located at our corporate headquarters in
Birmingham, Alabama; 185 of these employees are located at our
offices in Hartland and Madison, Wisconsin; 40 of these
employees are located at our office in Ottawa, Ontario, Canada;
and the remainder of our employees are located at customer
locations or in regional support offices. None of our employees
is a party to a collective bargaining agreement, and we consider
our relationship with our employees to be good.
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Government
Regulation
We market, sell, and distribute our products in the heavily
regulated U.S. health care industry. Our business
operations and financial arrangements in this industry may be
subject to a complex array of federal laws and regulations
governing medical devices. We are also subject to laws and
regulations governing reimbursement and referrals because our
products are used in diagnosing and treating Medicare and
Medicaid patients. Moreover, a number of states have adopted
their own versions of such laws and regulations, though these
may vary significantly from one state to the next. Violation of
such federal and state laws and regulations can result in civil
and criminal penalties involving substantial fines and
imprisonment.
Food and Drug Administration. Our radiology
and cardiology PACS, and hemodynamic measurement recording
software products are medical devices subject to extensive
regulation by the Food and Drug Administration, or FDA, pursuant
to the federal Food, Drug, and Cosmetic Act, as amended, or the
FDA Act. Each device that we wish to distribute commercially in
the U.S., unless otherwise exempt, requires regulatory clearance
prior to commercial distribution.
The FDA cleared EVMS, the radiology PACS; Heartsuite VERICIS,
the cardiology PACS; and Heartsuite Hemodynamics (formerly known
as Physiolog), the hemodynamic measurement recording software,
through the 510(k) notification process. We have applied, and
will continue to apply for, 510(k) clearance for additional
clinical uses of our devices. Clearance under the 510(k) process
typically takes 90 days to over a year from the date of a
complete filing, depending on the number of questions the FDA
has concerning the submission. Some applications may never
receive clearance because the FDA raises safety issues or
requests additional data that may not be economical to produce.
Therefore, there is the risk that FDA clearance for any of our
future devices, or for further clinical uses of our existing
devices, may be delayed or not cleared. There is also the risk
that FDA clearance, once received, may contain more restrictive
conditions of use than we would like. Moreover, the FDA is
always free to subsequently withdraw any clearance previously
granted.
For cases where the 510(k) approval process is not available,
the FDAs other approval process, the pre-market approval
process, or PMA, is a more costly, lengthy and uncertain process
than the 510(k) process. The PMA application requires human
clinical trial data to enable the FDA to evaluate whether the
PMA contains sufficient, valid scientific evidence that the
device is safe and effective for its intended use. The PMA
process generally requires one to several years from the date
the applicant submits the device for FDA review, if, in fact,
the FDA ever approves the device. Even then, the FDA may
condition its approval on stringent limitations regarding the
indicated uses for which the device may be marketed. To date,
our software and related comprehensive solutions have not
required approval under the PMA process. However, we cannot
assure you that our products will not require PMA approval in
the future, or, in such an event, that such approval would be
forthcoming.
The FDA can conduct announced and unannounced inspections of our
facilities at any time. We have procedures in place to ensure
that protocol is followed in accordance with the FDA guidelines
with respect to announced and unannounced inspections. We
believe that our manufacturing operations, and those of our
suppliers, comply with the FDAs Quality System Regulations
and current good manufacturing practices.
Medical device manufacturers and device user facilities are
required to complete Medical Device Reports (MDRs) upon the
occurrence of MDR reportable events. For device manufacturers,
an MDR reportable event is one about which a manufacturer has
received or becomes aware of information that reasonably
suggests that one of its marketed devices caused or contributed
to a death or serious injury, or has malfunctioned and the
device, or a similar device marketed by the manufacturer, would
likely cause or contribute to a death or serious injury if the
malfunction were to recur. The filing by manufacturers or user
facilities of a significant number of MDRs with the FDA could
potentially cause the FDA to commence post-marketing
investigations, which could revise device labeling, include
warnings, restrict use, or could even lead to a withdrawal of
marketing clearances or approvals.
Health Canada. Our radiology and cardiology
EVMS, and hemodynamic measurement recording software products
are medical devices subject to extensive regulation by the
Medical Devices Bureau of the Therapeutic Products Directorate
(TPD), Health Canada. Health Canada is the Canadian federal
regulator
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responsible for licensing medical devices in accordance with the
Food and Drugs Act and Regulations and the Medical Devices
Regulations. The TPD applies the Food and Drug Regulations and
the Medical Devices Regulations under the authority of the Food
and Drugs Act to ensure that the pharmaceutical drugs and
medical devices offered for sale in Canada are safe, effective
and of high quality. Each device that we wish to distribute
commercially in Canada, unless otherwise exempt, requires
attainment of the appropriate type of medical device license
prior to commercial distribution.
We currently hold licenses to market, sell, and distribute our
products in the Canadian health care industry. To date, we have
sold only the cardiac PACS and the hemodynamic measurement
recording devices in the Canadian marketplace, but our intent is
to market all devices for which we hold licenses in the future.
We have procedures in place to ensure that we are compliant with
the Canadian Medical Device Regulation as documented in the Food
and Drugs Act: Medical Devices Regulations for Canada:
SOR/98-282 which includes quality system certificates for ISO
13485:2003, CMDCAS for the classes of our devices.
HIPAA Privacy and Security Regulations. The
HIPAA Privacy Rule prohibits a covered entity from using or
disclosing an individuals protected health information
unless the use or disclosure is authorized by the individual or
is specifically required or permitted under the Privacy Rule.
The Privacy Rule has imposed a complex system of requirements on
covered entities for complying with this basic standard. Under
the Security Rule, covered entities must establish
administrative, physical, and technical safeguards to protect
the confidentiality, integrity, and availability of electronic
protected health information maintained or transmitted by them
or by others on their behalf.
The HIPAA Privacy and Security Rules apply directly only to
covered entities such as health plans, health care
clearinghouses, and health care providers who engage in
HIPAA-defined standard electronic transactions. We are not a
covered entity, but our customers are. In order to provide to a
customer certain services that may involve the use or disclosure
of protected health information, the HIPAA Privacy and Security
Rules require our customers to enter into business
associate agreements with us, which must provide adequate
written assurances with respect to, among other things, how we
will use and disclose the protected health information. In
addition to requiring us to provide these adequate written
assurances, the business associate agreements with our customers
also impose significant privacy and information security
requirements on us, and we cannot assure you that we will not in
the future be subject to liability in connection with those
business associate agreements.
Government Reimbursement. Our customer base
consists of health care providers, all of whom are subject to
regulation by a number of governmental agencies, including those
which administer Medicare and Medicaid programs. Accordingly,
our customers are sensitive to legislative and regulatory
changes in, and limitations on, the government health care
programs and changes in reimbursement. During recent years,
there have been numerous federal legislative and administrative
actions that have affected the Medicare and Medicaid programs,
including past adjustments that have reduced payments to
hospitals and other health care providers. For example, in an
effort to curb its increasing costs associated with diagnostic
imaging, the federal government has recently implemented a
percentage reduction applicable to a certain component (i.e.,
the technical component) of reimbursement for combined
diagnostic imaging services under specified circumstances. It is
likely that the federal government will consider and could
implement future reductions in Medicare reimbursement or other
changes that adversely affect our health care customer base. Any
such changes could adversely affect our own financial condition
by reducing the capital expenditure budgets of our customers.
Fraud and Abuse. A number of federal laws,
loosely referred to as
fraud-and-abuse
laws, are used to prosecute health care providers, physicians
and others that fraudulently or wrongfully obtain reimbursement
that increases costs to any federal health care program. Given
the breadth of these laws and regulations, we cannot assure you
that they will not be found applicable to our business or the
financial arrangements through which we market, sell, and
distribute our products. These include federal anti-kickback and
self-referral laws and regulations.
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Anti-Kickback Law. The anti-kickback
provisions of the Social Security Act prohibit the exchange of
anything of value with the intent to encourage utilization of
items or services payable under a federal health care program.
Courts have construed the anti-kickback law to mean that a
financial arrangement will violate such law if even one of the
purposes of one of the parties is to encourage patient referrals
or other Medicare/Medicaid business, regardless of whether
legitimate purposes also exist for the arrangement. Penalties
for federal anti-kickback violations are severe. Conviction can
result in up to five years imprisonment, a $25,000 fine per
offense, and exclusion from participation under federal health
care programs. Violators may also be assessed civil monetary
penalties ranging from $10,000 to $50,000 per offense, as
well as damage assessments equal to three times the total amount
of the kickback. We believe that all of our arrangements with
physicians and health care facilities have been fully lawful.
But given the broad sweep of the federal anti-kickback law, we
cannot assure you that all such arrangements will be found
compliant with such law if examined by government regulators, to
the extent that such regulators determine that any of our
arrangements are subject to such law.
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Stark Law. The Ethics in Patient Referrals
Act, known as the Stark Law, also prohibits certain
types of referral arrangements between physicians and health
care entities. Physicians are prohibited under the original
Stark Law, its subsequent Stark II amendment, and the Stark
implementing regulations from referring patients for
designated health services reimbursed under the
Medicare and Medicaid programs to entities with which they have
a financial relationship or an ownership interest, unless such
referrals fall within a Stark exception. Violations of the
statute can result in civil monetary penalties of up to
$15,000 per improper referral and exclusion from the
Medicare and Medicaid programs. We do not believe that our
arrangements with physician consultants or other health care
providers violate the Stark Law, but we cannot provide
assurances to such effect, nor can we assure you that we will
not in the future be subject to Stark Law penalties.
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State Law. Various states have enacted
equivalents of the foregoing federal statutory and regulatory
provisions. These state law equivalents would apply to items or
services reimbursed by any third-party payor, including
commercial payors. Many of these laws vary significantly from
state to state, rendering compliance a costly and uncertain
endeavor.
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Available
Information
Our internet website address is www.emageon.com. We make
available free of charge through our website our Annual Reports
on Form 10-K, Quarterly Reports on Form 10-Q and Current
Reports on Form 8-K, and amendments to those reports, as
soon as reasonably practicable after we file them with, or
furnish them to, the Securities and Exchange Commission.
Our business involves various risks and uncertainties, some
of which are discussed in this section. The information
discussed below should be considered carefully with the other
information contained in this Annual Report on
Form 10-K
and the other documents and materials we file with the SEC, as
well as news releases and other information we may publicly
disseminate from time to time. The risks and uncertainties
described below are not the only ones we face. Additional risks
and uncertainties not presently known to us, or that we
currently believe to be immaterial, may also adversely affect
our business. Any of the following risks or uncertainties that
develop into actual events could have a materially adverse
effect on our business, financial condition or results of
operations, or on the market price of our common stock.
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Our
industry includes many large companies that have significantly
greater resources and other competitive advantages, and we may
not be able to compete successfully against these
competitors.
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We compete with large, well-capitalized, multinational
corporations such as GE Healthcare, Siemens Medical Solutions,
McKesson Corp., and Philips Medical Systems. These competitors
have significantly greater brand recognition and more
established distribution networks and relationships with health
care providers. As our market grows, it may attract other
competitors with substantial resources, such as large
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information technology, or IT, integration companies. Because of
their greater resources, many of our existing or potential
competitors can respond more quickly to new or emerging
technologies or product lines and changes in customer
requirements. These companies may also be able to invest more
resources in research and development, strategic acquisitions,
sales and marketing, and patent prosecution and litigation, and
they can also finance capital equipment sales for their
customers. In addition, some of our competitors bundle their
image management software products with their sales of digital
imaging devices at little or no extra cost. This practice may
limit our opportunity to compete for customers who are also
purchasing these devices. Our ability to market and sell our
solution successfully to prospective customers depends, in part,
on persuading these customers to separate the purchase of
digital imaging devices from the selection and purchase of
related software and services. Because we do not and for the
foreseeable future will not have the financial resources,
technical expertise, marketing, distribution and support
capabilities of our competitors, we may not be able to compete
successfully against our current and future competitors.
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We
have incurred substantial operating losses in the past and may
not be profitable in the future.
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We have incurred substantial operating losses in each fiscal
year since our inception in December 1998, and we may continue
to incur substantial operating losses in the future. As a result
of our operating losses, we had an accumulated deficit of
$51.4 million at December 31, 2005. You should not
consider our recent growth in quarterly revenue or contracted
backlog as necessarily indicative of our future performance. In
addition, we expect our sales, marketing, research and
development and other operating expenses to increase in the
future as we expand our business. If our revenue does not grow
to offset these expected increased expenses or if our operating
expenses exceed our expectations, we may not be profitable and
may incur substantial additional operating losses. Our ability
to achieve and maintain annual profitability will depend on,
among other things, our ability to market successfully our
solution, create new product offerings, respond to competitive
developments and attract and retain qualified sales, technical
and management employees. Even if we are able to achieve
profitability, we may not be able to maintain profitable
operations on an annual basis.
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Our
operating results may fluctuate, which makes quarterly results
difficult to predict and could cause our stock price to decline
or exhibit volatility.
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Our operating results may fluctuate as a result of many factors
which are outside our control. Comparing our operating results
on a
quarter-to-quarter
basis may not be meaningful, and you should not rely on our past
results as an indication of future performance. Each of the
following factors, among others, could cause our operating
results to fluctuate from quarter to quarter:
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Long Sales Cycle: Many of our customers are
large organizations with lengthy and unpredictable purchasing
processes. Because our solution is a major capital expenditure
involving a multi-year commitment, it can take a significant
period of time to close a sale. We typically have to educate our
prospective customers on the benefits of our solution and obtain
approval from senior management. Consolidation in the health
care industry may also delay or extend the sales cycle for
affected customers. As a result, our solution has a typical
sales cycle, from the initial contact to the placing of an
order, of six to nine months, and sometimes much longer. This
long and unpredictable sales cycle may contribute to substantial
fluctuations in our quarterly operating results.
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Timing of Revenue: A significant portion of
our revenue each quarter comes from sales made in prior periods,
as we implement our solution and perform services under
multi-year maintenance and support agreements with our
customers. As a result, a decline in sales, client renewals, or
market acceptance of our products in a particular quarter will
not necessarily be reflected in revenue in that quarter and may
adversely affect our revenue and profitability in future
quarters. Moreover, a majority of our customers now purchase
perpetual licenses from us. Unlike term licenses, where license
revenue and certain implementation fees are recognized over the
life of an initial term typically ranging from two to seven
years, with perpetual licenses the full software license fee and
associated implementation fees are recognized as revenue in the
month when all revenue recognition criteria are met. Because
revenue recognition may not be achieved in the period expected,
our revenue could fluctuate from quarter to quarter solely due
to the timing of satisfying our revenue recognition criteria.
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Implementation Delays: Once we enter into a
customer contract, our recognition of revenue from that contract
depends, to a significant extent, on the timing of our
implementation of the project. Customer implementation schedules
may be delayed for reasons beyond our control, such as customer
scheduling changes, delays in acceptance testing by customers,
unusual integration issues or delays in obtaining equipment from
third-party vendors. Delays in the implementation of a
particular project may require us to delay the recognition of
anticipated revenue from one quarter to another and may
contribute to substantial fluctuations in our quarterly
operating results.
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Our quarterly results also may fluctuate due to other factors,
such as the timing of new product introductions and product
enhancements by us or our competitors and changes in the mix of
our software and third-party components, which have
significantly lower gross margins, included in the systems we
sell. If our revenue varies significantly from quarter to
quarter, we may have difficulty managing our business, and our
quarterly results could fall below expectations of investors and
stock market analysts which could cause our stock price to
decline or exhibit volatility.
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Our
failure to manage growth effectively may strain our management,
personnel and other resources, which could impair our ability to
meet customer requirements.
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We have grown very rapidly and must continue to add customers
and employees to be successful. Our business could suffer if we
fail to manage effectively our growth. From December 31,
2004 to December 31, 2005, our contracted backlog grew from
$118.2 million to $158.0 million and the number of our
employees increased from 199 to 469, including
212 employees added through our November 2005 acquisition
of Camtronics. While it is unlikely that we can continue to grow
at this rate, continued growth may significantly strain our
management, personnel and other resources. Simultaneously
undertaking numerous projects with large multi-site health care
providers could also strain our existing resources and cause our
implementation and customer service to suffer. This could cause
us to fail to satisfy material performance requirements under
our contracts which could, under certain circumstances, permit
customers to terminate their contracts with us and would
adversely affect our reputation.
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Acquisitions
could result in integration difficulties, dilution or other
adverse financial consequences.
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In November 2005 we acquired Camtronics, which added a new suite
of cardiology tools to our advanced visualization software
offering, increased our customer base by over 300 medical
facilities, and increased our employee headcount by
212 employees. We may in the future acquire other
businesses that we believe are complementary to our business.
The pursuit of acquisitions may divert the attention of
management and cause us to incur various expenses identifying,
investigating and pursuing suitable acquisitions, whether or not
they are consummated. If we acquire additional businesses, we
may not be able to integrate the acquired operations
successfully with our business or we may not achieve the
anticipated benefits from the acquired business. If we are
unable to integrate any new business successfully, we could be
required either to dispose of the acquired operation or to
undertake changes to the acquired operations in an effort to
integrate them with our business. In either event, our business
operations and financial condition could suffer a material
adverse effect. Future acquisitions could result in potentially
dilutive issuances of our equity securities, the incurrence of
debt, contingent liabilities or amortization expenses, or
write-offs of goodwill, any of which could harm our financial
condition. Acquisition financing, if needed, may not be
available on favorable terms.
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Analogic
Corporation, the former owner of Camtronics, identified a
material weakness in its internal control over financial
reporting due to control deficiencies at Camtronics, and we
cannot be certain that such control deficiencies have been fully
remediated, or that other control deficiencies will not be
identified that will lead us to conclude that a material
weakness in our internal control over financial reporting
exists.
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A companys internal control over financial reporting is a
process designed by or under the supervision of the chief
executive officer and chief financial officer and effected by
the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally
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accepted accounting principles. A material weakness in internal
control over financial reporting is a control deficiency, or
combination of control deficiencies, that results in more than a
remote likelihood that a material misstatement of the annual or
interim financial statements will not be prevented or detected.
Analogic Corporation, which sold Camtronics to us on
November 1, 2005, reported that as of July 31, 2005
(its fiscal year-end) and as of October 31, 2005, it had a
material weakness in its internal control over financial
reporting because its review and approval controls over the
completeness and accuracy of revenue and deferred revenue under
multiple-element software arrangements at its Camtronics
subsidiary were ineffective to ensure revenues were recorded in
the correct period. Analogic further reported that as of
October 31, 2005, it had undertaken numerous remediation
measures that had improved the design effectiveness of its
internal control over financial reporting with respect to such
matters, but that not all of the newly designed controls were
operating effectively at such date and not all had operated for
a sufficient period of time prior to such date to demonstrate
operating effectiveness. In our recently completed review of our
internal control over financial reporting we did not identify
any material weaknesses of the type previously identified by
Analogic at Camtronics prior to its sale to us. However we
cannot be certain that the control deficiencies at Camtronics
that led to the prior finding of a material weakness have been
fully remediated, or that other control deficiencies will not be
identified in the future which would lead us to conclude that a
material weakness in our internal control over financial
reporting exists.
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We
depend on highly specialized personnel, and the loss or failure
to identify, hire, motivate and retain additional highly
specialized personnel could adversely affect our ability to grow
our business.
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Our future success and the execution of our growth strategy
depend on our continuing ability to identify, hire, develop,
motivate and retain highly specialized personnel for technical
and sales positions within our organization. For example, when
hiring an advanced visualization software engineer, we generally
seek individuals with advanced post-graduate degrees in
specialized fields. We also must identify experienced candidates
for sales positions who can effectively communicate the cost,
clinical and information technology benefits of our products to
multiple constituents at our target customers. Our competitors,
employers in other industries, academic institutions and
governmental entities and organizations also often seek persons
with similar qualifications. As a result, we may not be able to
identify and hire the personnel we need in a timely manner.
In addition, to hire, motivate and retain these personnel, we
believe we must provide them with a competitive compensation
package, which may include stock-based incentives, such as
restricted stock or stock options. Increases in shares available
for issuance under our stock incentive plans generally will
require stockholder approval, and our stockholders may not
approve future increases. Recent changes in the accounting for
stock options may cause us to issue fewer stock options and rely
more on restricted stock grants instead, which may be less
attractive to potential employees. If this occurs, we may find
it more difficult to hire, motivate and retain highly
specialized personnel, which could have a material adverse
effect on our ability to grow our business.
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We are
dependent on our senior executive management, and the loss of
any member of senior executive management may prevent us from
managing and growing our businesses effectively.
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Our success depends largely on the continued service of our
senior executive management, including Charles A.
Jett, Jr., our Chairman, President and Chief Executive
Officer, Grady Floyd, our Chief Operating Officer, and W.
Randall Pittman, our Chief Financial Officer. We have entered
into executive employment agreements with these key members of
senior executive management. The terms of these employment
agreements are two years for Mr. Jett, 18 months for
Mr. Floyd and one year for Mr. Pittman and renew
automatically on a
day-by-day
basis thereafter unless we or the officer give notice to stop
the automatic renewal. The loss of any of our senior executive
officers could have an adverse impact on our ability to manage
and grow our business effectively. We cannot assure you that in
such an event we would be able to replace any member of senior
executive management in a timely manner, or at all, on
acceptable terms.
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The
loss of Ascension Health or future major customers could
materially and adversely affect our results of operations and
financial condition because portions of our future revenues are
tied to continuing relationships with significant
customers.
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We have historically depended on a small number of customers for
a substantial portion of our sales, and we are dependent on
Ascension Health for a large portion of the revenue to come from
our contracted backlog. Contracted future revenue from Ascension
Health was approximately $52 million, or 33%, of our
contracted backlog at December 31, 2005. In addition, our
future revenue and growth significantly depend on our ability to
sell add-on functionality and new products to existing
multi-facility customers such as Ascension Health. As a result,
the loss of Ascension Health or any other future major customers
or their failure to renew maintenance and support agreements
with us could have a material adverse effect on our revenue and
operating results.
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Our
products are complex and are operated in a wide variety of
network configurations, which could result in errors or product
failures.
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Because our software is complex, undetected errors, failures or
bugs may occur when we first introduce our products or when we
release new versions. As we develop product enhancements and
extensions, the complexity of our software may increase. Our
products often are installed and used in large-scale computing
environments with different operating systems, system management
software and equipment and networking configurations, any of
which may cause errors or failures in our products or may expose
undetected errors, failures or bugs in our products. In the
past, we have encountered failures in certain of our product
offerings after their installation, and we have been required to
expend significant resources to repair the problem and sustain
the customer relationship. Despite testing by us and by others,
errors, failures or bugs may not be found in new products or
releases until after general release. The occurrence or
existence of such errors, failures or bugs in our products could
result in negative publicity, contract cancellations, loss of or
delay in market acceptance or claims by customers or others. In
addition, if an actual or perceived breach of network security
occurs in one of our customers medical image storage
systems, regardless of whether the breach is attributable to our
solution, the market perception of our products and services
could be harmed.
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Changes
in our third-party reselling arrangements may affect our
revenues and our ability to deliver a complete solution, which
may adversely impact our revenue and cause customer
dissatisfaction.
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We resell third-party components from numerous companies,
including IBM Corporation, EMC Corporation and Eastman Kodak
Company, as part of our solution. As the cost of third-party
hardware components continues to decline, our revenue from
third-party component sales and installation and, consequently,
our overall revenue per individual sale may also decline. If we
cease selling third-party hardware components as part of our
solution or if the vendors of these products, some of whom are
also competitors, curtail or delay our ability to resell them as
part of our solution, we may be limited in our ability to
provide our customers with a complete solution, and our revenue,
profit and reputation may decline. Our implementation
capabilities and performance also may be adversely affected if
our customers are required to obtain the necessary third-party
components on their own.
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We may
not be able to respond to changes in our industry, competitive
technologies, changes in customer requirements or evolving
industry standards, which would result in reduced revenue and
profit margins.
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Because our industry is subject to rapid technological change,
we must constantly monitor changes in industry standards,
customer requirements and other matters. If we fail to
anticipate and respond adequately to these changes in a timely
manner, our business and operating results could suffer a
material adverse effect. Although we currently support emerging
industry standards, we cannot assure you that we will be able to
conform to future evolving standards in a timely fashion, or
that such conformity, if achieved, will benefit our competitive
position in the market. In anticipation of new product
introductions by us or our competitors, customers could refrain
from purchasing our existing products. New products could render
certain of our existing products obsolete, or we may fail to
develop product enhancements or new products that are accepted
by our customers. Furthermore, as the market for our solution
matures, we may be subject to pricing pressures,
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and our revenues and profits may decline. Any of these events
could delay or prevent our customers from acquiring our solution
or require us to reduce the price of our solution, either of
which could lead to a decrease in revenue and profit margins.
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Our
customers depend on third-party reimbursement. A reduction or
other change in third-party reimbursements to our customers
could negatively affect our business by reducing the demand for
our products or adversely impacting our pricing.
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We sell our products to hospitals, clinics, imaging centers and
other health care providers which typically bill various
third-party payors, such as government health programs, private
health insurance plans, managed care organizations and other
similar programs. Third-party payors increasingly challenge the
prices charged for medical services and, in some instances, have
put pressure on service providers to lower their prices or
reduce their services. We cannot predict what changes
third-party payors will make to their reimbursement methods.
Third-party payors can indirectly affect the pricing or relative
attractiveness of our products by regulating the maximum amount
of reimbursement that they will provide for generating, storing
and interpreting medical images. A decline in reimbursements for
radiological procedures, for instance, may decrease the amount
which physicians, clinics and hospitals are able to recover for
such services and may reduce the number and complexity of
medical images. A reduction in the use or reimbursement of
digital medical images may lead to our customers decreasing
their capital investment budgets, which could significantly
reduce the demand for our products.
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If we
fail to obtain or maintain necessary FDA clearances for our
products, if such clearances are delayed, or if our products are
subject to FDA recall, we will be unable to distribute and
market some of our products.
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Our advanced visualization software products are subject to FDA
regulation of medical devices. Medical devices are a highly
regulated class of products. The FDA regulates the development,
testing, manufacturing, labeling, promotion and record-keeping
procedures for medical devices, including imaging software and
systems. The process of obtaining FDA marketing clearance for
new products and new applications for existing products can be
time consuming and expensive. The FDA has granted us marketing
clearance, pursuant to the 510(k) pre-market notification
process, for our currently marketed uses of our advanced
visualization tools. Before we can market other clinical uses of
our advanced visualization tools, generally we must seek 510(k)
clearance for the additional clinical uses. We cannot assure you
either that the FDA will grant clearance for future uses of our
advanced visualization tools, that such clearance will be broad
enough to allow all the requested new uses, that such clearance
will not be delayed, or that once clearance is obtained, it will
not be necessary for us or the FDA to recall one or more of our
products. Also, the FDA may not grant clearance with respect to
our future products or enhancements, or future FDA reviews may
involve delays that could adversely affect our ability to market
such future products or enhancements. Moreover, our future
products or enhancements may be subject to the FDAs more
lengthy and expensive pre-market approval process if we are
unable to demonstrate that such products and enhancements meet
the FDAs requirements regarding similarity to pre-existing
approved devices.
Furthermore, it is possible that even if we receive required
regulatory clearances and approvals from the FDA to market a
given product, these clearances and approvals may include
limitations on the indicated uses of the product. Also, the FDA
can withdraw product clearances and approvals due to failure to
comply with regulatory standards, quality system manufacturing
regulations, unapproved manufacturing changes, or if unforeseen
problems arise after initial approval. The FDA could also limit
or prevent our distribution of products. We might conduct a
voluntary recall or the FDA could recall such products if it
deems them defective, a health risk, or in violation of FDA
regulations. These regulations depend heavily on administrative
interpretation, and any such future interpretations could
adversely affect us. The FDA may also inspect us and our
facilities from time to time, or the facilities of our
suppliers, to determine whether we are in compliance with
quality system regulations and current good manufacturing
practices. If the FDA determines that we are not in compliance
with such regulations, it could require us to correct these
deficiencies or could suspend the
21
manufacture and sale of the products. The agency could also
impose civil penalties, including fines, recall or seize
products and, in extreme cases, impose criminal sanctions.
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If we
fail to comply with other potentially applicable health care
regulations, we could face substantial penalties, and our
business, operations, and financial condition could be adversely
impacted.
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We do not deliver health care services directly to patients,
control health care referrals, or submit claims to or otherwise
bill Medicare, Medicaid, or any other third-party payors.
However, we have engaged certain physicians to serve as
consultants on our behalf, entered into service agreements and
license agreements with health care entities, and had certain of
our products evaluated at health care facilities, and some of
our health care customers hold warrants to purchase our stock.
Because of the breadth of many health care laws and regulations,
and their potential impact on our customers, we cannot assure
you that such laws and regulations will not apply to our
business, either directly or indirectly. We could be subject to
health care fraud and patient privacy regulation by both the
federal government and the states in which we conduct our
business. The regulations that may affect our ability to operate
include the following:
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The Federal Anti-Kickback Statute prohibits the exchange of
anything of value with the intent to encourage utilization of
services payable under a federal health care program. Courts
have construed this statute as being implicated even when only
one of the purposes of one of the parties is to encourage
patient referrals or other federal health care business, even if
legitimate purposes also exist for the arrangement.
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The Federal Ethics in Patient Referrals Act, known as the Stark
Law, prohibits (absent an applicable Stark exception) referrals
for designated health services reimbursable under Medicare or
Medicaid by a physician to an entity with which the physician,
or an immediate family member, has a financial relationship.
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The Federal Health Insurance Portability and Accountability Act
of 1996, or HIPAA, has increased the scope of federal
fraud-and-abuse
laws by applying them to prohibit fraudulent conduct in
connection with any health care benefit program, not only
federal health care programs. Although we are not a covered
entity that is directly subject to liability under the HIPAA
privacy and security standards, we could be impacted by such
regulations through contractual relations with those of our
customer base who are covered entities.
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State law equivalents of each of the above federal laws, such as
anti-kickback, self-referral, and false claims laws, may apply
to items or services reimbursed by any third-party payor
(including commercial insurers). State laws governing the
privacy of health information in certain circumstances, many of
which differ from each other in significant ways and often are
not preempted by HIPAA (thus complicating compliance efforts)
and some of which may apply to us directly, may also affect our
operations.
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If our operations are found to violate any of these laws or
other governmental regulations, we may be subject to penalties,
including civil and criminal penalties, damages, fines, and the
curtailment or restructuring of our operations. Any such
occurrences could adversely affect our ability to operate our
business and our financial results. Determining such risk is
complicated by the fact that many of these laws and regulations
have not been fully interpreted by governing regulatory
authorities or the courts, and many of the provisions of such
laws and regulations are open to a wide range of
interpretations. Any action against us for violating such laws
or regulations, even if we successfully defend such an action,
could cause us to incur significant legal expenses and divert
our managements attention from the operation of our
business. Moreover, compliance with applicable federal and state
privacy, security, and electronic transaction laws may require
us to modify our operations with respect to the handling of
patient information. Implementing these modifications may prove
costly and time consuming. At this time, we are not able to
determine the full consequences to us, including the total cost
of compliance, of these various federal and state laws.
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We may
not be able to raise additional capital on acceptable terms to
fund our operations, develop product enhancements or fund
acquisitions, which could adversely affect our growth
prospects.
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We expect our cash resources to be sufficient to meet our
working capital and capital expenditure needs for the next
twelve months. We may need to raise additional funds, however,
through public or private financings, strategic relationships or
other arrangements in order to:
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develop new technologies;
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enhance existing product lines, such as expanding our advanced
visualization tools product line to apply to additional clinical
specialties;
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fund additional sales and marketing programs;
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invest in or acquire complementary businesses, product lines or
technologies; or
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hire additional personnel, particularly to expand sales,
marketing, research and development.
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If it becomes necessary to raise additional funds, our ability
to operate our business could be adversely affected if we are
unable to identify additional sources of capital to fund these
activities on acceptable terms.
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If the
market for digital medical imaging products and services does
not develop as we expect, our business strategy may be
ineffective, and we may not be able to grow our
business.
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We operate in a developing industry where customer acceptance
and market demand is still evolving. The digital medical imaging
solutions market is still developing due to:
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the availability of high performance computers and storage
systems at reduced prices;
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the continuing development of industry standards for the
generation, transmission and storage of medical imaging data;
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changing dynamics in the health care industry, including
consolidation and third-party reimbursement, which are driving
increased automation across multiple sites; and
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changing medical practices, including demand for more and better
medical imaging.
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We cannot assure you that this market will continue to develop
in the manner we anticipate, that the market will provide growth
opportunities for us or that our business strategies will be
successful. If the market for digital medical imaging products
and services fails to develop as we expect, our business,
results of operations and financial condition are likely to be
materially and adversely affected.
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Product
liability claims may require us to pay damages, reduce the
demand for our products, and harm our reputation.
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Our business exposes us to a risk of product liability claims
and other adverse effects of product failures. We provide
products that, among other things, assist in clinical
decision-making, provide access to patient medical image
information and assist in creating patient treatment plans.
Although no one has brought a claim against us to date alleging
that they suffered damages due to a defect or other failure of
any of our products, our customers or their patients may assert
claims against us in the future if our software fails to provide
accurate and timely information. A product liability claim can
cause us to incur significant legal defense costs and adverse
publicity regardless of the claims merit or eventual
outcome. If we are required to pay damages that exceed our
insurance coverage to one or more plaintiffs, such payments
could significantly harm our financial condition. A product
liability claim also could harm our reputation and lead to a
decline in revenue. We attempt to limit by contract our
liability for damages arising from negligence, errors or
mistakes. Despite this precaution, such contract provisions may
not be enforceable or may not otherwise protect us from
liability for damages. We maintain general liability insurance
coverage, including coverage for errors or omissions. However,
this coverage may not be sufficient to cover one or more large
claims against us or otherwise continue to be available on terms
acceptable to us. In addition, the insurer could disclaim
coverage as to any future claim.
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If we
fail to protect our intellectual property rights, our
competitors may take advantage of our ideas to compete more
effectively with us.
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We rely on a combination of copyright, trade secret and
trademark laws, nondisclosure and confidentiality agreements,
and other contractual restrictions to protect our proprietary
technology and other intellectual property rights. However,
these legal means afford only limited protection and may not
adequately protect our rights or permit us to gain or keep any
competitive advantage based on our intellectual property. In
addition, we have filed patent applications to protect certain
aspects of our software technology. However, to date, only one
of our patent applications has resulted in the issuance of a
patent, and we cannot assure you that these patent applications
will result in patents being issued in the U.S., Europe or
Japan, or that such patents will be issued in a form that will
be advantageous to us. Even if we obtain such patents, they may
be challenged, invalidated or circumvented by third parties. We
may not be able to prevent the unauthorized disclosure or use of
our technical knowledge or other trade secrets by employees.
Furthermore, the laws of foreign countries may not protect our
intellectual property rights to the same extent as the laws of
the U.S. Litigation may be necessary to enforce our
intellectual property rights which could result in substantial
costs to us and substantial diversion of management attention.
If we do not adequately protect our intellectual property, our
competitors could use it to enhance their products.
Additionally, because we use or include open source software,
which is not proprietary, in the components of some of our
products, our competitors may freely use such open source
software, and in certain circumstances may freely use such
components. This could harm our competitive position, decrease
our market share or otherwise harm our business.
The prosecution and enforcement of copyrights and patents
relating to components licensed or sold to us by third parties
is not within our control, and without these components, we may
be unable to provide our solution or maintain our technological
advantage. If the third-party suppliers of components used by us
fail to protect their patents or copyrights or if these
components are found to infringe on the rights of another party,
the functionality of our products could suffer, and our ability
to bring new and existing products to market could be delayed or
even prohibited.
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Our
operating results could suffer if we become subject to a
protracted infringement claim or litigation or a significant
damage award.
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Substantial intellectual property litigation and threats of
litigation exist in our industry. We expect that digital image
visualization software, image management software and open
source software products may become increasingly subject to
third-party infringement or other claims as the number of
competitors grows and the functionality of products increases.
Any claims, with or without merit, could have the following
negative consequences:
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costly litigation and damage awards;
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diversion of management attention and resources;
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product sales and distribution delays or suspensions, either
temporary or permanent; and
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the need to enter into royalty or licensing agreements, which
may not be available on terms acceptable to us, if at all.
|
A successful infringement or other claim against us could result
in a substantial damage award and materially harm our financial
condition. Our failure or inability to license the infringed or
similar technology could prevent us from selling our products
and adversely affect our business and financial results.
|
|
|
Our
directors may not be held personally liable for certain actions,
which could discourage stockholder suits against
them.
|
As permitted by Delaware law, our amended and restated
certificate of incorporation provides that our directors shall
not be personally liable to us or our stockholders for monetary
damages for breach of fiduciary duty as a director, with limited
exceptions. These provisions may discourage stockholders from
bringing suit against a director for breach of fiduciary duty
and may reduce the likelihood of derivative litigation brought
by
24
stockholders on our behalf against a director. In addition, we
provide for mandatory indemnification of directors and officers
to the fullest extent permitted by Delaware law and have entered
into indemnification agreements with our directors and officers.
|
|
|
Delaware
law and certain anti-takeover provisions of our corporate
documents could delay or prevent a third party from acquiring us
or a change in control even if it would benefit our
stockholders.
|
Our amended and restated certificate of incorporation and bylaws
contain a number of provisions that may delay, deter or inhibit
a future acquisition or change in control that is not first
approved by our board of directors. This could occur even if our
stockholders receive an attractive offer for their shares or if
a substantial number or even a majority of our stockholders
believe the takeover may be in their best interest. These
provisions are intended to encourage any person interested in
acquiring us to negotiate with and obtain approval from our
board of directors prior to pursuing a transaction. Provisions
that could delay, deter or inhibit a future acquisition or
change in control include the following:
|
|
|
|
|
our board of directors may issue 200,000 shares of blank
check preferred stock without stockholder approval and that may
be substantially dilutive or contain preferences or rights
objectionable to an acquiror;
|
|
|
|
our board of directors is comprised of classes of directors with
staggered, three-year terms so that only a portion of our
directors is subject to election at each annual meeting;
|
|
|
|
our board of directors can amend our bylaws without stockholder
approval;
|
|
|
|
stockholders cannot call special meetings of stockholders;
|
|
|
|
stockholders cannot act by written consent;
|
|
|
|
stockholders must give advance notice to nominate directors for
election or to submit proposals at stockholder meetings;
|
|
|
|
we may be obligated to make payments under executive employment
agreements in the event of a change in control; and
|
|
|
|
some Delaware statutes restrict or prohibit certain transactions
with affiliated or interested parties and permit the adoption of
poison pills without stockholder approval.
|
These provisions could also discourage bids for our common stock
at a premium and cause the market price of our common stock to
decline. In addition, these provisions may also entrench our
management by preventing or frustrating any attempt by our
stockholders to replace or remove our current management.
|
|
ITEM 1B:
|
UNRESOLVED
STAFF COMMENTS
|
Not Applicable.
Our principal offices occupy approximately 40,200 square
feet of leased office space in Birmingham, Alabama, under a
lease that expires in March 2010 and 79,500 square feet of
owned office space including approximately 13 acres of land
in Hartland, Wisconsin. We also maintain a research and
development facility consisting of approximately
14,400 square feet of leased office space in Madison,
Wisconsin, under a lease expiring in January 2013; a research
and development and customer support facility consisting of
approximately 14,500 square feet of leased office space
located in Ottawa, Ontario, under a lease that expires in
December 2009; a research and development facility consisting of
approximately 2,000 square feet of leased office space in
Winter Park, Florida, under a lease expiring in October 2008;
and a research and development facility consisting of
approximately 2,400 square feet of leased office space
located in Hartland, Wisconsin under a lease expiring in April,
2006. We believe our current facilities are adequate for our
current needs.
25
|
|
ITEM 3:
|
LEGAL
PROCEEDINGS
|
There are no pending material legal proceedings other than
ordinary routine litigation incidental to normal business to
which the Company is a party or to which any of its properties
are subject.
|
|
ITEM 4:
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
Not applicable.
PART II
|
|
ITEM 5:
|
MARKET
FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Our common stock began trading on the Nasdaq National Market
under the symbol EMAG on February 9, 2005.
Prior to such date, there was no established public trading
market for our common stock. As of March 23, 2006, the
20,806,339 outstanding shares of common stock were held by
99 holders of record. The closing price per share of our
common stock on the Nasdaq National Market on March 23,
2006 was $16.87.
The following table presents the range of share prices for each
quarter of 2005:
|
|
|
|
|
|
|
|
|
2005 Quarter Ended
|
|
High
|
|
|
Low
|
|
March 31, 2005
|
|
$
|
18.50
|
|
|
$
|
14.35
|
|
June 30, 2005
|
|
$
|
17.29
|
|
|
$
|
13.99
|
|
September 30, 2005
|
|
$
|
15.00
|
|
|
$
|
11.30
|
|
December 31, 2005
|
|
$
|
16.47
|
|
|
$
|
12.35
|
|
Dividends
We have not declared or paid any cash dividends on our common
stock and do not anticipate paying cash dividends on our common
stock for the foreseeable future. Instead, we currently intend
to retain all future earnings, if any, for use in the operations
of our business and to fund future growth. Any future decision
to declare and pay dividends will be at the discretion of our
board of directors, after taking into account our financial
results, capital requirements and other factors it may deem
relevant. Covenants in our debt agreements currently prohibit us
from paying dividends or making other distributions.
|
|
|
Use of
Proceeds from Initial Public Offering
|
Our initial public offering of common stock was effected through
a Registration Statement on Form S-l (File No. 333-120621)
that was declared effective by the Securities and Exchange
Commission on February 8, 2005, pursuant to which we sold all
5,750,000 shares of our common stock registered. We received net
proceeds of approximately $67.2 million from the offering.
We used $4.0 million of the net proceeds to repay
borrowings outstanding under our subordinated notes on
February 18, 2005. We invested the remaining net proceeds,
after payment of such subordinated notes, in short-term,
investment-grade, interest bearing instruments pending their
further use.
During the year ended December 31, 2005, we spent approximately
$5.8 million of such net proceeds on capital purchases,
substantially all of which was spent on purchases of equipment,
and an additional $40 million of the net offering proceeds
to acquire all of the outstanding stock of Camtronics Medical
Systems, Ltd. on November 1, 2005.
|
|
|
Purchases
of Equity Securities by the Issuer and Affiliated
Purchasers
|
We did not repurchase any shares of our common stock during the
three month period ended December 31, 2005.
26
|
|
ITEM 6:
|
SELECTED
CONSOLIDATED FINANCIAL DATA
|
The following consolidated statements of operations data for the
years ended December 31, 2003, 2004 and 2005 and
consolidated balance sheet data as of December 31, 2004 and
2005 are derived from our audited consolidated financial
statements and related notes, which are included elsewhere in
this document. The consolidated statements of operations data
for the years ended December 31, 2001 and 2002 and the
balance sheet data as of December 31, 2001, 2002 and 2003
are derived from our audited consolidated financial statements
that do not appear in this filing. The consolidated selected
financial data set forth below should be read in conjunction
with our consolidated financial statements and related notes and
Managements Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in
this filing. Historical results are not necessarily indicative
of the results to be expected for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
|
(Dollars in thousands, except
per share data)
|
|
|
Consolidated Statements of
Operations Data(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System sales
|
|
$
|
1,868
|
|
|
$
|
8,437
|
|
|
$
|
17,234
|
|
|
$
|
33,441
|
|
|
$
|
50,041
|
|
Support services
|
|
|
630
|
|
|
|
4,182
|
|
|
|
6,057
|
|
|
|
12,361
|
|
|
|
23,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
2,498
|
|
|
|
12,619
|
|
|
|
23,291
|
|
|
|
45,802
|
|
|
|
73,791
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System sales
|
|
|
1,031
|
|
|
|
6,316
|
|
|
|
10,227
|
|
|
|
21,452
|
|
|
|
28,316
|
|
Support services
|
|
|
1,396
|
|
|
|
4,040
|
|
|
|
7,493
|
|
|
|
10,728
|
|
|
|
14,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
2,427
|
|
|
|
10,356
|
|
|
|
17,720
|
|
|
|
32,180
|
|
|
|
42,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
71
|
|
|
|
2,263
|
|
|
|
5,571
|
|
|
|
13,622
|
|
|
|
30,827
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
1,952
|
|
|
|
2,383
|
|
|
|
4,143
|
|
|
|
6,021
|
|
|
|
10,697
|
|
Sales and marketing
|
|
|
4,383
|
|
|
|
4,456
|
|
|
|
6,144
|
|
|
|
9,027
|
|
|
|
11,830
|
|
General and administrative
|
|
|
3,050
|
|
|
|
3,149
|
|
|
|
5,793
|
|
|
|
8,024
|
|
|
|
12,308
|
|
Amortization and write-off of
intangible assets related to Camtronics acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
993
|
|
Integration costs related to
Camtronics acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
244
|
|
Loss on contract from issuance of
warrants
|
|
|
550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
9,935
|
|
|
|
9,988
|
|
|
|
16,080
|
|
|
|
23,072
|
|
|
|
36,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(9,864
|
)
|
|
|
(7,725
|
)
|
|
|
(10,509
|
)
|
|
|
(9,450
|
)
|
|
|
(5,245
|
)
|
Interest income (expense), net
|
|
|
151
|
|
|
|
(601
|
)
|
|
|
(850
|
)
|
|
|
(1,022
|
)
|
|
|
248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(9,713
|
)
|
|
$
|
(8,326
|
)
|
|
$
|
(11,359
|
)
|
|
$
|
(10,472
|
)
|
|
$
|
(4,997
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per
share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
(7.41
|
)
|
|
$
|
(6.38
|
)
|
|
$
|
(5.79
|
)
|
|
$
|
(4.07
|
)
|
|
$
|
(0.28
|
)
|
Weighted average shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
|
1,313,693
|
|
|
|
1,314,238
|
|
|
|
1,973,108
|
|
|
|
2,589,832
|
|
|
|
17,975,083
|
|
Selected Cash Flow
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in)
operations
|
|
$
|
(4,280
|
)
|
|
$
|
(7,847
|
)
|
|
$
|
(2,377
|
)
|
|
$
|
4,959
|
|
|
$
|
(1,881
|
)
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31,
|
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Consolidated Balance Sheet
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,399
|
|
|
$
|
2,242
|
|
|
$
|
2,340
|
|
|
$
|
5,995
|
|
|
$
|
15,520
|
|
Marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,951
|
|
Intangible assets, net
|
|
|
|
|
|
|
|
|
|
|
8,000
|
|
|
|
6,873
|
|
|
|
34,277
|
|
Total assets
|
|
|
15,699
|
|
|
|
24,990
|
|
|
|
29,050
|
|
|
|
41,768
|
|
|
|
117,944
|
|
Total debt and capital lease
obligations
|
|
|
2,100
|
|
|
|
10,260
|
|
|
|
8,467
|
|
|
|
9,489
|
|
|
|
3,749
|
|
Redeemable preferred stock
|
|
|
24,269
|
|
|
|
24,326
|
|
|
|
30,282
|
|
|
|
30,348
|
|
|
|
|
|
Total stockholders equity
(deficit)
|
|
|
(17,369
|
)
|
|
|
(20,508
|
)
|
|
|
(23,535
|
)
|
|
|
(32,370
|
)
|
|
|
63,639
|
|
Other Data (unaudited, in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracted backlog(2)
|
|
$
|
35.3
|
|
|
$
|
55.4
|
|
|
$
|
82.7
|
|
|
$
|
118.2
|
|
|
$
|
158.0
|
|
|
|
|
(1) |
|
On November 1, 2005, we acquired Camtronics Medical
Systems, Ltd., and on May 30, 2003, we merged with
Ultravisual Medical Systems Corporation. Both the acquisition
and the merger were accounted for as purchases under Statement
of Financial Accounting Standards No. 141, Business
Combinations. Accordingly, the results of operations of
Camtronics Medical Systems, Ltd. and Ultravisual Medical Systems
Corporation have been included in the accompanying consolidated
financial statements since the respective dates of acquisition.
For more information, see Note 4 of the notes to our
consolidated financial statements. |
|
(2) |
|
We define contracted backlog as the aggregate dollar value of
unrecognized revenue from all executed contracts at a given
point in time. |
|
|
ITEM 7:
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Company
Overview
We provide 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. Our solutions consist of advanced
visualization and image management software for multiple medical
specialties such as cardiology, radiology and orthopedics,
comprehensive support services and third-party components. Our
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 2D perspective and a
3D 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. Our open standards-based solutions are
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.
We were founded in December 1998 as an Alabama corporation and
reincorporated in Delaware in January 2000. Since our first
commercial implementation in December 2000, we have experienced
substantial growth and have implemented our solutions at
facilities affiliated with some of the largest multi-facility
health care providers in the U.S.
Our fiscal year ends on December 31. References to 2005,
for example, refer to the fiscal year ended December 31,
2005.
Results
Overview
Total revenue for 2005 was $73.8 million, which represents
a 61.1% increase over 2004. The increase was comprised of a
49.6% increase in system sales revenue and a 92.1% increase in
support services revenue. Our overall gross margin percentage
increased from 29.7% for 2004 to 41.8% for 2005. We achieved
gross
28
margin percentages of 43.4% and 38.3% for system sales and
support services revenue, respectively, during 2005, compared to
35.9% and 13.2%, respectively, for 2004. Our net loss was
$(5.0) million in 2005 compared to a net loss of
$(10.5) million in 2004. This improvement was driven by
revenue growth, margin expansion and expense control.
As of December 31, 2005, we had $158.0 million in
contracted backlog, consisting of fees for contracted future
installations and for the support of existing installations,
compared with a contracted backlog of $118.2 million at
December 31, 2004. We expect to recognize revenue from our
current backlog of approximately $73.3 million in 2006 and
$27.0 million in 2007. Substantially all of the remaining
$57.7 million, which primarily consists of recurring
revenue from support services, is expected to be recognized by
2010. Our backlog will decrease as we recognize revenue under
existing contracts, and it will increase as we enter into new
contracts.
Important
Developments
On November 1, 2005, we acquired all the stock of
Camtronics Medical Systems, Ltd., based in Hartland, Wisconsin,
for $40 million in cash. We acquired all of
Camtronics assets, including its corporate headquarters
campus in Hartland, and all of Camtronics liabilities. We
expect to substantially complete the integration of this
business by the end of the third quarter of 2006.
Camtronics, founded in 1986, is a leading provider of cardiology
image and information management systems. Camtronics, which had
revenue of $38.1 million for its fiscal year ended
July 31, 2005, currently serves a customer base that
includes over 300 hospitals. In 2004, Frost and Sullivan, a
leading market research firm, named Camtronics as one of the top
five cardiology-solution vendors in the United States. Including
Camtronics customers, our combined organization now has a
customer base that includes approximately 600 medical facilities.
On February 14, 2005, we completed our initial public
offering of common stock. We sold 5.0 million shares of our
common stock at a price of $13.00 per share. On
February 18, 2005, our underwriters exercised the
over-allotment option to purchase 750,000 additional shares
of our common stock at $13.00 per share. Total proceeds
from the initial public offering (net of underwriting discount
and offering expenses) were $67.2 million.
Our
Market
We believe the health information technology market is
exhibiting the following trends:
|
|
|
|
|
Increasing procedure volumes
|
|
|
|
Increasing procedure size
|
|
|
|
Modality blending, a layering of studies from two
separate modalities for diagnostic and treatment purposes
|
|
|
|
Expanding adoption and use of standards
|
|
|
|
Increasing emphasis by healthcare providers and government
agencies on electronic health record integration
|
|
|
|
Body transparency, a new paradigm for navigating through large
volumes of information
|
The amount of imaging data being generated by health care
providers is growing extremely rapidly. This data must be stored
and made available for easy retrieval. Increasingly, health care
information users want access to the stored data at any time,
and in any location. In addition, modalities that provide
non-invasive alternatives continue to expand into other clinical
domains. Examples include:
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MR and CT angiography
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Multi-Detector CT for heart and chest imaging
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CT/PET Fusion
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Cardiac catheterization
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One area that has received significant attention is advanced
visualization, which uses 3D and other advanced analytic tools
as key elements in an enterprise visual medical system. Earlier
generation PACS have focused primarily on single departments and
have utilized generic 2D tools. A complete enterprise
visualization system must not only support full 2D capabilities,
but also include 3D tools, integrate easily into other
information systems, and adhere to standards. To understand
these images, referring physicians need new tools that adapt to
their specialty. We expect that clinicians and specialists will
soon consider enterprise visualization routine, since these
images can be easier to understand and utilize.
Our solutions can be extended to multiple stakeholders
throughout the health care enterprise. Our solutions go beyond
moving images from point A to point B to effectively
distributing multi-specialty tools and clinical content using a
web-enabled platform. Our solutions not only manage very complex
datasets, but also perform advanced visualization such as 3D
reconstruction and analysis within the viewing application, and
distribute essential clinical tools through the network.
Significant
Events in 2005
During the year ended December 31, 2005, we continued to
focus on our core set of strategic goals. In addition to the
initial public offering of our stock and our acquisition of
Camtronics, we believe the following events were significant
with respect to our goals:
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During February 2005, we entered into a ten-year contract with
Sisters of St. Francis Health Services, Inc., an integrated
network of 12 hospitals, clinics and associated facilities
located in Indiana and Illinois.
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During March 2005, our quality management system received ISO
13485:2003 certification from the certification body,
Lloyds Register Quality Assurance, for both the Madison,
Wisconsin and Birmingham, Alabama offices. This certification is
issued for the design and management of software manufacturing
and for services used by healthcare provider organizations for
the clinical analysis, management, storage, distribution and
visualization of digital medical images and corresponding data.
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During May 2005, we announced enhancements to our advanced
visualization software allowing radiologists and treating
physicians to better use volume rendering and 3D navigation in
one native, integrated, open-standards package. This improvement
means physicians can utilize both 2D and 3D tools without having
to resort to third-party software and proprietary hardware to
analyze medical images offering time-savings
and increased productivity.
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During September 2005, we received certification under the
Canadian Medical Device Conformity Assessment System recognizing
our ISO 13485:2003 status in Canada. We also received our
medical device license from Health Canada to allow us to market
our products in Canada. We believe that there may be a strong
opportunity for business with multi-facility providers
throughout the Canadian marketplace.
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During November 2005, we entered into a contract with Meridian
Health, a leading integrated delivery system serving central New
Jersey. The agreement with Meridian Health represented our first
combined sale of the Emageon Enterprise Visual Medical System
with the full suite of Camtronics cardiology imaging
products.
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During November 2005, we entered into a contract with The Johns
Hopkins Hospital, a world-renowned medical center headquartered
in Baltimore, Maryland.
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Also during November 2005, we entered into an agreement with
Orthocrat Ltd. to distribute TraumaCad, Orthocrats
orthopedic surgical planning application. This agreement allows
us to further extend our enterprise vision by offering
additional leading edge tools to orthopedic specialists in our
customer base.
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30
Change in
Financial Position
As noted above, we completed our initial public offering during
February 2005. The following significant changes in our
financial position occurred as a result of the completion of the
initial public offering:
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We issued 10,843,411 shares of common stock upon the
automatic conversion of outstanding shares of preferred stock
into shares of common stock.
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We sold 5,750,000 shares of common stock in connection with
the public offering.
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We issued 537,082 shares of common stock upon exercise of
mandatorily redeemable warrants.
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We received total cash proceeds (net of underwriting discount
and offering expenses) of $67.2 million.
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With a portion of the proceeds, we repaid $4.0 million of
our subordinated debt. We also recorded a non-cash interest
charge of $0.6 million for the write-off of the debt
discount related to the subordinated debt.
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We invested the remaining proceeds in cash equivalents and
short-term marketable securities.
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In November 2005, we utilized $40 million of the cash
proceeds to purchase Camtronics Medical Systems, Ltd.
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As of December 31, 2005, we had 20,628,913 shares of
common stock issued, 20,453,156 shares of common stock
outstanding, and warrants to purchase 48,986 shares of
our common stock outstanding at exercise prices ranging from
$3.63 to $5.52 per share.
Sources
of Revenue
A typical sale of our solution is comprised of system sales and
support services. Revenue from system sales is derived from the
licensing of our Advanced Visualization, Clinical Content
Management, and Clinical Workflow (collectively referred to as
our Enterprise Visual Medical System, or EVMS) and our
HeartSuite software products, as well as from sales and
integration of third-party components that are required to
implement our solution. Support services revenue is derived from
fees related to the implementation, training and on-going
customer support of our solution.
Our software is comprised of four main components: Advanced
Visualization, our suite of software tools for the advanced
visualization and analysis of digital medical images; Clinical
Content Management, our image archival and distribution
management software; Clinical Workflow, our standards-based
software used to manage integration and data migration between
our solution and other health information systems throughout the
enterprise; and HeartSuite, our suite of software tools focused
on the cardiology department. Although Clinical Content
Management and HeartSuite software products are available
collectively as stand-alone applications, we offer our software
primarily as an integrated enterprise-level image management
solution. License pricing for Advanced Visualization is
primarily determined by either number of licenses or number of
concurrent users. License pricing for Clinical Content
Management and Clinical Workflow is determined based on
projected volume and size of image studies to be stored or
migrated by the particular customer. License pricing for
HeartSuite software products is determined based on the number
of workstations purchased. We offer customers our software as
perpetual or term licenses, in either case with maintenance and
support relating to the software. Term licenses for our software
are typically from two to ten years with annual renewals after
the initial term. The sale and integration of third-party
components typically include servers, data storage, backup and
recovery systems, workstations and monitors, database software
and computed radiography devices as well as orthopedic templates
and dictation systems.
We also derive revenue from the provision of support services,
including implementation, project planning, management, design
and training services. Our customers typically contract for
these support services pursuant to their initial agreements with
us. The initial term of these support services under these
agreements range from one to ten years, with a typical duration
of five years. Upon expiration of the initial term, these
agreements typically renew automatically from
year-to-year
thereafter until terminated.
31
Because our solutions represent capital expenditures involving
multi-year commitments, it can take a significant period of time
to close a sale. Our EVMS solution has a typical sales cycle,
from the initial contact to the placing of an order, of six to
nine months, and sometimes much longer.
Ascension Health, the largest
not-for-profit
hospital system in the United States, is our largest customer.
Revenue associated with facilities controlled by Ascension
Health accounted for approximately 36% of our total revenue
during 2005 and approximately 33% of our total contracted
backlog at December 31, 2005. We anticipate that Ascension
Health will continue to be a significant customer as we sign
order addenda and contracts with additional Ascension Health
facilities. In 2003, 2004 and 2005, we had two, one and one
customer, respectively, who each accounted for more than 10% of
our total revenue.
Cost of
Revenue
The cost of our solution is comprised of two elements: the cost
of our system sales and the cost of our support services. The
cost of system sales consists of the cost of third-party
components and the cost of software licenses. The cost of our
third-party components consists primarily of direct and indirect
expenses related to the purchase, manufacturing, shipment,
installation and configuration of our solution. The cost of our
software licenses consists primarily of the amortization of
acquired software, the amortization of capitalized software
costs for internally developed software, and royalties paid for
a component of our Clinical Content Management software.
The cost of our support services consists primarily of labor
costs and overhead relating to the implementation, installation,
training, application support and maintenance of our solution as
well as costs related to maintenance of third-party components.
The cost of support services revenue varies based upon the
productivity of our support services organization as well as
costs associated with the use of outside contractors to support
internal resources.
We allocate overhead expenses such as rent and occupancy charges
and employee benefit costs to all departments based on
headcount. As such, general overhead expenses are reflected in
cost of support services, as well as in the research and
development, sales and marketing and general and administrative
expense categories.
We currently own and lease to certain customers, under operating
leases, third-party components with a net book value of
approximately $3.4 million at December 31, 2005. These
components relate to five customer installations completed in
2001 and 2002. We are depreciating these third-party components
to cost of support services revenue over the life of the
respective contracts. For the years ended December 31,
2003, 2004 and 2005, depreciation related to these third-party
components of $2.7 million, $3.4 million and
$2.4 million, respectively, was included in cost of support
services. The majority of the contracts will expire by the third
quarter of 2007. We have not entered into any agreements
requiring us to lease third-party components to customers since
early 2002 and do not expect to do so in the future. We
anticipate that several of these customers will upgrade to our
Advanced Visualization software from the existing third-party
visualization components that we lease to them.
Gross
Profit
Our overall gross profit has improved due to an increase in
software and recurring support services revenue derived from our
growing installed base of customers. We expect this trend to
continue as our installed customer base continues to grow. The
gross profit from system sales varies based on several factors,
including:
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actual sales prices negotiated in the contracting process;
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amount of amortization of acquired software and internally
developed capitalized software;
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costs associated with purchasing and manufacturing third-party
components;
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fluctuations in prices received from third-party component
manufacturers and distributors relative to the
mark-up
percentages provided for in customer contracts.
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The gross profit from sales of our support services varies based
on several factors, including:
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actual services fees negotiated during the contracting process;
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productivity of our professional service team;
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costs of service agreements related to third-party components
included in our solution; and
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costs associated with the use of outside contractors.
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Operating
Expenses
Research and Development. Research and
development expenses consist primarily of employee-related
expenses, allocated overhead, and outside contractors. We have
historically focused our research and development efforts on
improving the functionality, performance, and integration of our
software products. We expect that research and development
expenses will increase as we strive to introduce additional
products and services.
Sales and Marketing. Sales and marketing
expenses consist primarily of employee-related expenses,
including travel, marketing programs (which include trade shows,
workshops and seminars, corporate communications, other brand
building activities, and advertising), allocated overhead and
sales commissions. We expect that sales and marketing expenses
will increase as we expand our selling and marketing activities
associated with existing and new product and service offerings
to existing and new customers, build brand awareness and sponsor
additional marketing events.
General and Administrative. General and
administrative expenses consist primarily of employee-related
expenses, professional fees, other corporate expenses and
allocated overhead. We expect that general and administrative
expenses will increase as we add personnel and incur additional
professional fees and insurance costs related to the growth of
our business and operations, including additional compliance
costs in connection with public company financial reporting
requirements.
Depreciation. We depreciate the costs of our
tangible capital assets, primarily consisting of building,
machinery and equipment, computers and software, leasehold
improvements and furniture, on a straight-line basis over the
estimated economic life of the asset, which is generally three
to 39 years.
Stock-Based Expenses. Our operating expenses
and interest expense include the effects of stock-based expenses
related to the fair value of common stock options and warrants
issued to non-employees and stock option grants to employees in
situations where the exercise price was determined to be less
than the deemed fair value of our common stock at the date of
grant. Ordinarily, we do not issue options with an exercise
price below the then-current fair market value. However, certain
options awarded prior to the completion of our initial public
offering were determined to be below the appropriate fair market
value at the time of issuance.
Critical
Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United
States. The preparation of these consolidated financial
statements requires us to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenue,
costs and expenses and related disclosures. On an ongoing basis,
we evaluate our estimates and assumptions. Our actual results
may differ from these estimates.
We believe that, of our significant accounting policies, which
are described in Note 2 of the notes to our consolidated
financial statements, the following accounting policies involve
the greater degree of judgment and complexity. Accordingly,
these are the policies we believe are the most critical to aid
in fully understanding and evaluating our consolidated financial
condition and results of operations.
Revenue Recognition and Deferred Revenue. We
derive revenue from two primary sources: (1) system sales,
which includes software license revenue and third-party
component sales, and (2) support services, which includes
fees related to implementation, training, software maintenance,
ongoing customer support and third-party component maintenance.
While the basis for software license revenue recognition is
substantially
33
governed by the provisions of AICPA Statement of Position 97-2,
(SOP 97-2),
Software Revenue Recognition, as amended, in the
application of this standard, we exercise judgment and use
estimates in connection with the determination of the amount of
system sales and support services revenue to be recognized in
each accounting period.
We sell software under three types of licenses:
(1) Perpetual licenses: software licensed on a perpetual
basis to a customer based on a fixed number of users and/or
estimates of annual study volumes with no right to return the
licensed software.
(2) Enterprise licenses: software licensed on a perpetual
basis to a customer (typically a multi-facility health care
provider), as opposed to licensing based on a fixed number of
users or on estimates of annual study volumes, with no right to
return the licensed software.
(3) Term licenses: software licensed on a term basis
according to a fixed number of users and/or estimates of annual
study volumes.
Generally, our software license arrangements do not include
significant modification or customization of the underlying
software and, as a result, we recognize license revenue when:
(1) persuasive evidence of an arrangement exists;
(2) delivery has occurred; (3) customer payment is
deemed fixed or determinable and (4) collection is
probable. We assess each of the four criteria as follows:
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Persuasive evidence of an arrangement
exists: It is our customary practice to have a
written contract, which is signed by both the customer and us,
or a purchase order from those customers that have previously
negotiated a standard end-user license arrangement, prior to
recognizing revenue on an arrangement.
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Delivery has occurred: It is our customary
practice to obtain acceptance for our software, which is
evidenced by written customer acknowledgement. In the event that
we grant a customer the right to specified upgrades, we defer
recognition of the entire arrangement fee until we deliver the
specified upgrades as we have not established vendor-specific
objective evidence (VSOE) of fair value for specified upgrades.
Specified upgrades include, but are not limited to, future
software deliverables that are stated in the customer contract.
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The customers payment is deemed fixed or
determinable: We assess whether fees are fixed or
determinable and free of contingencies or significant
uncertainties at the time of sale and recognize revenue when all
other revenue recognition requirements are met. While our
standard payment terms are net 30 to 45 days, we have, on a
few occasions, extended payment terms beyond 45 days (but
none greater than six months) to creditworthy customers. We have
established a successful history of collection, without
concessions, on these receivables, therefore satisfying the
required criteria for revenue recognition. If the fee is
determined not to be fixed or determinable, we recognize revenue
as the amounts become due and payable.
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Collection is probable: Likelihood of
collection is assessed on a
customer-by-customer
basis. Both new and existing customers are subjected to a credit
review that evaluates such customers financial position
and ultimately their ability to pay. For follow-on sales to
existing customers, prior payment history is also used to
evaluate probability of collection. If it is determined from the
outset of the arrangement that collection is not probable based
upon our credit review process, revenue is recognized on a
cash-collected basis if all other criteria are met.
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We account for software license and non-recurring support
services revenue included in multiple element arrangements using
the residual method. Under the residual method, the fair value
of the undelivered elements (i.e., software maintenance and
ongoing support services) based on VSOE of fair value is
deferred and the remaining portion of the arrangement fee is
allocated to the delivered elements (i.e., software license and
non-recurring support services). If evidence of the fair value
of one or more of the undelivered services does not exist,
revenue is deferred and recognized when delivery of those
services occurs or fair value can be established. We determine
VSOE of fair value for ongoing support services revenue based
upon the renewal rates for the maintenance and ongoing support,
which coincide with our pricing model. Significant incremental
34
discounts offered in multiple element arrangements that would be
characterized as separate elements are infrequent and are
allocated to software license revenue under the residual method.
For term license arrangements, we recognize revenue for the
multiple element arrangement over the term of the arrangement
beginning in the month after we receive customer acceptance,
provided that the other revenue recognition criteria have been
met.
Software maintenance services generally include rights to
upgrades (when and if available), telephone support, updates and
bug fixes. Software maintenance revenue is recognized ratably
over the term of the maintenance contract on a straight-line
basis when all the revenue recognition requirements are met. We
include the first year of software maintenance in the software
license fee. We defer this software maintenance fee based on its
fair value and recognize it ratably over the first year of the
arrangement.
Ongoing support services generally include telephone support
related to third-party components as well as quarterly customer
metric reporting and other services. Ongoing support service
revenue is recognized ratably over the term of the ongoing
support services contract on a straight-line basis when all the
revenue recognition requirements are met. As it relates to
services, the Company may also provide services that vary
depending on the scope and complexity requested by the customer.
Examples of such services include additional database
consulting, system configuration, existing systems interface,
and network consulting. These services generally are not deemed
to be essential to the functionality of the software. If the
Company has VSOE of fair value for the services, the timing of
the software license revenue is not impacted, and service
revenue is recognized as the services are performed. The Company
commonly performs services for which the Company does not have
VSOE of fair value; accordingly, the software license revenue is
deferred until the services are completed.
The Company recognizes revenue from product sales in accordance
with SEC Staff Accounting Bulletin No, 104, Revenue
Recognition in Financial Statements. Revenue related to
product sales is recognized upon shipment provided that title
and risk of loss have passed to the customer, there is
persuasive evidence of an arrangement, the sales price is fixed
and determinable, collection of the related receivable is
reasonably assured and customer acceptance criteria, if any,
have been successfully demonstrated. The Company classifies
shipping and handling cost in cost of system sales.
When our contracts contain both software and third-party
components, we recognize revenue related to third-party
components that are stated separately in our contracts according
to guidance set forth in Emerging Issues Task Force Issue
No. 00-21,
Accounting for Revenue Arrangements with Multiple
Deliverables
(EITF 00-21).
Third-party component revenue, including hardware sales and
hardware maintenance, is recognized in accordance with
contractual terms. When we are responsible for installing the
third-party components, revenue is recognized when the
third-party components are delivered, installed and accepted by
the customer. When we are not responsible for installing the
third-party components, revenue is recognized when the
third-party components are delivered to the customer. We qualify
to recognize hardware sales and hardware maintenance under
EITF 00-21
as a result of the following factors: 1) our software is
not essential to the functionality of the hardware, 2) our
customers have the ability to purchase the hardware from other
vendors and 3) the purchase price of the hardware and
hardware maintenance is separately stated in our contracts. When
third-party components and related maintenance are not
separately priced in our contracts, we recognize revenue related
to the arrangement when all revenue recognition criteria have
been met.
The following is a summary of our product warranty and guarantee
and our related accounting policies for these agreements:
(1) Our sales agreements with customers generally contain
infringement indemnity provisions. Under these agreements, we
agree to indemnify, defend and hold harmless the customer in
connection with patent, copyright or trade secret infringement
claims made by third parties with respect to the customers
authorized use of our products and services. The indemnity
provisions generally provide for our control of any required
defense and settlement and cover costs and damages finally
awarded against the customer, if any. Our infringement indemnity
provisions typically give us the option to make modifications of
the product so it is no longer infringing or, if it cannot be
corrected, to require the customer to return the product in
exchange for a specified payment for loss of use. Our sales
agreements with customers
35
sometimes also contain indemnity provisions for death, personal
injury or property damage caused by our personnel or contractors
in the course of performing services to customers. Under these
agreements, we agree to indemnify, defend and hold harmless the
customer in connection with death, personal injury and property
damage claims made by third parties with respect to actions of
our personnel or contractors. The indemnity provisions generally
provide for our control of any required defense and settlement
and cover costs and damages finally awarded against the
customer, if any. The indemnity obligations contained in sales
agreements generally have no specified expiration date but
typically limit the amount of award covered to a portion of the
fees paid by the customer over a portion of the contract term.
We have not previously incurred costs to settle claims or pay
awards under these indemnification provisions. Accordingly, we
have no liabilities recorded for these provisions as of
December 31, 2005.
(2) We warrant that our software products will perform in
all material respects in accordance with our standard published
specifications in effect at the time of delivery of the licensed
products to the customer as long as the contract remains in
effect. Additionally, we warrant that our services will be
performed by qualified personnel in a manner consistent with
normally accepted industry standards. We provide for the
estimated cost of product and service warranties based on
specific warranty claims and claim history. As of
December 31, 2005 we have $0.9 million of liabilities
recorded for these agreements.
(3) Our standard contracts with customers typically provide
for a 99% guarantee of system availability and a 98% guarantee
of component availability, with penalty provisions if our
solution fails to meet the guarantees. Our 99% system
availability guarantee covers our solution as a whole, while the
component guarantee covers each individual component, as in
certain circumstances a component may fail without affecting
system availability. The penalty provisions in our contracts
typically allow the customer a reduction in software maintenance
fees related to failure to meet guaranteed uptime
percentages. We calculate these penalties as a percentage of the
software maintenance fee and would reduce the amount of the
software maintenance fee charged in a specific period for these
penalties, if incurred. To date, we have not incurred any
penalties associated with these guarantees. Accordingly, we have
no liabilities recorded for these agreements as of
December 31, 2005.
Billings may not coincide with the recognition of revenue.
Unbilled revenue, which is included in accounts receivable in
the consolidated balance sheet, occurs when revenue recognition
precedes billing to the customer, and arises primarily from
sales with predetermined billing schedules. Billings in excess
of sales (deferred revenue) occur when billing to the customer
precedes revenue recognition, and arise primarily from sales
with partial prepayments upon contract execution and from
maintenance revenue billed in advance of performance of the
maintenance activity. The Company recognizes deferred revenue,
as applicable, upon delivery and acceptance of products, as
ongoing services are rendered or as other requirements requiring
deferral under
SOP 97-2
are satisfied. Costs related to deferred revenue are included as
an asset in the Companys consolidated balance sheet and
charged to expense when the related deferred revenue is
recognized.
The timing of customer acceptances could significantly affect
our results of operations during a given period. As noted above,
we require written acknowledgement from the customer to evidence
that delivery of the products or services has occurred. Delays
in the implementation process could negatively affect operations
in a given period by increasing volatility in revenue
recognition.
Research and Development Costs. Research and
development costs are charged to expense as incurred. However,
costs incurred for the development of software that will be
sold, leased or otherwise marketed are capitalized as incurred
after technological feasibility has been established and
capitalization ceases when the software is generally available
for release. Judgment is involved in determining when
technological feasibility is reached. We believe that
technological feasibility is reached when we have completed a
working model that is ready to be beta-tested at a customer
site. These capitalized costs are subject to an ongoing
assessment of recoverability based on anticipated future revenue
and changes in technologies. Costs deemed not recoverable are
charged to expense. Costs that are capitalized primarily consist
of direct labor.
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Amortization of capitalized software development costs begins
when the product is available for general release. Amortization
is provided on a
product-by-product
basis using the straight-line method over periods not exceeding
three years.
Intangible and Other Long-Lived Assets. U.S.
generally accepted accounting principles require the purchase
method of accounting for all business combinations after
June 30, 2001, and that certain acquired intangible assets
in a business combination be recognized as assets separate from
goodwill. Accordingly, we identified and allocated values to the
intangibles based on discounted cash flow analyses and market
research, as well as our judgment. Intangibles determined to
have an indefinite life are not amortized but are tested for
impairment at least annually. We will evaluate intangible assets
for impairment on an annual basis and also when impairment
indicators are identified. In assessing the recoverability of
intangibles, we must make assumptions regarding estimated future
cash flows and other factors to determine the fair value of the
respective assets. These estimates include forecasted revenue,
which is inherently difficult to predict. If these estimates or
their related assumptions change in the future, we may be
required to record impairment charges for these assets.
Historically, intangible assets are reviewed for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Property,
equipment and intangible assets are amortized over their useful
lives. Useful lives of the intangible assets are based on
managements estimates of the periods over which such
assets will generate revenue.
Results
of Operations
Revenue
Revenue consists of system sales and support services revenue.
System sales revenue is comprised of revenue from sales of our
software and third party components. Support services revenue is
comprised of revenue from up-front professional services such as
implementation, adoption and training, as well as ongoing
maintenance services. The following table sets forth revenue
component data.
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Year Ended
December 31,
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Year Ended
December 31,
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2005
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2004
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Change
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Change (%)
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2004
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2003
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Change
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Change (%)
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(In thousands except
percentages)
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(In thousands except
percentages)
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System sales
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$
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50,041
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$
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33,441
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$
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16,600
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49.6
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%
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$
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33,441
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$
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17,234
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$
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16,207
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94.0
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%
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Percentage of total revenue
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67.8
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%
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73.0
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%
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|
|
|
|
|
|
|
|
73.0
|
%
|
|
|
74.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Support services
|
|
$
|
23,750
|
|
|
$
|
12,361
|
|
|
$
|
11,389
|
|
|
|
92.1
|
%
|
|
$
|
12,361
|
|
|
$
|
6,057
|
|
|
$
|
6,304
|
|
|
|
104.1
|
%
|
Percentage of total revenue
|
|
|
32.2
|
%
|
|
|
27.0
|
%
|
|
|
|
|
|
|
|
|
|
|
27.0
|
%
|
|
|
26.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
73,791
|
|
|
$
|
45,802
|
|
|
$
|
27,989
|
|
|
|
61.1
|
%
|
|
$
|
45,802
|
|
|
$
|
23,291
|
|
|
$
|
22,511
|
|
|
|
96.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in system sales revenue from 2004 to 2005 was
attributable to an increase in the number of new and existing
customer installations offset by a decrease in the size of these
installations, as well as the recognition of $4.5 million
of previously deferred revenue. During 2005, we had more
acceptances of our software and third party components than in
2004. The average revenue recognized per acceptance (excluding
outliers, such as unusually small or large dollar amounts)
decreased slightly in 2005 as compared to 2004. As our pricing
has not changed significantly from the prior year, the decrease
is primarily related to an increase in add-on sales to our
existing customer base, which tend to be smaller than initial
sales to new customers. Also, during 2005, we recognized system
sales revenue of $4.5 million related to two contracts for
which we deferred revenue in 2004 as a result of the existence
of certain undelivered upgrades. We delivered the additional
software features during the second and fourth quarters of 2005
and, as a result of all revenue recognition criteria being met,
we recognized the system sales revenue associated with these
contracts.
The increase in system sales revenue from 2003 to 2004 was
attributable to more health care institutions buying and
installing our solution, an increase in average contract value
and a shift in our sales from primarily term licenses, in which
revenue is recognized ratably over the multiple years covered by
the licenses, to primarily perpetual licenses, in which revenue
for the license fee is recognized at system acceptance assuming
all applicable revenue recognition criteria have been satisfied.
37
The increase in support services revenue from 2004 to 2005 was
attributable to an increase in customer installations.
Approximately $5.7 million of the increase in support
services revenue for 2005 was attributable to an increased
number of customers that have implemented our solution and are
paying us ongoing support and maintenance fees. Also included in
this $5.7 million increase is the recognition of
$1.6 million of revenue related to the contracts mentioned
above for which we deferred revenue in 2004 as a result of the
existence of undelivered upgrades. We delivered the additional
software features during the second and fourth quarters of 2005
and, as a result of all revenue recognition criteria being met,
we recognized the support services revenue attributable to the
previously provided services for which we had deferred support
services revenue. The remaining $5.7 million increase was
related to the increase in the recognition of non-recurring
revenue related to services such as implementation and training
for new customers as well as add-on services for existing
customers.
The increase in support services revenue from 2003 to 2004 was
attributable to an increase in customer installations.
Approximately $5.3 million of the increase in support
services revenue for 2004, was attributable to an increased
number of customers that have implemented our solution and are
paying us ongoing support and maintenance fees. The remaining
$1.0 million increase was related to the increase in the
recognition of non-recurring revenue related to services such as
implementation and training for new customers as well as add-on
services for existing customers.
In general, the increased number of customer installations was a
result of increased customer awareness and acceptance of our
products and services with multi-facility healthcare providers.
Of the software acceptances received during 2004 and 2005, 84%
and 92%, respectively, related to agreements with multi-facility
healthcare providers. We expect revenue to continue to increase
as we recognize revenue from our existing long-term customer
agreements while also recognizing revenue related to new
customer agreements.
We also believe that support services as a percentage of total
revenue will continue to increase as compared to prior periods
as our customer base expands.
Cost
of Revenue
Cost of revenue consists of costs associated with system sales
and support services revenue. System sales cost of revenue is
comprised of the cost of third-party components and the cost of
software licenses. Support services cost of revenue is comprised
of labor costs and related overhead relating to the
implementation, installation, training, application support and
maintenance of our solution as well as costs related to
maintenance of third-party components. The following table sets
forth cost of revenue component data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Change
|
|
|
Change (%)
|
|
|
2004
|
|
|
2003
|
|
|
Change
|
|
|
Change (%)
|
|
|
|
(In thousands except
percentages)
|
|
|
(In thousands except
percentages)
|
|
|
Cost of system sales revenue
|
|
$
|
28,316
|
|
|
$
|
21,452
|
|
|
$
|
6,864
|
|
|
|
32.0
|
%
|
|
$
|
21,452
|
|
|
$
|
10,227
|
|
|
$
|
11,225
|
|
|
|
109.8
|
%
|
Percentage of system sales revenue
|
|
|
56.6
|
%
|
|
|
64.1
|
%
|
|
|
|
|
|
|
|
|
|
|
64.1
|
%
|
|
|
59.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of support services revenue
|
|
$
|
14,648
|
|
|
$
|
10,727
|
|
|
$
|
3,921
|
|
|
|
36.6
|
%
|
|
$
|
10,728
|
|
|
$
|
7,493
|
|
|
$
|
3,235
|
|
|
|
43.2
|
%
|
Percentage of support services
revenue
|
|
|
61.7
|
%
|
|
|
86.8
|
%
|
|
|
|
|
|
|
|
|
|
|
86.8
|
%
|
|
|
123.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
$
|
42,964
|
|
|
$
|
32,179
|
|
|
$
|
10,785
|
|
|
|
33.5
|
%
|
|
$
|
32,180
|
|
|
$
|
17,720
|
|
|
$
|
14,460
|
|
|
|
81.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenue
|
|
|
58.2
|
%
|
|
|
70.3
|
%
|
|
|
|
|
|
|
|
|
|
|
70.3
|
%
|
|
|
76.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in total cost of revenue was attributable to
increased purchases of third-party components and, to a lesser
extent, increased labor costs, as a result of the increased
number and size of new customer installations. The decrease in
cost of revenue as a percentage of total revenue was a result of
the increase in the number of software acceptances received for
which we recognized revenue as compared to the
38
corresponding prior periods. Our costs associated with software
licenses as a percentage of total revenue are significantly
lower than costs associated with other components of our revenue.
For the years ended December 31, 2005 and 2004, cost of
system sales increased by 32.0% and 109.8%, respectively, as
compared to 2004 and 2003. These increases were caused by the
increased number of health care institutions that acquired and
installed our solution. We anticipate that our cost of revenue
will continue to increase in absolute dollars as a result of
additional purchases of third-party components related to
customer installations, which purchases are in turn driven by
our increase in customers. Cost of system sales as a percentage
of system sales revenue decreased in 2005 and 2004 as compared
to 2004 and 2003. A portion of the decrease in 2005 is
attributable to the recognition of $4.5 million of
previously deferred revenue during the second and fourth
quarters of 2005. As a result of the timing of the revenue
recognition, there were minimal costs associated with this
revenue when it was recognized.
For the years ended December 31, 2005 and 2004, cost of
support services increased by 36.6% and 43.2%, respectively, as
compared to 2004 and 2003. These increases were caused by an
increase in staffing levels in our support services teams as
well as increased costs to maintain third-party components due
to an increase in volume. Cost of support services as a
percentage of support services revenue decreased in 2005 and
2004 presented above as compared to 2004 and 2003. The decrease
in cost of support services as a percentage of total support
services revenue was a result of efficiencies realized as our
customer base grew and the cost of support services was spread
over the broader base of customers. Our management team has
focused on ensuring the professional services and support
departments achieve the benefits associated with efficiencies of
scale as a result of our increased customer base. These
initiatives include departmental reorganizations, investments in
software technologies, use of external consultants to gauge best
practices, and use of more cost effective resources.
Gross
Margin Percentage
Our gross margin percentage increased from 23.9% of total
revenue for 2003 to 29.7% of total revenue for 2004 to 41.8% of
total revenue for 2005. These improvements were primarily a
result of increased revenue attributable to software license
acceptances (earning higher margins than other components of our
revenue) as well as efficiencies realized as our customer base
has expanded.
Research
and Development (R&D)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Change
|
|
|
Change (%)
|
|
|
2004
|
|
|
2003
|
|
|
Change
|
|
|
Change (%)
|
|
|
|
(In thousands except
percentages)
|
|
|
(In thousands except
percentages)
|
|
|
R&D Expense
|
|
$
|
10,697
|
|
|
$
|
6,021
|
|
|
$
|
4,676
|
|
|
|
77.7
|
%
|
|
$
|
6,021
|
|
|
$
|
4,143
|
|
|
$
|
1,878
|
|
|
|
45.3
|
%
|
% of Revenue
|
|
|
14.5
|
%
|
|
|
13.1
|
%
|
|
|
|
|
|
|
|
|
|
|
13.1
|
%
|
|
|
17.8
|
%
|
|
|
|
|
|
|
|
|
The increases in research and development expense for the twelve
months ended December 31, 2005 and 2004 as compared to
corresponding periods in 2004 and 2003, respectively, are mainly
attributable to increases in personnel, both through internal
growth and growth through acquisitions of other companies.
During the twelve months ended December 31, 2005, personnel
and related expenses accounted for $3.1 million of the
expense growth compared to the corresponding period in 2004. In
addition, Camtronics, which we acquired November 1, 2005,
contributed $0.8 million of personnel expense during the
two months included in 2005 consolidated expenditures. An
increase of $1.7 million in research and development cost
for the twelve months ended December 31, 2004 from the
corresponding period in 2003 is attributable to personnel
increases throughout 2004 along with the inclusion of a full
year of expense from personnel added through the Ultravisual
merger in May 2003. Headcount has increased from 57 employees at
December 31, 2004 to 150 employees at
December 31, 2005, including the employees added through
the Camtronics acquisition. Along with the integration of the
research and development teams, the department has reorganized
into operating divisions that we believe will provide increased
productivity and efficiency during the development phase of a
software release and lead to more effective product roadmaps.
39
Increased spending for outside consultants accounted for
approximately $0.8 million and $0.2 million of the
increases for the twelve months ended December 31, 2005 and
December 31, 2004, respectively. A portion of the spending
has been focused on enhancing our use of low-cost consultants
that are engaged in quality development and service activities
in support of an expanding R&D employee base. The remaining
spending has been targeted on consultants and developers that
assist our personnel in product quality assurance and
validation, system framework implementations, and internal
network administration.
Investments have been made to develop testing programs and aid
development of software releases. Significant expenditures have
been made to purchase engineering laboratory equipment and
expand our laboratory and testing environments. The additional
expenditures are reflected in a growing asset base and increased
depreciation expense included in the General and Administrative
line item.
Sales
and Marketing (S&M)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Change
|
|
|
Change (%)
|
|
|
2004
|
|
|
2003
|
|
|
Change
|
|
|
Change (%)
|
|
|
|
(In thousands except
percentages)
|
|
|
(In thousands except
percentages)
|
|
|
S&M Expense
|
|
$
|
11,830
|
|
|
$
|
9,027
|
|
|
$
|
2,803
|
|
|
|
31.1
|
%
|
|
$
|
9,027
|
|
|
$
|
6,144
|
|
|
$
|
2,883
|
|
|
|
46.9
|
%
|
% of Revenue
|
|
|
16.0
|
%
|
|
|
19.7
|
%
|
|
|
|
|
|
|
|
|
|
|
19.7
|
%
|
|
|
26.4
|
%
|
|
|
|
|
|
|
|
|
Continued growth in sales and marketing expense for each of the
last two years demonstrates our commitment to extend our product
base to current and prospective customers through sales efforts,
targeted marketing, and acquisitions. The decrease in sales and
marketing expense as a percentage of revenue from 26.4% in 2003
to 16.0% in 2005 is evidence of the efficient use of these
expenditures and the leveraging of our sales and marketing
efforts in the marketplace.
The additional expenditures have mainly been focused on
additional headcount in both direct sales and sales and
marketing support teams. Sales and marketing headcount increased
to 74 employees at December 31, 2005, from 34 employees at
December 31, 2004 and 29 employees at December 31,
2003. Through the Camtronics acquisition, we added ten direct
sales representatives focused on selling cardiology products to
existing and new customers. The remainder of the additional
personnel have augmented our client sales group and marketing
support group. The client sales group primarily focuses on
support and development of current relationships with large
hospitals and hospital networks. The additional increases in
marketing support have been focused on expanding the product
demonstration team and product marketing teams. The product
demonstration team has also been equipped with new tools and
technology that have created enhanced avenues for potential
customers to evaluate our visualization technology. Accompanying
the increased headcount are increased expenditures related to
training, communications and technology that have increased the
effectiveness and productivity of our sales and marketing
personnel. Additional personnel expenses that include associated
costs such as travel, training, and communications, but exclude
commissions, have added $3.0 million in expenses to the
twelve months ended December 31, 2005 compared to 2004 and
$1.4 million to the twelve months ended December 31,
2004 compared to 2003.
Commission expense increased $1.1 million from the twelve
month period ended December 31, 2003 to the twelve month
period ended December 31, 2004. The increase is
attributable to the increase in contract signings in 2004. Even
though commission expense increased in absolute terms, the
decrease in sales and marketing expense as a percentage of
revenue noted earlier is the result of a change in our sales
commission plans. In late 2003, we changed our sales commission
plans so that a portion of the commission payment is linked to
customer acceptance. In addition, in 2004 we changed our
commission plans so that commission expense is recognized over
the periods the payments are earned rather than in the period
the payments are paid. Both of these revisions had the effect of
delaying payments and expense to future periods.
For the twelve month period ended December 31, 2005
commissions remained relatively stable with the comparable
period in 2004. Stability in commission expense even though both
contract sales and personnel expense increased is primarily
related to the timing and type of contracts closed and accepted
during the respective periods. Commission expense for the year
ended December 31, 2004 reflected greater than usual
commission expense related to the execution of master contracts
for large network customers. The twelve
40
months ended December 31, 2005 reflects reduced average
payments and expense of commissions related to the execution of
contract addenda in association with existing customer master
contracts. Commission payments related to the execution of
master contract addenda are lower than the payments for new
customer contracts, as commissions related to the original
master contracts have already been paid or are being paid and
expensed on a monthly basis over the period of the master
contract initial commitment. Commissions for new contract
addenda that are included in the master contract are typically
paid based on contract revenue above and beyond the levels in
the master contract for that particular site; therefore,
although the new contract addenda related to these master
contracts represent major new installations, the incremental
commission expense associated with these addenda is less than
the corresponding level for a similarly sized new contract. In
addition, as described earlier, the majority of new hires have
filled primarily support roles that have compensation plans with
lower commission levels than direct sales personnel. Thus, we
have seen significant increases in personnel expenses without
significant increases in commission expense.
Direct marketing expense increased during the twelve months
ended December 31, 2004 compared to the same period in 2003
by $0.4 million. The increase is related to expenditures
targeted to increase awareness of our products in the
marketplace. Conversely, direct marketing expense decreased
during the twelve months ended December 31, 2005 compared
to the same period in 2004 by $0.2 million. The decrease in
direct marketing expenses reflects a focused attempt to grow our
market presence with a more efficient use of expenditures. We
have directed funds towards industry trade shows that provide
opportunities for us to display our product to a wider, more
knowledgeable customer base through the utilization of
state-of-the-art
booths and exhibits. We have also internally developed and
published a periodic industry magazine that promotes industry
specific topics while providing brand name awareness.
We believe that all of the efforts discussed above have
augmented our reputation in the marketplace and should help
deliver continued growth in the future. We expect to increase
our sales and marketing expenses at a steady, controlled pace as
we hire additional sales and marketing personnel and focus on
increasing market awareness of our products and service
offerings.
General
and Administrative (G&A)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Change
|
|
|
Change (%)
|
|
|
2004
|
|
|
2003
|
|
|
Change
|
|
|
Change (%)
|
|
|
|
(In thousands except
percentages)
|
|
|
(In thousands except
percentages)
|
|
|
G&A Expense
|
|
$
|
12,308
|
|
|
$
|
8,024
|
|
|
$
|
4,284
|
|
|
|
53.4
|
%
|
|
$
|
8,024
|
|
|
$
|
5,793
|
|
|
$
|
2,231
|
|
|
|
38.5
|
%
|
% of Revenue
|
|
|
16.7
|
%
|
|
|
17.5
|
%
|
|
|
|
|
|
|
|
|
|
|
17.5
|
%
|
|
|
24.9
|
%
|
|
|
|
|
|
|
|
|
As expected, our general and administrative expense have grown
in absolute terms from 2003 to 2004 to 2005. These additional
expenditures are in support of our increasing employee base and
are a natural result of the growth of our company as a whole.
The majority of the increases can be broken down into the
following categories:
|
|
|
|
|
Administrative expense has increased $1.9 million and
$0.7 million for the twelve months ended December 31,
2005, and December 31, 2004, as compared to corresponding
periods in 2004 and 2003, respectively. The increases occurred
in insurance, accounting and legal fees, consultants, and other
professional fees mainly as a result of our becoming a public
company in 2005 and associated expenses incurred for compliance
and regulatory affairs.
|
|
|
|
Depreciation expense has increased $1.1 million and
$0.2 million for the twelve months ended December 31,
2005, and December 31, 2004, as compared to corresponding
periods in 2004 and 2003, respectively, mainly as a result of
increased purchases of employee computer equipment, server
equipment for the internal engineering laboratory, and testing
equipment.
|
|
|
|
Stock-based compensation has increased $0.7 million and
$0.6 million for the twelve months ended December 31,
2005, and December 31, 2004, as compared to corresponding
periods in 2004 and 2003, respectively. The majority of stock
options with an intrinsic value were issued during 2004 and the
beginning of 2005; thus we recorded minimal expense during the
first nine months of 2004. Periodic stock-based compensation has
remained consistent during 2005 as fewer options have been
granted.
|
41
|
|
|
|
|
Personnel expense has increased $0.6 million and
$0.5 million for the twelve months ended December 31,
2005, and December 31, 2004, as compared to corresponding
periods in 2004 and 2003. New employees have been added in the
accounting, human resources and general administrative functions
in support of our increased employee base and increased amount
of administrative transactions and activity. In addition,
associated costs such as travel, communications and rent have
increased in conjunction with the growth in our employee base.
|
Although our general and administrative expenses have increased
as a result of becoming a public company, our general and
administrative expenses as a percentage of revenue have
decreased as a result of revenue growth. We expect our general
and administrative expenses to continue to increase in absolute
dollars as a result of becoming a public company and also as a
result of our continued growth. Specifically, we expect to incur
increased costs associated with accounting, consulting, legal
and other professional services, increased insurance costs and
increased personnel in our finance, legal and human resources
functions. By way of example, although we have not previously
been involved in any type of significant litigation, we
recognize that most companies from time to time may be the
subject of customer or other complaints, and that such
complaints could result in litigation. In such a case, it is
likely that our external legal expenses would increase.
Amortization
and Write-Off of Intangible Assets related to Camtronics
Acquisition
During 2005, we estimated that $0.2 million of the purchase
price of Camtronics represented acquired in-process research and
development (IPR&D) that had not yet reached
technological feasibility as defined by SFAS No. 86,
Accounting for the Cost of Computer Software to Be Sold,
Leased or Otherwise Marketed, and had no alternative future
use. Accordingly, these amounts were immediately charged to
expense upon consummation of the acquisition. The value of the
IPR&D was determined with the assistance of an independent
third-party appraiser by utilizing a discounted cash flow
methodology, focusing on the income-producing capabilities of
the in-process technologies and taking into consideration stage
of completion, complexity of work to date and to complete,
anticipated product development and introduction schedules,
forecasted product sales cycles, internal and external risk
factors, revenue and operating expense estimates, contributory
asset charges, and costs already incurred and the expected costs
to complete. The remainder of the expense was related to
straight-line amortization of intangible assets related to the
acquisition of Camtronics, such as customer relationships and
trade names, which are being amortized over periods from one to
six years. The estimated asset lives of the amortizable
intangible assets are determined based on projected future
economic benefits and expected life cycles of the intangible
assets.
Integration
Costs Related to Camtronics Acquisition
We incurred integration costs of $0.2 million in 2005 as a
result of the November 1 acquisition of Camtronics.
Integration costs are comprised primarily of costs of
transitional employees and other contractors as well as travel
costs. We anticipate that integration costs related to this
acquisition will result in additional charges in the first half
of 2006.
Operating
Income (Loss)
For the year ended December 31, 2005, operating loss
decreased by $4.2 million as compared to the year ended
December 31, 2004. Operating loss as a percentage of total
revenue improved from a negative 20.6% for the year ended
December 31, 2004 to a negative 7.1% for the year ended
December 31, 2005. For the year ended December 31,
2004, operating loss decreased by $1.1 million as compared
to the year ended December 31, 2003. Operating loss as a
percentage of total revenue decreased from 45.1% for the year
ended December 31, 2003 to 20.6% for the year ended
December 31, 2004. These improvements are a result of the
total revenue increase, increases in gross margin, and the
increased leverage in operating costs discussed above.
42
Other
Income and Expense
For the year ended December 31, 2005, interest income
increased by $1.5 million over 2004. This increase is a
result of investing the proceeds from our initial public
offering.
For the year ended December 31, 2005, interest expense
increased by $0.2 million as compared to 2004 primarily as
a result of a non-cash interest charge of $0.6 million for
the write-off of subordinated debt discount, offset by a
reduction in interest expense from our repayment of
$4.0 million of subordinated debt with a portion of the
proceeds from our initial public offering.
Quarterly
Results of Operations
The following tables set forth selected unaudited quarterly
consolidated statement of operations data for the eight most
recent quarters. The information for each of these quarters has
been prepared on the same basis as the audited consolidated
financial statements included in this filing and, in the opinion
of management, includes all adjustments necessary for the fair
presentation of the results of operations for such periods. This
data should be read in conjunction with the audited consolidated
financial statements and the related notes included in this
filing. These quarterly operating results are not necessarily
indicative of our operating results for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2004
|
|
|
2004
|
|
|
2004
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
|
(Dollars in thousands, except
per share data)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System sales
|
|
$
|
4,909
|
|
|
$
|
8,761
|
|
|
$
|
7,458
|
|
|
$
|
12,313
|
|
|
$
|
7,719
|
|
|
$
|
13,402
|
|
|
$
|
13,490
|
|
|
$
|
15,430
|
|
Support services
|
|
|
2,208
|
|
|
|
3,356
|
|
|
|
2,864
|
|
|
|
3,933
|
|
|
|
3,617
|
|
|
|
5,168
|
|
|
|
6,116
|
|
|
|
8,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
7,117
|
|
|
|
12,117
|
|
|
|
10,322
|
|
|
|
16,246
|
|
|
|
11,336
|
|
|
|
18,570
|
|
|
|
19,606
|
|
|
|
24,279
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System sales
|
|
|
3,489
|
|
|
|
4,117
|
|
|
|
5,554
|
|
|
|
8,292
|
|
|
|
4,823
|
|
|
|
5,753
|
|
|
|
7,206
|
|
|
|
10,534
|
|
Support services
|
|
|
2,279
|
|
|
|
2,414
|
|
|
|
2,949
|
|
|
|
3,086
|
|
|
|
3,083
|
|
|
|
3,322
|
|
|
|
3,389
|
|
|
|
4,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
5,768
|
|
|
|
6,531
|
|
|
|
8,503
|
|
|
|
11,378
|
|
|
|
7,906
|
|
|
|
9,075
|
|
|
|
10,595
|
|
|
|
15,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,349
|
|
|
|
5,586
|
|
|
|
1,819
|
|
|
|
4,868
|
|
|
|
3,430
|
|
|
|
9,495
|
|
|
|
9,011
|
|
|
|
8,891
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
1,270
|
|
|
|
1,303
|
|
|
|
1,581
|
|
|
|
1,867
|
|
|
|
2,385
|
|
|
|
2,533
|
|
|
|
2,364
|
|
|
|
3,415
|
|
Sales and marketing
|
|
|
1,738
|
|
|
|
2,407
|
|
|
|
2,359
|
|
|
|
2,523
|
|
|
|
2,689
|
|
|
|
2,521
|
|
|
|
2,344
|
|
|
|
4,276
|
|
General and administrative
|
|
|
1,741
|
|
|
|
1,832
|
|
|
|
2,079
|
|
|
|
2,372
|
|
|
|
2,555
|
|
|
|
2,876
|
|
|
|
2,838
|
|
|
|
4,039
|
|
Amortization and write-off of
intangible assets related to Camtronics acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
993
|
|
Integration costs related to
Camtronics acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
4,749
|
|
|
|
5,542
|
|
|
|
6,019
|
|
|
|
6,762
|
|
|
|
7,629
|
|
|
|
7,930
|
|
|
|
7,546
|
|
|
|
12,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(3,400
|
)
|
|
|
44
|
|
|
|
(4,200
|
)
|
|
|
(1,894
|
)
|
|
|
(4,199
|
)
|
|
|
1,565
|
|
|
|
1,465
|
|
|
|
(4,076
|
)
|
Other expense, net
|
|
|
192
|
|
|
|
188
|
|
|
|
333
|
|
|
|
309
|
|
|
|
619
|
|
|
|
(335
|
)
|
|
|
(366
|
)
|
|
|
(166
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(3,592
|
)
|
|
$
|
(144
|
)
|
|
$
|
(4,533
|
)
|
|
$
|
(2,203
|
)
|
|
$
|
(4,818
|
)
|
|
$
|
1,900
|
|
|
$
|
1,831
|
|
|
$
|
(3,910
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per
share basic
|
|
$
|
(1.48
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(1.69
|
)
|
|
$
|
(0.82
|
)
|
|
$
|
(0.42
|
)
|
|
$
|
0.09
|
|
|
$
|
0.09
|
|
|
$
|
(0.19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per
share diluted
|
|
$
|
(1.48
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(1.69
|
)
|
|
$
|
(0.82
|
)
|
|
$
|
(0.42
|
)
|
|
$
|
0.09
|
|
|
$
|
0.09
|
|
|
$
|
(0.19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our operating results have fluctuated from quarter to quarter
and are likely to continue to fluctuate for a variety of
reasons. We discuss below some of the larger fluctuations in
various line items in the table above.
43
Revenue. During the first quarter of each
calendar year, the two components of our total revenue have
declined from the immediately preceding quarter due to timing
issues relating to our sales and installation process. This
impact is particularly evident for our system sales revenue. In
the past, we have experienced lower sales volumes in the third
quarter of each year relative to other quarters. We believe that
this is the result of the historical capital expenditure
patterns of our customer base. This, in turn, has caused our
revenue in the first quarter of the following year to be lower
in comparison to the immediately preceding quarter due to the
length of our installations and our revenue recognition policies.
Cost of Revenue. Our cost of revenue
fluctuates from quarter to quarter as a result of changes in the
relative contributions to our revenue from system sales and
support services and changes in the productivity of support
services personnel.
Operating Expenses. Our sales and marketing
expenses fluctuate due to timing of sales. Also, the most
significant trade show that we attend occurs within the fourth
quarter of each year, increasing our sales and marketing
expenses in that quarter.
Operating Income (Loss). Our quarterly
operating results are likely to continue to fluctuate. Some
important additional factors that could cause our revenue and
operating results to fluctuate from quarter to quarter include:
|
|
|
|
|
our ability to retain and increase sales to existing customers,
attract new customers and satisfy our customers
requirements;
|
|
|
|
our ability to successfully integrate our acquisition of
Camtronics;
|
|
|
|
length of the sales cycle for our solution;
|
|
|
|
implementation delays at customer sites, whether within or
outside our control;
|
|
|
|
renewal rates for our solutions;
|
|
|
|
changes in our pricing policies;
|
|
|
|
new product introductions and product enhancements by us or our
competitors;
|
|
|
|
effectiveness of our sales force;
|
|
|
|
buying and capital budgeting patterns of our customers;
|
|
|
|
our success in selling our solutions to large multi-facility
health care providers;
|
|
|
|
technical difficulties or downtime in our solutions;
|
|
|
|
general economic conditions in the U.S.;
|
|
|
|
additional investments in our solutions or operations; and
|
|
|
|
regulatory compliance costs.
|
Significant changes in the historical patterns of these factors
or the occurrence of unforeseen events could cause our operating
results to vary widely. As a result, we believe that
quarter-to-quarter
comparisons of our revenue and operating results may not be
meaningful and should not be relied upon as indications of
future performance.
44
Liquidity
and Capital Resources
As of December 31, 2005 and 2004, our net cash position was
as follows (in thousands except ratios):
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2005
|
|
|
2004
|
|
|
Working capital
|
|
$
|
10,717
|
|
|
$
|
(9,404
|
)
|
Current ratio*
|
|
|
1.2:1.0
|
|
|
|
0.7:1.0
|
|
Cash, cash equivalents and
marketable securities
|
|
|
20,471
|
|
|
|
5,994
|
|
Short-term borrowings and
long-term debt
|
|
|
3,749
|
|
|
|
9,489
|
|
|
|
|
* |
|
Current ratio is the ratio of current assets to current
liabilities. |
The increase in our working capital, current ratio, and cash,
cash equivalents, and marketable securities is due to
$67.2 million of net proceeds from the initial public
offering of our common stock that was completed in February 2005
offset by our $40 million acquisition of Camtronics in
November 2005. The large decrease in short-term borrowings and
long-term debt from December 31, 2004 to December 31,
2005 is a result of our repayment of $4.0 million of our
subordinated debt with a portion of the proceeds from the
initial public offering and scheduled debt retirement on other
debt.
Operating
Activities
During the year ended December 31, 2005, cash used in
operations was $1.9 million, which primarily related to our
net loss of $5.0 million and changes in working capital
accounts. We experienced significant increases in trade accounts
receivable, prepaid expenses and inventory to be sold to
customers during the year. Our accounts receivable balance
increased as a result of the timing of customer acceptances as
well as the timing of new customer contracts. Prepaid expenses
increased as a result of the existence of numerous annual
hardware maintenance contract renewals for customer third-party
components during the period for which expenses are recognized
on a monthly basis over the contract periods. Our inventory
increased as a result of the timing of acceptances of third
party components at customer sites. Our weighted average
collection period for accounts receivable as of
December 31, 2005 was 56 days compared to 55 days
at December 31, 2004. We calculate weighted average
collection period based on average days outstanding per customer
based on historical experience and then weight these days
outstanding based on proportional dollar value of the accounts
receivable balance at the end of the period. The changes in
other working capital accounts were primarily driven by
increased volume of operations and the timing of cash payments.
During the year ended December 31, 2004, cash provided by
operations was $5.0 million, which consisted of an increase
of $8.5 million from changes in working capital accounts
and a decrease of $3.5 million as a result of our net loss,
offset by non-cash items. Changes in the working capital
accounts primarily related to an increase in accounts
receivable, an increase in prepaid expenses, an increase in
third-party components to be sold to customers, increases in
accounts payable and other accrued expenses and an increase in
deferred revenue due to an increased customer base and timing of
customer payments. The changes in working capital accounts were
primarily driven by increased volume of operations and the
timing of cash payments.
During the year ended December 31, 2003, cash used in
operations was $2.4 million, which consisted of an increase
of $4.5 million from changes in working capital accounts
and a decrease of $6.9 million as a result of our net loss,
offset by non-cash items. Changes in the working capital
accounts primarily related to a decrease in accounts receivable,
an increase in prepaid expenses, a decrease in third-party
components to be sold to customers, an increase in accrued
payroll and related costs and an increase in deferred revenue
due to an increased customer base and timing of customer
payments. The changes in working capital accounts were primarily
driven by increased volume of operations and the timing of cash
payments.
Cash provided by and used in operating activities has
historically been affected by changes in working capital
accounts, primarily deferred revenue, accounts receivable and
accrued expenses. Fluctuations within
45
accounts receivable and deferred revenue are primarily related
to the timing of billings and associated revenue recognition.
Investing
Activities
We used cash of $53.3 million, $2.9 million and
$1.0 million for investing activities during 2005, 2004 and
2003, respectively.
We used $7.7 million, $2.9 million and
$2.5 million for property and equipment purchases during
2005, 2004 and 2003, respectively. Approximately
$5.8 million of the purchases for 2005 related to
investments in equipment for internal use, including test
equipment for our research and development and quality assurance
departments as well as computer equipment and furniture for new
and existing personnel. Approximately $2.7 million and
$1.4 million of the purchases for 2004 and 2003,
respectively, related to computer equipment for new and existing
personnel. We anticipate that we will continue to purchase
property and equipment for internal use as necessary, consistent
with growth of the Company. Approximately $1.9 million,
$0.2 million and $1.1 million of the purchases for
2005, 2004 and 2003, respectively, related to investments in
equipment located at contracted customer sites. We anticipate
that we will incur additional capital expenditures at customer
sites as we further standardize and update our hardware platform.
In November 2005, we used $40.4 million to acquire all the
stock of Camtronics Medical Systems, Ltd., based in Hartland,
Wisconsin. We acquired all of Camtronics assets, including
its corporate headquarters campus in Hartland, and all of
Camtronics liabilities.
We used $44.8 million for the purchase of marketable
securities and received proceeds of $39.9 million upon the
maturity or sale of some of these securities during 2005. The
marketable securities consist of U.S. government agency
obligations and corporate commercial paper, all with maturities
of less than one year.
Financing
Activities
Cash provided by financing activities totaled
$64.5 million, $1.6 million and $3.5 million for
2005, 2004 and 2003, respectively. The cash provided by
financing activities for 2005 resulted primarily from the
completion of our initial public offering. This inflow of cash
was offset by our $4.0 million repayment of our
subordinated debt and other payments on borrowings. During 2005,
we also had $0.4 million of restricted cash released from
restriction. The cash provided by financing activities for 2004
resulted from proceeds from the issuance of subordinated debt of
$4.0 million, which was later repaid upon completion of our
initial public offering, offset by payments on existing
borrowings and an addition to restricted cash used to secure a
letter of credit for an operating lease. The cash provided by
financing activities for 2003 resulted from proceeds from the
issuance of preferred stock of $5.9 million offset by
payments on existing borrowings and a purchase of treasury stock.
The following table summarizes, as of December 31, 2005,
the general timing of future payments (including payments of
interest) under our outstanding loan agreements, lease
agreements and other long-term contractual obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
More Than
|
|
Contractual Cash
Obligations
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
(Dollars in thousands)
|
|
|
Long-term debt, including interest
|
|
$
|
2,943
|
|
|
$
|
2,181
|
|
|
$
|
762
|
|
|
$
|
|
|
|
$
|
|
|
Capital lease obligations
|
|
|
1,063
|
|
|
|
820
|
|
|
|
243
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
7,292
|
|
|
|
1,419
|
|
|
|
2,951
|
|
|
|
2,057
|
|
|
|
865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
11,298
|
|
|
$
|
4,420
|
|
|
$
|
3,956
|
|
|
$
|
2,057
|
|
|
$
|
865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In August 2005, we executed a new operating lease for rental
space for our Madison, Wisconsin office. The lease term ends
January 31, 2013. Monthly lease payments of $23,468 begin
in February 2006 and increase 3% annually on each
August 1st until
the end of the lease term.
46
In April 2004, we entered into a loan and security agreement
with a bank under which we can borrow up to $4.0 million
subject to certain restrictions. Interest accrues at the prime
rate plus 1.5% to 2.0%, depending on our net income. This line
of credit was amended as of July 31, 2004 and expires
April 30, 2006 at which time all advances will be due and
payable. As of December 31, 2005 we had no outstanding
balance under this line of credit. Any borrowings under the
agreement are secured by certain assets of the Company,
including cash and receivables. We anticipate renewal of this
agreement upon its expiration under terms and conditions no less
favorable as in the existing agreement.
We believe our existing cash, together with future cash flows
from operations and available borrowings under our loan and
security agreement, if necessary, will be sufficient to execute
our business plan in 2006. However, any projections of future
cash inflows and outflows are subject to uncertainty. Our future
cash requirements will depend on many factors, including our
rate of revenue growth, the expansion of our marketing and sales
activities, the timing and extent of spending to support product
development efforts and expansion into new territories, the
timing of introductions of new products and services,
enhancements to existing products and services, the amount and
form of consideration we may issue in acquisition or similar
transactions, and the continuing market acceptance of our
solution. To the extent that our existing cash, together with
future cash flows from operations and availability under our
loan and security agreement are insufficient to fund our future
activities, we may need to raise additional funds through equity
or debt financing. Although we are currently not a party to any
binding agreement or letter of intent with respect to any other
potential investments in, or acquisitions of, complementary
businesses, services or technologies, we may enter into these
types of arrangements in the future, which could also require us
to seek additional equity or debt financing. It is possible that
additional funds may not be available on terms favorable to us
or at all.
Off-Balance
Sheet Arrangements
Except for operating leases entered into for ordinary business
purposes, we do not currently have any off-balance sheet
arrangements with unconsolidated entities or financial
partnerships, or with entities often referred to as structured
finance or special purposes entities which would have been
established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes.
In addition, we do not engage in trading activities involving
non-exchange traded contracts. As such, we are not materially
exposed to any financing, liquidity, market or credit risk that
could arise if we had engaged in these relationships.
Recently
Issued Accounting Pronouncements
In December 2004, the FASB issued Statement No. 123
(revised 2004), Share-Based Payment
(SFAS 123R). SFAS 123R establishes
standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. It
focuses primarily on accounting for transactions in which an
entity obtains employee services in share-based payment
transactions. SFAS 123R requires publicly-traded companies
to measure the cost of employee services received in exchange
for an award of equity instruments based on the grant-date fair
value of the award and the estimated number of awards that are
expected to vest. That cost is to be recognized over the period
during which an employee is required to provide service in
exchange for the award, which is usually the vesting period.
SFAS 123R supersedes APB 25, which the Company has
followed for all periods through December 31, 2005.
SFAS 123R will be effective for the Company at the
beginning of the fiscal first quarter of 2006. SFAS 123R
applies to all awards granted after the required effective date
and to awards modified, repurchased, or canceled after that
date. Compensation cost is recognized on or after the required
effective date for the portion of outstanding awards for which
the requisite services have not yet been rendered, based on the
grant-date fair value of those awards calculated under
SFAS 123. For periods before the required effective date,
SFAS 123R allows elective adjustment of the financial
statements of prior periods on a basis consistent with the pro
forma disclosures required for those periods by SFAS 123.
Upon adoption in the first quarter of 2006, the Company will not
restate prior periods. The Company expects to record additional
costs relating to compensation expense as a result of the
adoption of SFAS 123R; however, the precise effect of
adoption has not been predicted at this time because it will
47
depend on levels of share-based payments granted in the future
and the characteristics of our stock on the date of grant, as
well as the actual forfeiture rates we experience.
In December 2004, the FASB issued SFAS No. 151,
Inventory Costs. SFAS No. 151 clarifies the
accounting for inventory when there are abnormal amounts of idle
facility expense, freight, handling costs and wasted materials.
Under existing U.S. generally accepted accounting
principles, items such as idle facility expense, excessive
spoilage, double freight and rehandling costs may be so
abnormal as to require treatment as current period charges
rather than recorded as adjustments to the value of the
inventory. SFAS No. 151 requires that those items be
recognized as current-period charges regardless of whether they
meet the criterion of so abnormal. In addition,
SFAS No. 151 requires that allocation of fixed
production overheads to the cost of conversion be based on the
normal capacity of the production facilities. The provisions of
SFAS No. 151 are effective for inventory costs
incurred during fiscal years beginning after June 15, 2005.
Earlier application is permitted for inventory costs incurred
during fiscal years beginning after the date
SFAS No. 151 was issued. The adoption of
SFAS No. 151 is not expected to have a material impact
on the Companys financial position or results of
operations.
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections, which is a
replacement of APB Opinion No. 20, Accounting
Changes, and SFAS No. 3, Reporting Changes in
Interim Financial Statements. SFAS No. 154 applies
to all voluntary changes in accounting principle and changes in
the accounting for and reporting of a change in accounting
principle. SFAS No. 154 requires that a change in
method of depreciation or amortization for long-lived
non-financial assets be accounted for as a change in accounting
estimate that is effected by a change in accounting principle.
SFAS No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after
December 15, 2005. The Company does not expect that the
adoption of SFAS No. 154 will have a material impact
on its financial position or results of operations.
|
|
ITEM 7A:
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
Our debt instruments do not expose us to material market risks
relating to changes in interest rates. Some of the proceeds of
our initial public offering have been invested in short-term,
interest-bearing, investment grade securities pending their
application. The value of these securities will be subject to
interest rate risk and could fall in value if interest rates
rise. The effect of a hypothetical one hundred basis point
decrease across all interest rates related to our investments
would result in an annual decrease of approximately
$0.1 million in operating results assuming no further
changes in the amount of our investments outstanding at
December 31, 2005.
The primary objective of our investment activities is to
preserve principal while maximizing the income we receive from
our investments without significantly increasing our risk. We
invest excess cash principally in U.S. marketable debt
securities from a diversified portfolio of institutions with
strong credit ratings and in U.S. government and agency
bills and notes, and by policy limit the amount of credit
exposure at any one institution. These investments are generally
not collateralized and mature within one year. Some of the
securities we invest in may have market risk. This means that a
change in prevailing interest rates may cause the fair value of
the principal amount of the investment to fluctuate. To minimize
this risk, we schedule our investments to have maturities that
coincide with our expected cash flow needs, thus reducing the
need to sell or redeem an investment prior to its maturity date.
Accordingly, we believe we have no material exposure to interest
rate risk arising from our investments.
|
|
ITEM 8:
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
The information required by this item appears beginning on
page F-1
of this report.
|
|
ITEM 9:
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
Not applicable.
48
|
|
ITEM 9A:
|
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures
Our management, with the participation of our chief executive
officer and chief financial officer, evaluated the effectiveness
of our disclosure controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended (the
Exchange Act)) as of December 31, 2005. Based
on this evaluation, our chief executive officer and chief
financial officer concluded that, as of December 31, 2005,
our disclosure controls and procedures were (1) designed to
ensure that material information relating to us is made known to
our chief executive officer and chief financial officer by
others within our company, particularly during the period in
which this report was being prepared and (2) effective, in
that they provide reasonable assurance that information required
to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and
Exchange Commissions rules and forms.
Changes
in Internal Control over Financial Reporting
No change in our internal control over financial reporting (as
defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act) occurred during the year ended
December 31, 2005 that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.
|
|
ITEM 9B:
|
OTHER
INFORMATION
|
Not Applicable.
PART III
|
|
ITEM 10:
|
DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT
|
The information called for by this Item will be contained in our
definitive Proxy Statement for our 2006 Annual Meeting of
Shareholders and is incorporated herein by reference.
Our board of directors has adopted a code of conduct and code of
ethics applicable to our chief executive officer, chief
financial officer and senior financial officers, directors,
officers and employees in accordance with applicable rules and
regulations of the SEC and the Nasdaq National Market. Our code
of conduct and code of ethics is available on our website at
www.emageon.com.
|
|
ITEM
11:
|
EXECUTIVE
COMPENSATION
|
The information called for by this Item will be contained in our
definitive Proxy Statement for our 2006 Annual Meeting of
Shareholders and is incorporated herein by reference.
|
|
ITEM
12:
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
The information called for by this Item will be contained in our
definitive Proxy Statement for our 2006 Annual Meeting of
Shareholders and is incorporated herein by reference.
|
|
ITEM
13:
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
|
The information called for by this Item will be contained in our
definitive Proxy Statement for our 2006 Annual Meeting of
Shareholders and is incorporated herein by reference.
|
|
ITEM
14:
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
The information called for by this Item will be contained in our
definitive Proxy Statement for our 2006 Annual Meeting of
Shareholders and is incorporated herein by reference.
49
PART IV
|
|
ITEM 15:
|
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|
|
|
|
|
(a)
|
The following documents are filed as part of this Annual Report:
|
|
|
|
|
|
Page
|
|
|
Number in
|
Description
|
|
Report
|
Report of Independent Registered
Public Accounting Firm
|
|
F-2
|
Consolidated Balance Sheets as of
December 31, 2005 and 2004
|
|
F-3
|
Consolidated Statements of
Operations for the years ended December 31, 2005, 2004 and 2003
|
|
F-4
|
Consolidated Statements of
Stockholders Equity for the years ended December 31, 2005,
2004 and 2003
|
|
F-5
|
Consolidated Statements of Cash
Flows for the years ended December 31, 2005, 2004 and 2003
|
|
F-6
|
Notes to Consolidated Financial
Statements
|
|
F-7
|
|
|
2.
|
Financial
Statement Schedules
|
|
|
|
Schedule II Valuation
and Qualifying Accounts and Reserves for the three years ended
December 31, 2005
|
|
Follows page F-29
|
All other schedules are omitted because they are not applicable
or the required information is shown in the financial statements
or notes thereto.
The following exhibits are required to be filed with this Report
by Item 601 of Regulation S-K:
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
2
|
.1
|
|
Agreement and Plan of Merger,
dated as of April 30, 2003, by and among Emageon, Inc.,
Emageon UV Development Corporation, Ultravisual
Medical Systems Corporation and Jeff Rusinow as
Stockholders Representative (incorporated by reference to
Exhibit 2.1 to the Companys Registration Statement on
Form S-1,
Registration
No. 333-120621,
filed on November 19, 2004)
|
|
3
|
.1
|
|
Emageon Inc. Amended and Restated
Certificate of Incorporation (incorporated by reference to
Exhibit 3.2 to the Companys Registration Statement on
Form S-1/A,
Registration
No. 333-120621,
filed on January 25, 2005)
|
|
3
|
.2
|
|
Emageon Inc. Amended and Restated
Bylaws (incorporated by reference to Exhibit 3.4 to the
Companys Registration Statement on
Form S-1/A,
Registration
No. 333-120621,
filed on January 25, 2005)
|
|
4
|
.1
|
|
Form of Emageon Inc. common stock
certificate (incorporated by reference to Exhibit 3.4 to
the Companys Registration Statement on
Form S-1/A,
Registration
No. 333-120621,
filed on February 4, 2005)
|
|
10
|
.1#
|
|
Imageon Solutions, Inc. 2000
Equity Incentive Plan (incorporated by reference to
Exhibit 10.1 to the Companys Registration Statement
on
Form S-1,
Registration
No. 333-120621,
filed on November 19, 2004)
|
|
10
|
.2#
|
|
Emageon, Inc. 2000 Equity
Compensation Plan (incorporated by reference to
Exhibit 10.2 to the Companys Registration Statement
on
Form S-1,
Registration
No. 333-120621,
filed on November 19, 2004)
|
|
10
|
.3#
|
|
Emageon Inc. 2005 Equity Incentive
Plan (incorporated by reference to Exhibit 10.3 to the
Companys Registration Statement on
Form S-1/A,
Registration
No. 333-120621,
filed on February 4, 2005)
|
|
10
|
.4#
|
|
Emageon Inc. 2005 Non-Employee
Director Stock Incentive Plan (incorporated by reference to
Exhibit 10.4 to the Companys Registration Statement
on
Form S-1/A,
Registration
No. 333-120621,
filed on February 4, 2005)
|
50
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.5#
|
|
Employment Agreement of Charles A.
Jett, Jr. (incorporated by reference to Exhibit 10.5 to the
Companys Registration Statement on
Form S-1,
Registration
No. 333-120621,
filed on November 19, 2004)
|
|
10
|
.6#
|
|
Employment Agreement of Milton G.
Silva-Craig (incorporated by reference to Exhibit 10.6 to
the Companys Registration Statement on
Form S-1,
Registration
No. 333-120621,
filed on November 19, 2004)
|
|
10
|
.7#
|
|
Employment Agreement of W. Randall
Pittman (incorporated by reference to Exhibit 10.7 to the
Companys Registration Statement on
Form S-1,
Registration
No. 333-120621,
filed on November 19, 2004)
|
|
10
|
.8#
|
|
Employment Agreement of Mark A.
Gehring (incorporated by reference to Exhibit 10.8 to the
Companys Registration Statement on
Form S-1,
Registration
No. 333-120621,
filed on November 19, 2004)
|
|
10
|
.9#
|
|
Employment Agreement of Noel D.
Gartman (incorporated by reference to Exhibit 10.9 to the
Companys Registration Statement on
Form S-1,
Registration
No. 333-120621,
filed on November 19, 2004)
|
|
10
|
.10
|
|
Form of Indemnification Agreement
between the Registrant and each of its directors and executive
officers (incorporated by reference to Exhibit 10.10 to the
Companys Registration Statement on
Form S-1,
Registration
No. 333-120621,
filed on November 19, 2004)
|
|
10
|
.11
|
|
Amended and Restated Registration
Rights Agreement, dated as of October 2, 2001, by and among
Emageon UV, Inc. and certain stockholders, as amended and joined
on May 30, 2003 and June 25, 2003 (incorporated by
reference to Exhibit 10.11 to the Companys
Registration Statement on
Form S-1,
Registration
No. 333-120621,
filed on November 19, 2004)
|
|
10
|
.12
|
|
Enterprise Agreement, dated as of
May 5, 2004, by and between Emageon UV, Inc. and Ascension
Health (incorporated by reference to Exhibit 10.12 to the
Companys Registration Statement on
Form S-1/A,
Registration
No. 333-120621,
filed on February 8, 2005)
|
|
10
|
.13
|
|
Lease Agreement, dated as of
December 20, 2001, by and between Meadow Brook North,
L.L.C. and Emageon UV, Inc. (incorporated by reference to
Exhibit 10.13 to the Companys Registration Statement
on
Form S-1,
Registration
No. 333-120621,
filed on November 19, 2004)
|
|
10
|
.13A
|
|
Sixth Amendment to Lease
Agreement, dated as of July 23, 2004, by and between Meadow
Brook North, L.L.C. and Emageon UV, Inc. (incorporated by
reference to Exhibit 10.13A to the Companys
Registration Statement on
Form S-1,
Registration
No. 333-120621,
filed on November 19, 2004)
|
|
10
|
.14
|
|
Note and Warrant Purchase
Agreement, dated as of June 25, 2004, among Emageon UV,
Inc. and Whitecap Alabama Growth Fund I, LLC, Enhanced
Alabama Issuer, LLC and Advantage Capital Alabama Partners I,
L.P. (incorporated by reference to Exhibit 10.14 to the
Companys Registration Statement on
Form S-1/A,
Registration
No. 333-120621,
filed on January 25, 2005)
|
|
10
|
.15
|
|
Emageon, Inc. Amended and Restated
Stockholders Agreement, dated as of October 2, 2001, among
Emageon, Inc. and the stockholders signatory thereto
(incorporated by reference to Exhibit 10.15 to the
Companys Registration Statement on
Form S-1/A,
Registration
No. 333-120621,
filed on January 25, 2005)
|
|
10
|
.15A
|
|
Emageon, Inc. First Amendment and
Joinder to Amended and Restated Stockholders Agreement, dated as
of May 30, 2003, among Emageon, Inc and the stockholders
signatory thereto (incorporated by reference to
Exhibit 10.15A to the Companys Registration Statement
on
Form S-1/A,
Registration
No. 333-120621,
filed on January 25, 2005)
|
|
10
|
.15B
|
|
Emageon, Inc. Second Amendment and
Joinder to Amended and Restated Stockholders Agreement, dated as
of June 25, 2003, among Emageon, Inc. and the stockholders
signatory thereto (incorporated by reference to
Exhibit 10.15B to the Companys Registration Statement
on
Form S-1/A,
Registration
No. 333-120621,
filed on January 25, 2005)
|
|
14
|
.1
|
|
Emageon Inc. Code of Ethics
(incorporated by reference to Exhibit 14.1 to the Companys
Report on Form 10-K for the year ended December 31, 2004)
|
|
21
|
.1*
|
|
Subsidiaries of Emageon Inc.
|
|
23
|
.1*
|
|
Consent of Independent Registered
Public Accounting Firm
|
51
|
|
|
|
|
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 Chief Financial
Officer pursuant to
Rule 13a-14(a)
or
Rule 15d-14(a)
under the Securities Exchange Act of 1934
|
|
32
|
*
|
|
Certification of Chief Executive
Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
|
|
|
* |
|
Filed herewith |
|
# |
|
Indicates a management contract or any compensatory plan,
contract or arrangement |
|
|
|
Confidential treatment has been granted for portions of this
exhibit |
52
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Emageon Inc.
We have audited the accompanying consolidated balance sheets of
Emageon Inc. (the Company) as of December 31, 2004 and
2005, and the related consolidated statements of operations,
stockholders equity (deficit) and cash flows for each of
the three years in the period ended December 31, 2005. Our
audits also include the financial statement schedule listed in
the Index at Item 15(a). These financial statements and
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Companys internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Emageon Inc. at December 31, 2004 and 2005, and the
results of its operations and its cash flows for each of the
three years in the period ended December 31, 2005, in
conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Ernst & Young LLP
Atlanta, Georgia
March 29, 2006
F-2
EMAGEON
INC.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
|
(In thousands, except for share
data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,994
|
|
|
$
|
15,520
|
|
Marketable securities
|
|
|
|
|
|
|
4,951
|
|
Trade accounts receivable, net of
allowance for doubtful accounts of $75 and $126 at
December 31, 2004 and 2005, respectively
|
|
|
14,557
|
|
|
|
29,261
|
|
Prepaid expenses and other current
assets
|
|
|
1,799
|
|
|
|
3,052
|
|
Deferred offering costs
|
|
|
1,326
|
|
|
|
|
|
Inventories
|
|
|
1,422
|
|
|
|
8,031
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
25,098
|
|
|
|
60,815
|
|
Property and equipment, net
|
|
|
8,832
|
|
|
|
21,433
|
|
Restricted cash
|
|
|
903
|
|
|
|
535
|
|
Other noncurrent assets
|
|
|
62
|
|
|
|
884
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
3,755
|
|
|
|
21,079
|
|
Customer relationships, net
|
|
|
|
|
|
|
9,510
|
|
Developed technology, net
|
|
|
2,847
|
|
|
|
3,028
|
|
Capitalized software development
costs, net
|
|
|
21
|
|
|
|
231
|
|
Trademark and trade names, net
|
|
|
250
|
|
|
|
429
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
6,873
|
|
|
|
34,277
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
41,768
|
|
|
$
|
117,944
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, REDEEMABLE
PREFERRED STOCK AND STOCKHOLDERS EQUITY
(DEFICIT)
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
4,658
|
|
|
$
|
13,196
|
|
Accrued payroll and related costs
|
|
|
1,557
|
|
|
|
4,104
|
|
Deferred revenue
|
|
|
21,357
|
|
|
|
25,312
|
|
Other accrued expenses
|
|
|
3,838
|
|
|
|
4,723
|
|
Current portion of long-term debt
|
|
|
2,472
|
|
|
|
2,031
|
|
Current portion of capital lease
obligations
|
|
|
620
|
|
|
|
732
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
34,502
|
|
|
|
50,098
|
|
Long-term deferred revenue
|
|
|
2,796
|
|
|
|
3,221
|
|
Deferred tax liability
|
|
|
95
|
|
|
|
|
|
Long-term debt
|
|
|
5,528
|
|
|
|
750
|
|
Capital lease obligations, less
current portion
|
|
|
869
|
|
|
|
236
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
43,790
|
|
|
|
54,305
|
|
Redeemable preferred stock,
$0.001 par value, 64,450,000 shares authorized,
64,007,054 shares issued and outstanding at
December 31, 2004
|
|
|
30,348
|
|
|
|
|
|
Stockholders equity (deficit):
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par
value, 23,965,000 shares authorized, 19,692,358 shares
issued and 18,319,620 shares outstanding at
December 31, 2004
|
|
|
7,306
|
|
|
|
|
|
Common stock, $0.001 par
value; 165,050,000 shares authorized, 3,056,181 shares
and 20,628,913 shares issued and 2,709,370 shares and
20,453,156 shares outstanding at December 31, 2004 and
2005, respectively
|
|
|
3
|
|
|
|
21
|
|
Additional paid in capital
|
|
|
6,998
|
|
|
|
115,215
|
|
Accumulated other comprehensive
income
|
|
|
|
|
|
|
85
|
|
Accumulated deficit
|
|
|
(46,402
|
)
|
|
|
(51,407
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,095
|
)
|
|
|
63,914
|
|
Treasury stock,
175,757 shares, at cost
|
|
|
(275
|
)
|
|
|
(275
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
(deficit)
|
|
|
(32,370
|
)
|
|
|
63,639
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, redeemable
preferred stock and stockholders equity
|
|
$
|
41,768
|
|
|
$
|
117,944
|
|
|
|
|
|
|
|
|
|
|
F-3
EMAGEON
INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
|
(In thousands, except for share
data and per share amounts)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
System sales
|
|
$
|
17,234
|
|
|
$
|
33,441
|
|
|
$
|
50,041
|
|
Support services
|
|
|
6,057
|
|
|
|
12,361
|
|
|
|
23,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
23,291
|
|
|
|
45,802
|
|
|
|
73,791
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
System sales
|
|
|
10,227
|
|
|
|
21,452
|
|
|
|
28,316
|
|
Support services
|
|
|
7,493
|
|
|
|
10,728
|
|
|
|
14,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
17,720
|
|
|
|
32,180
|
|
|
|
42,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
5,571
|
|
|
|
13,622
|
|
|
|
30,827
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
4,143
|
|
|
|
6,021
|
|
|
|
10,697
|
|
Sales and marketing
|
|
|
6,144
|
|
|
|
9,027
|
|
|
|
11,830
|
|
General and administrative
|
|
|
5,793
|
|
|
|
8,024
|
|
|
|
12,308
|
|
Amortization and write-off of
intangible assets related to Camtronics acquisition
|
|
|
|
|
|
|
|
|
|
|
993
|
|
Integration costs related to
Camtronics acquisition
|
|
|
|
|
|
|
|
|
|
|
244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
16,080
|
|
|
|
23,072
|
|
|
|
36,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(10,509
|
)
|
|
|
(9,450
|
)
|
|
|
(5,245
|
)
|
Interest income
|
|
|
14
|
|
|
|
31
|
|
|
|
1,497
|
|
Interest expense
|
|
|
(864
|
)
|
|
|
(1,053
|
)
|
|
|
(1,249
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(11,359
|
)
|
|
$
|
(10,472
|
)
|
|
$
|
(4,997
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per
share basic and diluted
|
|
$
|
(5.79
|
)
|
|
$
|
(4.07
|
)
|
|
$
|
(0.28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common stock
outstanding basic and diluted
|
|
|
1,973,108
|
|
|
|
2,589,832
|
|
|
|
17,975,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-4
EMAGEON
INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
|
|
|
Stockholders
|
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
Par
|
|
|
Paid in
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
Accumulated
|
|
|
Equity
|
|
|
|
Shares
|
|
|
Value
|
|
|
Shares
|
|
|
Value
|
|
|
Capital
|
|
|
Income (Loss)
|
|
|
Stock
|
|
|
Deficit
|
|
|
(Deficit)
|
|
|
|
(In thousands, except for share
data)
|
|
|
Balance at December 31, 2002
|
|
|
5,965,000
|
|
|
$
|
1,438
|
|
|
|
1,314,238
|
|
|
$
|
1
|
|
|
$
|
2,490
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(24,438
|
)
|
|
$
|
(20,509
|
)
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
3,430
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
Common stock, Series D
preferred stock and warrants issued in connection with
Ultravisual Merger
|
|
|
13,727,358
|
|
|
|
5,868
|
|
|
|
1,715,541
|
|
|
|
2
|
|
|
|
2,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,659
|
|
Purchase of treasury stock
($1.5675 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(275
|
)
|
|
|
|
|
|
|
(275
|
)
|
Accretion of redeemable preferred
stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(66
|
)
|
|
|
(66
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,359
|
)
|
|
|
(11,359
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
19,692,358
|
|
|
|
7,306
|
|
|
|
3,033,209
|
|
|
|
3
|
|
|
|
5,294
|
|
|
|
|
|
|
|
(275
|
)
|
|
|
(35,863
|
)
|
|
|
(23,535
|
)
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
22,972
|
|
|
|
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
|
|
Issuance of warrants in connection
with subordinated debt and customer sales agreement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,046
|
|
Stock based
compensation options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
594
|
|
Accretion of redeemable preferred
stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(67
|
)
|
|
|
(67
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,472
|
)
|
|
|
(10,472
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
19,692,358
|
|
|
|
7,306
|
|
|
|
3,056,181
|
|
|
|
3
|
|
|
|
6,998
|
|
|
|
|
|
|
|
(275
|
)
|
|
|
(46,402
|
)
|
|
|
(32,370
|
)
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
417,607
|
|
|
|
1
|
|
|
|
1,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,293
|
|
Exercise of stock warrants
|
|
|
105,703
|
|
|
|
58
|
|
|
|
24,632
|
|
|
|
|
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
132
|
|
Exercise of mandatorily redeemable
stock warrants in connection with initial public offering
|
|
|
|
|
|
|
|
|
|
|
537,082
|
|
|
|
1
|
|
|
|
735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
736
|
|
Proceeds from initial public
offering, net of issuance costs
|
|
|
|
|
|
|
|
|
|
|
5,750,000
|
|
|
|
6
|
|
|
|
67,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67,201
|
|
Automatic conversion of
non-redeemable preferred stock into common stock in connection
with initial public offering
|
|
|
(19,798,061
|
)
|
|
|
(7,364
|
)
|
|
|
2,402,898
|
|
|
|
2
|
|
|
|
7,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automatic conversion of redeemable
preferred stock into common stock in connection with initial
public offering
|
|
|
|
|
|
|
|
|
|
|
8,440,513
|
|
|
|
8
|
|
|
|
30,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,356
|
|
Stock based
compensation stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,211
|
|
Foreign currency translation
adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93
|
|
|
|
|
|
|
|
|
|
|
|
93
|
|
Loss on
available-for-sale
marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
Accretion of redeemable preferred
stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
(8
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,997
|
)
|
|
|
(4,997
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
|
|
|
$
|
|
|
|
|
20,628,913
|
|
|
$
|
21
|
|
|
$
|
115,215
|
|
|
$
|
85
|
|
|
$
|
(275
|
)
|
|
$
|
(51,407
|
)
|
|
$
|
63,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-5
EMAGEON
INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(11,359
|
)
|
|
$
|
(10,472
|
)
|
|
$
|
(4,997
|
)
|
Adjustments to reconcile net loss
to net cash (used in)/provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,087
|
|
|
|
1,430
|
|
|
|
2,970
|
|
Depreciation of property and
equipment at contracted customer sites
|
|
|
2,743
|
|
|
|
3,360
|
|
|
|
2,698
|
|
Amortization of developed
technology, customer relationships and trade names
|
|
|
486
|
|
|
|
833
|
|
|
|
1,483
|
|
Write off of intangible assets
related to Camtronics acquisition, net of tax liability
|
|
|
|
|
|
|
|
|
|
|
403
|
|
Amortization of capitalized
software development costs
|
|
|
79
|
|
|
|
327
|
|
|
|
143
|
|
Amortization and write off of
subordinated debt discount
|
|
|
|
|
|
|
157
|
|
|
|
646
|
|
Employee stock based compensation
expense
|
|
|
|
|
|
|
533
|
|
|
|
1,171
|
|
Other operating activities
|
|
|
42
|
|
|
|
373
|
|
|
|
215
|
|
Changes in operating assets and
liabilities, net of acquired companies:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
2,589
|
|
|
|
(10,233
|
)
|
|
|
(7,659
|
)
|
Prepaid expenses and other current
assets
|
|
|
(788
|
)
|
|
|
(2,120
|
)
|
|
|
(885
|
)
|
Inventories
|
|
|
657
|
|
|
|
(1,137
|
)
|
|
|
(3,402
|
)
|
Other noncurrent assets
|
|
|
56
|
|
|
|
(59
|
)
|
|
|
(726
|
)
|
Accounts payable
|
|
|
13
|
|
|
|
3,243
|
|
|
|
5,775
|
|
Accrued payroll and related costs
|
|
|
688
|
|
|
|
184
|
|
|
|
348
|
|
Other accrued expenses
|
|
|
(155
|
)
|
|
|
3,500
|
|
|
|
(187
|
)
|
Deferred revenue
|
|
|
1,485
|
|
|
|
15,040
|
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in)/provided by
operating activities
|
|
|
(2,377
|
)
|
|
|
4,959
|
|
|
|
(1,881
|
)
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
for internal purposes
|
|
|
(1,424
|
)
|
|
|
(2,655
|
)
|
|
|
(5,815
|
)
|
Purchases of third-party components
located at contracted customer sites
|
|
|
(1,095
|
)
|
|
|
(250
|
)
|
|
|
(1,865
|
)
|
Purchases of marketable securities
|
|
|
|
|
|
|
|
|
|
|
(44,198
|
)
|
Proceeds from sales and maturities
of marketable securities
|
|
|
|
|
|
|
|
|
|
|
39,335
|
|
Capitalized software development
costs
|
|
|
(339
|
)
|
|
|
(32
|
)
|
|
|
(354
|
)
|
Purchase price of Camtronics, net
of cash received
|
|
|
|
|
|
|
|
|
|
|
(40,359
|
)
|
Net cash received from Ultravisual
merger
|
|
|
1,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(1,029
|
)
|
|
|
(2,937
|
)
|
|
|
(53,256
|
)
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common
stock, net of issuance costs
|
|
|
15
|
|
|
|
64
|
|
|
|
70,630
|
|
Proceeds from issuance of preferred
stock, net of issuance costs
|
|
|
5,889
|
|
|
|
|
|
|
|
58
|
|
Payments on capital lease
obligations
|
|
|
(514
|
)
|
|
|
(577
|
)
|
|
|
(642
|
)
|
Proceeds from loans, net of
issuance costs
|
|
|
|
|
|
|
3,980
|
|
|
|
|
|
Payments on loans
|
|
|
(1,611
|
)
|
|
|
(1,739
|
)
|
|
|
(5,873
|
)
|
Additions to restricted cash to
secure letter of credit
|
|
|
|
|
|
|
(96
|
)
|
|
|
|
|
Cash released from restriction
|
|
|
|
|
|
|
|
|
|
|
374
|
|
Purchase of treasury stock
|
|
|
(275
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
3,504
|
|
|
|
1,632
|
|
|
|
64,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on
cash
|
|
|
|
|
|
|
|
|
|
|
116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
|
98
|
|
|
|
3,654
|
|
|
|
9,526
|
|
Cash at beginning of year
|
|
|
2,242
|
|
|
|
2,340
|
|
|
|
5,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of year
|
|
$
|
2,340
|
|
|
$
|
5,994
|
|
|
$
|
15,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash
flow:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
897
|
|
|
$
|
863
|
|
|
$
|
1,266
|
|
Assets acquired under capital lease
|
|
$
|
107
|
|
|
$
|
|
|
|
$
|
|
|
Assets acquired through issuance of
equity securities
|
|
$
|
8,660
|
|
|
$
|
|
|
|
$
|
|
|
F-6
EMAGEON
INC.
Years Ended December 31, 2003, 2004 AND 2005
|
|
1.
|
Business
Description and Background
|
Business
Description
Emageon Inc., formerly Emageon UV, Inc. (Emageon or
the Company), provides an enterprise-level
information technology solution for the clinical analysis and
management of digital medical images within health care provider
organizations. Emageons solution consists of advanced
visualization and image management software for multiple medical
specialties such as cardiology, radiology and orthopedics,
comprehensive support services and third-party components.
Emageons web-enabled advanced visualization software
provides physicians across the enterprise in
multiple medical specialties and at any network access
point with tools to manipulate and analyze
images in two dimensions (2D) and three dimensions (3D).
Background
Emageon was incorporated in Delaware on January 3, 2000 as
Imageon Solutions, Inc. In June 2000, the Company formally
changed its name to Emageon Inc. In May 2003, the Company
acquired Ultravisual Medical Systems Corporation, and in
November 2005, the Company acquired Camtronics Medical
Systems, Ltd., both engaged in businesses similar and
complementary to that of the Company. In February 2005, the
Company completed its initial public offering of common stock.
See Note 4 for details of the Companys acquisitions
and Note 3 for details of the Companys initial public
stock offering.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Principles
of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany transactions and balances have been
eliminated in consolidation.
Presentation
Unless otherwise noted, all dollar amounts included in the
financial statements and notes, except per share data, are
denoted in thousands (000s).
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the
U.S. requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenues and
expenses during the reporting period. Actual results could
differ from those estimates.
Reclassification
Certain items relating to the prior years have been reclassified
to conform to the current year presentation.
Fair
value of financial instruments
The Companys financial instruments consist primarily of
cash, cash equivalents, marketable securities, accounts
receivable, and accounts payable for which the current carrying
amounts approximate fair market values.
F-7
EMAGEON
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Cash
and Cash Equivalents
For purposes of financial statement presentation, investments
with remaining maturities at acquisition of three months or less
are considered to be cash equivalents.
Restricted
Cash
In conjunction with two of the secured promissory notes to the
finance companies discussed in Note 13, the Company is
required to maintain a restricted cash account with a bank of
approximately 20% of the note amounts. In conjunction with an
operating lease for computer equipment, the Company is required
to maintain a certificate of deposit securing a letter of credit
with a bank. Both amounts are included in restricted cash.
Securities
Available-for-Sale
The Company is required to classify debt securities as
held-to-maturity,
available-for-sale,
or trading. The appropriateness of each classification is
reassessed at each reporting date. As of December 31, 2005,
the Company classified all debt securities as
available-for-sale.
At December 31, 2005, securities
available-for-sale
totaling $4,951 consisted of U.S. Government Agency
securities carried at fair market value in accordance with
Financial Accounting Standards Board Statement No. 115,
Accounting for Certain Investments in Debt and Equity
Securities.
Trade
Accounts Receivable and Allowance for Doubtful
Accounts
The Company performs ongoing credit evaluation of its
customers financial condition and generally does not
require collateral. The Company has one customer, Ascension
Health, whose hospitals accounted for 36% of the Companys
2005 revenue. As of December 31, 2005, hospitals controlled by
Ascension Health owed the Company approximately $12,200. The
Company continuously monitors collections and payments from its
customers.
Trade accounts receivable are stated net of an allowance for
doubtful accounts, which represents estimated losses resulting
from the inability of customers to make required payments. When
determining the allowance for doubtful accounts, management
takes several factors into consideration, including the overall
composition of accounts receivable aging, prior history of
accounts receivable write-offs, the type of customer, and
day-to-day
knowledge of specific customers.
The allowance for doubtful accounts is adjusted when additional
information is received that impacts the amount reserved. If
circumstances change, the estimates of the recoverability of
accounts receivable could be reduced or increased by a material
amount. Such a change in estimated recoverability would be
accounted for in the period in which the facts that give rise to
the change become known. Changes in the allowances for doubtful
accounts are recorded as bad debt expense and are included in
general and administrative expense in the statements of
operations.
As of December 31, 2004 and 2005, unbilled revenue of $302
and $161 is included in accounts receivable.
Inventories
Inventories are stated at the lower of cost or market (net
realizable value) using the specific identification and
first-in, first-out methods and include materials, labor and
manufacturing overhead. The Company periodically reviews its
quantities of inventories on hand and compares these amounts to
expected usage of each particular product or product line. The
Company records as a charge to cost of revenue the amount
required to reduce the carrying value of the inventories to
estimated net realizable value.
F-8
EMAGEON
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Costs of purchased third-party hardware and software associated
with the Companys customer contracts are included as
inventories in the Companys consolidated balance sheet and
charged to cost of system sales once the Company receives
customer acceptance and all other relevant revenue recognition
criteria are met.
Property
and Equipment
Property and equipment used for internal purposes are recorded
at cost. Expenditures for property and equipment are
capitalized, and minor replacements, maintenance and repairs are
charged to expense as incurred. Depreciation is computed using
the straight-line method over the related assets estimated
useful life. Leasehold improvements are amortized over the
shorter of their estimated useful lives or the term of the
respective leases. The asset cost and related accumulated
depreciation or amortization are adjusted upon asset retirement
or disposal with the resulting gain or loss, if any, credited or
charged to results of operations.
Property and equipment at contracted customer sites are recorded
at cost and consist of third-party hardware and software
associated with customer contracts. Depreciation is computed
using the straight-line method over the lives of the specific
customer contracts, which are typically five years.
Assets held under capital leases are recorded at the lower of
the net present value of minimum lease payments or the fair
value of the leased asset at the inception of the lease.
Amortization expense is computed using the straight-line method
over the shorter of the estimated useful lives of the assets or
the period of the related lease. Amortization of assets under
capital leases is included in depreciation expense.
Business
Combinations
The company records business combinations in accordance with
Statement of Financial Accounting Standard (SFAS)
No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 requires the purchase method
of accounting for all business combinations, and that certain
acquired intangible assets in a business combination be
recognized as assets separate from goodwill. The Company has
applied SFAS No. 141 in the allocation of the purchase
price of the Camtronics and Ultravisual acquisitions.
Accordingly, the company has identified and allocated estimated
fair value to the intangibles acquired. SFAS No. 142
requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead be tested for
impairment at least annually.
Goodwill,
Trademarks and Other Intangible Assets
In accordance with SFAS No. 142, intangible assets are
classified into three categories: (1) intangible assets
with definite lives subject to amortization; (2) intangible
assets with indefinite lives not subject to amortization; and
(3) goodwill. Intangible assets with indefinite lives and
goodwill are not amortized.
The Company continually evaluates whether events and
circumstances have occurred that indicate the carrying value of
long-lived assets and certain identifiable intangibles with
definite lives may not be recoverable. Recoverability of these
assets is evaluated by a comparison of the carrying amount of
the asset to future net undiscounted cash flows expected to be
generated by the asset. If the carrying amount of an asset
exceeds its estimated undiscounted future cash flows, an
impairment change is recognized for the excess of the carrying
amount over the fair value of the asset. The fair value of the
asset or asset group is measured by quoted market prices, if
available, or by utilizing present value techniques.
For intangible assets with indefinite lives and goodwill, tests
for impairment are performed at least annually or more
frequently if events or changes in circumstances indicate that
assets might be impaired. The Company is one reporting unit and,
consequently, tests its goodwill for impairment as a single
amount. The Companys goodwill impairment test entails
calculating the aggregate market value of the Companys
assets,
F-9
EMAGEON
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
including goodwill and other indefinite life intangible assets.
If the aggregate market value of the Companys outstanding
securities plus its liabilities is less than the aggregate
carrying value of the Companys assets, including goodwill
and other indefinite life intangible assets, the Company would
compare the estimated fair value of goodwill to the
corresponding book value of goodwill and record an impairment
loss to the extent the book value exceeds that estimated fair
value. For indefinite-lived assets other than goodwill, the
Company records impairment charges equal to the excess of the
book value of the asset over its estimated fair value.
The Company determined that its goodwill was not impaired based
on its annual tests during the years ended December 31,
2003, 2004 and 2005.
In assessing fair value of intangibles, management must make
assumptions regarding estimated future cash flows and other
factors. Critical estimates in valuing certain intangible assets
include, but are not limited to, future expected cash flows from
acquired developed technologies and patents, and discount rates.
Managements estimates of fair value are based upon
assumptions believed to be reasonable, but which are inherently
uncertain and unpredictable and, as a result, actual results may
differ from estimates.
Treasury
Stock
Treasury stock is accounted for using the cost method.
Revenue
Recognition
Revenue is derived primarily from two sources: system sales,
which include software licenses and third-party component sales,
and support services, which include fees related to system
implementation, user adoption and ongoing customer support
services.
Software licenses are sold under both perpetual and term license
arrangements ranging in length from two to seven years. The
Company typically requires deposits upon the receipt of a signed
purchase order or agreement. Deposits are classified as deferred
revenue in the Companys consolidated balance sheet.
The Company accounts for software and support services revenue
under the provisions of AICPA Statement of Position 97-2,
(SOP 97-2),
Software Revenue Recognition, as amended. Under this
guidance, revenue is recognized when persuasive evidence of an
arrangement exists, delivery has occurred or the services have
been rendered and accepted by the customer, the price to the
customer is fixed or determinable, and collectibility is
reasonably assured. The Company considers a signed contract or
purchase order to be persuasive evidence of an arrangement. The
Company obtains customer acceptance of software and third-party
component sales, in the form of written customer
acknowledgements. In the event that the Company grants a
customer the right to specified upgrades, the Company defers
recognition of the entire arrangement fee until the specified
upgrades are delivered, as the Company has not established
vendor-specific objective evidence (VSOE) of fair value for
specified upgrades. Specified upgrades include, but are not
limited to, future software deliverables. Payments that extend
beyond 30 days from the contract date but that are due
within twelve months are generally deemed to be fixed or
determinable, based on a successful collection history on such
arrangements.
Fees for sales including multiple-element arrangements are
allocated to each element of the arrangement based on the
relative fair values of the elements. The Company determines the
fair value of each element in multi-element arrangements based
on VSOE of the fair value for each element. If evidence of fair
value of all undelivered elements exists but evidence does not
exist for one or more delivered elements, revenue is recognized
using the residual method. Under the residual method, the fair
value of the undelivered elements is deferred and the remaining
portion of the arrangement fee is recognized as revenue. VSOE
for the undelivered elements is based on the renewal rates or
other objective criteria for maintenance and support services,
which coincide with current pricing. The Company may also
provide services that vary depending on the scope and
F-10
EMAGEON
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
complexity requested by the customer. Examples of such services
include additional database consulting, system configuration,
existing systems interface, and network consulting. These
services generally are not deemed to be essential to the
functionality of the software. If the Company has VSOE of fair
value for the services, the timing of software license revenue
recognition is not impacted, and service revenue is recognized
as the services are performed. If the Company performs services
for which VSOE of fair value is not available, software license
revenue is deferred until the services are completed.
For term based license arrangements, the Company recognizes
revenue for the elements over the term of the arrangement
commencing upon customer acceptance, provided that all other
revenue recognition criteria have been met.
For perpetual license arrangements, revenue is recognized using
the residual method for software license revenue and
implementation services commencing upon customer acceptance. The
Company generally includes the first year of maintenance in the
software license fee. This maintenance fee is deferred based on
its fair value and recognized ratably over the first year of the
arrangement.
The Company recognizes revenue from product sales in accordance
with SEC Staff Accounting Bulletin No, 104, Revenue
Recognition in Financial Statements. Revenue related to
product sales is recognized upon shipment provided that title
and risk of loss have passed to the customer, there is
persuasive evidence of an arrangement, the sales price is fixed
and determinable, collection of the related receivable is
reasonably assured and customer acceptance criteria, if any,
have been successfully demonstrated. The Company classifies
shipping and handling cost in cost of system sales.
When our contracts contain both software and third-party
components, the Company recognizes revenue related to the sale
of third-party components according to guidance set forth in
Emerging Issues Task Force No.
00-21,
Accounting for Revenue Arrangements with Multiple
Deliverables
(EITF 00-21).
Third-party component revenue is recognized in accordance with
contractual terms. When the Company is responsible for
installing third-party components, revenue is recognized when
the third-party components are delivered, installed and accepted
by the customer. When the Company is not responsible for
installing third-party components, revenue is recognized when
the third-party components are delivered to the customer.
Hardware maintenance is marketed under annual and multiyear
arrangements, and revenue is recognized ratably over the
contracted maintenance term.
Billings may not coincide with the recognition of revenue.
Unbilled revenue occurs when revenue recognition precedes
billing to the customer, and arises primarily from sales with
predetermined billing schedules. Billings in excess of sales
(deferred revenue) occur when billing to the customer precedes
revenue recognition, and arise primarily from sales with partial
prepayments upon contract execution and from maintenance revenue
billed in advance of performance of the maintenance activity.
The Company recognizes deferred revenue, as applicable, upon
delivery and acceptance of products, as ongoing services are
rendered or as other requirements requiring deferral under
SOP 97-2
are satisfied.
Cost
of Revenue
Cost of revenue is comprised of the cost of system sales and the
cost of support services.
Cost of system sales consists of the cost of third-party
components and the cost of software licenses. The cost of
third-party components consists primarily of direct expenses
related to the purchase, shipment, installation and
configuration of third-party components. The cost of software
licenses consists primarily of the amortization of acquired
software, the amortization of capitalized software costs for
internally developed software, and third-party software
royalties.
F-11
EMAGEON
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Cost of support services consists primarily of labor costs and
related overhead relating to the implementation, installation,
training, application support and maintenance of the
Companys systems as well as costs related to maintenance
of third-party components.
The Company expenses its sales commissions and other direct
incremental costs related to contract acquisition as the
liabilities are incurred, regardless of whether the associated
revenue has been recognized.
Customer
Indemnity and Warranty Costs
The Company provides for the estimated cost of product
warranties at the time revenue is recognized if the customer
does not purchase a service contract. Its actual warranty
obligations depend upon actual product failure rates and service
delivery costs incurred to correct product failures. Should
actual product failure rates or service delivery costs differ
from the Companys estimates (which are based on specific
warranty claims, historical data and engineering estimates,
where applicable), revision to the estimated warranty liability
would be required. Such revisions could adversely affect the
Companys operating results.
The Company offers its customers certain indemnities and
warranties related to its products as follows:
Customer Indemnity: Sales agreements with
customers generally contain infringement indemnity provisions.
Under these agreements, the Company agrees to indemnify, defend
and hold harmless the customer in connection with patent,
copyright or trade secret infringement claims made by third
parties with respect to the customers authorized use of
our products and services. The indemnity provisions generally
provide for the Companys control of any required defense
and settlement and cover costs and damages finally awarded
against the customer, if any. Infringement indemnity provisions
typically give the Company the option to make modifications of
the product so it is no longer infringing or, if it cannot be
corrected, to require the customer to return the product in
exchange for a specified payment for loss of use. Sales
agreements with customers generally also contain indemnity
provisions for death, personal injury or property damage caused
by the Companys personnel or contractors in the course of
performing services for customers. Under these agreements, the
Company agrees to indemnify, defend and hold harmless the
customer in connection with death, personal injury and property
damage claims made by third parties with respect to actions of
Company personnel or contractors. The indemnity provisions
generally provide for the Companys control of any required
defense and settlement and cover costs and damages finally
awarded against the customer, if any. The indemnity obligations
contained in sales agreements generally have no specified
expiration date but typically limit the amount of award covered
to the fees paid by the customer over the contract term. To
date, the Company has not incurred any costs to settle claims or
pay awards under these indemnification provisions, nor has it
been notified of any such claims. Accordingly, there are no
liabilities recorded for these provisions as of
December 31, 2005.
Product Warranty: 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 to the customer as
long as the contract remains in effect. Additionally, the
Company warrants that its services will be performed by
qualified personnel in a manner consistent with normally
accepted industry standards. The Company has a $937 liability
recorded for these provisions as of December 31, 2005.
System Availability: Standard contracts with
customers typically provide for a guarantee of software
availability and third-party component availability, and certain
penalty provisions if the Companys solution fails to meet
the guarantee thresholds. The software availability guarantee
covers the functionality of software, while the component
guarantee covers each individual component, as in certain
circumstances a component may fail without affecting system
availability. Penalty provisions in these contracts typically
allow the customer a reduction in software maintenance fees
related to failure to meet
F-12
EMAGEON
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
guaranteed uptime percentages. Penalties are
calculated as a percentage of the software maintenance fee for
the particular component failing to meet the uptime guarantee,
and would reduce the amount of the software maintenance fee
charged for that component in a specific period for these
penalties, if incurred. To date, the Company has not incurred
any penalties associated with these guarantees. Accordingly,
there is no liability recorded for these provisions as of
December 31, 2005.
Income
Taxes
The Company accounts for income taxes using the liability
method. Deferred income tax assets and liabilities are
determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using
enacted tax rates and laws. Valuation allowances are established
when necessary to reduce deferred tax assets to the amounts that
are more likely than not to be realized. The effective tax rate
for the year ended December 31, 2005 is zero percent due to
a reduction in the valuation allowance, which equaled the tax
effect of our taxable loss during the year.
Because the majority of the deferred tax assets relate to net
operating loss (NOL) carryforwards that can only be realized if
the Company is profitable in future periods, it is uncertain
whether the Company will realize any tax benefit related to the
net operating loss carryforward. Accordingly, the Company has
provided a valuation allowance against the net deferred tax
assets. The valuation allowance will remain at the full amount
of the deferred tax asset until it is more likely than not that
the related tax benefits will be realized through deduction
against taxable income during the carryforward period. In the
event of certain ownership changes, the Tax Reform Act of 1986
imposes restrictions on the amount of net operating loss and
research credit carryforwards that the Company may use in any
year. Due to recent stock issuances, it is possible that such
limitations could currently apply. The Company has not performed
a detailed analysis of its ability to use these net operating
loss and research credit carryforwards. However, it is not
anticipated that any such analysis would have a material impact
on the Companys financial position or results of
operations.
Other
Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income,
established standards for reporting and displaying other
comprehensive income and its components. The Companys
other comprehensive income adjustments consist of foreign
currency translation adjustments and unrealized losses on
available-for-sale
marketable securities. Total comprehensive loss for the year
ended December 31, 2005 was $4,912.
Computation
of Net Loss Per Share
Basic net loss per share is computed using the weighted average
common shares outstanding during the period. Diluted net loss
per share is computed using the weighted average common shares
outstanding and common share equivalents outstanding during the
period. Common share equivalents consist of convertible
preferred stock, stock warrants, and options to purchase common
stock granted to employees and directors of the Company. These
common share equivalents were excluded from the computation for
periods in which the Company incurred a net loss because they
were anti-dilutive.
F-13
EMAGEON
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The computations for basic and diluted net loss per share for
each period are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
Net loss
|
|
$
|
(11,359
|
)
|
|
$
|
(10,472
|
)
|
|
$
|
(4,997
|
)
|
Accretion of redemption value
related to redeemable preferred stock
|
|
|
(66
|
)
|
|
|
(66
|
)
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss allocable to common
stockholders
|
|
$
|
(11,425
|
)
|
|
$
|
(10,538
|
)
|
|
$
|
(5,005
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock outstanding at
beginning of period
|
|
|
1,314,238
|
|
|
|
2,429,742
|
|
|
|
2,709,370
|
|
Weighted average effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued in connection with
the Ultravisual merger
|
|
|
762,114
|
|
|
|
|
|
|
|
|
|
Purchase of treasury shares
|
|
|
(104,973
|
)
|
|
|
|
|
|
|
|
|
Release of escrowed common stock
|
|
|
|
|
|
|
151,866
|
|
|
|
|
|
Conversion of preferred stock to
common stock
|
|
|
|
|
|
|
|
|
|
|
9,506,552
|
|
Issuance of common stock in
initial public offering
|
|
|
|
|
|
|
|
|
|
|
5,032,877
|
|
Issuance of common stock and
preferred stock pursuant to stock option and warrant exercises
|
|
|
1,729
|
|
|
|
8,224
|
|
|
|
576,321
|
|
Release of escrowed common stock
upon completion of initial public offering
|
|
|
|
|
|
|
|
|
|
|
149,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares
of common stock basic and diluted
|
|
|
1,973,108
|
|
|
|
2,589,832
|
|
|
|
17,975,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per
share basic and diluted
|
|
$
|
(5.79
|
)
|
|
$
|
(4.07
|
)
|
|
$
|
(0.28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock convertible into 10,827,403, 10,827,403 and zero
shares of common stock for the years ended December 31,
2003, 2004 and 2005, respectively, were not included in the
computation of diluted earnings per share because their effect
on earnings per share would have been anti-dilutive. Options and
warrants to purchase 3,131,649, 3,683,036 and
2,171,361 shares of common stock for the years ended
December 31, 2003, 2004 and 2005, respectively, and
warrants to purchase 216,138, 216,138 and 51,027 shares of
Series D preferred stock for the years ended
December 31, 2003, 2004 and 2005, respectively, were not
included in the computation of diluted earnings per share
because their effect on earnings per share would have been
anti-dilutive.
Stock-Based
Compensation
The Company recognizes compensation expense on a straight-line
basis for its stock-based employee and director compensation
plans using the intrinsic value method prescribed in Accounting
Principles Board Opinion (APB) No. 25,
Accounting for Stock Issued to Employees
(APB 25), and complies with the disclosure
provisions of Statement of Financial Accounting Standard
(SFAS) No. 123, Accounting for Stock-Based
Compensation, as amended. Under APB 25, compensation
expense of fixed stock options is based on the difference, if
any, on the date of the grant between the fair value of the
stock and the exercise price of the option. Compensation expense
is recognized on a straight-line basis over the vesting period,
which is generally three years. The Company recognizes expense
for stock-based compensation issued to non-employees and
non-directors at fair value in accordance with the provisions of
SFAS No. 123 and Emerging Issues Task Force
F-14
EMAGEON
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(EITF) Issue
No. 96-18,
Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services. See Note 16.
Had compensation expense for stock-based compensation plans been
determined using the fair-value method at the grant date for all
employee and director awards using the Black-Scholes pricing
model, the Companys net loss and related net loss per
share would have been as follows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
Actual net loss
|
|
$
|
(11,359
|
)
|
|
$
|
(10,472
|
)
|
|
$
|
(4,997
|
)
|
Deduct: Accretion of redemption
value related to redeemable preferred stock
|
|
|
(66
|
)
|
|
|
(66
|
)
|
|
|
(8
|
)
|
Add: Total stock-based employee
compensation expense determined under APB 25
|
|
|
|
|
|
|
533
|
|
|
|
1,171
|
|
Deduct: Total stock-based employee
compensation expense determined under fair value method for all
awards
|
|
|
(64
|
)
|
|
|
(801
|
)
|
|
|
(2,045
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss allocable to
common stockholders
|
|
$
|
(11,489
|
)
|
|
$
|
(10,806
|
)
|
|
$
|
(5,879
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common
stock basic and diluted
|
|
|
1,973,108
|
|
|
|
2,589,832
|
|
|
|
17,975,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss per
share basic and diluted
|
|
$
|
(5.82
|
)
|
|
$
|
(4.17
|
)
|
|
$
|
(0.33
|
)
|
The pro forma effects on the net loss for the periods presented
above are not necessarily representative of the effects that may
occur in future periods.
Research
and Development Costs
Research and development costs are charged to expense as
incurred. However, costs incurred for the development of
computer software that will be sold, leased or otherwise
marketed are capitalized as incurred after technological
feasibility of the product has been established, and
capitalization ceases when the software is available for general
release. These capitalized costs are subject to an ongoing
assessment of recoverability based on anticipated future
revenues and changes in hardware and software technologies.
Costs deemed not recoverable, if any, are charged to expense.
Costs that are capitalized primarily consist of direct labor
costs.
Amortization of capitalized software development costs begins
when the product is available for general release. Amortization
is provided on a
product-by-product
basis using the straight-line method, which generates greater
period expense than the percent of future revenues method, over
periods not exceeding three years and is recorded as cost of
system sales.
Sales
Commissions
Sales commissions are charged to expense in the periods in which
payments of those commissions are earned.
Translation
of Foreign Currencies
The assets and liabilities of the Companys foreign
subsidiaries, all of which are located in Canada and whose cash
flows are primarily in their local currency, have been
translated into U.S. dollars using current exchange rates
at each balance sheet date. The operating results of these
foreign subsidiaries have been translated at average exchange
rates that prevailed during each reporting period. Adjustments
resulting from
F-15
EMAGEON
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
translation of foreign currency financial statements are
reflected as accumulated other comprehensive income in the
consolidated balance sheets.
Exchange gains and losses resulting from foreign currency
transactions (transactions denominated in a currency other than
that of the entities primary cash flow), excluding
long-term intercompany receivables and investments, are included
in operations in the period in which they occur.
Foreign currency translation and exchange gains and losses have
not had, and are not expected to have, a material effect on the
results of operations of the Company.
Advertising
Expense
The Company expenses advertising costs as they are incurred.
Advertising expense for the years ended December 31, 2003,
2004 and 2005 was $195, $191 and $48, respectively.
Recently
Issued Accounting Pronouncements
In December 2004, the FASB issued Statement No. 123
(revised 2004), Share-Based Payment
(SFAS 123R). SFAS 123R establishes
standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. It
focuses primarily on accounting for transactions in which an
entity obtains employee services in share-based payment
transactions. SFAS 123R requires publicly-traded companies
to measure the cost of employee services received in exchange
for an award of equity instruments based on the grant-date fair
value of the award and the estimated number of awards that are
expected to vest. That cost is to be recognized over the period
during which an employee is required to provide service in
exchange for the award, which is usually the vesting period.
SFAS 123R supersedes APB 25, which the Company has
followed for all periods through December 31, 2005.
SFAS 123R will be effective for the Company at the
beginning of the fiscal first quarter of 2006. SFAS 123R
applies to all awards granted after the required effective date
and to awards modified, repurchased, or canceled after that
date. Compensation cost is recognized on or after the required
effective date for the portion of outstanding awards for which
the requisite services have not yet been rendered, based on the
grant-date fair value of those awards calculated under
SFAS 123. For periods before the required effective date,
SFAS 123R allows elective adjustment of the financial
statements of prior periods on a basis consistent with the pro
forma disclosures required for those periods by SFAS 123.
Upon adoption in the first quarter of 2006, the Company will not
restate prior periods. The Company expects to record additional
costs relating to compensation expense as a result of the
adoption of SFAS 123R; however, the precise effect of
adoption has not been predicted at this time because it will
depend on levels of share-based payments granted in the future
and the characteristics of the Companys common stock on
the date of grant, as well as the actual forfeiture rates
experienced.
In December 2004, the FASB issued SFAS No. 151,
Inventory Costs. SFAS No. 151 clarifies the
accounting for inventory when there are abnormal amounts of idle
facility expense, freight, handling costs and wasted materials.
Under existing U.S. generally accepted accounting
principles (GAAP), items such as idle facility expense,
excessive spoilage, double freight and rehandling costs may be
so abnormal as to require treatment as current
period charges rather than recorded as adjustments to the value
of the inventory. SFAS No. 151 requires that those
items be recognized as current-period charges regardless of
whether they meet the criterion of so abnormal. In
addition, SFAS No. 151 requires that allocation of
fixed production overheads to the cost of conversion be based on
the normal capacity of the production facilities. The provisions
of SFAS No. 151 are effective for inventory costs
incurred during fiscal years beginning after June 15, 2005.
Earlier application is permitted for inventory costs incurred
during fiscal years beginning after the date
SFAS No. 151 was issued. The adoption of
SFAS No. 151 is not expected to have a material impact
on the Companys financial position or results of
operations.
F-16
EMAGEON
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections, which is a
replacement of APB Opinion No. 20, Accounting
Changes, and SFAS No. 3, Reporting Changes in
Interim Financial Statements. SFAS No. 154 applies
to all voluntary changes in accounting principle and changes in
the accounting for and reporting of a change in accounting
principle. SFAS No. 154 requires that a change in
method of depreciation or amortization for long-lived
non-financial assets be accounted for as a change in accounting
estimate that is effected by a change in accounting principle.
SFAS No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after
December 15, 2005. The Company does not expect that the
adoption of SFAS No. 154 will have a material impact
on its financial position, results of operations or cash flows.
|
|
3.
|
Initial
Public Offering
|
On February 14, 2005, the Company completed the initial
public offering of its common stock. The Company sold
5,000,000 shares of its common stock at a price of
$13.00 per share. On February 18, 2005, the
over-allotment option to purchase 750,000 additional shares of
common stock was exercised at $13.00 per share. Total
proceeds from the initial public offering (net of underwriting
discount and offering expenses) were approximately $67,200. In
conjunction with the initial public offering, the Company issued
10,843,411 shares of common stock upon the automatic
conversion of outstanding shares of preferred stock into shares
of common stock. The Company also issued 537,082 shares of
common stock upon the required exercise of warrants to purchase
common stock upon the closing of the offering. The Company also
released the remaining escrow holdback related to the
Ultravisual Medical Systems Corporation
(Ultravisual) merger upon the closing of the
offering. Upon completion of the offering, 552,661 of common
stock warrants with an exercise price of $0.00825 per share
were canceled. As of the close of the initial public offering,
the Company had no outstanding warrants to purchase preferred
stock.
With a portion of the proceeds from the offering, the Company
repaid $4,000 of its subordinated debt on February 18,
2005. Concurrent with this repayment, the Company recorded a
non-cash interest charge of $621 for the write-off of debt
discount related to the subordinated debt.
|
|
4.
|
Acquisitions
and Mergers
|
Effective November 1, 2005, the Company acquired all of the
outstanding capital stock of Camtronics Medical Systems Ltd.
(Camtronics), for a cash purchase price of $40,359
including expenditures associated with the acquisition and net
of $826 of cash acquired. Camtronics develops, manufactures, and
markets cardiology image and information management systems.
The Company believes that adding a cardiology solution to its
suite of products is particularly important to the
Companys growth. The Company expects to sell its software
products to Camtronics existing customer base, and vice
versa.
F-17
EMAGEON
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the estimated fair value of the
assets acquired and liabilities assumed at the date of
acquisition:
|
|
|
|
|
Accounts receivable
|
|
$
|
7,101
|
|
Inventories
|
|
|
3,207
|
|
Property, plant and equipment
|
|
|
10,595
|
|
Other current assets
|
|
|
693
|
|
Goodwill
|
|
|
17,325
|
|
Intangible assets:
|
|
|
|
|
Customer relationships
|
|
|
10,028
|
|
Developed technology
|
|
|
1,074
|
|
Trade names
|
|
|
501
|
|
In-process technology
|
|
|
248
|
|
|
|
|
|
|
Total assets acquired
|
|
|
50,772
|
|
Accounts payable and other
liabilities
|
|
|
5,312
|
|
Accrued expenses
|
|
|
844
|
|
Unearned revenue
|
|
|
4,257
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
10,413
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
40,359
|
|
|
|
|
|
|
The purchase price was allocated to identified assets and
liabilities of Camtronics. A third-party appraisal firm assisted
the Company with valuation of the identified intangible assets.
The valuation resulted in the allocation of $11,603 to
identifiable intangible assets, which will be amortized over
periods ranging from one to six years. The valuation also
resulted in the identification of $248 of acquired in-process
technology costs. This amount was determined by identifying the
acquired specific in-process research and development projects
that would be continued, and for which (1) technological
feasibility had not been established at the acquisition date,
(2) there was no alternative future use, and (3) the
fair value was estimable with reasonable reliability.
Accordingly, this amount was immediately expensed in the
consolidated statement of operations upon the acquisition date.
The intangible assets are being amortized on a straight-line
basis over lives ranging from one to six years. The estimated
asset lives are determined based on projected future economic
benefits and expected life cycles of the intangible assets. The
amount of the purchase price allocated to customer
relationships, developed technology, trade names and in-process
technology was determined by an independent appraiser.
F-18
EMAGEON
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following unaudited pro forma information shows results of
operations for 2004 and 2005 as if the acquisition had occurred
at the beginning of 2004 and 2005, respectively. Pro forma
results include adjustments for amortization of identified
intangible assets, acquired in-process technology, additional
interest expense and reduced interest income for cash needed to
finance the acquisition. However, pro forma results do not
include any anticipated cost savings or other effects of
integration. The unaudited pro forma condensed consolidated
results of operations are for comparative purposes only and are
not necessarily indicative of results that would have occurred
had the acquisition occurred as of the beginning of the years
presented, nor are they necessarily indicative of future results.
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
|
(unaudited)
|
|
|
Revenue
|
|
$
|
99,876
|
|
|
$
|
111,032
|
|
Net loss
|
|
$
|
(16,459
|
)
|
|
$
|
(11,689
|
)
|
Loss per
share basic and diluted
|
|
$
|
(6.38
|
)
|
|
$
|
(0.65
|
)
|
Effective May 30, 2003, the Company merged with Ultravisual
Medical Systems Corporation. Ultravisual had been engaged in the
business of developing visualization software for the medical
imaging market. The merger with Ultravisual facilitated a
strategic expansion of the Companys product offering in
accordance with its growth plan. At the time of the merger,
Ultravisual was a software vendor of the Company. The Company
issued 1,715,539 shares of common stock valued at
$1.5675 per share, 13,727,358 shares of Series D
preferred stock valued at $0.4275 per share, and warrants
to purchase 552,661 shares of common stock, with an
exercise price of $0.000825, exercisable upon sale of the
Company. These warrants were canceled as a result of the initial
public offering (see Note 3).
Goodwill arising from the acquisition of other businesses
includes, but is not limited to, the synergistic value and
potential competitive benefits that may be realized by the
Company as a result of the acquisitions, any future products
that may arise from the related technology, and the skilled and
specialized workforce acquired. The amounts assigned to goodwill
are not being amortized, but will be tested for impairment at
least annually or as circumstances arise that may indicate a
potential impairment.
The results of operations of Camtronics and Ultravisual have
been included in the Companys statements of operations
since their respective acquisition dates.
Intangible assets are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
December 31, 2004
|
|
|
December 31, 2005
|
|
|
|
Average
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Amortization
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
Period (Years)
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
|
Developed technology
|
|
|
5.0
|
|
|
$
|
4,166
|
|
|
$
|
(1,319
|
)
|
|
$
|
5,240
|
|
|
$
|
(2,212
|
)
|
Goodwill
|
|
|
n/a
|
|
|
|
3,755
|
|
|
|
|
|
|
|
21,079
|
|
|
|
|
|
Customer relationships
|
|
|
4.9
|
|
|
|
|
|
|
|
|
|
|
|
10,028
|
|
|
|
(518
|
)
|
Trade names
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
501
|
|
|
|
(72
|
)
|
Capitalized software development
costs
|
|
|
1.3
|
|
|
|
445
|
|
|
|
(424
|
)
|
|
|
798
|
|
|
|
(567
|
)
|
Ultravisual trademark
|
|
|
n/a
|
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,616
|
|
|
$
|
(1,743
|
)
|
|
$
|
37,646
|
|
|
$
|
(3,369
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-19
EMAGEON
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amortization expense was $565, $1,160 and $2,007 for the years
ended December 31, 2003, 2004 and 2005, respectively. The
2005 expense includes the write-off of the Ultravisual trademark
and the write-off of the in-process technology acquired in the
Camtronics acquisition described in Note 4. In
accordance with SFAS No. 86, Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed, the Company uses the straight-line method of
amortization because it generates greater period expense than
the percent of future revenues method. Estimated aggregate
amortization expense for each of the next five years and beyond
is as follows:
|
|
|
|
|
2006
|
|
$
|
4,962
|
|
2007
|
|
|
2,573
|
|
2008
|
|
|
2,027
|
|
2009
|
|
|
1,381
|
|
2010 and thereafter
|
|
|
2,254
|
|
|
|
|
|
|
Total
|
|
$
|
13,197
|
|
|
|
|
|
|
At December 31, 2005, the Company had marketable debt
securities that were classified as
available-for-sale
and carried at estimated fair market value, consisting of
U.S. government agency securities in the amount of $4,951
and with a maturity date of March 27, 2006.
At December 31, 2005, these securities were classified as a
current asset. During the year ended December 31, 2005, the
Company recorded $1,399 of interest income and $29 of losses
related to its marketable securities. The Company held no
marketable securities at December 31, 2004.
Inventories consist of the following components:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
Third party components
|
|
$
|
|
|
|
$
|
497
|
|
Work in process
|
|
|
|
|
|
|
345
|
|
Completed systems
|
|
|
1,422
|
|
|
|
7,189
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,422
|
|
|
$
|
8,031
|
|
|
|
|
|
|
|
|
|
|
F-20
EMAGEON
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
8.
|
Property
and Equipment
|
The Companys major classes of property and equipment were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
December 31,
|
|
|
|
Useful Lives
|
|
|
2004
|
|
|
2005
|
|
|
Land
|
|
|
Indefinite
|
|
|
$
|
|
|
|
$
|
791
|
|
Buildings and improvements
|
|
|
39 years
|
|
|
|
|
|
|
|
5,913
|
|
Machinery and equipment
|
|
|
5 to 7 years
|
|
|
|
|
|
|
|
861
|
|
Computers, software and other
|
|
|
3 to 7 years
|
|
|
|
5,388
|
|
|
|
12,733
|
|
Furniture and fixtures
|
|
|
3 to 7 years
|
|
|
|
1,534
|
|
|
|
1,967
|
|
Leasehold improvements
|
|
|
4 to 5 years
|
|
|
|
365
|
|
|
|
1,411
|
|
Third-party components leased to
customers under operating leases
|
|
|
5 to 7 years
|
|
|
|
11,924
|
|
|
|
13,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,211
|
|
|
|
36,910
|
|
Less accumulated depreciation and
amortization
|
|
|
|
|
|
|
(10,379
|
)
|
|
|
(15,477
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,832
|
|
|
$
|
21,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.
|
Major
Customers and Related Party Transactions
|
Revenue associated with hospitals controlled by Ascension Health
accounted for approximately 8%, 36% and 36% of total revenue
during 2003, 2004 and 2005, respectively. As of
December 31, 2005, Ascension Health held warrants to
purchase up to 36,424 shares of common stock at an exercise
price of $5.52.
In 2003, the Company had two customers who accounted for
approximately 14% and 18% of total revenue. In 2004 and 2005,
the Company had one customer, Ascension Health, who accounted
for more than 10% of total revenue.
In February 1999, the Company entered into a license and royalty
agreement with the University of Alabama at Birmingham Research
Foundation (UABRF) for the right to sell, lease,
subscribe, license or sublicense certain technology and know-how
as a component or part of its Clinical Content Management
software license. Under the terms of the license agreement, the
Company paid a licensing fee of $5 and transferred an aggregate
of 72,727 shares of common stock to UABRF. The Company is
obligated to pay royalties of 5% of gross revenues collected
from the sale, lease, subscription, licensing or sublicensing of
certain products that are based upon the technology and know-how
licensed from UABRF. This royalty percentage declines
1% per year on the anniversary date of the agreement until
it reaches 1%. For the royalty years beginning on
February 16, 2004, total annual royalty payments are capped
at $200. Such royalty payments shall be no less than $5 each
calendar year and are not to exceed $2,500 in the aggregate. The
Company has paid a total of $104 in connection with this
agreement as of December 31, 2005.
|
|
11.
|
Defined
Contribution Benefit Plans
|
The Company has established a 401(k) plan (the Emageon
Plan) for all eligible employees pursuant to
Section 401(k) of the Internal Revenue Code. From inception
through December 31, 2005, the Company did not match
employee contributions to the Emageon Plan. Effective
January 1, 2006, the Company began matching employee
contributions to its 401(k) plans at the rate of 50% of
employees contributions up to 3% of employees annual
salary.
F-21
EMAGEON
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Effective with the acquisition of Camtronics at November 1,
2005, all eligible former Camtronics employees were given the
opportunity to enroll in the Emageon Plan.
On May 30, 2003, the Company adopted the Ultravisual 401(k)
plan (the Ultravisual Plan) for all former
Ultravisual employees. The Ultravisual Plan was established
pursuant to Section 401 (k) of the Internal Revenue
Code. The Company matched employee contributions to the
Ultravisual Plan based on a discretionary percentage of employee
contributions determined on an annual basis, with total Company
contributions to the Ultravisual Plan of $27 and $10 during the
years ended December 31, 2003 and December 31, 2004,
respectively. As of April 1, 2004, the Company ceased
matching contributions to the Ultravisual Plan. During 2004, the
Company dissolved the Ultravisual Plan and all participants were
given the opportunity to enroll in the Emageon Plan.
The Company has not had taxable income since incorporation and,
therefore, has not paid any income taxes. Significant components
of deferred taxes at December 31, 2004 and 2005 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2004
|
|
|
2005
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
15,772
|
|
|
$
|
16,610
|
|
Deferred revenue
|
|
|
1,990
|
|
|
|
3,017
|
|
Reserves and accrued liabilities
|
|
|
1,270
|
|
|
|
809
|
|
Other
|
|
|
232
|
|
|
|
396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,264
|
|
|
|
20,832
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(632
|
)
|
|
|
(231
|
)
|
Developed technology
|
|
|
(1,061
|
)
|
|
|
(831
|
)
|
Other
|
|
|
(95
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,788
|
)
|
|
|
(1,062
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
17,476
|
|
|
|
19,770
|
|
Valuation allowance
|
|
|
(17,571
|
)
|
|
|
(19,770
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
(95
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Based on an updated analysis of the components of deferred
taxes, the Company increased net deferred tax assets by $1,202
in 2004. The Company also increased the related valuation
allowance by the same amounts. There was no impact on the net
deferred tax liability at December 31, 2003, 2004 and 2005
or results of operations for the years then ended.
Because the majority of the deferred tax assets relate to net
operating loss (NOL) carryforwards that can only be realized if
the Company is profitable in future periods and because the
company has never been profitable in the past, it is uncertain
whether the Company will realize any tax benefit related to the
net operating loss carryforward. Accordingly, the Company has
provided a valuation allowance against the net deferred tax
assets due to uncertainties as to their ultimate realization.
The valuation allowance will remain at the full amount of the
deferred tax asset until it is more likely than not that the
related tax benefits will be realized through deduction against
taxable income during the carryforward period. The net operating
loss and research credit carryforwards expire at various times
from 2019 through 2026. In the event of certain ownership
changes, the Tax Reform Act of 1986 imposes restrictions on the
amount of net operating loss and research credit carryforwards
that the Company may use in any year. Due to recent stock
issuances, it is
F-22
EMAGEON
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
possible that such limitations could currently apply. The
Company has not performed a detailed analysis on its ability to
use these net operating loss and research credit carryforwards.
However, it is not anticipated that any such analysis would have
a material impact on the financial position of the Company as a
result of offsetting changes in the deferred tax valuation
allowance. At December 31, 2005, the Company had net
operating loss carryforwards of approximately $48.4 million.
A reconciliation of the income tax benefit computed using the
statutory rate of 34% to the tax provision reported in the
statements of operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
Tax benefit computed at the
statutory federal rate
|
|
$
|
(3,862
|
)
|
|
$
|
(3,561
|
)
|
|
$
|
(1,731
|
)
|
State taxes, net of federal tax
benefit
|
|
|
(341
|
)
|
|
|
(314
|
)
|
|
|
(227
|
)
|
Increase in tax from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in deferred tax valuation
allowance
|
|
|
4,123
|
|
|
|
3,899
|
|
|
|
1,591
|
|
Permanent differences
|
|
|
29
|
|
|
|
33
|
|
|
|
184
|
|
Other
|
|
|
51
|
|
|
|
(57
|
)
|
|
|
183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit for income taxes
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The deferred income tax provisions were $3,620, $3,423 and
$1,397, respectively, for the years ended December 31,
2003, 2004 and 2005 with respect to federal taxes and $503, $476
and $194, respectively for the years ended December 31,
2003, 2004 and 2005 with respect to state taxes. These amounts
were offset entirely in each year by changes in the valuation
allowance.
F-23
EMAGEON
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
Secured promissory note payable to
finance company in 60 monthly installments of $45,
including interest at 10.0%, due in December 2006, secured by
hardware and software at customer site with a net book value at
December 31, 2005 of $397
|
|
$
|
967
|
|
|
$
|
508
|
|
Secured promissory note payable to
finance company in 60 monthly installments of $38,
including interest at 9.88%, due in March 2007, secured by
hardware and software at customer site with a net book value at
December 31, 2005 of $786
|
|
|
920
|
|
|
|
536
|
|
Secured promissory note payable to
bank in 58 monthly installments of $11, including interest
at 4.76%, final payment of $10 in September 2007, secured by
hardware and software at customer site with a net book value at
December 31, 2005 of $310
|
|
|
358
|
|
|
|
237
|
|
Secured promissory note payable to
bank in 54 monthly installments of $83, including interest
at 6.13%, due in June 2007, secured by hardware and software at
customer site with a net book value at December 31, 2005 of
$1,176
|
|
|
2,260
|
|
|
|
1,397
|
|
Promissory note to governmental
agency payable in 57 monthly installments of $5, including
interest at 4.0%, final payment of $4 in October 2007
|
|
|
156
|
|
|
|
103
|
|
Promissory notes to various
purchasers under a subordinated debt agreement, payable in
quarterly installments starting June 25, 2005, net of
discount of $646 and $0 at December 31, 2004 and 2005
|
|
|
3,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
8,000
|
|
|
|
2,781
|
|
Current portion
|
|
|
(2,472
|
)
|
|
|
(2,031
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current
portion
|
|
$
|
5,528
|
|
|
$
|
750
|
|
|
|
|
|
|
|
|
|
|
Future maturities of long-term debt as of December 31, 2005
are as follows:
|
|
|
|
|
2006
|
|
$
|
2031
|
|
2007
|
|
|
750
|
|
|
|
|
|
|
|
|
$
|
2,781
|
|
|
|
|
|
|
The Company entered into a loan and security agreement with a
bank dated April 30, 2004, as amended July 31, 2004,
under which the Company may borrow up to $4.0 million
subject to certain restrictions and covenants, including
maintenance of certain minimum levels of tangible net worth and
current ratio. Interest accrues at the prime rate plus 1.5% to
2.0%, depending on the Companys net income. There were no
amounts outstanding under this agreement at December 31,
2005 and 2004. Any borrowings under the agreement are secured by
certain of the assets of the Company, including its cash and
accounts receivable. The agreement expires April 30, 2006,
at which time all advances, if any, will be due and payable. The
agreement is renewable and the Company believes it will renew
the line of credit under terms at least as favorable as the
current terms and that the available credit will be adequate to
meet any short-term cash needs for the foreseeable future.
F-24
EMAGEON
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On June 25, 2004, the Company issued $4,000 of promissory
notes to three purchasers under a subordinated debt agreement.
The agreement incorporates by reference certain of the
restrictions contained in the loan and security agreement, as
amended, referred to in the preceding paragraph. In connection
with the notes, the Company issued 127,589 warrants to purchase
common stock at an exercise price of $4.70 per share. The
warrants vested upon execution of the subordinated debt
agreement. The proceeds from the $4,000 promissory notes were
allocated to the carrying value of the notes and the warrants
issued based on their relative fair values, resulting in the
recognition of a debt discount of $800, which the Company
recognized as additional interest expense over the term of the
notes using the interest method. Two of the three purchasers of
the notes are affiliated with Company stockholders. With a
portion of the proceeds from the initial public offering, the
Company repaid the promissory notes on February 18, 2005.
Concurrent with this repayment, the Company recorded a non-cash
interest charge of $621 for the write-off of the debt discount
related to the subordinated debt.
|
|
14.
|
Capital
Lease Obligations
|
In July 2002, the Company completed financing of the purchase of
third-party hardware and software related to one of its customer
sites under a sale-leaseback arrangement with a finance company.
The third-party hardware and software was sold to a finance
company for $2,648. The transaction has been accounted for as a
capital lease, wherein the hardware and software remain on the
Companys books and are depreciated and the obligation of
the Company is recorded as debt. The lease has a term of
57 months. The Company has the option to renew the lease at
the end of the lease term, the option to prepay the lease after
two years and the option to purchase the hardware and software
at the end of the lease at its fair value.
The Company has entered into agreements for certain office and
computer equipment that are treated for financial reporting
purposes as capital leases. For the years ended
December 31, 2003, 2004 and 2005, the Company entered into
capital lease arrangements for computer equipment totaling $107,
$0 and $0, respectively. Accumulated amortization of the leased
equipment at December 31, 2003, 2004 and 2005 was $120,
$195 and $247, respectively. Amortization of assets under
capital leases is included in depreciation expense.
Future minimum lease payments required under capital leases and
the present value of the net minimum lease payments as of
December 31, 2005, are as follows:
|
|
|
|
|
2006
|
|
$
|
820
|
|
2007
|
|
|
229
|
|
2008
|
|
|
14
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
1,063
|
|
Loan closing costs
|
|
|
(10
|
)
|
|
|
|
|
|
Net total minimum lease payments
|
|
|
1,053
|
|
Amount representing interest
|
|
|
(85
|
)
|
|
|
|
|
|
Present value of net minimum lease
payments
|
|
|
968
|
|
Current maturities of capital
lease obligations
|
|
|
(732
|
)
|
|
|
|
|
|
Long-term capital lease obligations
|
|
$
|
236
|
|
|
|
|
|
|
F-25
EMAGEON
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Reverse
Stock Split
On January 25, 2005, the Companys Board of Directors
approved a reverse stock split of the Companys common
stock. In a subsequent vote, the Companys stockholders
approved the
1-for-8.25
reverse stock split of the outstanding common stock, which was
effected February 4, 2005 with the filing of a certificate
of amendment to the Companys Amended and Restated
Certificate of Incorporation. The accompanying financial
statements give retroactive effect to this reverse stock split
for all periods presented.
Preferred
Stock
Pursuant to a private placement in January 2000, the Company
issued 5,965,000 shares of Series A preferred stock at
$0.2514669 per share. The total consideration received was
$1,438, net of issuance costs of $61. As of December 31,
2004, there were 5,965,000 Series A shares authorized and
outstanding. These shares were converted to common stock at the
time of the Companys initial public offering.
In conjunction with the Ultravisual merger (see Note 3),
the Company issued 13,727,358 shares of Series D
preferred stock. The shares were valued at $0.4275 per
share. As of December 31, 2004, there were 18,000,000
Series D shares authorized, 13,727,358 shares issued
and 12,354,620 shares outstanding. These shares were
converted to common stock at the time of the Companys
initial public offering.
As of December 31, 2005 the Company is authorized to issue
200,000 shares of preferred stock.
Redeemable
Preferred Stock
In the second and third quarter of 2000, the Company issued
22,538,597 shares of Series B redeemable preferred
stock at $0.57 per share. The total consideration received
was $12,707, net of issuance costs of $140. As of
December 31, 2004, there were 17,200,000 Series B
shares authorized and 16,885,966 shares outstanding. These
shares were converted to common stock at the time of the
Companys initial public offering.
Over the course of fourth quarter 2001 and first quarter 2002,
the Company issued a total of 27,433,370 shares of
Series C preferred stock at $0.4275 per share. The
total consideration received was $11,515, net of issuance costs
of $212. As of December 31, 2004, there were 27,500,000
Series C shares authorized and 27,433,370 shares
outstanding. These shares were converted to common stock at the
time of the Companys initial public offering.
In conjunction with the closing of the Series C preferred
stock private placement, a new class of preferred stock was
issued to former Series B preferred stockholders who did
not fully participate in the Series C placement. The
Series B-1
preferred stock has the same rights and privileges as the
Series B preferred stock. As of December 31, 2004,
there were 5,700,000
Series B-1 shares
authorized and 5,652,631 shares outstanding. These shares
were converted to common stock at the time of the Companys
initial public offering.
Over the course of second and third quarter 2003, the Company
issued 14,035,087 shares of Series E preferred stock
at $0.4275 per share. The total consideration received was
$5,889, net of issuance costs of $111. As of December 31,
2004, there were 14,050,000 shares authorized and
14,035,087 shares outstanding. These shares were converted
to common stock at the time of the Companys initial public
offering.
Warrants
During 2003, the Company issued certain warrants in conjunction
with the Ultravisual Merger (see note 4). The warrants did
not have an expiration date and were canceled as a result of the
initial public offering.
F-26
EMAGEON
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On June 25, 2004, in conjunction with the issuance of
$4,000 of promissory notes to various purchasers under a
subordinated debt agreement, the Company issued a warrant to
purchase 127,589 shares of common stock with an exercise
price of $4.70 per share. The warrants vested upon
execution of the subordinated debt agreement. The fair value of
the warrants issued was $7.80 per share and was estimated using
the Black-Scholes method with the following assumptions: fair
value of the common stock of $10.725 per share, dividend
yield of zero percent, risk-free interest rate of 3.2%, expected
volatility of 70.87%,and expected life of four years. These
warrants were converted to common stock at the time of the
Companys initial public offering.
In conjunction with a customer agreement signed in May 2004, the
Company issued a warrant to purchase 36,424 shares of
common stock at an exercise price of $5.52 per share. These
warrants vested upon execution of the agreement. The fair value
of the warrants issued was $6.76 per share and was
estimated using the Black-Scholes method with the following
assumptions: fair value of the common stock of $10.725 per
share, dividend yield of zero percent, risk-free interest rate
of 3.2%, expected volatility of 70.87% and expected life of
2.5 years. The warrants are recorded at a fair value of
$246 and classified in prepaid expenses and other current assets
in the balance sheet. This amount is being recorded as a sales
discount over the life of the agreement.
A summary of warrant activity and related information is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Common stock warrants at beginning
of period
|
|
|
735,760
|
|
|
$
|
5.95
|
|
|
|
1,315,430
|
|
|
$
|
3.39
|
|
|
|
1,479,443
|
|
|
$
|
3.56
|
|
Forfeited or Canceled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(552,661
|
)
|
|
|
0.01
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(883,981
|
)
|
|
|
5.67
|
|
Granted
|
|
|
579,670
|
|
|
$
|
0.18
|
|
|
|
164,013
|
|
|
$
|
4.88
|
|
|
|
6,185
|
|
|
|
3.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
1,315,430
|
|
|
$
|
3.39
|
|
|
|
1,479,443
|
|
|
$
|
3.56
|
|
|
|
48,986
|
|
|
$
|
5.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period
|
|
|
730,952
|
|
|
$
|
5.81
|
|
|
|
910,116
|
|
|
$
|
5.66
|
|
|
|
48,986
|
|
|
$
|
5.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2005, common stock warrants outstanding
had exercise prices ranging from $3.63 to $5.52 and a weighted
average remaining contractual life of 2.5 years.
The Company has established stock option plans (the
Plans) as a means to attract, motivate and retain
key employees and directors. The Compensation Committee of the
Board of Directors administers and interprets the Plans and is
authorized to grant options to all eligible employees of Emageon
and non-employee directors and consultants. The Plans provide
for incentive stock options and non-qualified stock options
which are, in general, granted under the Plans on such terms and
at such prices as determined by the Compensation Committee.
Options granted under the Plans during 2003, 2004 and 2005
generally vest over three to four years and are exercisable for
a period of ten years.
F-27
EMAGEON
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
At December 31, 2005, 5.9 million shares of common
stock were reserved for issuance under the Plans.
The Company applies APB No. 25, Accounting for Stock
Issued to Employees, and related interpretations in
accounting for its Plans. Accordingly, no compensation cost has
been recognized for fixed stock options granted to employees
where the exercise price of the option equals or exceeds the
fair value of the underlying common stock on the grant date.
Pro forma information regarding results of operations is
required by SFAS No. 123 as if the Company had
accounted for its stock options under the fair value method of
SFAS No. 123. The fair value of these options was
estimated at the date of the grant using the Black-Scholes
pricing model using the following assumptions for the years
ended December 31, 2003, 2004 and 2005: dividend yield of
zero percent, risk-free interest rates of 3.2%, 3.0% and 4.11%,
respectively, an expected life of five years and a volatility
factor of 70.9%. The required pro forma information is presented
in Note 2.
The weighted average grant date fair values of options granted
to employees under all stock option plans during the years ended
December 31, 2003, 2004 and 2005 were $0.00, $5.86 and
$8.53, respectively. During 2003 and 2005, options were granted
under these plans at exercise prices greater than or equal to
market value of the Companys stock on the date of grant.
During 2004 and 2005, options were granted under these plans at
exercise prices less than market value of the Companys
stock on the date of grant.
A summary of stock option activity and related information is
detailed below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Options at beginning of period
|
|
|
1,299,217
|
|
|
$
|
3.93
|
|
|
|
1,779,527
|
|
|
$
|
4.14
|
|
|
|
2,166,901
|
|
|
$
|
4.46
|
|
Forfeited
|
|
|
(15,341
|
)
|
|
|
4.54
|
|
|
|
(51,842
|
)
|
|
|
4.26
|
|
|
|
(33,517
|
)
|
|
|
4.90
|
|
Exercised
|
|
|
(3,432
|
)
|
|
|
4.37
|
|
|
|
(22,972
|
)
|
|
|
2.76
|
|
|
|
(448,141
|
)
|
|
|
3.76
|
|
Granted
|
|
|
499,083
|
|
|
|
4.70
|
|
|
|
462,188
|
|
|
|
5.85
|
|
|
|
443,317
|
|
|
|
10.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
1,779,527
|
|
|
$
|
4.14
|
|
|
|
2,166,901
|
|
|
$
|
4.46
|
|
|
|
2,128,560
|
|
|
$
|
5.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period
|
|
|
978,280
|
|
|
$
|
3.88
|
|
|
|
1,328,091
|
|
|
$
|
3.94
|
|
|
|
1,262,281
|
|
|
$
|
4.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Further information relating to stock option plans outstanding
at December 31, 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Remaining
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
Range of Exercise
Prices
|
|
Number
|
|
|
Contractual Life
|
|
|
Price
|
|
|
Number
|
|
|
Price
|
|
|
$1.73 to $2.07
|
|
|
205,202
|
|
|
|
5.49 years
|
|
|
$
|
1.85
|
|
|
|
205,202
|
|
|
$
|
1.85
|
|
$4.70 to $7.17
|
|
|
1,648,798
|
|
|
|
6.95 years
|
|
|
|
5.25
|
|
|
|
1,057,079
|
|
|
|
4.84
|
|
$12.72 to $14.90
|
|
|
274,560
|
|
|
|
9.74 years
|
|
|
|
12.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,128,560
|
|
|
|
7.17 years
|
|
|
$
|
5.91
|
|
|
|
1,262,281
|
|
|
$
|
4.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-28
Lessee Arrangements. The Company leases office
space and computer equipment under operating leases. The Company
recognized rent expense during the years ended December 31,
2003, 2004 and 2005 of $649, $939 and $1,147, respectively. As
of December 31, 2005, the amount of operating lease
payments in each of the next five years and beyond is as
follows:
|
|
|
|
|
2006
|
|
$
|
1,419
|
|
2007
|
|
|
1,471
|
|
2008
|
|
|
1,480
|
|
2009
|
|
|
1,462
|
|
2010
|
|
|
595
|
|
2011 and Beyond
|
|
|
865
|
|
|
|
|
|
|
|
|
$
|
7,292
|
|
|
|
|
|
|
Lessor Arrangements. Revenue associated with
rentals under operating leases was approximately $2,004, $2,187
and $2,432 for the years ended December 31, 2003, 2004 and
2005, respectively, and is included in systems sales.
The following is a schedule by year of minimum future rental
income under noncancelable operating leases of computer hardware
as of December 31, 2005:
|
|
|
|
|
2006
|
|
$
|
2,350
|
|
2007
|
|
|
629
|
|
|
|
|
|
|
Total minimum future rentals
|
|
$
|
2,979
|
|
|
|
|
|
|
|
|
18.
|
Selected
Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
11,336
|
|
|
$
|
18,570
|
|
|
$
|
19,606
|
|
|
$
|
24,279
|
|
Gross profit
|
|
|
3,430
|
|
|
|
9,495
|
|
|
|
9,011
|
|
|
|
8,891
|
|
Operating income (loss)
|
|
|
(4,199
|
)
|
|
|
1,565
|
|
|
|
1,465
|
|
|
|
(4,076
|
)
|
Net income (loss)
|
|
$
|
(4,818
|
)
|
|
$
|
1,900
|
|
|
$
|
1,831
|
|
|
$
|
(3,910
|
)
|
Net income (loss) per
share basic and diluted
|
|
$
|
(0.42
|
)
|
|
$
|
0.09
|
|
|
$
|
0.09
|
|
|
$
|
(0.19
|
)
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
7,117
|
|
|
$
|
12,117
|
|
|
$
|
10,322
|
|
|
$
|
16,246
|
|
Gross profit
|
|
|
1,349
|
|
|
|
5,586
|
|
|
|
1,819
|
|
|
|
4,868
|
|
Operating income (loss)
|
|
|
(3,400
|
)
|
|
|
44
|
|
|
|
(4,200
|
)
|
|
|
(1,894
|
)
|
Net loss
|
|
$
|
(3,592
|
)
|
|
$
|
(144
|
)
|
|
$
|
(4,533
|
)
|
|
$
|
(2,203
|
)
|
Net loss per
share basic and diluted
|
|
$
|
(1.48
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(1.69
|
)
|
|
$
|
(0.82
|
)
|
F-29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized March 30, 2006.
Emageon Inc.
|
|
|
|
By:
|
/s/ Charles A. Jett, Jr.
|
Charles A. Jett, Jr.
Chairman, President, and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons in
the capacities indicated on March 30, 2006.
|
|
|
|
|
Signature
|
|
Title
|
|
/s/ Charles A. Jett,
Jr.
Charles
A. Jett, Jr.
|
|
Chairman of the Board, President
and
Chief Executive Officer
(principal executive officer)
|
|
|
|
/s/ W. Randall
Pittman
W.
Randall Pittman
|
|
Chief Financial Officer and
Treasurer
(principal accounting and financial officer)
|
|
|
|
/s/ Arthur P.
Beattie
Arthur
P. Beattie
|
|
Director
|
|
|
|
/s/ Roddy J.H. Clark
Roddy
J.H. Clark
|
|
Director
|
|
|
|
/s/ Fred C. Goad,
Jr.
Fred
C. Goad, Jr.
|
|
Director
|
|
|
|
/s/ Chris H. Horgen
Chris
H. Horgen
|
|
Director
|
|
|
|
/s/ Mylle H. Mangum
Mylle
H. Mangum
|
|
Director
|
|
|
|
/s/ John W. Thompson
John
W. Thompson
|
|
Director
|
|
|
|
/s/ Hugh H. Williamson,
III
Hugh
H. Williamson, III
|
|
Director
|
EMAGEON
INC.
SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS AND
RESERVES
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
Balance
|
|
|
Charged to
|
|
|
Charged to
|
|
|
|
|
|
End of
|
|
Description
|
|
|
|
|
Beginning of Period
|
|
|
Costs and Expenses
|
|
|
Other Accounts
|
|
|
Deductions
|
|
|
Period
|
|
|
Allowance for doubtful accounts
deducted from accounts receivable in the balance sheet
|
|
|
2005
|
|
|
$
|
75
|
|
|
$
|
57
|
|
|
$
|
|
|
|
$
|
(6
|
)(1)
|
|
$
|
126
|
|
|
|
|
2004
|
|
|
|
50
|
|
|
|
123
|
|
|
|
|
|
|
|
(98
|
)(1)
|
|
|
75
|
|
|
|
|
2003
|
|
|
|
|
|
|
|
104
|
|
|
|
|
|
|
|
(54
|
)(1)
|
|
|
50
|
|
Valuation allowance deducted from
net deferred tax asset in the balance sheet
|
|
|
2005
|
|
|
$
|
17,571
|
|
|
$
|
1,591
|
|
|
$
|
608(2
|
)
|
|
$
|
|
|
|
$
|
19,770
|
|
|
|
|
2004
|
|
|
|
13,672
|
|
|
|
3,899
|
|
|
|
|
|
|
|
|
|
|
|
17,571
|
|
|
|
|
2003
|
|
|
|
9,312
|
|
|
|
4,123
|
|
|
|
237(2
|
)
|
|
|
|
|
|
|
13,672
|
|
|
|
|
(1) |
|
Uncollectible accounts written off |
|
(2) |
|
Deferred tax assets arising from Ultravisual merger in 2003 and
Camtronics acquisition in 2005. |